As filed with the Securities and Exchange Commission on February 6, 2001
Registration No. 333-45458
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1 to
FORM S-3
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
ACE SECURITIES CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 56-2088493
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
6525 MORRISON BOULEVARD
SUITE 318
CHARLOTTE, NORTH CAROLINA 28211
(704) 365-0569
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S
PRINCIPAL EXECUTIVE OFFICES)
ELIZABETH S. ELDRIDGE
ACE SECURITIES CORP.
6525 MORRISON BOULEVARD
SUITE 318
CHARLOTTE, NORTH CAROLINA 28211
(704) 365-0569
(NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPY TO:
REED D. AUERBACH
STROOCK & STROOCK & LAVAN LLP
180 MAIDEN LANE
NEW YORK, NEW YORK 10038
(212) 806-6648
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time to
time after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. /__/
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. /__/
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. /__/
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. /__/
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(A), MAY DETERMINE.
EXPLANATORY NOTE
This Registration Statement contains seven base Prospectuses (each, a
"Prospectus") relating to the offering of one or more series of securities each
of which will include one or more classes of certificates and/or one or more
classes of notes.
The first Prospectus (the "Automobile Prospectus") contemplates the
securitization of assets which may include (1) certain new and used automobile,
recreational vehicle, including motor homes, campers, boats, boat motors,
motorcycles, jet skis, wave runners, all terrain vehicles, and snow mobiles,
van, truck, bus and trailer receivables or (2) asset backed certificates or
notes, each representing an interest in a trust fund consisting of a pool of
such receivables.
The second Prospectus (the "Mortgage Prospectus #1") contemplates the
securitization of assets which may include (1) one or more mortgage pools,
containing (A) mortgage loans secured by residential, cooperative and
multifamily properties and (B) certain conventional mortgage pass-through
certificates issued by one or more trusts established by one or more private
entities or (2) one or more contract pools containing manufactured housing
conditional sales contracts and installment loan agreements or participation
certificates representing participation interests in such contracts.
The third Prospectus (the "Mortgage Prospectus #2") contemplates the
securitization of assets which may include (1) one or more mortgage pools,
containing (A) mortgage loans secured by residential, cooperative and
multifamily properties and (B) certain conventional mortgage pass-through notes
issued by one or more trusts established by one or more private entities or (2)
one or more contract pools containing manufactured housing conditional sales
contracts and installment loan agreements or participation certificates
representing participation interests in such contracts.
The fourth Prospectus (the "Credit Card Prospectus") contemplates the
securitization of assets that may include a pool of receivables arising from
time to time in the ordinary course of business in one or more designated
portfolios of credit card, charge card or certain other types of accounts and
asset-backed securities consisting of notes secured by, receivables arising in
certain designated portfolios of credit card, charge card or certain other types
of accounts.
The fifth Prospectus (the "Floorplan Prospectus") contemplates the
securitization of assets that may include a pool of receivables arising from
time to time in the ordinary course of business in one or more designated
portfolios of wholesale consumer receivables and asset-backed securities
consisting of notes secured by, receivables arising in certain designated
portfolios of wholesale consumer receivables.
The sixth Prospectus (the "Equipment Prospectus #1") contemplates the
securitization of assets that may include a pool of receivables arising from
time to time in the ordinary course of business in one or more designated
portfolios of wholesale consumer receivables and asset-backed securities
consisting of certificates secured by, receivables arising in certain designated
portfolios of wholesale consumer receivables.
The seventh Prospectus (the "Floorplan Prospectus #2") contemplates
the securitization of assets that may include a pool of receivables arising from
time to time in the ordinary course of business in one or more designated
portfolios of equipment receivables.
This Registration Statement also contains three forms of prospectus
supplement with respect to the Automobile Prospectus, two forms of prospectus
supplement with respect to the Mortgage Prospectus #1, two forms of prospectus
supplement with respect to Mortgage Prospectus #2, two forms of prospectus
supplement with respect to the Credit Card Prospectus, one form of prospectus
supplement with respect to each Floorplan Prospectus, and one form of prospectus
supplement with respect to the Equipment Prospectus.
SUBJECT TO COMPLETION, [ ]
PROSPECTUS SUPPLEMENT (to prospectus dated [ ])
$[ ] (APPROXIMATE)
ACE SECURITIES CORP.
[ ] TRUST
[ ] AUTO RECEIVABLES OWNER TRUST [ ]-[ ]
$[ ] [ ]% ASSET BACKED NOTES, CLASS A-1
$[ ] [ ]% ASSET BACKED NOTES, CLASS A-2
[ ]
SELLER AND SERVICER
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-[ ] OF THIS
PROSPECTUS SUPPLEMENT AND ON PAGE [ ] OF THE PROSPECTUS.
For a list of capitalized terms used in this prospectus supplement and
the prospectus, see the index of defined terms beginning on page S-[ ] of this
prospectus supplement and on page [ ] of the prospectus.
The notes will represent interests in the trust fund only and will not
represent interests in or obligations of any other entity.
This prospectus supplement may be used to offer and sell the notes
only if accompanied by the prospectus.
The notes will be issued by a trust. The sources for payment of the
notes are a pool of non-prime auto loans held by the issuing trust, cash held by
the issuing trust and, in the case of the class A-1 notes and class A-2 notes, a
financial guaranty insurance policy issued by [ ].
We are only offering to you the class A-1 notes and class A-2 notes.
The class B notes are subordinated to the class A notes to the extent described
in this prospectus supplement. Interest and principal on the notes are scheduled
to be paid monthly, on the [ ]th day of the month. The first scheduled payment
date is [ ].
Deutsche Banc Alex. Brown is purchasing the class A-1 notes from the
issuing trust at approximately [ ]% of the principal amount of the class A-1
notes plus accrued interest from [ ], [ ] and the class A-2 notes at
approximately [ ]% of the principal amount of the class A-2 notes plus accrued
interest from [ ]. Deutsche Banc Alex. Brown is offering the class A-1 notes and
class A-2 notes from time to time in negotiated transactions or at varying
prices which will be determined at the time of sale. The aggregate proceeds to
the issuing trust, before deducting expenses payable by or on behalf of the
issuing trust estimated at $[ ], will be $[ ].
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR
DETERMINED IF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO WHICH IT RELATES
IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
UNDERWRITER:
DEUTSCHE BANC ALEX. BROWN
The date of this prospectus supplement is [ ]
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS:
We provide information to you about the notes offered by this
prospectus supplement in two separate documents that progressively provide more
detail: (1) the accompanying prospectus, which provides general information,
some of which may not apply to your notes, and (2) this prospectus supplement,
which describes the specific terms of your notes.
IF INFORMATION VARIES BETWEEN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS, YOU SHOULD RELY ON THE INFORMATION IN THIS PROSPECTUS
SUPPLEMENT.
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We have
not authorized anyone to provide you with different information.
We are not offering the notes in any state where the offer is not
permitted. We do not claim that the information in this prospectus supplement
and prospectus is accurate as of any date other than the dates stated on their
respective covers.
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Dealers will deliver a prospectus supplement and prospectus when
acting as underwriters of the notes and with respect to their unsold allotments
or subscriptions. In addition, all dealers selling the notes will be required to
deliver a prospectus supplement and prospectus for ninety days following the
date of this prospectus supplement.
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We include cross-references in this prospectus supplement and the
accompanying prospectus to captions in these materials where you can find
further related discussions. The following table of contents and the table of
contents included in the accompanying prospectus provide the pages on which
these captions are located.
Table of Contents
PROSPECTUS SUPPLEMENT
Summary of Terms.............................................
Risk Factors.................................................
The Seller and the Servicer..................................
The Trust....................................................
Trust Property...............................................
The Seller's Automobile Financing Program....................
The Backup Servicer..........................................
The Receivables..............................................
Yield Considerations.........................................
Use of Proceeds..............................................
The Insurer..................................................
Incorporation of Certain Documents by
Reference.................................................
The Notes....................................................
Description of the Transaction Documents.....................
The Policy...................................................
Material Federal Income Tax Consequences.....................
Certain State Tax Consequences...............................
ERISA Considerations.........................................
Ratings......................................................
Underwriting.................................................
Experts......................................................
Legal Matters................................................
Glossary.....................................................
Index of Terms...............................................
PROSPECTUS
Risk Factors.................................................
The Trusts...................................................
The Trustee..................................................
The Receivables Pools........................................
The Collateral Certificates..................................
The Government Securities....................................
Weighed Average Life of the Securities.......................
Pool Factors and Trading Information.........................
The Seller and the Servicer..................................
Use of Proceeds..............................................
Description of the Notes.....................................
Description of the Certificates..............................
Certain Information Regarding the
Securities.................................................
Description of the Transfer and Servicing
Agreements.................................................
Certain Matters Regarding the Servicer.......................
Certain Legal Aspects of the
Receivables..................................................
Material Federal Income Tax
Consequences...............................................
State and local Tax Consequences.............................
ERISA Considerations.........................................
Plan of Distribution.........................................
Legal Matters................................................
Prospectus Supplement........................................
Reports to Securityholders...................................
Available Information........................................
Incorporation of Certain Documents
by Reference..............................................
Index of Terms...............................................
Annex I - Global Clearance, Settlement and
Documentation Procedures..................................
SUMMARY OF TERMS
O THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROSPECTUS
SUPPLEMENT AND DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU NEED
TO CONSIDER IN MAKING YOUR INVESTMENT DECISION. TO UNDERSTAND ALL OF
THE TERMS OF THE OFFERING OF THE NOTES, IT IS NECESSARY THAT YOU READ
CAREFULLY THIS ENTIRE PROSPECTUS SUPPLEMENT AND ACCOMPANYING
PROSPECTUS.
o WHILE THIS SUMMARY CONTAINS AN OVERVIEW OF CERTAIN CALCULATIONS, CASH
FLOW PRIORITIES, AND OTHER INFORMATION TO AID YOUR UNDERSTANDING, YOU
SHOULD READ CAREFULLY THE FULL DESCRIPTION OF THESE CALCULATIONS, CASH
FLOW PRIORITIES AND OTHER INFORMATION IN THIS PROSPECTUS SUPPLEMENT
AND THE ACCOMPANYING PROSPECTUS BEFORE MAKING ANY INVESTMENT DECISION.
PARTIES
THE TRUST
[ ] Auto Receivables Owner Trust [ ]-[ ] is a Delaware business trust. The trust
will issue the notes and be liable for their payment. The issuing trust's
principal asset will be a pool of auto loans.
SELLER AND SERVICER
[ ] is a [ ] corporation. It will sell the auto loans to ACE Securities Corp. [
] will also service the auto loans held by the issuing trust.
COMPANY
ACE Securities Corp. is a special purpose Delaware corporation. Neither Deutsche
Banc Alex. Brown nor any of its affiliates has guaranteed, will guarantee or is
or will be otherwise obligated with respect to any notes.
THE INSURER
[ ] is a [ ] financial guaranty insurance company. [ ] will issue a policy,
which will guarantee the payment of timely interest and principal due on the
class A-1 notes and class A-2 notes but only as set forth in the section of this
prospectus supplement titled "The Policy."
THE OWNER TRUSTEE
[ ] is a [ ]. [ ] will be the owner trustee.
THE INDENTURE TRUSTEE
[ ] is a [ ]. [ ] will be the indenture trustee and the backup servicer.
DATES
INITIAL CUTOFF DATE
o [ ]. The issuing trust will receive payments due on, or received with
respect to, the auto loans after this date.
CLOSING DATE
o On or about [ ].
DESCRIPTION OF THE SECURITIES
The issuing trust will issue three classes of asset backed notes. The class A-1
notes will be designated as the "Class A-1 Notes" and the class A-2 notes will
be designated as the "Class A-2 Notes". The Class A-1 Notes together with the
Class A-2 Notes will be designated as the "Class A Notes". The class B notes
will be designated as the "Class B Notes." Only the Class A Notes are offered to
you pursuant to this prospectus supplement. Any information in this prospectus
supplement relating to the Class B Notes is presented solely to provide you with
a better understanding of the Class A Notes.
Each of the Class A-1 Notes and Class A-2 Notes will have the initial principal
amount and the interest rate set forth in the following table. The dates on
which the final payment of principal and interest on each of the Class A-1 Notes
and Class A-2 Notes is scheduled to be made are also set forth in the following
table.
FINAL
INITIAL NOTE SCHEDULE
PRINCIPAL INTEREST PAYMENT
CLASS BALANCE RATE DATE
- ----- ------------ -------- ---------
A-1 $[ ] [ ]% [ ]
A-2 $[ ] [ ]% [ ]
The Class A Notes will initially be issued in book-entry form only. The Class A
Notes will be issued in minimum denominations of $1,000 and multiples of $1,000
in excess of $1,000.
You may hold your Class A Notes through The Depository Trust Company in the
United States.
The notes will be secured solely by the pool of non-prime auto loans and the
other assets of the issuing trust which are described under the section entitled
"The Trust Property."
A collection period means, with respect to a payment date, the calendar month
prior to the month in which the payment date occurs.
The Class A-2 Notes will not receive any payment of principal on a payment date
until the full amount of the Class A-1 Notes principal has been paid in full. On
each payment date, the Class B Notes will not receive any payment of interest or
principal until all amounts due the Class A Notes on the payment date have been
paid in full.
PAYMENT DATES
o The payment date will be the [ ]th day of each month, or, if that day is
not a business day, on the next succeeding business day. The first payment
date will be [ ].
o The record date for all payment dates is the [ ]th day of each month, or,
if that day is not a business day, on the prior business day.
INTEREST
o In the case of the first payment date, interest will accrue from [ ]
through and excluding the first payment date of [ ]. For any subsequent
payment interest will accrue on the Class A Notes during the month
preceding each payment date. Interest on the notes will be calculated on a
"30/360" basis.
PRINCIPAL
o Prior to achieving a required level of overcollateralization, the amount of
principal available to be distributed to the Class A Notes is generally
equal to (1) the amount of collections on the auto loan pool allocable to
principal during the prior calendar month plus any losses recognized on the
auto loan pool during the prior calendar month and (2) a specified amount
of excess interest received on the auto loan pool during the prior calendar
month, after paying specific expenses of the trust, interest on the Class A
Notes and funding the reserve account to the required level, necessary to
achieve the required level of overcollateralization.
o Once the required level of overcollateralization has been reached, the
amount of principal available to be distributed to the Class A Notes will
be equal to (1) the amount of collections on the auto loan pool allocable
to principal during the prior calendar month plus any losses recognized on
the auto loan pool during the prior calendar month less (2) the excess of
(a) the amount of overcollateralization on the payment date less (b) the
required level of overcollateralization on the payment date. Additionally,
once the required level of overcollateralization has been reached, excess
interest will no longer be used to create any further
overcollateralization.
o Principal distributable to the Class A Notes will be distributed first to
the Class A-1 Notes until its principal balance is reduced to zero and then
will be distributed to the Class A-2 Notes until its principal balance has
been reduced to zero.
o In addition, the outstanding principal amount of the Class A-1 Notes and
the Class A-2 Notes, to the extent not previously paid, will be payable on
the final scheduled payment date of the related class of notes.
THE TRUST ASSETS
The issuing trust's assets will include:
o non-prime motor vehicle retail installment sale contracts secured by new
and used automobiles and light-duty trucks;
o monies due on, or received under the receivables, after [ ];
o an assignment of the security interests in the vehicles securing the auto
loan pool;
o the related files;
o all rights to proceeds from claims on physical damage, credit life and
disability insurance policies covering the vehicles or the obligors;
o all rights to liquidation proceeds with respect to the auto loan pool;
o an assignment of the rights of ACE Securities Corp. under a receivables
purchase agreement with [ ];
o an assignment of the rights of [ ] against dealers under agreements between
[ ] and these dealers;
o specific bank accounts;
o all proceeds of the foregoing; and
o particular rights under the principal transaction documents for this
offering.
THE AUTO LOAN POOL
The auto loans consist of non-prime motor vehicle retail installment sale
contracts originated by dealers and then acquired by [ ] pursuant to its
contract acquisition program. [The motor vehicle retail installment sale
contracts consist primarily of contracts with individuals with less than perfect
credit due to various factors. These factors include the manner in which the
individuals have handled previous credit, the limited extent of their prior
credit history and/or their limited financial resources.]
STATISTICAL INFORMATION
The statistical information in this prospectus supplement is based on the auto
loans in the pool as of [ ]. It is expected that the composition and
characteristics of the pool of auto loans on the closing date will be similar to
the information set forth in this prospectus supplement. However, some auto
loans in the pool may be excluded on the closing date as a result of
administrative considerations. [ ] does not believe that the characteristics of
the auto loans included in the trust on the closing date in the aggregate will
differ materially from the information set forth in this prospectus supplement.
o As of [ ] the auto loans in the pool have:
- an aggregate principal balance of $[ ];
- a weighted average annual percentage rate of approximately [ ]%;
- a weighted average original term to scheduled maturity of
approximately 60 months;
- a weighted average remaining term to scheduled maturity of
approximately [ ] months; and
- a remaining term to scheduled maturity of not more than 72 months and
not less than [ ] months.
PRE-FUNDING FEATURE
Approximately $[ ] of the proceeds of the notes will be held by [ ]in an account
which is formed solely to hold this money, and used to purchase additional auto
loans with the prior written consent of [ ] in each case. The issuing trust will
purchase from ACE Securities Corp. additional non-prime auto loans from time to
time on or before [ ], [ ], from funds on deposit in this account. The
obligation of ACE Securities Corp. to sell additional auto loans to the trust is
conditioned on these loans having been sold to ACE Securities Corp. from [ ].
The auto loans acquired by the issuing trust during the period between the day
of the closing and [ ], will also be originated or acquired by [ ]. The
characteristics of the subsequently-acquired auto loans are not expected to
differ to any great extent from the auto loans acquired by the issuing trust on
the day of the closing.
THE INSURANCE POLICY
On the day of the closing, [ ] will issue a financial guaranty insurance policy
for the benefit of the Class A noteholders. Pursuant to this policy, [ ] will
unconditionally and irrevocably guarantee the payments of interest and principal
for each payment date with respect to the Class A Notes required to be made
during the term of the policy, subject to the further provisions of the policy
as described in this prospectus supplement. The Class B Notes do not have the
benefit of the policy.
OPTIONAL REDEMPTION
The notes, if still outstanding, may be redeemed in whole, but not in part, on
any payment date on which [ ] exercises its "clean-up call" option to purchase
the auto loan pool. This can only occur after the pool balance declines to 10%
or less of the original pool balance. [ ]'s exercise of the "clean-up call" is
also subject to the satisfaction of particular conditions, including obtaining
the prior written consent, in some circumstances, of [ ] The redemption price is
equal to the unpaid principal amount of the notes plus accrued and unpaid
interest on the notes.
MANDATORY REDEMPTION
IF PRE-FUNDING ACCOUNT IS NOT DEPLETED
Each of the Class A-1 Notes and Class A-2 Notes will be redeemed in part on a
pro rata basis if any portion of the $[ ] deposited in a segregated pre-funding
account with [ ]remains on deposit in that account on [ ], or prior to this date
if the amount remaining in the account is less than $100,000, provided, however
if the amount remaining in the pre-funding account is less than $100,000, only
the Class A-1 Notes will be redeemed.
UPON EVENT OF DEFAULT
The notes may be accelerated and subject to immediate payment at par upon the
occurrence of an event of default under the indenture. So long as [ ] is not in
default, the power to declare an event of default will be held by [ ]. In the
case of an event of default, the notes will automatically be accelerated and
subject to immediate payment at par. The policy issued by [ ] does not guarantee
payment of any amounts that become due on an accelerated basis, unless [ ]
elects, in its sole discretion, to pay the amounts in whole or in part.
RATING OF THE NOTES
The Class A Notes must receive at least the following ratings from [ ] and [ ]
in order to be issued.
RATING
------
CLASS ___ ___
- ----- ----- -----
A-1..........................
A-2..........................
TAX STATUS
Stroock & Stroock & Lavan LLP, special federal tax counsel, will
deliver an opinion of counsel that, for federal income tax purposes, the Class A
Notes will be treated as indebtedness and the trust will not be an association,
or publicly traded partnership, taxable as a corporation. Each noteholder, by
accepting a Class A Note, will agree to treat the notes as indebtedness.
ERISA CONSIDERATION
Subject to particular considerations discussed in this prospectus supplement
under "ERISA Considerations," the Class A Notes are eligible for purchase by
employee benefit plans.
RISK FACTORS
THE FOLLOWING INFORMATION, WHICH YOU SHOULD CAREFULLY CONSIDER,
IDENTIFIES CERTAIN SIGNIFICANT SOURCES OF RISK ASSOCIATED WITH AN INVESTMENT IN
THE CERTIFICATES.
THE INFORMATION RELATING TO There can be no assurance that
THE AUTO LOANS MAY NOT REFLECT the net loss experience
ACTUAL EXPERIENCE. calculated and presented in
this prospectus supplement by [ ]
with respect to its portfolio of
serviced contracts will reflect
actual experience with respect to
the auto loans included in the
issuing trust. In addition, there
can be no assurance that the future
delinquency or loan loss experience
of the servicer with respect to the
auto loans will be better or worse
than that set forth in this
prospectus supplement with respect
to [ ]'s servicing portfolio.
THE [ ] FINANCE PROGRAM AND [ ] generally originated by
THE NATURE OF OBLIGORS automobile dealers for sale and
MAY INCREASE THE RISK OF assignment to [ ]. [ ] purchases
DELINQUENCIES AND LOSSES. automobile retail installment sale
contracts which may not meet the
credit standards of traditional
primary lenders. As a result, the
underwriting standards applied by [
] are not as stringent as those of
the finance companies of motor
vehicle manufacturers or other
financial institutions. The [ ]
finance program focuses on the
non-prime market, including
borrowers with sub-standard credit
profiles who may not be able to
receive financing from more
traditional sources. The borrowers
may have had credit problems in the
past, including prior
delinquencies, repossessions,
bankruptcy filings or charge-offs
by other credit companies.
Accordingly, borrowers may have
greater difficulty or be less
likely to make their scheduled
payments. The number of
delinquencies and losses on the
auto loans is expected to be higher
than would be the case with lower
risk borrowers. Due to the credit
quality of these borrowers, the
auto loans have been originated
with higher annual percentage
interest rates than more
traditional lenders charge lower
risk borrowers. Any increase in
losses on the auto loans will
result in accelerated prepayments
on the Class A Notes. Any
reinvestment risks associated with
prepayment will be borne by the
noteholders. Additionally, if [ ],
as the security insurer, defaults
under the policy, you will bear the
risk of loss on the auto loans. You
are urged to consider the credit
quality of the auto loans when
analyzing an investment in the
notes.
A CHANGE IN SERVICER MAY [ ] believes that its credit loss
ADVERSELY AFFECT COLLECTIONS ON and delinquency experience reflect
THE AUTO LOANS. in part its trained staff and
collection procedures. If a
servicer termination event occurs
under the sale and servicing
agreement and [ ] is removed as
servicer, or if [ ] resigns or is
terminated as servicer, the backup
servicer has agreed to assume the
obligations of successor servicer.
Typically, a change in servicers
results in a temporary disruption
of servicing. There can be no
assurance, however, that
collections with respect to the
auto loans will not be adversely
affected by any change in servicer.
THE ISSUING TRUST HAS ONLY The sole sources for repayment of
LIMITED ASSETS. the notes are payments on the auto
loans, amounts on deposit in the
pre-funding account, other cash
accounts held by [ ], proceeds from
the repossession and sale of
related financed vehicles that
secure defaulted auto loans and
payments made under the insurance
policy. The receivables are NOT
insured or guaranteed by any
person. The notes represent
obligations of the trust and will
not be insured or guaranteed by any
entity. The money in the
pre-funding account will be used
solely to purchase additional auto
loans or, in limited circumstances,
redeem a portion of the Class A
Notes and is not available to cover
losses on the auto loan pool. The
capitalized interest account is
designed to cover obligations of
the issuing trust relating to the
portion of its assets not invested
in auto loans and is not designed
to provide protection against
losses on the auto loan pool.
Although the insurance policy will
be available to cover shortfalls in
distributions of the payments due
on the Class A Notes, pursuant to,
and in accordance with, the
insurance policy, the issuing trust
will depend on current
distributions on the auto loan
pool, including amounts otherwise
payable to the Class B Notes, and
amounts, if any, available in
specific collateral accounts
maintained for the benefit of [ ]
to make payments on the Class A
Notes. The Class A Notes represent
limited obligations of the issuing
trust, and the Class A Notes will
not be insured or guaranteed by [
], ACE Securities Corp., [ ]or any
other person or entity. If [ ] has
not perfected security interests in
the related financed vehicles, its
ability to realize on the
collateral securing the auto loans
may be affected and the proceeds to
be distributed to the noteholders
on a current basis may be reduced.
GEOGRAPHIC CONCENTRATION OF AUTO Obligors with respect to
LOANS MAY INCREASE CONCENTRATION RISKS. approximately [ ]% of the auto
loans were located in [ ] as of
based on current principal balance
as of the Initial Cutoff Date and
the address of the Obligor. Adverse
economic conditions or other
factors affecting [ ] could
increase the delinquency, loan loss
or repossession experience of the
issuing trust with respect to the
auto loans.
LIMITED ABILITY TO The underwriter may assist in
RESELL CLASS A NOTES. resales of the Class A Notes,
but they are not required to do so.
A secondary market for the Class A
Notes may not develop. If a
secondary market does develop, it
might not continue or it might not
be sufficiently liquid to allow you
to resell any of your Class A
Notes.
THE RATE AT WHICH THE CLASS Interest on the auto loans will be
A NOTES WILL AMORTIZE CANNOT payable to the holders of the Class
BE PREDICTED. A-1 Notes and Class A-2 Notes on
each payment date. This amount will
equal one-twelfth of the interest
rate on the note balance of the
class as of the close of business
on the last day of the month
immediately preceding the payment
date. The auto loans have different
APRs.
All of the auto loans are
prepayable at any time. The rate of
prepayments on the auto loans may
be influenced by a variety of
economic, social and other factors.
These factors include the fact that
a consumer obligor generally may
not sell or transfer the related
financed vehicle securing an auto
loan without the consent of [ ]
unless the loan is repaid by the
Obligor at the time of the sale or
transfer. The rate of prepayment on
the auto loans may also may be
influenced by the structure of the
loan, the nature of the consumer
obligors and the related financed
vehicles and servicing decisions.
In addition, under some
circumstances, [ ] is obligated to
purchase auto loans as a result of
breaches of particular
representations and warranties,
pursuant to the sale and servicing
agreement and the receivables
purchase agreement. Under some
circumstances, the servicer is
obligated to purchase auto loans
pursuant to the sale and servicing
agreement as a result of specified
uncured breaches of covenants by
it. The servicer may also purchase
all the auto loans if the pool
balance has declined to less than
10% of the original pool balance,
subject to specified limitations in
the sale and servicing agreement.
[ ] is not aware of publicly
available industry statistics that
set forth principal prepayment
experience for motor vehicle retail
installment contracts similar to
the auto loans. None of the issuing
trust, ACE Securities Corp. or [ ]
make any representation as to the
actual prepayment rates on the auto
loans. [ ], however, believes that
the actual rate of prepayments will
result in the Class A Notes being
repaid prior to their respective
final scheduled payment date. The
amounts paid to noteholders will
include prepayments on the auto
loans. The noteholders will bear
all reinvestment risk resulting
from the timing of payments on the
notes.
EFFECT OF LITIGATION ON Due to the consumer-oriented
[ ]'S FINANCIAL CONDITION. nature of [ ]'s industry and the
application of particular laws and
regulations, industry participants
are regularly named as defendants
in litigation alleging violations
of federal and state laws and
regulations and consumer law torts,
including fraud. Many of these
actions involve alleged violations
of consumer protection laws. A
significant judgment against [ ] or
others within the industry could
have a material adverse effect on [
]. It could affect [ ]'s financial
condition, results of operations
and/or its ability to perform its
obligations under the receivables
purchase agreement, the sale and
servicing agreement and the trust
agreement.
RATINGS OF THE CLASS A A rating is not a recommendation to
NOTES ARE NOT GUARANTEED TO REMAIN purchase, hold or IN PLACE. sell
notes. The ratings of the Class A
Notes address the likelihood of the
payment of principal and interest
on the Class A Notes pursuant to
their terms. There is no assurance
that a rating will remain in effect
for any given period of time or
that a rating will not be lowered
or withdrawn entirely by a rating
agency if in its judgment
circumstances in the future so
warrant. In the event that any
ratings initially assigned to the
Class A Notes are subsequently
lowered or withdrawn for any
reason, including by reason of a
downgrading of the claims-paying
ability of [ ], no person or entity
will be obligated to provide any
additional credit enhancement with
respect to the Class A Notes. Any
reduction or withdrawal of a rating
may have an adverse effect on the
liquidity and market price of the
Class A Notes.
EVENTS OF DEFAULT Upon the occurrence of an event
UNDER THE INDENTURE MAY RESULT IN of default under the indenture, so
AN ACCELERATION. long as _[ ] shall not have
defaulted and the default is not
continuing, [ ] as indenture
trustee, will continue to submit
claims under the insurance policy
as necessary in accordance with the
terms of the insurance policy to
enable the issuing trust to
continue to make payments due with
respect to the Class A Notes on
each payment date. However,
following the occurrence of an
event of default, [ ] may, at its
option, elect to cause the
liquidation of the assets of the
issuing trust, in whole or in part,
and pay all or any portion of the
outstanding amount of the Class A
Notes, plus accrued interest on the
Class A Notes.
IF THE ISSUING TRUST DOES NOT USE If the issuing trust has not used
ALL OF THE MONEY IN THE PRE-FUNDING all of the money deposited in
ACCOUNT A MANDATORY REDEMPTION the pre-funding account to purchase
OF A PORTION OF THE CLASS additional auto loans by [ ], [ ],
A NOTES COULD RESULT. then the holders of each of the
Class A-1 Notes and the Class A-2
Notes will receive a pro rata
prepayment of principal in an
amount equal to the unused amount
or if the amount remaining in the
pre-funding account is less than
$100,000, only the Class A-1 Notes
will be redeemed. Any reinvestment
risk from the mandatory redemption
of a portion of the Class A Notes
from the unused amount will be
borne by the holders of the Class A
Notes.
[ ] MAY NOT BE ABLE TO ORIGINATE The ability of [ ] to acquire or
SUFFICIENT AUTO LOANS TO USE originate sufficient additional
ALL MONEYS IN THE PRE-FUNDING ACCOUNT. auto loans may be affected by a
variety of social and economic
factors including: interest rates;
unemployment levels; the rate of
inflation and consumer perception
of economic conditions generally.
If [ ] does not originate
sufficient additional auto loans
then the money deposited in the
pre-funding account will not be
completely used and a mandatory
redemption of a portion of the
Class A Notes will result.
THE SELLER AND THE SERVICER
[To be inserted]
THE TRUST
The issuing trust, [ ]Auto Receivables Owner Trust [ ]- [ ] (the
"Trust" or the "Issuer"), is a business trust formed under the laws of the State
of Delaware pursuant to the trust agreement for the transactions described in
this prospectus supplement. On or about [ ] (the "Closing Date"), the Trust will
issue Class A-1 [ ]% Asset Backed Notes (the "Class A-1 Notes"), Class A-2 [ ]%
Asset Backed Notes (the "Class A-2 Notes", and together with the Class A-1
Notes, the "Class A Notes") and Class B [ ]% Asset Backed Notes (the "Class B
Notes" and, together with the Class A Notes, the "Notes.") The Class A-1 Notes
will have an aggregate original principal amount of $[ ], the Class A-2 Notes
will have an aggregate original principal amount of $[ ] and the Class B Notes
will have an aggregate original principal amount of $[ ]. Only the Class A Notes
are offered to you pursuant to this prospectus supplement. Any information in
this prospectus supplement relating to the Class B Notes is presented solely to
provide you with a better understanding of the Class A Notes. On the Closing
Date, the Trust will also issue an Asset Backed Certificate (the "Certificate")
which represents the equity ownership in the trust and is subordinate in right
of payment to the Notes. The Certificate is not being offered by this prospectus
supplement.
After its formation, the Trust will not engage in any activity other
than
o acquiring, holding and managing motor vehicle retail
installment sales contracts secured by new and used
automobiles, recreational vehicles, including motor homes,
campers, boats, boat motors, motorcycles, jet skis,
waverunners, all-terrain-vehicles and snowmobiles, vans
trucks, buses and trailers financed by these motor vehicle
retail installment sales contracts (the "Receivables") and
the other assets of the Trust and proceeds from the Trust,
o issuing the Notes and the Certificate,
o making payments on the Notes, and
o engaging in other activities that are necessary, suitable or
convenient to accomplish the foregoing or are incidental to
the foregoing or connected with the foregoing.
The proceeds from the initial sale of the Notes will be used by the
Trust to purchase the Initial Receivables from the Company pursuant to the Sale
and Servicing Agreement and to fund deposits in the Pre-Funding Account and the
Capitalized Interest Account. The Servicer will service the Receivables pursuant
to the Sale and Servicing Agreement and will be compensated for acting as
Servicer. See "Description of the Transaction Documents--Servicing Compensation"
in this prospectus supplement.
The Trust's principal offices are located in Wilmington, Delaware, in
care of [ ], as Owner Trustee, at the address listed below under "--The Owner
Trustee."
CAPITALIZATION OF THE TRUST
The following table illustrates the capitalization of the Trust as of
the Initial Cutoff Date, as if the issuance and sale of the Notes had taken
place on this date:
Class A-1 Notes............................ $[ ]
Class A-2 Notes............................ $[ ]
Class B Notes.............................. $[ ]
Total................................. $[ ]
THE OWNER TRUSTEE
[ ], the Owner Trustee (the "Owner Trustee") under the Trust Agreement
dated as of [ ], as amended as of [ ] among the Seller, the Company and the
Owner Trustee (the "Trust Agreement") is a [ ] and its principal offices are
located at [ ]. The Owner Trustee will perform limited administrative functions
under the Trust Agreement. The Owner Trustee's liability in connection with the
issuance and sale of the Notes is limited solely to the express obligations of
the Owner Trustee set forth in the Trust Agreement and the Sale and Servicing
Agreement.
THE INDENTURE TRUSTEE
[ ] will be the Indenture Trustee under the Indenture dated as of [
]among the Trust and the Indenture Trustee (the "Indenture"). [ ] is a [ ], the
corporate trust office of which is located at [ ].
TRUST PROPERTY
Each Note represents a limited obligation of the Trust secured by the
property of the Trust (the "Trust Property"). The Trust Property will include,
among other things, the following:
o non-prime motor vehicle retail installment sale contracts (the
"Initial Receivables") secured by new and used automobiles and
light-duty trucks (the "Initial Financed Vehicles");
o monies due or received under the Initial Receivables (a) with
respect to the Initial Receivables, after [ ] (the "Initial
Cutoff Date"), or (b) with respect to the Subsequent Receivables
after the related cutoff date (each a "Subsequent Cutoff Date");
o amounts as from time to time may be held in one or more separate
trust accounts established and maintained by the Indenture
Trustee, including the Collection Account, the Pre-Funding
Account and the Capitalized Interest Account, and the proceeds of
these accounts, as described below (see "Description of the
Transaction Documents--Accounts");
o security interests in the Financed Vehicles granted by the
obligors (the "Obligors") pursuant to the Receivables and any
accessions;
o the interest of the Seller in any proceeds from claims on any
credit life, credit disability, and physical damage insurance
policies or other insurance policies covering the Financed
Vehicles or Obligors;
o specific rights under the Sale and Servicing Agreement and the
Receivables Purchase Agreement;
o amounts payable to the Seller under all Dealer Recourse
obligations;
o all items contained in the related receivable files and any and
all other documents that the Seller keeps on file in accordance
with its customary procedures relating to the Receivables;
o property, including the right to receive future Liquidation
Proceeds, that secures any of the Receivables and that has been
acquired pursuant to the liquidation of any Receivable; and
o any and all payments on and proceeds of the foregoing.
Additional non-prime motor vehicle retail installment sale contracts
(the "Subsequent Receivables") secured by new and used automobiles and
light-duty trucks (the "Subsequent Financed Vehicles") and related property are
intended to be purchased by the Trust from the Seller from time to time on or
before [ ], from funds on deposit in the Pre-Funding Account. The Subsequent
Receivables will be purchased by the Company from the Seller pursuant to one or
more subsequent purchase agreements (each, a "Subsequent Purchase Agreement")
between the Company and the Seller, and from the Company by the Trust pursuant
to one or more subsequent transfer agreements. The purchase by the Trust of the
Initial Receivables and the Subsequent Receivables are in this prospectus
supplement referred to as the "Receivables," and the Initial Financed Vehicles
and the Subsequent Financed Vehicles are in this prospectus supplement referred
to as the "Financed Vehicles."
Pursuant to the dealer agreement between the Dealer and the Seller, a
Dealer generally is obligated to pay the Seller for the unpaid balance of those
Receivables which do not meet limited representations made by the Dealers (these
obligations referred to in this prospectus supplement as "Dealer Recourse").
These representations and warranties relate primarily to the origination of the
contracts and the perfection of the security interests in the related Financed
Vehicles, and do not typically relate to the creditworthiness of the related
Obligors or the collectability of the relevant contracts. Although the Dealer
Agreements with respect to the Receivables will not be assigned to the Trust or
Indenture Trustee, the Receivables Purchase Agreement and the Sale and Servicing
Agreement will require the Seller to cause the amount of any recovery in respect
to any Receivable pursuant to any Dealer Recourse to be deposited in the
Collection Account in satisfaction of the Seller's obligations under the Sale
and Servicing Agreement. The sales by the Dealers of installment sale contracts
to the Seller do not generally provide for recourse against the Dealers for
unpaid amounts in the event of a default by an Obligor under the installment
sales contract, other than in connection with the breach of the foregoing
representations and warranties. There can be no assurance that the Seller will
pursue all claims under the Dealer Agreements nor that the Seller will prevail
if any claim is made.
The Receivables were generally originated by Dealers in accordance
with the Seller's requirements under agreements with Dealers for assignment to
the Seller and were so assigned. All the Initial Receivables will be sold and
assigned by the Seller to the Company pursuant to the Receivables Purchase
Agreement and by the Company to the Trust pursuant to the Sale and Servicing
Agreement on or prior to the Closing Date. The Subsequent Receivables will be
sold and assigned on one or more future dates occurring no later than [ ] (each,
a "Subsequent Transfer Date"). The Indenture Trustee, as custodian, will hold
the original installment sales contract or promissory note as well as copies of
documents and instruments relating to each Receivable (the "Receivables File").
Pursuant to the Indenture, the Trust will grant a security interest in
the Trust Property in favor of the Indenture Trustee on behalf of the
Noteholders and for the benefit of the [ ] (the "Insurer") in support of the
obligations owing to it under the Insurance and Indemnity Agreement, dated as of
[ ], between the Seller, the Trust, the Certificateholder and the Insurer. Any
proceeds of the security interest in the Trust Property would be distributed
according to the Indenture as described under "The Notes--Priority of
Distribution Amounts." The Insurer would be entitled to the distributions only
after payment of amounts owing to, among others, Noteholders.
THE SELLER'S AUTOMOBILE FINANCING PROGRAM
[To Be Inserted]
DELINQUENCY AND LOSS EXPERIENCE
The following tables set forth information relating to the delinquency
and loss experience of the Seller for the periods indicated. The data presented
in the delinquency and loss tables below are for illustrative purposes only.
There is no assurance that the delinquency and credit loss experience with
respect to the Seller's automobile, light-duty truck and sports utility vehicle
installment contracts in the future, or that the experience of the Trust
Property with respect to the Receivables pledged to the Indenture Trustee for
the benefit of the Noteholders, will be similar to that set forth below. Losses
and delinquencies are affected by, among other things, general and regional
economic conditions and the supply of and demand for automobiles, light-duty
trucks and sports utility vehicles. The delinquency and loss percentages may be
affected by the increase in size of, and the relative lack of seasoning of, a
substantial portion of the portfolio. THE INFORMATION IN THE TABLE BELOW IS NOT
INTENDED TO INDICATE OR PREDICT THE EXPECTED DELINQUENCY EXPERIENCE ON PAST,
CURRENT OR FUTURE POOLS OF AUTOMOBILE LOANS FOR WHICH THE SERVICER IS THE
PRIMARY SERVICER. See "Risk Factors--The information relating to the auto loans
may not reflect actual experience."
HISTORICAL DELINQUENCY EXPERIENCE
AS OF ______________ AS OF ____________
----------------------------------------- ----------------------------------------
% OF % OF
NO. OF PRINCIPAL PRINCIPAL NO. OF PRINCIPAL PRINCIPAL
RECEIVABLES BALANCE BALANCE RECEIVABLES BALANCE BALANCE
----------- ----------- ----------- ----------- ----------- -----------
Aggregate Principal Balance at Period
End(1), (2).......................
Delinquencies
31-60 Days........................
61-90 Days........................
91+ Days..........................
Total Delinquencies.................
Amount in Repossession(3)...........
Total Delinquencies and Amount in
Repossession......................
AS OF ______________
--------------------------------------
% OF
NO. OF PRINCIPAL PRINCIPAL
RECEIVABLES BALANCE BALANCE
----------- ----------- -----------
Aggregate Principal Balance at Period
End(1), (2).......................
Delinquencies
31-60 Days........................
61-90 Days........................
91+ Days..........................
Total Delinquencies.................
Amount in Repossession(3)...........
Total Delinquencies and Amount in
Repossession......................
AS OF ______________ AS OF ____________
----------------------------------------- ------------------------------------
% OF % OF
NO. OF PRINCIPAL PRINCIPAL NO. OF PRINCIPAL PRINCIPAL
RECEIVABLES BALANCE BALANCE RECEIVABLES BALANCE BALANCE
----------- ----------- ----------- ----------- ----------- ---------
Aggregate Principal Balance at Period
End (1), (2).................................
Delinquencies
31-60 Days...................................
61-90 Days...................................
91+ Days.....................................
Total Delinquencies............................
Amount in Repossession(3)......................
Total Delinquencies and Amount in
Repossession.................................
-------------------
(1) The aggregate principal balance is equal to the gross receivable less
unearned finance charges on Precomputed Receivables plus the principal
balance on Simple Interest Receivables.
(2) Represents the aggregate principal balance of all contracts purchased
and serviced by the Seller.
(3) Represents the aggregate principal balance as of the repossession
date.
HISTORICAL NET LOSS EXPERIENCE
DURING THE PERIOD ENDED
---------------------------------------------------------------------------
______ ______ ______ ______ ______ ______
---------- ---------- ---------- ---------- ---------- ----------
Average Aggregate Principal
Balance(1)........................................
Gross Charge-Offs(2)................................
Recoveries(3).......................................
Net Losses..........................................
Net Losses as a Percentage of Average
Aggregate Principal Balance.......................
---------------------
(1) The aggregate principal balance is equal to the gross receivable less unearned finance charges on Precomputed Receivables
plus the principal balance on Simple Interest Receivables.
(2) Gross Charge-Offs are defined as the remaining principal balance of the charged-off contract less the net proceeds of the
liquidation of the related vehicle.
(3) Recoveries include post-liquidation amounts received on previously charged-off contracts, including deficiency payments,
rebates on related extended service contracts and insurance policies.
THE BACKUP SERVICER
If a Servicer Termination Event occurs and remains unremedied and the
Seller is terminated as Servicer or resigns as Servicer, in each case in
accordance with the Sale and Servicing Agreement, [ ], a [ ], will serve as
Backup Servicer.
The Backup Servicer will receive a fee on each Payment Date equal to
one-twelfth the product of [ ] basis points and the then outstanding Note
Balance as compensation for, among other things, (1) standing by to act as
successor Servicer and (2) confirming particular calculations made by the
Servicer on the monthly statement to Noteholders, including but not limited to
(a) interest and principal payments due to the Noteholders and (b) some of the
Receivables performance ratios.
THE RECEIVABLES
Pursuant to the Receivables Purchase Agreement, the Seller will sell
and assign to the Company all of its right, title and interest in and to the
Receivables and the other Trust Property, and the Company, pursuant to the Sale
and Servicing Agreement, will sell and assign to the Trust all of its right,
title and interest in and to the Receivables and any other Trust Property. The
Trust will then pledge all of its right, title and interest in and to the
Receivables to the Indenture Trustee for the benefit of the Noteholders and the
Insurer pursuant to the Indenture. The Receivables consist of non-prime motor
vehicle retail installment sales contracts. The Receivables were purchased by
the Seller in the ordinary course of its business pursuant to its finance
programs and underwriting standards. As detailed in this prospectus supplement,
credit guidelines may be less stringent than those applied in the origination of
other automobile loans by other lenders. See "The Seller's Automobile Financing
Program."
No selection procedures adverse to the Noteholders or the Insurer were
utilized in selecting the Initial Receivables sold and assigned to the Company
and then sold and assigned to the Trust. The Receivables existing as of the
Initial Cutoff Date were selected from the Seller's portfolio according to
several criteria. Among the criteria, each Receivable:
(1) arises from the delivery and acceptance of a Financed Vehicle and
which delivery and acceptance has been fully performed by the
Obligor and the Dealer party to the transaction,
(2) arises from the normal course of the Dealer's business,
(3) is not in default,
(4) the Obligor of which is a natural person residing in any state or
the District of Columbia,
(5) the Obligor of which is not a government or a governmental
subdivision or agency,
(6) met the Seller's underwriting criteria at the time of purchase,
(7) is denominated and payable in Dollars in the United States,
(8) is in full force and effect and constitutes the legal, valid and
binding obligation of the Obligor in accordance with its terms,
(9) is not subject to any dispute, litigation, counterclaim or
defense, or any offset or right of offset at the time of purchase
by the Seller, any exercisable right of rescission,
(10) is not more than [ ] days past due,
(11) has an original term to scheduled maturity of not less than [ ]
or more than 72 months,
(12) has a remaining term to scheduled maturity of not less than [ ]
months or greater than 72 months,
(13) provides for equal monthly payments which will cause the
Receivable to fully amortize [ ] during its term,
(14) has a remaining principal balance of not less than $[ ] or more
than $[ ],
(15) has an APR of not less than [ ]% and
(16) the model year of the related Financed Vehicle is not earlier
than [ ].
PAYMENTS ON THE RECEIVABLES
All of the Receivables provide for the payment by the related Obligor
of a specific total amount of payments, payable in substantially equal monthly
installments on each scheduled payment date, which total represents the amount
financed plus interest charges on the amount financed for the term of the
Receivable. Each Receivable provides for repayment of the Amount Financed by an
Obligor according to:
o the Rule of 78's (a "Rule of 78's Receivables"),
o the actuarial method (an "Actuarial Receivable" and together with
Rule of 78's Receivables, the "Precomputed Receivables") or
o the simple interest method (a "Simple Interest Receivable").
Under a Rule of 78's Receivable, the rate at which the amount of
finance charges is earned and, correspondingly, the amount of each scheduled
monthly payment allocated to reduction of the outstanding principal balance of
the related Receivable are calculated in accordance with the "Rule of 78's".
Under the Rule of 78's, the portion of a payment allocable to interest earned
during that month is determined by multiplying the total amount of interest
payable over the term of the Receivable by a fraction, the denominator of which
is equal to the sum of a series of numbers beginning with one and ending with
the number of scheduled monthly payments due under the related Receivable, and
the numerator of which is the number of payments remaining under the Receivable
before giving effect to the payment to which the fraction is being applied. The
difference between the amount of the scheduled monthly payment made by the
Obligor and the amount of earned interest calculated for the month is applied to
principal reduction.
An Actuarial Receivable provides for amortization of the loan over a
series of fixed level monthly installments. Each scheduled monthly payment is
deemed to consist of an amount of interest equal to one-twelfth of the stated
APR of the Receivable multiplied by the outstanding principal balance of the
Receivable and an amount of principal equal to the remainder of the scheduled
monthly payment.
All payments received by the Servicer on or in respect of Precomputed
Receivables, including the final scheduled payment, will be allocated pursuant
to the Sale and Servicing Agreement on an actuarial basis. No adjustment will be
made in the event of early or late payments, although in the latter case, the
Obligor may be subject to a late charge.
"Simple Interest Receivables" provide for the amortization of the
amount financed under the Receivable over a series of fixed level monthly
payments. However, unlike the monthly payment under Rule of 78s Receivables,
each monthly payment consists of an installment of interest which is calculated
on the basis of the outstanding principal balance of the receivable multiplied
by the stated APR and further multiplied by the period elapsed, as a fraction of
a calendar year, since the preceding payment of interest was made. As payments
are received under a Simple Interest Receivable, the amount received is applied
first to interest accrued to the date immediately preceding the date of payment
and the balance is applied to reduce the unpaid principal balance. Accordingly,
if an Obligor pays a fixed monthly installment before its scheduled due date,
the portion of the payment allocable to interest for the period since the
preceding payment was made will be less than it would have been had the payment
been made as scheduled, and the portion of the payment applied to reduce the
unpaid principal balance will be correspondingly greater. Conversely, if an
Obligor pays a fixed monthly installment after its scheduled due date, the
portion of the payment allocable to interest for the period since the preceding
payment was made will be greater than it would have been had the payment been
made as scheduled, and the portion of the payment applied to reduce the unpaid
principal balance will be correspondingly less. In either case, the Obligor pays
a fixed monthly installment until the final scheduled payment date, at which
time the amount of the final installment is increased or decreased as necessary
to repay the then outstanding principal balance.
In the event of a prepayment in full, voluntarily or by acceleration,
of a Precomputed Receivable, a "rebate" in the loan accounting records of the
Servicer may be made to the Obligor of that portion of the total amount of
payments under the relevant Receivable allocable to "unearned" finance charges.
In the event of the prepayment in full, voluntarily or by acceleration, of a
Simple Interest Receivable, a "rebate" will not be made to the Obligor, but the
Obligor will be required to pay interest only to the date immediately preceding
the date of prepayment. The amount of a rebate under a Precomputed Receivable
generally will be less than or equal to the remaining scheduled payments of
interest that would have been due under a Simple Interest Receivable for which
all remaining payments were made on schedule.
The amount of a rebate under a Rule of 78's Receivable calculated in
accordance with the Rule of 78's generally will be less than the amount of a
rebate on an Actuarial Receivable calculated in accordance with the actuarial
method. Distributions to Noteholders will not be affected by Rule of 78's
rebates under the Rule of 78's Receivables because pursuant to the Sale and
Servicing Agreements distributions will be determined using the actuarial
method. Amounts received upon prepayment in full of a Rule of 78's Receivable in
excess of the then outstanding principal balance of the Receivable and accrued
interest on the then outstanding principal balance of the Receivable, calculated
pursuant to the actuarial method, will not be passed through to Noteholders.
PURCHASE OR REPLACEMENT OBLIGATIONS
Pursuant to the Receivables Purchase Agreement and the Sale and
Servicing Agreement, the Seller will be obligated to repurchase or replace,
subject to limits on replacement set forth in the Sale and Servicing Agreement,
any Receivable sold and assigned to the Trust as to which a breach has occurred
as to particular representations or warranties made by the Seller with respect
to the Receivable, if the breach has not been cured by the last day of the first
full calendar month following the discovery by or notice to the Seller of the
breach, if the breach will materially and adversely affect the interests of the
Noteholders, the Insurer or the Trust in the relevant Receivable. The Indenture
Trustee will also have rights to enforce the obligations of the Seller under the
Receivables Purchase Agreement. See "Description of the Transaction
Documents--Sale and Assignment of Receivables" and "Trust Property" in this
prospectus supplement.
The Sale and Servicing Agreement also provides that if the Servicer
breaches certain of its servicing obligations under the Sale and Servicing
Agreement, including but not limited to its obligation to maintain perfection of
the first priority security interest of the Seller created by each Receivable in
the related Financed Vehicle, or other covenants with regard to the Servicer, in
each case only in a manner that materially and adversely affects the interests
of the Noteholders, the Insurer or the Trust in any Receivable, the Servicer
will purchase or replace the relevant Receivable from the Trust, unless the
breach has been cured by the last day of the first full calendar month following
the discovery by or notice to the Servicer of the breach.
COMPOSITION OF THE POOL OF INITIAL RECEIVABLES
The tables below set forth information regarding the composition and
characteristics of the pool of Receivables as of the Initial Cutoff Date. It is
expected that the composition and characteristics of the Receivables on the
Closing Date will be similar to the information set forth below. However, some
Receivables may be excluded on the Closing Date as of a result of particular
administrative considerations. The Seller does not believe that the
characteristics of the Receivables included in the Trust on the Closing Date in
the aggregate will differ materially from the information set forth in this
prospectus supplement.
COMPOSITION OF THE INITIAL RECEIVABLES
Aggregate Principal Balance............. $[ ]
Number of Receivables................... [ ]
Average Amount Financed................. $[ ]
Range of Amounts Financed............... $[ ] to $[ ]
Average Current Principal Balance....... $[ ]
Range of Current Principal Balances..... $[ ] to $[ ]
Weighted Average APR.................... [ ]%
Range of APRs........................... [ ]% to [ ]%
Weighted Average Original Term to
Scheduled Maturity(1)................. [ ] months
Range of Original Terms to Scheduled
Maturity.............................. [ ] to [ ] months
Weighted Average Remaining Term to
Scheduled Maturity(1)................. [ ] months
Range of Remaining Terms to
Scheduled Maturity. [ ] to 72 months
- ----------------------
(1) Rounded to the nearest month.
DISTRIBUTION OF RECEIVABLES BY CURRENT PRINCIPAL BALANCE
(AS OF THE INITIAL CUTOFF DATE)
PERCENTAGE OF PERCENTAGE OF
TOTAL NUMBER CURRENT AGGREGATE
CURRENT PRINCIPAL NUMBER OF OF PRINCIPAL PRINCIPAL
BALANCE RECEIVABLES RECEIVABLES(1) BALANCE BALANCE(1)
- ----------------- ------------- ---------------- -------------- -------------
$5,000.00 to 9,999.99........
10,000.00 to 14,999.99........
15,000.00 to 19,999.99........
25,000.00 to 29,999.99........
30,000.00 to 34,999.99........ ------------- ---------------- --------------- -------------
TOTAL......................... 100.00% $_____________ 100.00%
------------- ---------------- --------------- --------------
DISTRIBUTION OF RECEIVABLES BY AMOUNT FINANCED
(AS OF THE INITIAL CUTOFF DATE)
PERCENTAGE OF PERCENTAGE OF
TOTAL NUMBER CURRENT AGGREGATE
AMOUNT NUMBER OF OF PRINCIPAL PRINCIPAL
FINANCED RECEIVABLES RECEIVABLES(1) BALANCE BALANCE(1)
- ----------------- ------------- ---------------- -------------- -------------
$5,000.00 to 9,999.99........
10,000.00 to 14,999.99........
15,000.00 to 19,999.99........
20,000.00 to 24,999.99........
25,000.00 to 29,999.99........
30,000.00 to 34,999.99........
35,000.00 to 39,999.99........ ------------- ---------------- --------------- -------------
TOTAL......................... 100.00% $_____________ 100.00%
------------- ---------------- --------------- --------------
- ---------------------
(1) Percentages may not add to 100.00% due to rounding.
DISTRIBUTION OF RECEIVABLES BY APR
(AS OF THE INITIAL CUTOFF DATE)
PERCENTAGE OF PERCENTAGE OF
TOTAL NUMBER CURRENT AGGREGATE
NUMBER OF OF PRINCIPAL PRINCIPAL
RANGE OF APRS (%) RECEIVABLES RECEIVABLES(1) BALANCE BALANCE(1)
- ----------------- ------------- ---------------- -------------- ------------
10.00 to 10.99...............
11.00 to 11.99...............
12.00 to 12.99...............
13.00 to 13.99...............
14.00 to 14.99...............
15.00 to 15.99...............
16.00 to 16.99...............
17.00 to 17.99...............
18.00 to 18.99...............
19.00 to 19.99...............
20.99 to 20.99...............
21.00 to 21.99...............
22.00 to 22.99...............
23.00 to 23.99...............
24.00 to 24.99...............
25.00 to 25.99............... ------------- ---------------- --------------- -------------
TOTAL........................ 100.00% $_____________ 100.00%
------------- ---------------- --------------- -------------
DISTRIBUTION OF RECEIVABLES BY MODEL YEAR OF FINANCED VEHICLE
(AS OF THE INITIAL CUTOFF DATE)
PERCENTAGE OF PERCENTAGE OF
TOTAL NUMBER CURRENT AGGREGATE
NUMBER OF OF PRINCIPAL PRINCIPAL
MODEL YEAR RECEIVABLES RECEIVABLES(1) BALANCE BALANCE(1)
- ----------------- ------------- ---------------- -------------- -------------
1999........................
1998........................
1997........................
1996........................
1995........................
1994........................
1993........................
1992........................
1991........................ ------------- ---------------- --------------- -------------
TOTAL....................... 100.00% $_____________ 100.00%
------------- ---------------- --------------- -------------
- ---------------------
(1) Percentages may not add up to 100.00% due to rounding.
DISTRIBUTION OF RECEIVABLES BY REMAINING TERM TO SCHEDULED MATURITY
(AS OF THE INITIAL CUTOFF DATE)
PERCENTAGE OF PERCENTAGE OF
TOTAL NUMBER CURRENT AGGREGATE
NUMBER OF OF PRINCIPAL PRINCIPAL
RANGE OF REMAINING TERMS RECEIVABLES RECEIVABLES(1) BALANCE BALANCE(1)
- ------------------------ ------------- ---------------- -------------- ------------
24 to 29 months..............
30 to 35 months..............
36 to 41 months..............
42 to 47 months..............
48 to 53 months..............
54 to 59 months..............
60 to 65 months..............
66 to 71 months..............
72 months.................... ------------- ---------------- --------------- -------------
TOTAL........................ 100.00% $_____________ 100.00%
------------- ---------------- --------------- ----------
DISTRIBUTION OF RECEIVABLES BY ORIGINAL TERM TO SCHEDULED MATURITY
(AS OF THE INITIAL CUTOFF DATE)
PERCENTAGE OF PERCENTAGE OF
TOTAL NUMBER CURRENT AGGREGATE
NUMBER OF OF PRINCIPAL PRINCIPAL
RANGE OR ORIGINAL TERMS RECEIVABLES RECEIVABLES(1) BALANCE BALANCE(1)
- ------------------------ ------------- ---------------- -------------- ------------
30 to 35 months...........
36 to 41 months...........
42 to 47 months...........
48 to 53 months...........
54 to 59 months...........
60 to 65 months...........
66 to 71 months...........
72 months................. ------------- ---------------- --------------- -------------
TOTAL..................... 100.00% $_____________ 100.00%
------------- ---------------- --------------- -------------
- ---------------------
(1) Percentages may not add up to 100.00% due to rounding.
DISTRIBUTION OF RECEIVABLES BY ADDRESS OF OBLIGOR
(AS OF THE INITIAL CUTOFF DATE)
PERCENTAGE OF PERCENTAGE OF
TOTAL NUMBER CURRENT AGGREGATE
NUMBER OF OF PRINCIPAL PRINCIPAL
STATE RECEIVABLES RECEIVABLES(1) BALANCE BALANCE(1)
- ------------------------ ------------- ---------------- -------------- ------------
- --------....................
- ---------...................
- ---------...................
- ------------................
- ----------..................
- -----------.................
- ------------................
- ---------...................
- -----------.................
- -----------.................
- ---------...................
- ----------..................
- ----------..................
- ---------...................
- ----------..................
- ---------...................
- -----------.................
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- -----------.................
- ----------..................
- ----------..................
- --------....................
- ----------..................
- -----------.................
- -----------.................
- ---------...................
- -------.....................
- ----------.................. ------------- ---------------- --------------- -------------
TOTAL....................... 100.00% $_____________ 100.00%
------------- ---------------- --------------- -------------
- --------------------
(1) Percentages may not add up to 100.00% due to rounding.
MATURITY AND PREPAYMENT CONSIDERATIONS
All the Receivables are prepayable at any time. The rate of
prepayments on the Receivables may be influenced by a variety of economic,
social and other factors, including the fact that an Obligor generally may not
sell or transfer the Financed Vehicle securing a Receivable without the consent
of the Seller unless the loan is repaid by the Obligor at the time of the sale
or transfer. For this purpose the term "prepayments" includes prepayments in
full, or in part, including, without limitation, some partial prepayments
related to refunds of extended service contract costs and unearned insurance
premiums, liquidations due to default, as well as receipts of proceeds from
physical damage, credit life and credit accident and health insurance policies
and other Receivables repurchased for administrative reasons. The rate of
prepayment on the Receivables may also be influenced by the structure of the
loan, the nature of the Obligors and the Financed Vehicles and servicing
decisions as discussed above. In addition, under some circumstances, the Seller
is obligated to repurchase or replace Receivables as a result of breaches of
representations and warranties pursuant to the Sale and Servicing Agreement and
the Receivables Purchase Agreement, and under some circumstances, the Servicer
is obligated to purchase Receivables pursuant to the Sale and Servicing
Agreement as a result of breaches of specific covenants. Subject to particular
conditions, the Servicer has the option to purchase the Receivables when the
aggregate principal balance of the Receivables is 10% or less of the Original
Pool Balance.
If prepayments are received on the Receivables, the actual weighted
average life of the Receivables may be shorter than the scheduled weighted
average life, i.e., the weighted average life assuming that payments will be
made as scheduled and that no prepayments will be made. "Weighted Average Life"
means the average amount of time during which each dollar of principal on a
Receivable is outstanding.
Any reinvestment risks resulting from a faster or slower incidence of
prepayment of Receivables will be borne by the Noteholders. See also "The
Notes--Optional Purchase of Receivables" regarding the Servicer's right to
purchase the Receivables and the other Trust Property on any Determination Date
as of which the Aggregate Principal Balance has declined to less than 10% of the
Original Pool Balance.
Prepayments on automobile receivables can be measured relative to a
prepayment standard or model. The model used in this prospectus supplement, the
Absolute Prepayment Model ("ABS"), represents an assumed rate of prepayment each
month relative to the original number of receivables in a pool of receivables.
ABS further assumes that all the Receivables are the same size and amortize at
the same rate and that each Receivable in each month of its life will either be
paid as scheduled or be prepaid in full. For example, in a pool of receivables
originally containing 10,000 receivables, a 1% ABS rate means that 100
receivables prepay each month. ABS does not purport to be an historical
description of prepayment experience or a prediction of the anticipated rate of
prepayment of any pool of receivables, including the Receivables.
The tables captioned "Percent of Initial Note Principal Balance at
Various ABS Percentages" ("ABS Tables") have been prepared on the basis of the
following assumptions:
o the Trust includes two pools of Receivables with the
characteristics set forth in the following table;
o the Receivables prepay in full at the specified constant
percentage of ABS monthly, with no defaults, losses or
repurchases,
o each scheduled monthly payment on the Receivables is made on the
last day of each month and each month has 30 days;
o the initial principal amount of each of the Class A-1 Notes and
Class A-2 Notes are as set forth on the cover page of this
prospectus supplement;
o interest accrues during each Interest Period at the following
assuming coupon rates; Class A-1 Notes, [ ]% and Class A-2 Notes,
[ ]%;
o payments on the notes are made on the [ ](th) of each month
whether or not a Business Day;
o the Class A Notes are purchased on [ ];
o the scheduled monthly payment for each Receivable has been
calculated on the basis of the assumed characteristics in the
following table so that each Receivable will amortize in amounts
sufficient to repay the Principal Balance of the Receivable by
its indicated remaining term to maturity;
o the first due date for each Receivable is the last day of the
month of the assumed cutoff date for each Receivable as set forth
in the following table;
o the entire Pre-Funded Amount is used to purchase Subsequent
Receivables;
o the Servicer does exercise its option to purchase the
Receivables; and
o the difference between the gross APR and the net APR is equal to
the Servicer Fee, and the net APR is further reduced by the fees
due to the Indenture Trustee, the Backup Servicer and the
Insurer.
REMAINING
ORIGINAL TERM TO
AGGREGATE TERM TO SCHEDULED
PRINCIPAL GROSS ASSUMED MATURITY (IN MATURITY (IN
POOL BALANCE APR(%) CUTOFF DATE MONTHS) MONTHS)
- --------- ------------ ----------- ------------- ------------- -------------
1 $ [ ] [ ] [ ] [ ] [ ]
2 [ ] [ ] [ ] [ ] [ ]
Total $ [ ]
The ABS Tables indicate, based on the assumptions set forth above, the
percentages of the initial principal amount of the Class A-1 Notes and Class A-2
Notes that would be outstanding after each of the Payment Dates shown at various
percentages of ABS and the corresponding weighted average lives of the Notes.
The actual characteristics and performance of the Receivables will differ from
the assumptions used in constructing the ABS Tables. The assumptions used are
hypothetical and have been provided only to give a general sense of how the
principal cash flows might behave under the varying prepayment scenarios. For
example, it is very unlikely that the Receivables will prepay at a constant
level of ABS until maturity, that all of the Receivables will prepay at the same
level of ABS or that the coupon rates on the Notes will remain constant.
Moreover, the diverse terms of Receivables could produce slower or faster
principal distributions than indicated in the ABS Tables at the various constant
percentage of ABS specified, even if the original and remaining terms of
maturity of the Receivables are as assumed. Any difference between the
assumptions and the actual characteristics and performance of the Receivables,
including actual prepayment experience or losses, will affect the percentages of
initial balances outstanding over time and the weighted average lives of the
Class A-1 Notes and Class A-2 Notes.
PERCENT OF INITIAL NOTE BALANCE
AT VARIOUS ABS PERCENTAGES(1)
CLASS A-1 NOTES CLASS A-2 NOTES
PAYMENT -----------------------------------------------------------------------------------------------------
DATE ___% ___% ___% ___% ___% ___% ___% ___%
- --------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
INITIAL
- ---------
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Weighted
Average Life
in Years(2)
(1) The percentages in this table have been rounded to nearest whole number.
(2) The weighted average life of a note is determined by (1) multiplying the
amount of each principal payment on a note by the number of years from the
date of the Issuance of the note to the related Payment Date, (b) adding
the results and (c) dividing the sum by the related initial principal
amount of the note.
YIELD CONSIDERATIONS
Other than on the first Payment Date, on each Payment Date, interest
on the Receivables will be passed through to the Class A-1 and Class A-2
Noteholders in an amount equal to one-twelfth of the Interest Rate multiplied by
the Note Balance of the applicable Class on the last day of the immediately
preceding Collection Period. In the event of prepayments on Receivables,
Noteholders will nonetheless be entitled to receive interest for the full month
on the Notes. See also "The Receivables--Payments on the Receivables" in this
prospectus supplement.
USE OF PROCEEDS
The Trust will use the net proceeds from the sale of the Notes to
purchase Receivables from the Company and to make the initial deposit into the
Capitalized Interest Account and the Pre-Funding Account. The Company will use
the net proceeds paid to the Company by the Trust to purchase Receivables from
the Seller, which in turn will use the proceeds to pay related expenses and
repay specific warehouse loans and any additional proceeds will be added to the
Seller's general funds and used for its general corporate purposes.
THE INSURER
The following information has been obtained from the Insurer and has
not been verified by the Seller, the Company or the Underwriter. No
representations or warranty is made by the Seller, the Company or the
Underwriter with respect to this information.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
In addition to the documents described in the prospectus under
"Incorporation of Certain Documents by Reference," the consolidated financial
statements of the Insurer and its subsidiaries included in, or as exhibits to,
the following documents which have been filed with the Commission by Holdings,
are incorporated by reference in this prospectus supplement:
o Annual Report on Form 10-K for the year ended [ ],
o Quarterly Report on Form 10-Q for the period ended [ ],
o Quarterly Report on Form 10-Q for the period ended [ ], and
o Quarterly Report on Form 10-Q for the period ended [ ].
All financial statements of the Insurer included in documents filed by
the Insurer pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities and
Exchange Act of 1934, as amended (the "Exchange Act") subsequent to the date of
this prospectus supplement and prior to the termination of the offering of the
Class A Notes shall be deemed to be incorporated by reference into this
prospectus supplement and to be a part of this prospectus supplement from the
respective dates of filing of these documents.
The Seller will provide without charge to any person to whom this
prospectus supplement is delivered, upon their oral or written request, a copy
of any or all of the foregoing financial statements incorporated in this
prospectus supplement by reference. Requests for copies should be directed to:
[ ]
The Seller on behalf of the Trust undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Trust's annual report pursuant to section 13(a) or section 15(d) of the Exchange
Act and each filing of the financial statements of the Insurer included in or as
an exhibit to the annual report the Insurer of filed pursuant to section 13(a)
or section 15(d) of the Exchange Act that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the Class A Notes offered by this prospectus supplement, and the
offering of the Class A Notes at that time shall be deemed to be the initial
bona fide offering of the Class A Notes.
All documents filed by the Company with respect to the Registration
Statement, either on its own behalf or on behalf of the Trust, relating to the
Class A Notes, with the Securities and Exchange pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act, after the date of this prospectus
supplement and prior to the termination of any offering of the Class A Notes
offered by this prospectus supplement, shall be deemed to be incorporated by
reference in this prospectus supplement and to be a part of this prospectus
supplement from the date of the filing of these documents. Any statement
contained in this prospectus supplement or in a document incorporated or deemed
to be incorporated by reference in this prospectus supplement shall be deemed to
be modified or superseded for purposes of this prospectus supplement to the
extent that a statement contained in this prospectus supplement or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference in this prospectus supplement, modifies or replaces the statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this prospectus supplement.
THE NOTES
The Notes will be issued pursuant to the Indenture, a form of which
has been filed as an exhibit to the Registration Statement. The following
summary describes some of the terms of the Class A 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.
The following summary supplements the description of the general terms and
provisions of the Notes of any given series and the related Indenture set forth
in the accompanying prospectus, to which description reference is made by this
prospectus supplement.
The Class A Notes initially will be represented by notes registered in
the name of Cede & Co., as the nominee of The Depository Trust Company ("DTC"),
and will only be available in the form of book-entries on the records of DTC and
participating members of DTC in denominations of $1,000. All references to
"Holders" or "Noteholders" and to authorized denominations, when used with
respect to the Notes, shall reflect the rights of Note Owners, and limitations
of Note Owners, as they may be indirectly exercised through DTC and its
participating members, except as otherwise specified in this prospectus
supplement. See "Certain Information Regarding the Securities--Book-Entry
Regulation" in the prospectus supplement and Annex I to the prospectus.
In general, the Class A-1 Noteholders will be entitled to receive, on
each Payment Date, the Class A-1 Principal Payment Amount and the Class A-1
Interest Payment Amount and the Class A-2 Noteholders will be entitled to
receive, on each Payment Date, the Class A-2 Principal Payment Amount and the
Class A-2 Interest Payment Amount, subject to the priority of payments as
described in "--Priority of Distribution Amounts." Payments on the Notes will be
made from the Note Distribution Account.
MANDATORY REDEMPTION
The Class A Notes will be redeemed in part on the Mandatory Redemption
Date in the event that any portion of the Pre-Funded Amount remains on deposit
in the Pre-Funding Account at the end of the Funding Period. The aggregate
principal amount of the Class A Notes to be redeemed will be an amount equal to
the remaining Pre-Funded Amount on that date (the "Class A Mandatory Redemption
Amount"). The Class A Mandatory Redemption Amount will be distributed pro rata
to each of the Class A-1 Notes and the Class A-2 Notes, based on the current
principal balance of each Class, provided, however, that if the amount remaining
in the Pre-Funding Account is less than $100,000, only the Class A-1 Notes will
be redeemed.
OPTIONAL PURCHASE OF RECEIVABLES
As an administrative convenience, the Servicer may purchase all the
Receivables and other Trust Property on any Payment Date if, as of the last day
of the related Collection Period, the Aggregate Principal Balance has declined
to less than 10% of the sum of (1) the Aggregate Principal Balance as of the
Initial Cutoff Date plus (2) the aggregate principal balances of the Subsequent
Receivables added to the Trust as of their respective Cutoff Dates (the
"Original Pool Balance"). To exercise this option, the Servicer must pay the
aggregate Purchase Amounts for the Receivables and obtain the prior written
consent of the Insurer, or if the redemption would result in a claim under the
Policy or if the redemption would result in any amount owing to the Insurer
remaining unpaid. Upon exercising the option, the Servicer will succeed to all
interests in and to the Trust Property. The purchase price paid by the Servicer
will be deposited into the Collection Account and distributed pursuant to
"--Priority of Distribution Amounts" below. See "Certain Matters Regarding the
Servicer--Termination" in the accompanying prospectus.
This purchase will cause a redemption of the Notes; provided, however,
that the Servicer will provide the Indenture Trustee, the Backup Servicer, the
Insurer and the Rating Agencies at least 10 days' prior written notice of any
redemption. The Indenture Trustee will give notice to each Noteholder at least
five days prior to any redemption. The redemption price for each Note will be no
less than the outstanding principal balance of the relevant Note on the date of
redemption plus accrued and unpaid interest on the outstanding principal balance
(the "Redemption Price"). The Servicer will deposit the Redemption Price into
the Collection Account, and the Indenture Trustee will distribute the amounts so
deposited in accordance with the "Priority of Distribution Amounts" below.
DISTRIBUTIONS FROM THE TRUST
No later than 12:00 p.m. New York City time on each Determination
Date, the Servicer will inform the Indenture Trustee of the amount of aggregate
collections on the Receivables and the aggregate Purchase Amount of Receivables
to be purchased by the Servicer with respect to the related Collection Period.
The Servicer will determine prior to the Determination Date, the Class A-1
Interest Payment Amount, the Class A-1 Principal Payment Amount, the Class A-2
Interest Payment Amount, the Class A-2 Principal Payment Amount, the Payment
Amount, the amounts, if any, required to be deposited in the Class A Reserve
Account, the Class A Overcollateralization Amount and the Class A Target
Overcollateralization Amount.
For purposes of this prospectus supplement, the following terms shall
have the following meanings:
"Additional Funds Available" means, with respect to any Payment Date
the sum of (1) the Deficiency Claim Amount, if any, received by the Indenture
Trustee with respect to the Payment Date plus (2) the Insurer Optional Deposit,
if any, received by the Indenture Trustee with respect to the Payment Date.
"Class A Interest Carryover Shortfall" means, as of the close of
business on any Payment Date, the sum of (1) the Class A-1 Interest Carryover
Shortfall and (2) the Class A-2 Interest Carryover Shortfall.
"Class A Interest Payment Amount" means, with respect to any Payment
Date, the sum of (1) the Class A-1 Interest Payment Amount and (2) the Class A-2
Interest Payment Amount.
"Class A Mandatory Redemption Amount" means the amount, if any,
remaining of the Pre-Funded Amount on the Mandatory Redemption Date.
"Class A Overcollateralization Amount" means, with respect to any
Payment Date, an amount equal to the excess, if any, of:
(1) the sum of,
(a) the remaining Aggregate Principal Balance as of the last
day of the related Collection Period and
(b) all amounts, if any, in the Pre-Funding Account, over
(2) the remaining Class A Note Balance, after giving effect to
the amounts payable on the Payment Date pursuant to clauses (1)
through (5) under "--Priority of Distribution Amounts" on the Payment
Date.
"Class A Principal Payment Amount" means, with respect to any Payment
Date, the sum of the Class A-1 Principal Payment Amount and the Class A-2
Principal Payment Amount.
"Class A Target Overcollateralization Amount" means, with respect to
any Payment Date, an amount equal to the product of (1) [ ]%, or any lesser
percentage as the Insurer may decide in its sole discretion, and (2) the sum of
(a) the remaining Aggregate Principal Balance, and (b) amounts, if any, in the
Pre-Funded Account, each determined as of the last day of the related Collection
Period.
"Class A-1 Interest Carryover Shortfall" means, as of the close of
business on any Payment Date, the excess of (a) the Class A-1 Interest Payment
Amount for the Payment Date and any outstanding Class A-1 Interest Carryover
Shortfall from the immediately preceding Payment Date plus interest on this
outstanding Class A-1 Interest Carryover Shortfall, to the extent permitted by
law, at the Class A-1 Interest Rate from the preceding Payment Date through the
current Payment Date, calculated on the basis of a 360-day year consisting of
twelve 30-day months, over (b) the amount of interest that the Holders of the
Class A-1 Notes actually received on the current Payment Date.
"Class A-1 Interest Payment Amount" means, with respect to any Payment
Date, 30 days' interest, calculated on the basis of a 360-day year consisting of
twelve 30-day months or, in the case of the first Payment Date, the number of
days (on a "30/360" basis) from and including [ ], to but excluding [ ], at the
Class A-1 Interest Rate on the Class A-1 Note Balance as of the close of
business on the last day of the related Collection Period.
"Class A-1 Mandatory Redemption Amount" means, (1) with respect to the
Mandatory Redemption Date on which the Class A Mandatory Redemption Amount is
less than $100,000, the Class A Mandatory Redemption Amount, and (2) with
respect to any Payment Date on which the Class A Mandatory Redemption Amount is
greater than $100,000, the product of (A) the Class A Mandatory Redemption
Amount and (B) a fraction, the numerator of which is the Class A-1 Note Balance
as of the class of business on the date prior to the related Payment Date and
the denominator of which is the Class A Note Balance as of the class of business
on the date prior to the related Payment Date.
"Class A-1 Principal Carryover Shortfall" means, as of the close of
business on any Payment Date, the excess of (a) the Class A-1 Principal Payment
Amount and any outstanding Class A-1 Principal Carryover Shortfall from the
immediately preceding Payment Date, over (b) the amount of principal that the
Holders of the Class A-1 Notes actually received on the current Payment Date.
"Class A-2 Interest Payment Amount" means, with respect to any Payment
Date, 30 days' interest, calculated on the basis of a 360-day year consisting of
twelve 30-day months or, in the case of the first Payment Date, the number of
days (on a "30/360" basis) from and including [ ], to but excluding [ ], at the
Class A-2 Interest Rate on the Class A-2 Note Balance as of the close of
business on the last day of the related Collection Period.
"Class A-1 Principal Payment Amount" means:
(a) with respect to any Payment Date other than the Class A-1 Final
Scheduled Payment Date: the lesser of,
(1) the Class A-1 Note Balance immediately prior to the Payment
Date and
(2) the sum of
(A) the Principal Payment Amount and
(B) the Class A-1 Mandatory Redemption Amount and
(b) with respect to the Class A-1 Final Scheduled Payment Date, the
then outstanding Class A-1 Note Balance.
"Class A-2 Interest Carryover Shortfall" means, as of the close of
business on any Payment Date, the excess of (a) the Class A-2 Interest Payment
Amount for the Payment Date and any outstanding Class A-2 Interest Carryover
Shortfall from the immediately preceding Payment Date plus interest on the
outstanding Class A-2 Interest Carryover Shortfall, to the extent permitted by
law, at the Class A-2 Interest Rate from the preceding Payment Date through the
current Payment Date, calculated on the basis of a 360-day year consisting of
twelve 30-day months, over (b) the amount of interest that the Holders of the
Class A-2 Notes actually received on the current Payment Date.
"Class A-2 Mandatory Redemption Amount" means, with respect to the
Mandatory Redemption Payment Date, the positive difference, if any, between the
Class A Mandatory Redemption Amount and the Class A-1 Mandatory Redemption
Amount.
"Class A-2 Principal Carryover Shortfall" means, as of the close of
business on any Payment Date, the excess of (a) the Class A-2 Principal Payment
Amount and any outstanding Class A-2 Principal Carryover Shortfall from the
immediately preceding Payment Date, over (b) the amount of principal that the
Holders of the Class A-2 Notes actually received on the current Payment Date.
"Class A-2 Principal Payment Amount" means:
(a) with respect to any Payment Date other than the Class A-2 Final
Scheduled Payment Date: the lesser of,
(1) the Class A-2 Note Balance immediately prior to the Payment
Date, and
(2) the difference between
(A) the sum of the Principal Payment Amount and the Class
A-2 Mandatory Redemption Amount and
(B) the Class A-1 Principal Payment Amount and
(b) with respect to the Class A-2 Final Scheduled Payment Date, the
then outstanding Class A-2 Note Balance.
"Class B Interest Carryover Shortfall" means, as of the close of
business on any Payment Date, the excess of (a) the Class B Interest Payment
Amount for the Payment Date and any outstanding Class B Interest Carryover
Shortfall from the immediately preceding Payment Date plus interest on the
outstanding Class B Interest Carryover Shortfall, to the extent permitted by
law, at the Class B Interest Rate from the preceding Payment Date through the
current Payment Date, calculated on the basis of a 360-day year consisting of
twelve 30-day months, over (b) the amount of interest that the Holders of the
Class B Notes actually received on the current Payment Date.
"Class B Interest Payment Amount" means, with respect to any Payment
Date, 30 days' interest, calculated on the basis of a 360-day year consisting of
twelve 30-day months or, in the case of the first Payment Date, the number of
days (on a "30/360" basis) from and including [ ] to but excluding [ ], at the
Class B Interest Rate on the Class B Note Balance as of the close of business on
the last day of the related Collection Period.
"Class B Principal Payment Amount" means:
(a) with respect to any Payment Date other than the Class B Final
Scheduled Payment Date: the lesser of,
(x) the Class B Note Balance immediately prior to the Payment
Date, and
(y) amounts remaining from the sum of,
(A) Available Funds and
(B) amounts available from the Class A Reserve Account in
accordance with the terms of the Sale and Servicing
Agreement, after application of priorities First
through Ninth under "--Priority of Distribution
Amounts," and
(b) with respect to the Class B Final Scheduled Payment Date, the
then outstanding Class B Note Balance.
"Contract Scheduled Payment" means, for any Collection Period for any
Receivable, the amount indicated in the Receivable as required to be paid by the
Obligor in the relevant Collection Period, without giving effect to deferments
of payments granted to Obligors by the Servicer pursuant to the Sale and
Servicing Agreement or any rescheduling of payments in an insolvency or similar
proceeding.
"Defaulted Receivable" means any Receivable with respect to which any
of the following shall have occurred:
o for which the related Financed Vehicle has been repossessed by
the Servicer;
o for which all or more than 10% of any payment is 120 days or more
past due; or
o a Contract with respect to which the Servicer has determined in
good faith that all amounts expected to be recovered have been
received.
"Draw Date" means, with respect to any Payment Date the third business
Day (as defined in the Policy) immediately preceeding the Payment Date.
"Excess Overcollateralization Amount" means, with respect to any
Payment Date, the excess, if any, of
(1) the Class A Overcollateralization Amount calculated for this
purpose only without deduction for any Excess Overcollateralization Amount
(I.E., assuming that the entire amount described in clause (x) of the definition
of "Principal Payment Amount" is distributed as principal on the Class A Notes)
over
(2) the Class A Target Overcollateralization Amount on the Payment
Date.
"Insurer Optional Deposit" means, with respect to any Payment Date, an
amount delivered by the Insurer, at its sole option, other than amounts in
respect of a Policy Claim Amount, for deposit into the Collection Account for
any of the following purposes:
(1) to provide funds in respect of the payment of fees or expenses of
any provider of services to the Trust with respect to the Payment Date; or
(2) to include this amount as part of the Additional Funds Available
for the Payment Date to the extent that without this amount a draw would be
required to be made on the Policy.
"Liquidated Receivable" means any Receivable with respect to which any
of the following shall have occurred with respect to any Collection Period:
o the sale of the Financed Vehicle;
o for which all or more than 10% of any Contract Scheduled Payment
is 120 days or more past due, except in the case of repossessed
Financed Vehicles,
o the Servicer has determined in good faith that all amounts it
expects to be recovered have been received, or
o 90 days have elapsed since the Servicer repossessed the Financed
Vehicle.
"OC Stabilization Date" means the first Payment Date on which the
Class A Overcollateralization Amount equals the Class A Target
Overcollateralization Amount.
"Policy Claim Amount" means, for any Payment Date, the excess, if any,
of
(1) the sum of the Class A Interest Payment Amount and the Class A
Principal Payment Amount for the Payment Date over
(2) the sum of
(a) the amounts actually deposited into the Class A Note
Distribution Account on the related Payment Date and
(b) the Additional Funds Available to pay the Class A Interest
Payment Amount or the Class A Principal Payment Amount if any, for the
Payment Date.
"Principal Balance" of a Receivable:
o as of the Cutoff Date, means the Amount Financed minus
(1) in the case of a Precomputed Receivable, that portion of all
payments, including all Contract Scheduled Payments and any
prepayments in full or partial prepayments, actually
received on or prior to that date and allocable to principal
in accordance with the actuarial method and
(2) in the case of a Simple Interest Receivable, that portion of
all payments, including all Contract Scheduled Payments and
any prepayments in full or partial prepayments, actually
received on or prior to that date and allocable to principal
in accordance with the simple interest method, and
o as of any date after the Cutoff Date, means the Principal Balance
as of the Cutoff Date minus
(1) in the case of a Precomputed Receivable, that portion of all
payments, including all Contract Scheduled Payments and any
prepayments in full or partial prepayments, actually
received on or prior to that date, but after the Cutoff
Date, and allocable to principal in accordance with the
actuarial method,
(2) in the case of a Simple Interest Receivable, that portion of
all payments, including all Contract Scheduled Payments and
any prepayments in full or partial prepayments, actually
received on or prior to that date, but after the Cutoff
Date, and allocable to principal in accordance with the
simple interest method and
(3) any Cram Down Loss in respect of the Receivable. The
Principal Balance of a Liquidated Receivable for purposes
other than the definition of Principal Payment Amount shall
be equal to $0.
"Principal Payment Amount" means the amount equal to the excess, if
any, of (x) the sum of the following amounts, without duplication:
o the principal portion of all Contract Scheduled Payments received
during the Collection Period on Precomputed Receivables,
calculated in accordance with the actuarial method, and all
payments of principal received on Simple Interest Receivables,
calculated in accordance with the simple interest method, during
the Collection Period;
o the principal portion of all prepayments received during the
related Collection Period;
o the portion of the Purchase Amount allocable to principal of each
Receivable that became a Purchased Receivable as of the last day
of the related Collection Period and, at the option of the
Insurer, the Principal Balance of each Receivable that was
required to be but was not so purchased or repurchased;
o the Principal Balance of each Receivable that first became a
Liquidated Receivable during the related Collection Period; and
o the aggregate amount of Cram Down Losses with respect to the
Receivables that have occurred during the related Collection
Period, over
(y) the Excess Overcollateralization Amount, if any, for the Payment Date.
"Purchase Amount" means, with respect to a Receivable, the Principal
Balance plus interest on the Principal Balance at the respective APR from the
last day through which interest has been paid to the last day of the immediately
preceding Collection Period if purchased prior to the Determination Date
immediately following the end of the Collection Period, and otherwise through
the last day of the month of repurchase.
CALCULATION OF PAYMENT AMOUNTS. The Class A-1 Noteholders will be
entitled to receive, to the extent funds are available, the Class A-1 Principal
Payment Amount and the Class A-1 Interest Payment Amount with respect to each
Payment Date. The Class A-2 Noteholders will be entitled to receive to the
extent funds are available, the Class A-2 Principal Payment Amount and the Class
A-2 Interest Payment Amount with respect to each Payment Date, subject to the
priority of payments as described in "--Priority of Distribution Amounts". The
"Class A-1 Note Balance" will initially represent $[ ], and afterward, an amount
equal to the initial Class A-1 Note Balance reduced by all amounts distributed
to the Noteholders that are allocable to principal. The "Class A-2 Note Balance"
will initially represent $[ ], and afterward, an amount equal to the initial
Class A-2 Note Balance reduced by all amounts distributed to the Class A-2
Noteholders that are allocable to principal.
PRIORITY OF DISTRIBUTION AMOUNTS
On each Payment Date, the Indenture Trustee will, based on the
information contained in the Servicer's Certificate delivered on the related
Determination Date, distribute the following amounts in the following order of
priority:
(1) first, from the Available Funds, to the Servicer, the Servicer
Fee (as defined in this prospectus supplement) for the related
Collection Period, and any Servicer Expenses for the related or
any prior Collection Period and other amounts mistakenly
deposited in the Collection Account belonging to the Servicer, if
any, or otherwise required to be distributed to the Servicer in
accordance with the Sale and Servicing Agreement;
(2) second, from the remaining Available Funds, to the Lockbox Bank,
the Indenture Trustee, the Owner Trustee and the Backup Servicer,
any accrued and unpaid fees and in the case of the Backup
Servicer, Servicer Transition Expenses, if any, up to an amount
specified in the Sale and Servicing Agreement, in each case, to
the extent the Person (as defined in this prospectus supplement)
has not previously received this amount from the Servicer;
(3) third, from the remaining Available Funds, pro rata in respect of
the amounts due, (a) to the Class A-1 Noteholders, the Class A-1
Interest Payment Amount for the Payment Date and the Class A-1
Interest Carryover Shortfall, if any, and (b) to the Class A-2
Noteholders, the Class A-2 Interest Payment Amount for the
Payment Date and the Class A-2 Interest Carryover Shortfall, if
any;
(4) fourth, from the remaining Available Funds, to the Class A-1
Noteholders, the Class A-1 Principal Payment Amount for the
Payment Date, and the Class A-1 Principal Carryover Shortfall, if
any;
(5) fifth, from the remaining Available Funds, to the Class A-2
Noteholders, the Class A-2 Principal Payment Amount for the
Payment Date, and the Class A-2 Principal Carryover Shortfall, if
any;
(6) sixth, from the remaining Available Funds, to the Insurer to the
extent of any amounts owing the Insurer under the Insurance
Agreement;
(7) seventh, from the remaining Available Funds, to the Class A
Reserve Account to the extent necessary to increase the amount on
deposit tin this prospectus supplement to its then required
level;
(8) eighth, on or prior to the OC Stabilization Date, from the
remaining Available Funds, and together with amounts, if any,
available in accordance with the terms of the Class A Reserve
Account Agreement, sequentially, to the Class A-1 Noteholders and
to the Class A-2 Noteholders, as principal, until the Class A
Target Overcollateralization Amount is achieved;
(9) ninth, from the remaining Available Funds, to the Class B
Noteholders, the Class B Interest Payment Amount for the Payment
Date and the Class B Interest Carryover Shortfall, if any;
(10) tenth, from the remaining Available Funds, and together with
amounts, if any, available from the Class A Reserve Account in
accordance with the terms of the Sale and Servicing Agreement, to
the Class B Noteholders, the Class B Principal Payment Amount;
and
(11) eleventh, from the remaining Available Funds, to the Class A
Reserve Account, or as otherwise specified in the Trust
Documents, any remaining funds.
PAYMENT DATE CALCULATIONS AND PAYMENTS
In the event that any Servicer's Certificate delivered by the Servicer
indicates that the Available Funds with respect to a Payment Date are
insufficient to fund in full the related Scheduled Payments plus the amounts
described in clauses (1), (2) and (6) above in "--Priority of Distribution
Amounts", the Indenture Trustee shall request the Deficiency Claim Amount from
the Class A Reserve Account, at the time required by and pursuant to, the Class
A Reserve Account Agreement. Any funds received by the Indenture Trustee
pursuant to this request will be deposited in the Collection Account and paid on
the related Payment Date to the persons entitled to the funds, in the amounts
described in clauses (1) through (6) of "--Priority of Distributions" in
accordance with the priority of payment. Further, in the event that any
Servicer's Certificate delivered by the Servicer indicates that the sum of (1)
the Available Funds with respect to a Payment Date, plus (2) any related
Deficiency Claim Amount funds deposited in the Collection Account or otherwise
received by the Indenture Trustee is insufficient to fund in full the related
Scheduled Payments, the Indenture Trustee shall furnish to the Insurer no later
than 12:00 noon New York City time on the related Draw Date a completed notice
of claim in the amount of the Policy Claim Amount. Amounts paid by the Insurer
pursuant to any notice of claim shall be deposited by the Insurer into the Note
Distribution Account for payment to Noteholders on the Payment Date.
STATEMENTS TO NOTEHOLDERS
On each Payment Date, the Indenture Trustee must provide to each Class
A Noteholder, the Insurer and the Rating Agencies a statement prepared by the
Servicer based on the information in the related Servicer's Certificate, which
statement sets forth the information required under the Sale and Servicing
Agreement. Each statement will include the following information with respect to
the Payment Date or the immediately preceding Collection Period, as applicable:
(1) the amount of the payment allocable to interest with respect to
the Class A-1 Notes, the Class A-2 Notes and the Class B Notes,
as applicable;
(2) the amount of the payment allocable to principal on or with
respect to the Class A-1 Notes, the Class A-2 Notes and the Class
B Notes;
(3) the amount of the payment pursuant to a claim on the Policy;
(4) the amount of fees paid by the Trust with respect to the related
Collection Period, including any Servicer Fee and Servicer
Expenses;
(5) the Class A-1 Note Balance, the Class A-2 Note Balance and the
Class B Note Balance;
(6) the Class A-1 Interest Carryover Shortfall, the Class A-2
Interest Carryover Shortfall and the Class B Interest Carryover
Shortfall, if any, and the Class A-1 Principal Carryover
Shortfall, the Class A-2 Principal Carryover Shortfall and the
Class B Principal Carryover Shortfall, if any;
(7) the Class A-1 Note Factor, the Class A-2 Note Factor and the
Class B Note Factor;
(8) for each date during the Pre-Funding Period, the remaining
Pre-Funded Amount, the amount in the Pre-Funding Account and the
amount remaining the Capitalized Interest Account;
(9) the number of Receivables and the aggregate Principal Balance due
of the Receivables, for which the related Obligors are delinquent
in making Contract Scheduled Payments (A) between 31 and 60 days,
(B) between 61 and 90 Days, (C) between 91 and 120 days and (D)
more than 120 days;
(10) the number of Receivables which became Liquidated Receivables,
and the aggregate principal amount of the Receivables which
became Liquidated Receivables net of Recoveries;
(11) the number of Receivables which became Defaulted Receivables, and
the aggregate principal amount of these Receivables;
(12) the number and the aggregate Purchase Amount of Receivables that
became Purchased Receivables during the related Collection Period
and the number and aggregate Purchase Amount of Receivables that
were required to be repurchased during the related Collection
Period but were not so repurchased;
(13) the Principal Balance, APR and model year of each Receivable that
was replaced and the Principal Balance, APR and model year of the
corresponding Replacement Receivable;
(14) the number and the aggregate Principal Balance of Receivables
with respect to which, to the knowledge of the Servicer, Obligors
became the subject of bankruptcy proceedings during the
Collection Period, or during a prior Collection Period, if the
Servicer first became aware of the proceeding during the current
Collection Period;
(15) the amount of any Deficiency Claim Amounts deposited in the
Collection Account from the Class A Reserve Account;
(16) the Class A Overcollateralization Amount and the Class A Target
Overcollateralization Amount; and
(17) the beginning balance, amount of claims paid, amount of deposits
made, and ending balance of the applicable collateral
self-insurance fund, if any.
Each amount set forth pursuant to subclauses (1), (2) and (5) will be
expressed as a dollar amount per $1,000 of the initial principal amount of a
Note.
Unless and until Definitive Notes are issued, the reports will be sent
on behalf of the Trust to Cede & Co., as registered holder of the Class A Notes
and the nominee of DTC. See "Reports to Securityholders" and "Description of the
Notes" in the prospectus. Within the required period of time after the end of
each calendar year, the Indenture Trustee will furnish to each person who at any
time during the calendar year was a Noteholder, a statement as to the aggregate
amounts of interest and principal paid to that Noteholder and any other
information as the Servicer deems necessary to enable the Noteholder to prepare
its tax returns. See "Certain Federal Income Tax Consequences."
CREDIT SUPPORT
The Class A Overcollaterization Amount and the Class A Reserve Account
(a funded cash reserve account (the "Class A Reserve Account")), result in
credit support for the Class A Notes. This credit support is required to be
increased to, and subsequently maintained at, a level established by the
Insurer. This level changes over time. The Insurer may permit the required level
of credit support provided by the Class A Reserve Account and the Class A
Overcollateralization Amount to be reduced, or "step down", over time without
the consent of Noteholders.
OVERCOLLATERIZATION. Overcollaterization for the Class A Notes is
created as a result of the application of "excess interest" and "excess
principal" to the payment of principal on the Class A Notes. The "excess
interest" is interest which is collected on the Receivables in excess of the
amount of interest that is paid on the Class A Notes, used to pay specific fees,
or, under some circumstances, deposited to the Class A Reserve Account. This
application of excess interest results in the outstanding principal balance of
the Class A Notes amortizing more quickly than the Pool Balance. The "excess
principal" is the principal allocated to the Class A Notes which is in excess of
the principal the Class A Notes would receive if the principal collected on the
Receivables were distributed pro rata to the Class A Notes and Class B Notes
based on their relative outstanding principal balances. This application of the
"excess principal" results in the outstanding principal balance on the Class A
Notes amortizing more quickly than the Aggregate Principal Balance on a
percentage basis.
If the Insurer permits the required level of overcollaterization to
step down, principal collections which would otherwise be paid through to the
Class A Noteholders as part of the Class A Principal Payment Amount may be
instead released to the Class B Noteholders or the Certificateholder.
SUBORDINATION. As of the Closing Date, the principal balance of the
Class B Notes equals ____% of the Note Balance. The transaction is structured so
that until the OC Stabilization Date, the Class B Note Balance will grow as a
percentage of the Note Balance. The Class B Notes are subordinated in right of
payment to the payment of the Class A Notes. No payments of principal will be
made to the Class B Notes until the OC Stabilization Date. Payment of interest
on the Class B Notes is subordinated to payment of interest and principal on the
Class A Notes, the funding of the Class A Reserve Account and, until the OC
Stabilization Date, the payment of excess interest as additional principal to
the Class A Notes. If there are losses on the Receivables, those losses will be
borne entirely by the Certificateholder and by the Class B Notes before there
are any losses on the Class A Notes.
CLASS A RESERVE ACCOUNT. The Class A Reserve Account will be funded
with an initial cash deposit on the Closing Date. On each subsequent Payment
Date, the Indenture Trustee will be required to deposit additional amounts into
the Class A Reserve Account from payments on the Receivables as described under
"The Notes--Priority of Distribution Amounts" above to the extent that the
balance on deposit tin this prospectus supplement is below the then required
level. Amounts, if any, on deposit in the Class A Reserve Account on a Payment
Date will be available to the extent provided in the Class A Reserve Account
Agreement to fund any Deficiency Claim Amount with respect to the Payment Date.
Amounts on deposit in the Class A Reserve Account on any Payment Date on or
prior to the OC Stabilization Date, after giving effect to all distributions
made on the Payment Date, in excess of the specified Class A Reserve Account
Requirements for the Payment Date shall be distributed to Class A Noteholders as
a prepayment of principal on the Class A Notes. On any Payment Date after the OC
Stabilization Date, the excess funds may be released to the Class B Noteholders
or the Certificateholder without the consent of the Class A Noteholders.
In addition, the Certificateholder, the Insurer and the Collateral
Agent under the Class A Reserve Account Agreement may amend the Class A Reserve
Account Agreement, and any provisions in the Insurance Agreement relating to the
Class A Reserve Account, in any respect, including, without limitation, reducing
or eliminating the funding requirements of the Class A Reserve Account or
permitting these funds to be used for the benefit of persons other than Class A
Noteholders, without the consent of, or notice to, the Trustee, the Owner
Trustee or the Noteholders. The Collateral Agent shall not withhold or delay its
consent with respect to any amendment that does not adversely affect the
Collateral Agent in its individual capacity. Notwithstanding any reduction in or
elimination of the funding requirements of the Class A Reserve Account or the
depletion of the Class A Reserve Account, the Insurer will be obligated on each
Payment Date to fund the full amount of each Scheduled Payment required to be
paid by the Payment Date, and which would not be in the absence of a payment
under the Policy. If the Insurer breaches its obligations, any losses on the
Receivables will be borne first by the Class B Noteholders and then by the
Noteholders.
THE INDENTURE
THE INDENTURE TRUSTEE. [ ] is the Indenture Trustee under the
Indenture. For the purpose of meeting the legal requirements of some
jurisdictions, the Indenture Trustee may appoint co-trustees or separate
trustees of all or any part of the trust estate and confer upon this party any
powers, duties, obligations, rights and trusts as the Indenture Trustee deems
necessary, or desirable. In the event of an appointment, all rights, powers,
duties and obligations conferred or imposed upon the Indenture Trustee by the
Indenture will be conferred or imposed upon the Indenture Trustee and the
separate trustee or co-trustee jointly, or, in any jurisdiction in which the
Indenture Trustee shall be incompetent or unqualified to perform particular
acts, singly upon the separate trustee or co-trustee who will exercise and
perform these rights, powers, duties, and obligations solely at the direction of
the Indenture Trustee.
The Indenture Trustee may resign at any time after 60 days' written
notice to the Issuer, the Insurer and Noteholders in which event the Controlling
Party will be obligated to appoint a successor trustee. The Controlling Party
may remove the Indenture Trustee if, among other reasons, the Indenture Trustee
ceases to be eligible to continue as the Indenture Trustee under the Indenture,
becomes legally unable to act or becomes insolvent. In these circumstances, the
Controlling Party will be obligated to appoint a successor trustee. Any
resignation or removal of the Indenture Trustee and appointment of a successor
trustee will not become effective until acceptance of the appointment of a
successor trustee.
The Sale and Servicing Agreement will provide that the Indenture
Trustee will be entitled to indemnification by the Servicer for, and will be
held harmless against, any loss, liability, fee, disbursement or expense
incurred by the Indenture Trustee not resulting from the Indenture Trustee's own
willful misfeasance, bad faith or negligence and other than by reason of a
breach of any of the Indenture Trustee's representations or warranties set forth
in the Sale and Servicing Agreement. The Sale and Servicing Agreement will
further provide that the Servicer will indemnify the Indenture Trustee for some
of the taxes that may be asserted in connection with the transaction.
The Indenture Trustee makes no representations as to the validity or
sufficiency of the Sale and Servicing Agreement, the Notes, other than the
authentication of the Notes, or any Receivables or the Related Documents and is
not accountable for the use or application by the Seller or the Servicer of any
funds paid to the Seller or the Servicer in respect of the Notes or the
Receivables, or the investment of any monies received by the Servicer before the
monies are deposited in the Collection Account. The Indenture Trustee has not
independently verified the Receivables. The Indenture Trustee is required to
perform only those duties specifically required of it under the Sale and
Servicing Agreement and the Indenture. The Indenture Trustee shall determine
whether the certificates, reports or other instruments required to be furnished
to the Indenture Trustee under the Sale and Servicing Agreement and the
Indenture conform to the requirements of the Sale and Servicing Agreement and
the Indenture, respectively.
MODIFICATION OF INDENTURE WITHOUT NOTEHOLDER CONSENT. The Trust and
Indenture Trustee may, with the prior written consent of the Insurer, prior to
the occurrence and continuance of an Insurer Default, but without consent of the
Noteholders, enter into one or more supplemental indentures for any of the
following purposes:
o to correct or amplify the description of the property subject to
the lien of the Indenture or add additional property to it;
o to evidence the succession of another Person to the Trust and the
assumption by the successor of the covenants of the Trust;
o to add additional covenants for the benefit of the Noteholders or
to surrender any right or power conferred on the Trust;
o to convey, transfer, assign, mortgage or pledge any additional
property to or with the Indenture Trustee;
o to cure any ambiguity, or to correct or supplement any provision
in the Indenture or in any supplemental indenture that may be
inconsistent with any other provision of the Indenture or any
supplemental indenture;
o to add to or change any of the provisions of the Indenture as
shall be necessary and permitted to facilitate the administration
by more than one trustee; and
o to add any provisions to, change in any manner or eliminate any
of the provisions of the Indenture or modify in any manner the
rights of Noteholders under the Indenture; provided that any
action must not, as evidenced by an opinion of counsel, adversely
affect in any material respect the interests of any Noteholder.
MODIFICATION OF INDENTURE WITH NOTEHOLDER CONSENT. With the prior
written consent of the Insurer, prior to the occurrence and continuance of an
Insurer Default, and the Note Majority, the Trust and the Indenture Trustee may
execute one or more supplemental indentures to add, change or eliminate any
other provisions of the Indenture, modify in any manner the rights of the
Noteholders or provide for the acceptance of the appointment of a successor
Indenture Trustee. Without the prior written consent of the Insurer, prior to
the occurrence and continuance of an Insurer Default, and the Holder of each
outstanding related Note affected, however, no supplemental indenture will:
o change the due date of any installment of principal of or
interest on any Note or reduce the principal amount of any Note,
the interest rate on the Note or the redemption price with
respect to the Note, change the provisions of the Indenture
relating to the application of collections on, or the proceeds of
the sale of, the collateral to the payment of principal of or
interest on the Notes, change any place of payment where or the
coin or currency in which any Note or any interest on the Note is
payable;
o impair the right to institute suit for the enforcement of
particular provisions of the Indenture regarding payment;
o reduce the percentage of the aggregate amount of the outstanding
Notes the consent of the Holders of which is required for any
supplemental indenture or the consent of the Holders of which is
required for any waiver of compliance with particular provisions
of the Indenture or of some of the defaults under the Indenture
and their consequences as provided for in the Indenture;
o modify or alter the provisions of the Indenture regarding
particular aspects of what constitutes an "Outstanding" Note;
o reduce the percentage of the aggregate outstanding amount of the
Notes the consent of the Holders of which is required to direct
the Indenture Trustee to sell or liquidate the Receivables if the
proceeds of the sale would be insufficient to pay the principal
amount and accrued but unpaid interest on the outstanding Notes;
o modify the provision of the Indenture requiring consent of
Noteholders except to increase the percentage of the aggregate
principal amount of the Notes required to amend the sections of
the Indenture or to provide additional provisions requiring the
consent of each Noteholder prior to modification or waiver;
o modify any of the provisions of the Indenture affecting the
calculation of the amount of any payment of interest or principal
due on any Note on any Payment Date;
o permit the creation of any lien ranking prior to or on a parity
with the lien of the Indenture with respect to any of the
collateral for the Notes or, except as otherwise permitted or
contemplated in the Indenture, terminate the lien of the
Indenture on any collateral or deprive the Holder of any Note of
the security afforded by the lien of the Indenture; or
o become effective if the Rating Agency Condition has not been
satisfied with respect to it.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT. Unless an Insurer
Default shall have occurred and be continuing, "Events of Default" under the
Indenture will consist of those events defined in the Insurance Agreement as
Insurance Agreement Indenture Cross Defaults, and will constitute an Event of
Default under the Indenture only if the Insurer shall have delivered to the
Indenture Trustee, and not rescinded, a written notice specifying that any
Insurance Agreement Indenture Cross Default constitutes an Event of Default
under the Indenture. "Insurance Agreement Indenture Cross Defaults" consist of:
(1) any payment being made under the Policy;
(2) some events of bankruptcy, insolvency, receivership or
liquidation of the Trust, the Seller or the Certificateholder;
(3) the Trust becoming taxable as an association, or publicly traded
partnership, taxable as a corporation for federal or state income
tax purposes;
(4) the Class A Notes not being treated as indebtedness for federal
or applicable state income tax purposes and the
characterization's having a material adverse effect on the Trust
and the Noteholders or the Insurer;
(5) the sum of the Available Funds with respect to any Payment Date
plus the amount, if any, available from particular collateral
accounts maintained for the benefit of the Insurer is less than
the sum of the amounts described in clauses (1)-(6) under "The
Notes--Priority of Distribution Amounts" in this prospectus
supplement; and
(6) any failure to perform in any material respect any other
covenants or agreements in the Indenture, or any representation
or warranty of the Trust made in the Indenture or in any
certificate or other writing delivered pursuant to the Indenture
or in connection with the Indenture proving to have been
incorrect in any material respect when made, and the failure
continuing or not being cured, or the circumstances or condition
in respect of which the misrepresentation or warranty was
incorrect not having been eliminated or otherwise cured, for 30
days after the giving of written notice of the failure or
incorrect representation or warranty to the Trust and the
Indenture Trustee by the Insurer.
Upon the occurrence of an Event of Default, so long as an Insurer
Default shall not have occurred and be continuing, the Insurer will have the
right, but not the obligation, to cause the Indenture Trustee to liquidate the
Trust Property in whole or in part, on any date or dates following the
acceleration of the Class A Notes due to the Event of Default as the Insurer, in
its sole discretion, shall elect, and to deliver the proceeds of the liquidation
to the Indenture Trustee for distribution to the Class A-1 Noteholders and Class
A-2 Noteholders on a pro rata basis based on the Class A-1 Note Balance and the
Class A-2 Note Balance then outstanding, in accordance with the terms of the
Indenture. The Insurer may not, however, cause the Indenture Trustee to
liquidate the Trust Property in whole or in part if the proceeds of the
liquidation would not be sufficient to pay all outstanding principal of and
accrued interest on the Notes, unless the Event of Default arose from an event
specified in (1), (2), (3), or (4) in the immediately preceding paragraph.
Following the occurrence of any Event of Default, the Indenture Trustee will
continue to submit claims under the Policy for any shortfalls in the Scheduled
Payments on the Class A Notes in accordance with the terms of the Policy.
Following any Event of Default under the Indenture, the Insurer, in its sole
discretion, may elect to pay all or any portion of the outstanding amount of the
Class A Notes, plus accrued interest on the Class A Notes. See "The Policy" in
this prospectus supplement.
If an Insurer Default has occurred and is continuing, "Events of
Default" under the Indenture will consist of the Events of Default described in
the accompanying prospectus under "Description of the Notes--Provisions of the
Indenture" and "--Events of Default; Rights Upon Events of Default"; and the
Indenture Trustee and the Noteholders have the rights under the Indenture
described tin this prospectus supplement.
NOTE FACTORS; STATEMENT TO NOTEHOLDERS; SERVICER REPORTS TO THE INDENTURE
TRUSTEE
The "Class A-1 Note Factor" will be a seven-digit decimal number that
the Servicer will compute each month indicating the Class A-1 Note Balance as of
the close of business on the last day of the related Collection Period in that
month as a fraction of the respective original outstanding principal balance of
the Class A-1 Notes. The Class A-1 Note Factor will be 1.0000000 as of the
Cutoff Date; and afterward, the Class A-1 Note Factor will decline to reflect
reductions in the Class A-1 Note Balance as a result of scheduled payments
collected, partial prepayments, prepayments and liquidations of the Receivables.
The amount of a Class A-1 Noteholder's pro rata share of the Class A-1 Note
Balance can be determined on any date by multiplying the original denomination
of the Holder's Note by the Class A-1 Note Factor as of the close of business on
the most recent Payment Date.
The "Class A-2 Note Factor" will be a seven-digit decimal number that
the Servicer will compute each month indicating the Class A-2 Note Balance as of
the close of business on the last day of the related Collection Period in that
month as a fraction of the respective original outstanding principal balance of
the Class A-2 Notes. The Class A-2 Note Factor will be 1.0000000 as of the
Cutoff Date; and afterward, the Class A-2 Note Factor will decline to reflect
reductions in the Class A-2 Note Balance as a result of scheduled payments
collected, partial prepayments, prepayments and liquidations of the Receivables.
The amount of a Class A-2 Noteholder's pro rata share of the Class A-2 Note
Balance can be determined on any date by multiplying the original denomination
of the Holder's Note by the Class A-2 Note Factor as of the close of business on
the most recent Payment Date.
Under the Sale and Servicing Agreement, the Servicer will perform some
monitoring and reporting functions for the Trust, including the preparation and
delivery of the Servicer's Certificate on each Determination Date to the
Indenture Trustee, the Backup Servicer, the Insurer, and the Rating Agencies
setting forth specified information with respect to the preceding Collection
Period.
Within the prescribed period of time for tax reporting purposes after
the end of each calendar year during the term of the Sale and Servicing
Agreement, the Indenture Trustee will be required to mail to each person who at
any time during the relevant calendar year will have been a Noteholder, a
statement containing information related to the Noteholder's preparation of
federal income tax returns.
DESCRIPTION OF THE TRANSACTION DOCUMENTS
The following summary describes some of the terms of the Transaction
Documents. Forms of the Transaction Documents have been filed as exhibits to the
Registration Statement. This summary does not purport to be complete and is
subject to, and qualified in its entirety by reference to, all the provisions in
the Transaction Documents. The following summary supplements the description of
the general terms and provisions of the Transfer and Servicing Agreements (as
this term is used in the prospectus) set forth in the prospectus, to which
description reference is made by this prospectus supplement.
SALE AND ASSIGNMENT OF RECEIVABLES
Some information with respect to the sale of the Receivables by the
Seller and the Company is set forth under "Description of the Transfer and
Servicing Agreements--Sale and Assignment of Primary Assets" in the prospectus.
See also "The Receivables" in this prospectus supplement and "The Receivables
Pools" in the prospectus for additional information regarding the Receivables
and some of the obligations of the Seller and the Servicer with respect to the
Receivables.
At the time of issuance of the Notes, the Seller will sell and assign
to the Company, the Seller's entire interest in the Receivables, including its
security interests in the Financed Vehicles, and the Company will sell and
assign to the Trust the Company's entire interest in the Receivables, including
the security interests in the Financed Vehicles. On or before the Closing Date,
the Trust will pledge the Receivables to the Indenture Trustee for the benefit
of the Noteholders and the Insurer pursuant to the Indenture. Each Receivable
will be identified in a schedule to the Sale and Servicing Agreement. The
Indenture Trustee will, concurrently with the pledge, authenticate and deliver
the Notes, which have been executed on behalf of the Trust.
Any conveyance of Subsequent Receivables is subject to the
satisfaction, on or before the related Subsequent Transfer Date, of the
following conditions, among others:
(1) each Subsequent Receivable satisfies the eligibility criteria
specified in the Sale and Servicing Agreement;
(2) the Insurer, so long as no Insurer Default shall have occurred
and be continuing, shall in its absolute and sole discretion have
approved the transfer of the Subsequent Receivables to the Trust;
(3) the Seller will not have selected the Subsequent Receivable in a
manner that it believes is adverse to the interests of the
Noteholders or the Insurer;
(4) as of each applicable Subsequent Cutoff Date, the Receivables in
the Trust together with the Subsequent Receivables to be conveyed
by the Seller as of the Subsequent Cutoff Date, meet the
following criteria, computed based on the characteristics of the
Initial Receivables on the Initial Cutoff Date and any Subsequent
Receivables on the related Subsequent Cutoff Date:
(a) the weighted average APR of the Receivables will not be less
than one percent less than the weighted average APR of the
Initial Receivables on the Initial Cutoff Date;
(b) the remaining term of the Receivables will not be greater
than 72 months nor less than [ ] months;
(c) not more than [ ]% of the Principal Balances of the
Receivables will be attributable to Loans for the purchase
of used Financed Vehicles;
(d) the APR is not less than [ ]% nor more than [ ]%; and
(e) no vehicle is older than a [ ] model year, and the Trust,
the Indenture Trustee, the Owner Trustee
(f) and the Insurer shall have received written confirmation
from a firm of certified independent public accountants as
to the satisfaction of the criteria in clauses (a) through
(e) above;
(5) the Seller shall have executed and delivered to the Trust, with a
copy to the Indenture Trustee, a Subsequent Transfer Agreement
conveying the Subsequent Receivable to the Trust, including a
schedule identifying the Subsequent Receivables;
(6) the Seller shall have delivered certain opinions of counsel to
the Indenture Trustee, the Insurer, the Owner Trustee and the
Rating Agencies with respect to the validity of the conveyance of
the Subsequent Receivables; and
(7) the Rating Agencies shall have each notified the Seller, the
Owner Trustee, the Indenture Trustee and the Insurer in writing
that, following the addition of all of the Subsequent
Receivables, each of the Class A-1 Notes and the Class A-2 Notes
will be rated [ ] by [ ] and [ ] by [ ].
Pursuant to the Receivables Purchase Agreement and the Sale and
Servicing Agreement, the Seller will represent and warrant that, among other
things:
o as of each Cutoff Date, the information provided in the schedule
to the Sale and Servicing Agreement with respect to the
Receivables is correct in all material respects;
o at the date of issuance of the Notes and any Subsequent Transfer
Date, the Receivables are free and clear of all liens or claims
and no right of setoff, counterclaim or rescission has been
asserted or, to the best of its knowledge, threatened with
respect to the Receivables;
o at the date of issuance of the Notes and any Subsequent Transfer
Date, each of the Receivables is secured by, or will be when all
necessary steps have been taken to result in, a first priority
perfected security interest in the Financed Vehicle in favor of
the Seller and this security interest has been validly assigned
to the Seller, the Trust and the Indenture Trustee; and
o each Receivable, at the time it was originated, complied, and at
the date of issuance of the Notes and any Subsequent Transfer
Data, complies in all material respects with applicable federal,
state and local laws, including consumer credit, truth in
lending, equal credit opportunity and disclosure laws.
Pursuant to the Receivables Purchase Agreement and the Sale and
Servicing Agreement, the Seller will be obligated to repurchase or replace
subject to limits on replacement set forth in the Sale and Servicing Agreement a
Receivable from the Trust, if the interests of the Noteholders, the Insurer or
the Trust in the Receivable are materially adversely affected by a breach of any
representation or warranty made by the Seller, with respect to the Receivable,
if the breach has not been cured following discovery by or notice to the Seller
of the breach. Pursuant to the Sale and Servicing Agreement, the Servicer will
be obligated to purchase or replace a Receivable from the Trust if the interests
of the Noteholders, the Insurer or the Trust in the Receivables are materially
adversely affected by a breach of some of its servicing obligations under the
Sale and Servicing Agreement, including its obligation to maintain perfection of
the first priority security interest created by each Receivable in the related
Financed Vehicle or other covenants with respect to the Servicer, if the breach
has not been cured following the discovery or notice to the Servicer of the
breach. Each Receivable will be purchased from the Trust or replaced by the
Seller or the Servicer, as the case may be, at a price equal to the Purchase
Amount. The purchase or replacement obligations will constitute the sole remedy
available to the Noteholders or the Indenture Trustee for any uncured breaches.
Pursuant to the Sale and Servicing Agreement, the Servicer will
service and administer the Receivables. The documents evidencing the Initial
Receivables and Subsequent Receivables will be delivered to the Indenture
Trustee on the Closing Date and Subsequent Transfer Date. In addition, the
Seller's accounting records and computer systems will be marked to reflect the
sale and assignment, and UCC financing statements reflecting the sale and
assignment will be filed. See "Certain Legal Aspects of the
Receivables--Security Interests in Financed Vehicles" in the accompanying
prospectus.
ACCOUNTS
Each Obligor has been instructed to make payments with respect to the
Receivables after the applicable Cutoff Date to a Lockbox which has been
established and will be maintained by [ ] (the "Lockbox Bank").
Upon receipt of payments in the Lockbox, the Lockbox Bank will deposit funds
into an account maintained by the Lockbox Bank at a depository institution (the
"Lockbox Account") acceptable to the Insurer. The Indenture Trustee will
establish the Collection Account (the "Collection Account") in the name of the
Indenture Trustee for the benefit of the Noteholders and the Insurer. All
payments made on or with respect to the Receivables previously deposited in the
Lockbox Account will be transferred to the Collection Account within two
Business Days of the receipt of available funds tin this prospectus supplement.
Upon receipt, but in no event later than two Business Days after the receipt of
amounts in respect of Receivables, each of the Servicer and the Seller will
remit all amounts received by it in respect of the Receivables in the form of
checks with payment coupons directly to the Lockbox. Other payments received by
each of the Servicer and the Seller will be deposited into a local servicing
account for processing, and then transferred to the Collection Account within
two Business Days of the receipt of available funds tin this prospectus
supplement. The Collection Account will be maintained with the Indenture Trustee
as long as the Indenture Trustee's deposits have a rating acceptable to the
Insurer and the Rating Agencies. If the deposits of the Indenture Trustee no
longer have an acceptable rating, the Indenture Trustee shall cause the accounts
to be moved to a bank or trust company having acceptable ratings.
The Indenture Trustee will also establish and maintain an account, in
its name, on behalf of Noteholders and the Insurer, in which amounts released
from the Collection Account for distribution to Noteholders will be deposited
and from which all distributions to Noteholders will be made (the "Note
Distribution Account").
On the Closing Date, a cash amount equal to approximately $[ ] (the
"Initial Pre-Funded Amount") will be deposited in an account (the "Pre-Funding
Account") which will be established with the Indenture Trustee. The "Funding
Period" is the period from the Closing Date until the earliest of the date on
which:
(1) the amount on deposit in the Pre-Funding Account is less than
$100,000,
(2) a Servicer Termination Event occurs under the Sale and Servicing
Agreement or an Insurance Agreement Event of Default occurs, or
(3) the Payment Date in [ ].
The Initial Pre-Funded Amount, as reduced from time to time during the Funding
Period by the amount used to purchase Subsequent Receivables in accordance with
the Sale and Servicing Agreement, is referred to in this prospectus supplement
as the "Pre-Funded Amount." The Seller expects that the Pre-Funded Amount will
be reduced to less than $100,000 on or before the Payment Date in [ ]. Any
Pre-Funded Amount remaining at the end of the Funding Period will be payable to
the Noteholders as described in this prospectus supplement. The "Mandatory
Redemption Date" is the earlier of (1) the Payment Date in [ ] and (2) if the
last day of the Funding Period occurs on or prior to the Determination Date in
[ ], then the [ ] Payment Date.
On the Closing Date, a cash amount shall be deposited in an account
(the "Capitalized Interest Account") which will be established with the
Indenture Trustee. The amount, if any, deposited in the Capitalized Interest
Account will be applied on the Payment Dates occurring in [ ], [ ] and [ ], and
to fund an amount (the "Monthly Capitalized Interest Amount") equal to the
amount of interest accrued for each Payment Date at the excess of (1) the
weighted average interest rate on the Class A Notes over (2) [ ]%, on the
portion of the Class A Notes having a principal balance in excess of the
Aggregate Principal Balances of the Receivables. Any amounts remaining in the
Capitalized Interest Account on the Mandatory Redemption Date and not used for
these purposes are required to be paid to the Class A Noteholders on the
relevant date. See "Description of the Transaction Documents--Accounts."
All of these Accounts shall be Eligible Deposit Accounts (as defined
in the prospectus) acceptable to the Insurer, so long as no Insurer Default has
occurred and is continuing.
Consistent with the Sale and Servicing Agreement and its normal
collection practices and procedures, the Servicer may, in its discretion,
arrange with the Obligor on a Receivable to extend or modify the payment
schedule, subject to particular limitations. No extension or modification in
accordance with the Sale and Servicing Agreement will result in a repurchase
obligation for the Servicer.
SERVICING PROCEDURES
The Servicer will make all reasonable efforts to collect all payments
due with respect to the Receivables and will continue these collection
procedures as it follows with respect to all comparable motor vehicle
receivables that it services for itself or others, in a manner consistent with
the Sale and Servicing Agreement. If the Servicer determines that eventual
payment in full of a Receivable is unlikely, the Servicer will follow its normal
collection practices and procedures, including the repossession and disposition
of the Financed Vehicle securing the Receivable at a public or private auction,
or the taking of any other action permitted by applicable law.
The Servicer will not be required under the Sale and Servicing
Agreement to make any advances of principal or interest due on any Receivable.
COLLECTIONS
The Servicer or the Seller, as the case may be, will remit or cause to
be remitted the aggregate Purchase Amount of any Receivables required to be
purchased by it from the Trust to the Collection Account. Under the Sale and
Servicing Agreement, the amounts of any recoveries in respect of any Receivables
repurchased by Dealers pursuant to any Dealer Recourse constitute collections on
the Receivables.
For purposes of the Sale and Servicing Agreement, collections on a
Receivable, other than a Receivable purchased by the Servicer or the Seller,
which are not late fees or other administrative fees and expenses collected
during a Collection Period are required to be applied first to the Contract
Scheduled Payment. To the extent that the collections on a Receivable during a
Collection Period exceed the Contract Scheduled Payment on the Receivable, the
collections are required to be applied to prepay the Receivable in full. If the
collections are insufficient to prepay the Receivable in full, any partial
prepayment of principal during a Collection Period will be immediately applied
to reduce the principal balance of the Receivable during that Collection Period.
SERVICING COMPENSATION
The Servicer is entitled under the Sale and Servicing Agreement to
receive on each Payment Date a fee (the "Servicer Fee") equal to the sum of (a)
the product of one-twelfth and [ ]% (the "Servicing Fee Rate") and the Principal
Balance outstanding at the beginning of the calendar month immediately preceding
the month in which the Payment Date occurs and (b) any late fees. If the Backup
Servicer, or any other entity becomes the successor Servicer, it will receive
compensation at the Servicing Fee Rate. The Servicer will also be reimbursed for
particular expenses related to the repossession of Financed Vehicles (the
"Servicer Expenses"). The Servicer Fee and Servicer Expenses will be paid out of
collections from the Receivables pursuant to the distribution described under
"The Notes--Priority of Distribution Amounts".
The Servicer Fee and the Servicer Expenses will compensate the
Servicer for performing the functions of a third-party servicer of the
Receivables as an agent for the Trust, including collecting and posting all
payments, responding to inquiries of Obligors on the Receivables, investigating
delinquencies, reporting any required tax information to Obligors, paying costs
of collections and monitoring the collateral. In addition, the Servicer Fee will
(a) compensate the Servicer for administering the Receivables, including
accounting for collections, furnishing monthly and annual statements with
respect to payments and generating federal income tax information, if any, and
(b) reimburse the Servicer for some of the taxes, independent accountants' fees
and other costs incurred in connection with administering the Receivables.
BACKUP SERVICING AND BACKUP SERVICING COMPENSATION
Pursuant to the Sale and Servicing Agreement, [ ] will perform
particular duties as the Backup Servicer. In addition, following the resignation
or removal of the Servicer, the Backup Servicer has agreed to serve as the
successor Servicer under the Sale and Servicing Agreement. The Backup Servicer
will be required to carry out its duties in accordance with the customary and
usual procedures of institutions which perform similar functions. On each
Payment Date, the Backup Servicer will be entitled to receive a fee for acting
as Backup Servicer (the "Backup Servicer Fee") equal to one-twelfth the product
of [ ] basis points and the outstanding Note Balance. In addition, following the
resignation or removal of the Servicer, the Backup Servicer will be reimbursed
for particular costs and expenses associated with the transition of the Backup
Servicer to Servicer (the "Servicer Transition Expenses").
The Sale and Servicing Agreement will provide that the Backup Servicer
may not resign from its obligations and duties as Backup Servicer under the Sale
and Servicing Agreement, except upon determination that, by reason of a change
in legal requirements, the Backup Servicer's performance of these duties would
be in violation of particular legal requirements and the Controlling Party does
not elect to waive the obligations of the Backup Servicer to perform the duties
that render it legally unable to act or to delegate those duties to another
Person. No resignation will become effective until a successor backup servicer
has assumed the Backup Servicer's servicing obligations and duties under the
Sale and Servicing Agreement. Notwithstanding the foregoing, the Backup Servicer
may resign for any reason, provided an entity acceptable to the Controlling
Party has assumed the Backup Servicer's obligations and duties under the Sale
and Servicing Agreement prior to the effectiveness of any resignation and the
Rating Agency Condition is also satisfied with respect to the resignation and
assumption of the Backup Servicer's obligations.
EVIDENCE AS TO COMPLIANCE
The Sale and Servicing Agreement will provide that the Servicer will
cause a firm of nationally recognized independent certified public accountants
to deliver to the Servicer, on or before [ ] of each year, commencing [ ], a
statement to the effect that the firm has audited the books and records of the
Servicer and issued its report on the books and records from the fiscal year
ended on the immediately preceding [ ]. The Servicer will deliver a copy of the
report to the Indenture Trustee, the Insurer, the Backup Servicer and the Rating
Agencies.
The Sale and Servicing Agreement will also provide for delivery to the
Indenture Trustee, the Insurer, the Backup Servicer and the Rating Agencies, on
or before [ ] of each year, commencing [ ], of a certificate signed by an
officer of the Servicer stating that, to the officer's knowledge, the Servicer
has fulfilled its obligations under the Sale and Servicing Agreement throughout
the preceding 12 months, or, for the initial report, for a longer period as will
have elapsed from the date of issuance of the Notes, or, if there has been a
default in the fulfillment of any obligation, describing each default. A copy of
the certificate may be obtained by any Noteholder by a request in writing to the
Indenture Trustee addressed to the Corporate Trust Office.
CERTAIN MATTERS REGARDING THE SERVICER
The Sale and Servicing Agreement will provide that the Servicer may
not resign from its obligations and duties as Servicer under the Sale and
Servicing Agreement, except (1) upon determination that, by reason of a change
in legal requirements, the Servicer's performance of these duties would be in
violation of particular legal requirements and (2) the Insurer, or, if an
Insurer Default has occurred and is continuing, a Note Majority, does not elect
to waive the obligations of the Servicer to perform the duties that render it
legally unable to act or to delegate those duties to another Person. No
resignation will become effective until the Backup Servicer or a successor
servicer has assumed the Servicer's servicing obligations and duties under the
Sale and Servicing Agreement.
The Sale and Servicing Agreement will further provide that neither the
Servicer nor any of its stockholders, directors, officers, employees or agents,
will be liable to the Trust or the Indenture Trustee for taking any action or
for refraining from taking any action pursuant to the Sale and Servicing
Agreement; provided, however, that neither the Servicer nor any Person will be
protected against any liability that would otherwise be imposed by reason of the
Servicer's material breach of the Sale and Servicing Agreement, willful
misfeasance, bad faith or negligence, other than errors in judgment, in the
performance of its duties.
Subject to the provisions of the Sale and Servicing Agreement, any
entity into which the Servicer may be merged or consolidated, resulting from any
merger, conversion or consolidation to which the Servicer is a party, which
acquires all or substantially all of the assets of the Servicer, or succeeding
to the business of the Servicer, which in any case assumes the obligations of
the Servicer, will be the successor of the Servicer, under the Sale and
Servicing Agreement. The Servicer may at any time perform specific duties as
Servicer through other subcontractors with the prior written consent of the
Insurer.
SERVICER TERMINATION EVENTS; RIGHTS UPON SERVICER TERMINATION EVENT
A "Servicer Termination Event" under the Sale and Servicing Agreement
will include:
o the Servicer's failure to make deposits into the Collection
Account or to deliver to the Indenture Trustee any proceeds or
payments payable to the Noteholders or the Insurer required to be
so deposited or delivered in accordance with the Sale and
Servicing Agreement, which failure continues unremedied for a
period of two Business Days, one Business Day with respect to
payment of Purchase Amounts, after the earlier of (x) discovery
of the failure by the Servicer and (y) notice of the failure is
given by the Indenture Trustee to the Servicer;
o the Servicer's failure or failures to satisfy any other covenant
or agreement set forth in the Sale and Servicing Agreement, which
failure or failures, individually or in the aggregate, materially
and adversely affect the rights of Noteholders or the Insurer and
remains uncured for a period of 60 days after the earlier of the
date on which (a) it obtains actual knowledge of the failure or
(b) it receives written notice of the failure from (1) the
Insurer or the Indenture Trustee or (2) if an Insurer Default has
occurred and is continuing, the Note Majority;
o partiuclar events of insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings with
respect to the Servicer indicating its insolvency;
o so long as an Insurer Default shall not have occurred and be
continuing, the Insurer shall not have delivered an extension
notice,
o so long as an Insurer Default shall not have occurred and be
continuing, an Insurance Agreement Event of Default shall have
occurred or an event of default under any other Insurance
Agreement relating to any series of securities shall have
occurred;
o a claim is made under the Policy; or
o any representation or warranty shall prove to be incorrect in any
material respect and this incorrectness shall have a material
adverse effect on the interest of the Trust, the Noteholders or
the Insurer in the Receivables, which has not been cured within
30 days.
"Insurer Default" shall mean the occurrence and continuance of any of
the following events:
(a) the Insurer shall have failed to make a payment required under
the Policy in accordance with its terms;
(b) the Insurer shall have
o filed a petition or commenced any case or proceeding under
any provision or chapter of the United States Bankruptcy
Code or any similar federal or state law relating to the
insolvency, bankruptcy, rehabilitation, liquidation or
reorganization,
o made a general assignment for the benefit of its creditors,
or
o had an order for relief entered against it under the United
States Bankruptcy Code or any other similar federal or state
law relating to insolvency, bankruptcy, rehabilitation,
liquidation or reorganization which is final and
nonappealable; or
(c) a court of competent jurisdiction, the New York Department of
Justice or other competent regulatory authority shall have
entered a final and nonappealable order, judgment or decree (1)
appointing a custodian, trustee, agent or receiver for the
Insurer or for all or any material portion of its property or (2)
authorizing the taking of possession by a custodian, trustee,
agent or receiver of the Insurer, or the taking of possession of
all or any material portion of the property of the Insurer.
As long as a Servicer Termination Event under the Sale and Servicing
Agreement remains unremedied, (x) provided that no Insurer Default shall have
occurred and be continuing, the Insurer in its sole and absolute discretion, or
(y) if an Insurer Default shall have occurred and be continuing, then the Note
Majority may terminate all of the rights and obligations of the Servicer under
the Sale and Servicing Agreement. Upon termination, all authority, power,
obligations and responsibilities of the Servicer under the Sale and Servicing
Agreement, other than obligations and responsibilities arising prior to the
termination, will automatically pass to the Backup Servicer, or other successor
servicer appointed by the Insurer, provided that no Insurer Default shall have
occurred and be continuing.
WAIVER OF PAST DEFAULTS
As set forth under "Certain Matters Regarding Servicer--Waiver of Past
Defaults" in the prospectus, the Insurer may, so long as no Insurer Default
shall have occurred and be continuing, on behalf of the Noteholders, waive any
default by the Servicer in the performance of its obligations under the Sale and
Servicing Agreement and its consequences. No waiver will impair the Noteholders'
rights with respect to subsequent defaults.
AMENDMENT
The Sale and Servicing Agreement may be amended by the Issuer, the
Seller, the Servicer, the Company, the Indenture Trustee and the Backup
Servicer, with the prior written consent of the Insurer, so long as no Insurer
Default has occurred and is continuing, but without the consent of any of the
Certificateholders or the Noteholders, to cure any ambiguity, to correct or
supplement any provision in this prospectus supplement or for the purpose of
adding any provision to or changing in any manner or eliminating any provision
of this prospectus supplement or modifying in any manner the rights of the
Noteholders; PROVIDED, HOWEVER, that the action must not, as evidenced by an
opinion of counsel, adversely affect in any material respect the interests of
the Noteholders. The Seller, the Issuer, the Servicer, the Company, the Backup
Servicer and the Indenture Trustee may also amend the Sale and Servicing
Agreement with the prior written consent of the Insurer, so long as no Insurer
Default has occurred and is continuing, and a Note Majority to add, change or
eliminate any provisions of the Sale and Servicing Agreement or to modify the
rights of the Noteholders; provided, however, that the action will not:
o increase or reduce in any manner the amount of, or accelerate or
delay the timing of, collections of payments on Receivables or
distributions that are required to be made for the benefit of the
Noteholders or Certificateholders;
o reduce the aforesaid percentage of the Noteholders or
Certificateholders which is required to consent to any amendment,
without, in either case, the consent of the Holders of all Notes
and Certificates outstanding; PROVIDED, FURTHER, that if an
Insurer Default has occurred and is continuing, the action shall
not materially adversely affect the interest of the Insurer; or
o result in a downgrade or withdrawal of the then current rating of
the Notes by the Rating Agencies without the consent of each
Noteholder.
The above should in no way be construed to require the consent of the
Noteholders or Certificateholders to a reduction in the Target
Overcollateralization Amount or the required level of the Class A Reserve
Account.
LIST OF NOTEHOLDERS; VOTING OF NOTES
Upon written request by three or more Noteholders or any one or more
Noteholders with an aggregate principal balance evidencing not less than 25% of
the Note Balance and upon compliance by these Noteholders with other provisions
of the Sale and Servicing Agreement, the Indenture Trustee will afford the
Noteholders, within five Business Days after receipt of the request, access
during business hours to the current list of Noteholders for purposes of
communicating with other Noteholders with respect to their rights under the Sale
and Servicing Agreement and the Notes.
If the Seller, the Seller or any of their affiliates owns any Notes,
the Note will not have voting rights under the Sale and Servicing Agreement or
the other Related Documents.
The Sale and Servicing Agreement will not provide for the holding of
any annual or other meetings of Noteholders.
TERMINATION
The respective obligations of the Issuer, the Seller, the Servicer,
the Company, the Backup Servicer and the Indenture Trustee pursuant to the Sale
and Servicing Agreement will terminate upon the latest of:
o the maturity or other liquidation of the last Receivable and the
payment to Noteholders and the Insurer of amounts required to be
paid under the Notes, the Indenture and the Insurance Agreement;
o the expiration of the Policy in accordance with its terms; or
o the payment to Noteholders of all amounts required to be paid to
them pursuant to the Indenture and the expiration of any related
preference period.
In order to avoid excessive administrative expense, the Servicer has
the option to purchase from the Trust, as of the last day of any month as of
which the Aggregate Principal Balance with respect to the Receivables is less
than or equal to 10% of the Original Pool Balance, all remaining Receivables at
a price equal to the aggregate of the Purchase Amounts of the Receivables as of
that last day, plus the appraised value of any other property held by the Trust,
with the prior written consent of the Insurer, if the redemption would result in
a claim under the Policy or if the redemption would result in any amount owing
to the Insurer remaining unpaid. 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 the office or agency of the Indenture Trustee specified in the notice of
termination; PROVIDED, HOWEVER, that if on the Payment Date upon which final
payment of the Notes is to be made, there are five or fewer Noteholders of
record, the final payment to that Noteholder will be made by check or wire
transfer as described above and each Noteholder shall present and surrender its
Note at the office or agency designated in the notice of final distribution
referred to above within 30 days after the Payment Date.
THE POLICY
The following summary of the terms of the Policy does not purport to
be complete and is qualified in its entirety by reference to the Policy.
Simultaneously with the issuance of the Class A Notes, the Insurer
will deliver the Policy to the Indenture Trustee for the benefit of each Class A
Noteholder. Under the Policy, the Insurer will unconditionally and irrevocably
guarantee to the Indenture Trustee, on each Payment Date, for the benefit of
each Class A Noteholder the full and complete payment of (1) Scheduled Payments
on the Class A Notes and (2) the amount of any Scheduled Payment which
subsequently is avoided in whole or in part as a preference payment under
applicable law. In the event the Indenture Trustee fails to make a claim under
the Policy, Class A Noteholders do not have the right to make a claim directly
under the Policy, but may sue to compel the Indenture Trustee to do so.
"Scheduled Payments" means payments which are scheduled to be made on
the Class A Notes during the term of the Policy in accordance with the original
terms of the Class A Notes when issued and without regard to any subsequent
amendment or modification of the Class A Notes, the Sale and Servicing Agreement
or the Indenture that has not been consented to by the Insurer, which "Scheduled
Payments", are
(1) the Class A Interest Payment Amount, with respect to a Payment
Date and
(2) the Class A Principal Payment Amount with respect to a Payment
Date. Scheduled Payments do not include payments which become due
on an accelerated basis as a result of
o a default by the Trust,
o an election by the Trust to pay principal on an accelerated
basis,
o the occurrence of an Event of Default under the Indenture or
o any other cause,
unless the Insurer elects, in its sole discretion, to pay in whole or in part
the principal due upon acceleration, together with any accrued interest to the
date of acceleration.
In the event the Insurer does not so elect, the Policy will continue to
guarantee Scheduled Payments due on the Class A Notes in accordance with their
original terms. Scheduled Payments shall not include
(1) any portion of a Class A Interest Payment Amount due to the Class
A Noteholders because the appropriate notice and certificate for
payment in proper form was not timely Received by the Insurer,
(2) any portion of a Class A Interest Payment Amount due to Class A
Noteholders representing interest on any Class A Interest
Carryover Shortfall or
(3) any Class A Mandatory Redemption Amounts,
unless the Insurer elects, in its sole discretion, to pay the amount in whole or
in part. Scheduled Payments shall not include, any amounts due in respect of the
Class A Notes attributable to any increase in interest rate, penalty or other
sum payable by the Trust by reason of any default or event of default in respect
of the Class A Notes or by reason of any deterioration of the creditworthiness
of the Trust nor shall coverage be provided under the Policy in respect of any
taxes, withholding or other charge imposed with respect to any Noteholder by any
governmental authority due in connection with the payment of any Scheduled
Payment to a Class A Noteholder.
Payment of claims on the Policy made in respect of Scheduled Payments
will be made by the Insurer following Receipt by the Insurer of the appropriate
notice for payment on the later to occur of (1) 12:00 noon, New York City time,
on the third Business Day following Receipt of notice for payment, and (2) 12:00
noon, New York City time, on the date on which the payment was due on the Class
A Notes.
If payment of any amount avoided as a preference under applicable
bankruptcy, insolvency, receivership or similar law is required to be made under
the Policy, the Insurer shall cause the payment to be made on the later of
(a) the date when due to be paid pursuant to the Order referred to
below or
(b) the first to occur of
(1) the fourth Business Day following Receipt by the Insurer
from the Indenture Trustee of
o a certified copy of the order (the "Order") of the
court or other governmental body that exercised
jurisdiction to the effect that the Class A Noteholder
is required to return Scheduled Payments made with
respect to the Class A Notes during the term of the
Policy because the payments were avoidable as
preference payments under applicable bankruptcy law,
o a certificate of the Class A Noteholder that the Order
has been entered and is not subject to any stay and
o an assignment duly executed and delivered by the Class
A Noteholder, in a form as is reasonably required by
the Insurer and provided to the Class A Noteholder by
the Insurer, irrevocably assigning to the Insurer all
rights and claims of the Class A Noteholder relating to
or arising under the Class A Notes against the Trust or
otherwise with respect to the preference payment, or
(2) the date of Receipt by the Insurer from the Indenture
Trustee of the items referred to in clauses (A), (B) and (C)
above if, at least four Business Days prior to the date of
Receipt, the Insurer shall have Received written notice from
the Indenture Trustee that these items were to be delivered
on that date and the date was specified in the notice.
This payment shall be disbursed to the receiver, conservator,
debtor-in-possession or trustee in bankruptcy named in the Order and not to the
Indenture Trustee or any Class A Noteholder directly, unless a Class A
Noteholder has previously paid the amount to the receiver, conservator,
debtor-in-possession or trustee in bankruptcy named in the Order, in which case
the payment shall be disbursed to the Indenture Trustee for distribution to the
Class A Noteholder upon proof of the payment reasonably satisfactory to the
Insurer. In connection with the foregoing, the Insurer shall have the rights
provided pursuant to the Sale and Servicing Agreement including, without
limitation, the right to direct all matters relating to any preference claim and
subrogation to the rights of the Indenture Trustee and each Class A Noteholder
in the conduct of any proceeding with respect to a preference claim.
OTHER PROVISIONS OF THE POLICY
The terms "Receipt" and "Received" with respect to the Policy shall
mean actual delivery to the Insurer and to its fiscal agent, if any, prior to
12:00 noon, New York City time, on a Business Day; delivery either on a day that
is not a Business Day or after 12:00 noon, New York City time, shall be deemed
to be Received on the next succeeding Business Day. If any notice or certificate
given under the Policy by the Indenture Trustee is not in proper form or is not
properly completed, executed or delivered, it shall be denied not to have been
Received, and the Insurer or its fiscal agent shall promptly so advise the
Indenture Trustee, and the Indenture Trustee may submit an amended notice.
Under the Policy, "Business Day" means any day other than a Saturday,
Sunday, legal holiday or other day on which commercial banking institutions in
Wilmington, Delaware, the City of New York or any other location of any
successor Servicer, successor Owner Trustee or successor Indenture Trustee are
authorized or obligated by law, executive order or governmental decree to be
closed.
The Insurer's obligations under the Policy in respect of Scheduled
Payments shall be discharged to the extent funds are transferred to the
Indenture Trustee as provided in the Policy whether or not the funds are
properly applied by the Indenture Trustee.
The Insurer shall be subrogated to the rights of each Class A
Noteholder to receive payments of principal and interest to the extent of any
payment by the Insurer under the Policy.
Claims under the Policy constitute direct, unsecured and
unsubordinated obligations of the Insurer ranking not less than pari passu with
other unsecured and unsubordinated indebtedness of the Insurer for borrowed
money. Claims against the Insurer under the Policy and each other financial
guaranty insurance policy issued by the Policy constitute pari passu claims
against the general assets of the Insurer. The terms of the Policy cannot be
modified or altered by any other agreement or instrument, or by the merger,
consolidation or dissolution of the Trust. The Policy may not be canceled or
revoked prior to distribution in full of all Scheduled Payments with respect to
the Notes. THE POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY INSURANCE SECURITY
FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW. The Policy is
governed by the laws of the State of New York.
It is a condition to issuance that the Class A Notes be rated [ ] by [
] and [ ] by [ ]. The ratings by the Rating Agencies of the Class A Notes will
be based on the issuance of the Policy. A rating is not a recommendation to
purchase, hold or sell Class A Notes. In the event that the rating initially
assigned to any of the Class A Notes is subsequently lowered or withdrawn for
any reason, including by reason of a downgrading of the claims-paying ability of
the Insurer, no person or entity will be obligated to provide any additional
credit enhancement with respect to the Class A Notes. Any reduction or
withdrawal of a rating may have an adverse effect on the liquidity and market
price of the Notes. See "Ratings" in this prospectus supplement.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following is a general summary of some of the related Federal
income tax consequences of the purchase, ownership and disposition of the Class
A Notes. This discussion does not address every aspect of the Federal income tax
laws that may be relevant to holders of Class A Notes in light of their personal
investment circumstances or to particular types of Class A Noteholders subject
to special treatment under the Federal income tax laws, including, without
limitation, banks and thrifts, insurance companies, dealers in securities,
foreign investors, regulated investment companies, individuals, trusts and
estates and pass-through entities, the equity holders of which are any of the
foregoing. This discussion is directed to prospective purchasers who purchase
Class A Notes in the initial distribution of the Class A Notes and who hold the
Class A Notes as "capital assets" within the meaning of Section 1221 of the
Internal Revenue Code of 1986, as amended (the "Code"). Prospective purchasers
are urged to consult their own tax advisors in determining the Federal, state,
local, foreign and any other tax consequences to them of the purchase, ownership
and disposition of the Class A Notes.
The following summary is based upon current provisions of the Code,
the Treasury regulations promulgated under the Code, judicial authority, and
ruling authority, all of which are subject to change, which change may be
retroactive. The Issuer will be provided with an opinion of Federal Tax Counsel
regarding some of the related Federal income tax matters discussed below. An
opinion of Federal Tax Counsel, however, is not binding on the Internal Revenue
Service (the "IRS") or the courts. Moreover, there are no cases or IRS rulings
on similar transactions with terms similar to those of the Class A Notes. As a
result, the IRS may disagree with all or a part of the discussion below. No
ruling on any of the issues discussed below will be sought from the IRS.
TAX CHARACTERIZATION OF THE ISSUER
Stroock & Stroock & Lavan LLP will deliver its opinion that the Issuer
will not be classified as an association, or publicly traded partnership,
taxable as a corporation for Federal income tax purposes. This opinion will be
based on the assumption of compliance by all parties with the terms of the Trust
Agreement and related documents.
If the Issuer were taxable as a corporation for Federal income tax
purposes, the Issuer would be subject to corporate income tax on its taxable
income. The Issuer's taxable income would include all its income on the
Receivables, possibly reduced by its interest expense on the Class A Notes. Any
corporate income tax could materially reduce cash available to make payments on
the Class A Notes and distributions on the Certificates, and Certificateholders,
and possibly Class A Noteholders, could be liable for any tax that is not paid
by the Trust.
TAX CONSEQUENCES TO HOLDERS OF THE CLASS A NOTES
TREATMENT OF THE CLASS A NOTES AS INDEBTEDNESS. The Issuer will agree,
and the Class A Noteholders will agree by their purchase of Class A Notes, to
treat the Class A Notes as debt for Federal, state and local income and
franchise tax purposes. Federal Tax Counsel will advise the Issuer that in its
opinion the Class A Notes will be classified as debt for Federal income tax
purposes.
Alternatively, if, contrary to the opinion of Federal Tax Counsel, the
Class A Notes were not properly classified as debt and Issuer were treated as a
publicly traded partnership taxable as a corporation, it would be subject to
Federal income tax, and any similar state or local taxes, at corporate tax rates
on its taxable income generated by ownership of the Receivables. This tax could
result in reduced distributions to Class A Noteholders. Distributions to Class A
Noteholders generally would not be deductible in computing the taxable income of
the publicly traded partnership. In addition, all or a portion of any
distributions would, to the extent of the current and accumulated earnings and
profits of the corporation, be treated as dividend income to the Class A
Noteholders, and in the case of Class A Noteholders that are foreign persons
would be subject to withholding tax.
INTEREST INCOME AND OID ON THE CLASS A NOTES. It is not anticipated
that the Class A Notes will be issued with original issue discount ("OID")
within the meaning of Section 1273 of the Code. The stated interest on the Class
A Notes will be taxable to a Class A Noteholder as ordinary interest income when
received or accrued in accordance with the Class A Noteholder's method of tax
accounting. If the Class A Notes were treated as being issued with OID, the
excess of the "stated redemption price at maturity" of the Class A Notes over
their issue price would constitute OID. Under the OID Regulations, a holder of a
Class A Note issued with a DE MINIMIS amount of OID must include this OID in
income, on a pro rata basis, as principal payments are made on the Class A Note.
A subsequent purchaser who buys a Class A Note for more or less than its
principal amount will generally be subject, respectively, to the premium
amortization or market discount rules of the Code.
SALE OR OTHER DISPOSITION. If a Class A Noteholder sells a Class A
Note, the holder will recognize gain or loss in an amount equal to the
difference between the amount realized on the sale and the holder's adjusted tax
basis in the Class A Note. The adjusted tax basis of a Class A Note to a
particular Class A Noteholder will equal the holder's cost for the Class A Note,
increased by any market discount, and gain previously included by the Class A
Noteholder in income with respect to the Class A Note and decreased by the
amount of premium, if any, previously amortized and by the amount of principal
payments previously received by the Class A Noteholder with respect to the
related Class A Note. Any gain or loss will be capital gain or loss, except for
gain representing accrued interest, including OID, and accrued market discount
not previously included in income. Capital losses generally may be used by a
corporate taxpayer only to offset capital gains, and by an individual taxpayer
only to the extent of capital gains plus $3,000 of other income.
FOREIGN HOLDERS. Except as discussed below, a Class A Noteholder that is not a
"United States person" (as defined below) generally will not be subject to
United States income or withholding tax in respect of a distribution on a Class
A Note provided that (i) the holder complies to the extent necessary with
certain certification requirements, which generally relate to the identity of
the beneficial owner and the status of the beneficial owner as a person that is
not a United States person (as defined below), (ii) the holder is not a
"10-percent shareholder" within the meaning of Section 871(h)(3)(B) of the Code,
which could be interpreted to include a person that directly or indirectly owns
10% or more of the certificates in the Trust or the equity in the Seller or the
Company, (iii) the holder is not a "controlled foreign corporation" (as defined
in the Code) related to the Trust or related to a 10 percent holder of
certificates in the Trust or equity in the Seller or the Company, and (iv) the
holder is not engaged in a United States trade or business, or otherwise subject
to Federal income tax as a result of any direct or indirect connection to the
United States other than through its ownership of a Class A Note. For these
purposes, the term "United States person" means (i) a citizen or resident of the
United States, (ii) a corporation or partnership (or other entity properly
treated as a corporation or partnership for Federal income tax purposes) created
or organized in or under the laws of the United States or any political
subdivision thereof, (iii) an estate whose income is includable in gross income
for United States Federal income taxation regardless of its source, and (iv) a
trust for which one or more United States fiduciaries have the authority to
control all substantial decisions and for which a court of the United States can
exercise primary supervision over the trust's administration. A "Foreign Person"
is any person that is not a United States person. Each Class A Noteholder should
consult its tax advisors regarding the tax documentation and certifications that
must be provided to secure the exemption from United States withholding taxes.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Class A Note by a Foreign Person generally will be
exempt from United States Federal income and withholding tax, provided that (i)
such gain is not effectively connected with the conduct of a trade or business
in the United States by the Foreign Person and (ii) in the case of an individual
Foreign Person, the Foreign Person is not present in the United States for 183
days or more in the taxable year.
If the interest, gain or income on a Class A Note held by a Foreign
Person is effectively connected with the conduct of a trade or business in the
United States by the Foreign Person (although exempt from the withholding tax
previously discussed if the holder provides an appropriate statement
establishing that such income is so effectively connected), the holder generally
will be subject to United States Federal income tax on the interest, gain or
income at regular Federal income tax rates. In addition, if the Foreign Person
is a foreign corporation, it may be subject to a branch profits tax equal to 30%
of its effectively connected earnings and profits," within the meaning of the
Code, for the taxable year, as adjusted for certain items, unless it qualifies
for a lower rate under an applicable tax treaty (as modified by the branch
profits tax rules).
If the IRS were to contend successfully that the Class A Notes are
interests in a partnership, not taxable as a corporation, a Class A Noteholder
that is a foreign person might be required to file a United States. Federal
income tax return and pay tax on its share of partnership income at regular
United States tax rates, including the branch profits tax, and could be subject
to withholding tax on its share of partnership income. If the Class A Notes were
recharacterized as interests in a "publicly traded partnership" taxable as a
corporation, distributions on the Class A Notes treated as dividends would
generally be subject to withholding tax on the gross amount of the dividends at
the rate of 30% unless the rate were reduced by an applicable treaty. If the
Class A Notes are recharacterized as equity interests in a partnership, or,
contrary to the opinion of Federal Tax Counsel, in a publicly traded partnership
taxable as a corporation, any taxes required to be so withheld will be treated
for all purposes of the Class A Notes as having been paid to the related Class A
Noteholder.
BACKUP WITHHOLDING. Distributions made on the Class A Notes and
proceeds from the sale of Class A Notes to or through certain brokers may be
subject to a "backup" withholding tax of 31 percent of "reportable payments"
(including interest accruals, original issue discount, and, under certain
circumstances, distributions in reduction of principal amount) if the holder of
the Class A Notes fails to comply with certain identification procedures, unless
the Class A Noteholder is an exempt recipient under applicable provisions of the
Code and, if necessary, demonstrates such status. Any amounts so withheld from
distributions on the Class A Notes would be refunded by the IRS or allowable as
a credit against the Class A Noteholder's Federal income tax.
CERTAIN STATE TAX CONSEQUENCES
In addition to the federal income tax consequences described in
"Material Federal Income Tax Consequences" above, potential purchasers should
consider the state income tax consequences of the acquisition, ownership and
disposition of the Class A Notes. State income tax law may vary substantially
from state to state, and this discussion does not purport to describe any aspect
of the income tax laws of any state. Therefore, potential purchasers should
consult their own tax advisors with respect to the various tax consequences of
an investment in the Class A Notes.
ERISA CONSIDERATIONS
Section 406 of ERISA and Section 4975 of the Code prohibit a pension,
profit sharing, or other employee benefit plan, as well as individual retirement
accounts and particular types of Keogh Plans subject to those provisions, and
entities deemed to hold plan assets of these plans (each, a "Benefit Plan"),
from engaging in particular transactions involving "plan assets" with persons
that are "parties in interest" under ERISA or "disqualified persons" under the
Code with respect to the Benefit Plan. A violation of these "prohibited
transaction" rules may generate excise tax and other penalties and liabilities
under ERISA and the Code for these persons. ERISA also imposes particular duties
on persons who are fiduciaries of Benefit Plans subject to ERISA. Under ERISA,
any person who exercises any authority or control respecting the management or
disposition of the assets of a Benefit Plan is considered to be a fiduciary of
the Benefit Plan, subject to exceptions not here relevant.
Some transactions involving the Issuer might be deemed to constitute
prohibited transactions under ERISA and the Code with respect to a Benefit Plan
that purchases Class A Notes if assets of the Issuer were deemed to be assets of
the Benefit Plan. Under a regulation issued by the United States Department of
Labor (the "Plan Assets Regulation"), the assets of the Issuer would be treated
as plan assets of a Benefit Plan for the purposes of ERISA and the Code only if
the Benefit Plan acquired an equity interest in the Issuer and none of the
exceptions contained in the Plan Assets Regulation was applicable. An "equity
interest" is defined under the Plan Assets 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 Issuer believes that, at the time of their issuance the Class A
Notes should be treated as indebtedness without substantial equity features for
purposes of the Plan Assets Regulation. The debt status of the Class A Notes
could be affected subsequent to their issuance by particular types of changes in
the financial condition of the Issuer.
Without regard to whether Class A Notes are treated as an equity
interest under the Plan Assets Regulation, the acquisition or holding of the
Class A Notes by or on behalf of a Benefit Plan could be considered to give rise
to a prohibited transaction if the Issuer, the Seller, the Servicer, the Backup
Servicer, the Indenture Trustee or the Owner Trustee is or becomes a party in
interest or a disqualified person with respect to a Benefit Plan or in the event
that a subsequent transfer of a Class A Note occurs between a Benefit Plan and a
party in interest or disqualified person with respect to the Plan. Some
exemptions from the prohibited transaction rules could be applicable to the
purchase and holding of Class A Notes by a Benefit Plan depending on the type
and circumstances of the plan fiduciary making the decision to acquire the Class
A Notes. Included among these exemptions, each of which contains several
conditions which must be satisfied before the exemption applies, are: PTCE 90-1,
regarding partiuclar transactions entered into by insurance company pooled
separate accounts; PTCE 95-60, regarding particular transactions entered into by
insurance company general accounts; PTCE 96-23, regarding particular
transactions effected by "in-house asset managers"; PTCE 91-38 regarding
particular types of transactions entered into by bank collective investment
funds; and PTCE 84-14, regarding particular transactions effected by "qualified
professional asset managers." By acquiring a Class A Note, each purchaser and
each transferee of a Class A Note shall be deemed to represent and warrant that
either (1) it is not acquiring a Class A Note with the assets of a Benefit Plan;
or (2) its purchase and holding of the Class A Notes will qualify for prohibited
transaction exemptive relief under PTCE 95-60, PTCE 96-23, PTCE 91-38, PTCE
90-1, PTCE 84-14 or some other applicable exemption.
Employee benefit plans that are governmental plans (as defined in
Section 3(32) of ERISA) and some church plans (as defined in Section 3(33) of
ERISA) may not be subject to ERISA requirements. However, governmental plans can
be subject, under federal, fiduciary, state or local law, to restrictions which
are similar to ERISA and church plans may be subject to other types of
prohibited transaction restrictions under the Code.
A Benefit Plan fiduciary considering the purchase of Class A Notes
should consult its tax and/or legal advisors regarding whether the assets of the
Issuer would be considered plan assets, the possibility of exemptive relief from
the prohibited transaction rules and other issues and their potential
consequences.
RATINGS
It is a condition to issuance that each of the Class A-1 Notes and the
Class A-2 Notes be rated [ ] by [ ] and [ ] by [ ]. The ratings by the Rating
Agencies of the Class A Notes will be based on the issuance of the Policy. A
rating is not a recommendation to purchase, hold or sell Class A Notes. In the
event that the rating initially assigned to any of the Class A Notes is
subsequently lowered or withdrawn for any reason, including by reason of a
downgrading of the claims-paying ability of the Insurer, no person or entity
will be obligated to provide any additional credit enhancement with respect to
the Class A Notes. Any reduction or withdrawal of a rating may have an adverse
effect on the liquidity and market price of the Class A Notes.
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting
agreement dated [ ] (the "Underwriting Agreement"), the Company has agreed to
cause the Trust to sell to Deutsche Banc Alex. Brown (the "Underwriter"), and
the Underwriter has agreed to purchase, all of the Class A Notes.
Under the terms and conditions of the Underwriting Agreement, the
Underwriter is committed to take and pay for all the Class A Notes offered by
this prospectus supplement, if any are taken.
The Seller has been advised by the Underwriter that the Underwriter
proposes to offer the Class A Notes from time to time for sale in negotiated
transactions or otherwise, at prices determined at the time of sale. The
Underwriter may effect these transactions by selling Class A Notes to or through
dealers and these dealers may receive compensation in the form of underwriting
discounts, concessions or commissions from the Underwriter and any purchasers of
Class A Notes for whom they may act as agents. The Underwriter and any dealers
that participate with the Underwriter in the distribution of the Class A Notes
may be deemed to be underwriters, and any discounts or commissions received by
them and any profit on the resale of Class A Notes by them may be deemed to be
underwriting discounts or commissions under the Securities Act of 1933, as
amended (the "Securities Act").
The Class A Notes are a new issue of securities with no established
trading market. The Trust has been advised by the Underwriter that it intends to
make a market in the Class A Notes, but the Underwriter is not obligated to make
a market and may discontinue market making at any time without notice. No
assurance can be given as to the liquidity of the trading market for the Class A
Notes.
An affiliate of the underwriter provides a warehouse facility to the
Seller.
The Seller has agreed to indemnify the Underwriter against particular
types of liabilities, including liabilities under the Securities Act.
EXPERTS
The consolidated balance sheets of Financial Security and Subsidiaries
as of December 31, [ ] and [ ] and the related consolidated statements of
income, changes in shareholder's equity and cash flows for each of the three
years in the period ended December 31, [ ], incorporated by reference in this
prospectus supplement, have been incorporated in this prospectus supplement in
reliance on the report of [ ], independent accountants, given on the authority
of that firm as experts in accounting and auditing.
LEGAL MATTERS
Some legal matters relating to the Class A Notes and some related
federal income tax and other matters will be passed upon for the Seller by [ ].
Some legal matters relating to the Class A Notes will be passed upon for the
Underwriter and the Company by Stroock & Stroock & Lavan LLP, New York, New
York.
GLOSSARY
AGGREGATE PRINCIPAL BALANCE: With respect to the Closing Date, the
Cutoff Date Principal Balance, and with respect to any Determination Date, the
sum of the Principal Balances, computed as of the last day of the related
Collection Period end date, for all Receivables, other than Liquidated
Receivables and Purchased Receivables.
AMOUNT FINANCED: With respect to a Receivable, the aggregate amount
advanced extended under the Receivable toward the purchase price of the Financed
Vehicle and related costs, including amounts of credit extended in respect of
accessories, insurance premiums, service and warranty policies or contracts and
other items customarily financed as part of motor vehicle retail installment
contracts or promissory notes, and related costs.
AVAILABLE FUNDS: With respect to any Determination Date, the sum of
(1) the "Collected Funds" received by the Servicer during the related
Collection Period,
(2) all Purchase Amounts deposited in the Collection Account for the
related Collection Period,
(3) all income received from investments of funds in the Collection
Account during the related Collection Period,
(4) the Monthly Capitalized Interest Amount with respect to the
Payment Date,
(5) the Insurer Optional Deposit, if any, and
(6) any remaining Pre-Funded Amount applied to the mandatory
redemption of Notes.
CERTIFICATEHOLDER: The holder of a Certificate
CLASS: A class of Notes.
CLASS A NOTE BALANCE: The sum of (1) the Class A-1 Note Balance and
(2) the Class A-2 Note Balance.
CLASS A-1 FINAL SCHEDULED PAYMENT DATE: [ ] or, if this day is not a
Business Day, the next succeeding Business Day.
CLASS A-2 FINAL SCHEDULED PAYMENT DATE: [ ], or, if this day is not a
Business Day, the next succeeding Business Day.
CLASS B NOTE BALANCE: An amount equal to $[ ] on the Closing Date and
after, an amount equal to the initial Class B Note Balance reduced by all
amounts distributed to the Class B Noteholders that are allocable to principal.
COLLECTED FUNDS: With respect to any Determination Date, the amount of
funds in the Collection Account representing collections on the Receivables
received by the Servicer during the related Collection Period, including all
Liquidation Proceeds collected during the related Collection Period, but
excluding any Purchase Amounts, and all amounts paid by Dealers under Dealer
Agreements or Dealer Assignments with respect to the Receivables during the
related Collection Period.
COLLECTION PERIOD: With respect to any Payment Date or Determination
Date, the calendar month preceding the month in which the Payment Date or
Determination Date occurs.
CONTROLLING PARTY: The Insurer, so long as an Insurer Default shall
not have occurred and be continuing, otherwise, the Indenture Trustee for the
benefit of the Noteholders; provided, however, that the Owner Trustee for the
benefit of the Certificateholder will be the Controlling Party after all unpaid
principal and interest on the Notes shall have been paid in full and all amounts
due to the Insurer have been paid and the Policy has expired in accordance with
its terms.
CORPORATE TRUST OFFICE: The office of the Indenture Trustee at which
its corporate trust business shall be principally administered, which office as
of the date of this prospectus supplement is located at [ ].
CRAM DOWN LOSS: With respect to a Receivable, if a court of
appropriate jurisdiction in an insolvency proceeding shall have issued an order
reducing the amount owed on a Receivable or otherwise modifying or restructuring
the Contract Scheduled Payments to be made on a Receivable, an amount equal to
(1) the excess of the Principal Balance of the Receivable immediately prior to
the order over the Principal Balance of the Receivable as so reduced and/or (2)
if the court shall have issued an order reducing the effective rate of interest
on the Receivable, the net present value, using as the discount rate the higher
of the APR on the Receivable or the rate of interest, if any, specified by the
court in the order, of the Contract Scheduled Payments as so modified or
restructured. A Cram Down Loss shall be deemed to have occurred on the date of
issuance of the order.
CUTOFF DATE: With respect to the Initial Receivables, the Initial
Cutoff Date, and with respect to the Subsequent Receivables, the Subsequent
Cutoff Date.
DEALER AGREEMENT: An agreement generally between the Seller and a
Dealer relating to the sale of retail installment contracts to the Seller and
all documents and instruments relating to that agreement.
DEALER ASSIGNMENT: With respect to a Receivable, the executed
assignment conveying a Receivable to the Seller.
DEFICIENCY CLAIM AMOUNT: With respect to any Determination Date, the
positive difference, if any, of (1) the sum of the related Scheduled Payments
plus the amounts described in clauses (1), (2) and (3) under the heading "The
Notes--Priority of Distribution Amounts" minus (2) the amount of Available Funds
with respect to the Determination Date, which amount will be withdrawn from the
Class A Reserve Account to the extent funds are on deposit tin this prospectus
supplement in accordance with the terms of the Class A Reserve Account Agreement
and deposited into the Collection Account on the related Payment Date.
DETERMINATION DATE: With respect to a Collection Period, the 5th
Business Day preceding the Payment Date in the next calendar month; provided,
however that the first Determination Date will be the Closing Date.
HOLDER OR NOTEHOLDER: The Person in whose name a Note is registered in
the Note Register.
LIQUIDATION PROCEEDS: With respect to a Liquidated Receivable,
o proceeds from the disposition of Financed Vehicles securing the
Liquidated Receivables,
o any insurance proceeds or rebates, or
o other monies received from the Obligor or otherwise, less amounts
required to be refunded to the Obligor.
MANAGED RECEIVABLE: Any retail installment contract, including any
related promissory note, for a Financed Vehicle, and all rights and obligations
under the retail installment contract, generally originated by and currently
serviced by the Seller for Obligors.
NOTE BALANCE: The sum of the Class A Note Balance and Class B Note
Balance.
NOTE MAJORITY: As of any date of determination, Holders of Class A-1
Notes and Class A-2 Notes and Class B Notes representing more than 50% of the
Note Balance.
PAYMENT AMOUNT: With respect to a Payment Date, the sum of (1) the
Available Funds as of the last day of a Collection Period, plus (2) the
Deficiency Claim Amount, if any, with respect to the Payment Date.
PERSON: Any legal person, including any individual, corporation,
limited liability company, partnership, joint venture, estate, association,
joint stock company, trust, unincorporated organization or government or any
agency or political subdivision of these or any other entity.
PURCHASED RECEIVABLE: A Receivable that was purchased as of the close
of business on the last day of a Collection Period by the Seller or the Servicer
as the result of the violation of particular representations or warranties of
the Seller under the Sale and Servicing Agreement or a breach by the Servicer of
some of the Servicer's obligations.
RATING AGENCY CONDITION: With respect to any action, that the Rating
Agency has been given prior notice of and that the Rating Agency has notified
the Seller, the Seller, the Servicer and the Indenture Trustee in writing that
the action will not result in a reduction or withdrawal of the then current
rating of the Notes.
SALE AND SERVICING AGREEMENT: The Sale and Servicing Agreement between
the Seller, in its individual capacity and as Servicer, ACE Securities Corp., as
Company, [ ] Auto Receivables Owner Trust [ ]- [ ] as purchaser, and [ ], as
Indenture Trustee and Backup Servicer.
SERVICER'S CERTIFICATE: With respect to each Collection Period, a
certificate, completed by and executed on behalf of the Servicer, in accordance
with the applicable Sale and Servicing Agreement provisions.
SERVICER RECEIVABLES FILES: The following documents or instruments in
the Servicer's possession with respect to each Receivable: (1) documents
evidencing or relating to any Insurance Policy; and (2) any and all other
documents, in original or electronic form, that the Servicer keeps on file in
accordance with its customary procedures relating to the individual Receivable,
Obligor or Financed Vehicle.
STATE: Any state of the United States or the District of Columbia.
TRANSACTION DOCUMENTS: The Sale and Servicing Agreement, the
Indenture, the Trust Agreement, the Notes, the Receivables Purchase Agreement,
the Underwriting Agreement and the other agreements executed in connection with
the closing of the transactions described in this prospectus supplement.
TRUST AGREEMENT: The Trust Agreement between ACE Securities Corp., the
Certificateholder, the Seller, and [ ], as Owner Trustee.
INDEX OF TERMS
Set forth below is a list of the defined terms used in this prospectus
supplement and the pages on which the definitions of these terms may be found.
10 percent shareholder.................................................S-65
ABS....................................................................S-29
ABS Tables.............................................................S-29
Actuarial Receivable...................................................S-23
Additional Funds Available.............................................S-35
Aggregate Principal Balance............................................S-70
Amount Financed........................................................S-70
Available Funds........................................................S-70
Backup Servicer Fee....................................................S-55
Benefit Plan...........................................................S-66
Business Day...........................................................S-62
capital assets.........................................................S-63
Capitalized Interest Account...........................................S-54
Certificate............................................................S-15
Certificateholder......................................................S-70
Class..................................................................S-70
Class A Interest Carryover Shortfall...................................S-35
Class A Interest Payment Amount........................................S-35
Class A Mandatory Redemption Amount....................................S-35
Class A Note Balance...................................................S-70
Class A Notes..........................................................S-15
Class A Overcollateralization Amount...................................S-35
Class A Principal Payment Amount.......................................S-36
Class A Reserve Account................................................S-44
Class A Target Overcollateralization Amount............................S-36
Class A-1 Final Scheduled Payment Date.................................S-70
Class A-1 Interest Carryover Shortfall.................................S-36
Class A-1 Interest Payment Amount......................................S-36
Class A-1 Mandatory Redemption Amount..................................S-36
Class A-1 Note Balance.................................................S-41
Class A-1 Note Factor..................................................S-49
Class A-1 Notes........................................................S-15
Class A-1 Principal Carryover Shortfall................................S-36
Class A-1 Principal Payment Amount.....................................S-37
Class A-2 Final Scheduled Payment Date.................................S-70
Class A-2 Interest Carryover Shortfall.................................S-37
Class A-2 Interest Payment Amount......................................S-37
Class A-2 Mandatory Redemption Amount..................................S-37
Class A-2 Note Balance.................................................S-41
Class A-2 Note Factor..................................................S-50
Class A-2 Notes........................................................S-15
Class A-2 Principal Carryover Shortfall................................S-37
Class A-2 Principal Payment Amount.....................................S-37
Class B Interest Carryover Shortfall...................................S-38
Class B Interest Payment Amount........................................S-38
Class B Note Balance...................................................S-70
Class B Notes..........................................................S-15
Class B Principal Payment Amount.......................................S-38
Closing Date...........................................................S-15
Code...................................................................S-63
Collected Funds........................................................S-70
Collection Account.....................................................S-53
Collection Period......................................................S-71
Contract Scheduled Payment.............................................S-38
controlled foreign corporation.........................................S-65
Controlling Party......................................................S-71
Corporate Trust Office.................................................S-71
Cram Down Loss.........................................................S-71
Cutoff Date............................................................S-71
Dealer Agreement.......................................................S-71
Dealer Assignment......................................................S-71
Dealer Recourse........................................................S-17
Defaulted Receivable...................................................S-38
Deficiency Claim Amount................................................S-71
Determination Date.....................................................S-71
disqualified persons...................................................S-66
Draw Date..............................................................S-39
DTC....................................................................S-34
equity interest........................................................S-67
Events of Default......................................................S-48
excess interest........................................................S-44
Excess Overcollateralization Amount....................................S-39
excess principal.......................................................S-44
Exchange Act...........................................................S-33
Final Regulations......................................................S-65
Financed Vehicles......................................................S-17
Foreign Person.........................................................S-65
Funding Period.........................................................S-53
Holder.................................................................S-72
Holders................................................................S-34
Indenture..............................................................S-16
in-house asset managers................................................S-67
Initial Cutoff Date....................................................S-16
Initial Financed Vehicles..............................................S-16
Initial Pre-Funded Amount..............................................S-53
Initial Receivables....................................................S-16
Insurance Agreement Indenture Cross Defaults...........................S-48
Insurer................................................................S-18
Insurer Default........................................................S-57
Insurer Optional Deposit...............................................S-39
IRS....................................................................S-63
Issuer.................................................................S-15
Liquidated Receivable..................................................S-39
Liquidation Proceeds...................................................S-72
Lockbox Account........................................................S-53
Lockbox Bank...........................................................S-53
Managed Receivable.....................................................S-72
Mandatory Redemption Date..............................................S-54
Monthly Capitalized Interest Amount....................................S-54
Note Balance...........................................................S-72
Note Distribution Account..............................................S-53
Note Majority..........................................................S-72
Noteholder.............................................................S-72
Noteholders............................................................S-34
Notes..................................................................S-15
Obligors...............................................................S-16
OC Stabilization Date..................................................S-39
OID....................................................................S-64
Order..................................................................S-61
Original Pool Balance..................................................S-34
Owner Trustee..........................................................S-16
parties in interest....................................................S-66
Payment Amount.........................................................S-72
Person.................................................................S-72
plan assets............................................................S-66
Plan Assets Regulation.................................................S-66
Policy Claim Amount....................................................S-39
portfolio interest.....................................................S-65
Precomputed Receivables................................................S-22
Pre-Funded Amount......................................................S-54
Pre-Funding Account....................................................S-53
Principal Balance......................................................S-40
Principal Payment Amount...............................................S-39
publicly traded partnership............................................S-66
Purchase Amount........................................................S-41
Purchased Receivable...................................................S-72
qualified professional asset managers..................................S-67
Rating Agency Condition................................................S-72
Receipt................................................................S-62
Receivables............................................................S-15
Receivables File.......................................................S-18
Received...............................................................S-62
Redemption Price.......................................................S-35
related person.........................................................S-65
Rule of 78's Receivables...............................................S-22
Sale and Servicing Agreement...........................................S-72
Scheduled Payments.....................................................S-60
Securities Act.........................................................S-68
Servicer Expenses......................................................S-55
Servicer Fee...........................................................S-55
Servicer Receivables Files.............................................S-72
Servicer Termination Event.............................................S-57
Servicer Transition Expenses...........................................S-55
Servicer's Certificate.................................................S-72
Servicing Fee Rate.....................................................S-55
Simple Interest Receivable.............................................S-22
State..................................................................S-73
stated redemption price at maturity....................................S-64
Subsequent Cutoff Date.................................................S-16
Subsequent Financed Vehicles...........................................S-17
Subsequent Purchase Agreement..........................................S-17
Subsequent Receivables.................................................S-17
Subsequent Transfer Date...............................................S-18
Transaction Documents..................................................S-73
Trust..................................................................S-15
Trust Agreement....................................................S-16, 73
Trust Property.........................................................S-16
Underwriter............................................................S-68
Underwriting Agreement.................................................S-68
Weighted Average Life..................................................S-29
The information in this prospectus supplement is not complete and may be
changed. We may not sell these securities until the registration statement
filed with the Securities and Exchange Commission is effective. This
prospectus supplement is not an offer to sell these securities and it is not
soliciting an offer to buy these securities in any state where the offer or
sale is not permitted.
SUBJECT TO COMPLETION, [ ]
PROSPECTUS SUPPLEMENT (to prospectus dated [ ])
$[ ] (APPROXIMATE)
[ ] AUTO GRANTOR TRUST [ ]-[ ]
Issuer
ACE SECURITIES CORP.
Depositor
[ ]
Servicer
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-[] IN THIS PROSPECTUS
SUPPLEMENT AND ON PAGE [ ] OF THE PROSPECTUS. For a list of capitalized terms
used in this prospectus supplement and the prospectus see the index of defined
terms beginning on page S-[ ] of this prospectus supplement and on page [ ] of
the prospectus. The certificates will represent interests in the trust fund only
and will not represent interests in or obligations of any other entity. This
prospectus supplement may be used to offer and sell the certificates only if
accompanied by the prospectus
CERTIFICATES OFFERED
o $[ ], [ ]% Class A certificates
o $[ ],[ ]% Class B certificates
ASSETS
o Retail automobile receivables
CREDIT ENHANCEMENT
o Class A certificates
o subordination of Class B certificates
o reserve account
o Class B certificates
o reserve account
EXPECTED RATINGS
o AAA from S&P and Aaa from Moody's for the Class A certificates
o AA from S&P and A3 from Moody's for the Class B certificates
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS SUPPLEMENT OR THE ATTACHED PROSPECTUS IS ACCURATE OR COMPLETE. MAKING
ANY CONTRARY REPRESENTATION IS A CRIMINAL OFFENSE.
Underwriting
Discounts
Price to and Proceeds to
Public(1) Commissions the Depositor(1)(2)
Per Class A Certificates.................. % % %
Per Class B Certificates.................. % % %
Total..................................... $ $ $
- -------------
(1) Plus accrued interest from [ ].
(2) Before deducting expenses, estimated to be $[ ].
DEUTSCHE BANC ALEX. BROWN
The date of this prospectus supplement is [ ]
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS:
We provide information to you about the certificates offered by this
prospectus supplement in two separate documents that progressively provide more
detail: (1) the accompanying prospectus, which provides general information,
some of which may not apply to your certificates, and (2) this prospectus
supplement, which describes the specific terms of your certificates.
IF INFORMATION VARIES BETWEEN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS, YOU SHOULD RELY ON THE INFORMATION IN THIS PROSPECTUS
SUPPLEMENT.
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We have
not authorized anyone to provide you with different information.
We are not offering the certificates in any state where the offer is
not permitted. We do not claim that the information in this prospectus
supplement and prospectus is accurate as of any date other than the dates stated
on their respective covers.
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Dealers will deliver a prospectus supplement and prospectus when
acting as underwriters of the certificates and with respect to their unsold
allotments or subscriptions. In addition, all dealers selling the certificates
will be required to deliver a prospectus supplement and prospectus for ninety
days following the date of this prospectus supplement.
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We include cross-references in this prospectus supplement and the
accompanying prospectus to captions in these materials where you can find
further related discussions. The following table of contents and the table of
contents included in the accompanying prospectus provide the pages on which
these captions are located.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
CAPTION PAGE
Summary of Terms...................................S-
Risk Factors.......................................S-
Formation of the Trust.............................S-
The Trust Property.................................S-
The Receivables Pool...............................S-
The Servicer.......................................S-
Weighted Average Life of the
Certificates....................................S-
Use of Proceeds....................................S-
Description of the Certificates....................S-
Federal Income Tax Consequences....................S-
State and Local Tax Consequences...................S-
ERISA Considerations...............................S-
Underwriting.......................................S-
Ratings............................................S-
Legal Matters......................................S-
PROSPECTUS
CAPTION PAGE
Risk Factors.....................................
The Trusts.......................................
The Trustee......................................
The Receivables Pools............................
The Collateral Certificates......................
The Government Securities........................
Weighted Average Life of the Securities..........
Pool Factors and Trading Information.............
The Seller and the Servicer......................
Use of Proceeds..................................
Description of the Notes.........................
Description of the Certificates..................
Certain Information Regarding....................
the Securities.................................
Description of the Transfer and
Servicing Agreements...........................
Certain Legal Aspects of the Receivables.........
Material Federal Income Tax Consequences.........
State and Local Tax Consequences.................
ERISA Considerations.............................
Plan of Distribution.............................
Legal Matters....................................
Prospectus Supplement............................
Reports to Securityholders.......................
Available Information............................
Incorporation of Certain Documents by Reference..
Index of Terms...................................
Annex I - Global Clearance, Settlement and Tax
Documentation Procedures......................
SUMMARY OF TERMS
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROSPECTUS SUPPLEMENT AND
DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU NEED TO CONSIDER IN MAKING YOUR
INVESTMENT DECISION. TO UNDERSTAND ALL OF THE TERMS OF THE OFFERING OF THE
NOTES, IT IS NECESSARY THAT YOU READ CAREFULLY THIS ENTIRE PROSPECTUS SUPPLEMENT
AND ACCOMPANYING PROSPECTUS.
WHILE THIS SUMMARY CONTAINS AN OVERVIEW OF CERTAIN CALCULATIONS, CASH FLOW
PRIORITIES, AND OTHER INFORMATION TO AID YOUR UNDERSTANDING, YOU SHOULD READ
CAREFULLY THE FULL DESCRIPTION OF THESE CALCULATIONS, CASH FLOW PRIORITIES AND
OTHER INFORMATION IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
BEFORE MAKING ANY INVESTMENT DECISION.
ISSUER...................... [ ] Auto Grantor Trust [ ]-[ ].
DEPOSITOR................... Ace Securities Corp.
SERVICER.................... [........]
SELLER...................... [........]
TRUSTEE..................... [........]
COLLATERAL AGENT............ [........]
CLOSING DATE................ On or about [..... ].
CUTOFF DATE................. The opening of business on [ ]
DISTRIBUTION DATES.......... The [ ]th day of each month or the next
business day if the [ ]th day is not a
business day, beginning in [ ].
RECORD DATES The business day immediately prior to a
distribution date or, if definitive
certificates are issued, the last day of
the month prior to a distribution date.
MINIMUM DENOMINATIONS $25,000 except for one Class B
certificate.
FORM Book-entry.
INTEREST ACCRUAL METHOD 30/360.
Final Scheduled Distribution Date [........].
THE RECEIVABLES
The receivables are amounts owed by individuals under fixed rate simple interest
or actuarial retail installment sale contracts to purchase or refinance new or
used automobiles, including passenger cars, minivans, sport utility vehicles and
light trucks, substantially all of which were purchased from motor vehicle
dealers.
The receivables had the following characteristics as of [ ]. As of the closing
date, no more than [ ]% of the receivables will have characteristics that differ
from those described in this prospectus supplement as of [ ].
Number of receivables..............
Principal amount................... $
Annual percentage rates............ % to %
Weighted average annual percentage %
rate...............................
Original term...................... months to months
Weighted average original term..... months
Remaining term..................... months to months
Weighted average remaining term.... months
New by principal................... %
Used by principal.................. %
Simple interest by principal....... %
Actuarial by principal............. %
States
PA by principal................. %
DE by principal................. %
NJ by principal................. %
INTEREST DISTRIBUTIONS
On each distribution date, if the trust has sufficient cash, it will pay you the
interest accrued on your certificates during the related interest period. The
trust will not pay interest on the Class B certificates on any distribution date
until the Class A certificateholders have received their full payment of
interest on that distribution date. Interest periods begin on the prior
distribution date and run through the day before the current distribution date.
The first interest period begins on [ ] and runs through the day before the
first distribution date. We will assume that each year has 360 days consisting
of twelve 30 day months.
PRINCIPAL DISTRIBUTIONS
The Class A certificates and Class B certificates will be entitled to a pro rata
share of the principal collections. However, the trust will make principal
distributions to the Class A certificates before making principal distributions
to the Class B certificates on each distribution date.
RESERVE ACCOUNT
There will be a reserve account to help cover cash flow shortfalls. Initially,
the account will be $[ ]. On each distribution date the trustee will deposit
amounts remaining after distribution of the servicing fee and amounts to be paid
to the certificateholders in the reserve account until the amount equals a
specified amount.
OPTIONAL TERMINATION
When the principal amount of the receivables is 10% or less than it was on the
cutoff date, the servicer may buy the receivables. You must receive the
principal amount of your certificates and all accrued but unpaid interest or the
receivables will not be sold.
FEDERAL TAX CONSEQUENCES
Stroock & Stroock & Lavan LLP, special federal tax counsel to the trust, is of
the opinion that the trust will be classified, for federal income tax purposes,
as a grantor trust and not as an association taxable as a corporation.
Certificateholders must report their respective allocable shares of income
earned on trust assets excluding certain amounts retained by the depositor as
described in this prospectus supplement and, subject to the limitations
applicable to individuals, estates, trusts and partnerships, may deduct their
respective allocable shares of reasonable servicing and other fees. However, the
tax code is complex, and we recommend that you and your tax advisors review the
information under the caption "Federal Income Tax Consequences" in this
prospectus supplement and "Material Federal Income Tax Consequences -- Grantor
Trusts" in the prospectus.
ERISA CONSIDERATIONS
The certificates may be purchased by ERISA and other retirement plans if one or
more administrative exemptions apply. See "ERISA Considerations" in this
prospectus supplement and the prospectus.
RISK FACTORS
THE FOLLOWING INFORMATION, WHICH YOU SHOULD CAREFULLY CONSIDER, IDENTIFIES
CERTAIN SIGNIFICANT SOURCES OF RISK ASSOCIATED WITH AN INVESTMENT IN THE
CERTIFICATES.
YOU MAY HAVE DIFFICULTY
SELLING YOUR CERTIFICATES The certificates will not be listed on any
securities exchange. As a result, if you want
to sell your certificates you must locate a
purchaser that is willing to purchase those
certificates. Each underwriter intends to
make a secondary market for the certificates
purchased by it. The underwriters will do so
by offering to buy the certificates from
investors that wish to sell. However, neither
underwriter will be obligated to make offers
to buy the certificates and may stop making
offers at any time. In addition, the prices
offered, if any, may not reflect prices that
other potential purchasers, were they to be
given the opportunity, would be willing to
pay. There have been times in the past where
there have been very few buyers of asset
backed securities, and there may be times in
the future where there will be very few
buyers of asset backed securities. As a
result, you may not be able to sell your
certificates when you want to do so or you
may not be able to obtain the price that you
wish to receive.
CERTAIN FEATURES OF THE There are a number of features of the
RECEIVABLES POOL MAY receivables in the pool that create
RESULT IN LOSSES OR CASH additional risk of loss, including the
FLOW SHORTFALLS following:
[THE CONCENTRATION OF Economic conditions in the states where
RECEIVABLES IN SPECIFIC obligors reside may affect the delinquency,
GEOGRAPHIC AREAS MAY loan loss and repossession experience of the
INCREASE THE RISK OF LOSS. trust with respect to the receivables. As of
the cutoff date, with respect to
approximately [ ]%, [ ]% and [ ]% of the
principal amount of the receivables, obligors
took initial title to the motor vehicles
relating to the receivables in [ ], [ ] and [
], respectively. Economic conditions in any
state or region may decline over time and
from time to time. Because of the
concentration of the obligors in certain
states, any adverse economic conditions in
those states may have a greater effect on the
performance of the certificates than if the
concentration did not exist. We are not aware
of any adverse economic conditions that are
peculiar to [ ], [ ] or [ ] as of the date of
this prospectus supplement. In addition, we
do not believe that the laws of those states
relating to motor vehicle financing and the
rights of lenders are more burdensome than
those in other states.]
NEWLY ORIGINATED LOANS Defaults on automobile loans tend to occur
MAY BE MORE LIKELY TO at higher rates during the early years
DEFAULT WHICH MAY CAUSE LOSSES. of the automobile loans. A substantial
majority of the automobile loans will have
been originated within 12 months prior to the
sale to the trust. As a result, the trust may
experience higher rates of default than if
the automobile loans had been outstanding for
a longer period of time.
CLASS B CERTIFICATES
WILL ABSORB CASH SHORTFALLS
BEFORE THE CLASS A CERTIFICATES The Class B certificateholders will not
receive any distribution of interest until
the full amount of interest on the Class A
certificates has been paid on each
distribution date. The Class B
certificateholders will not receive any
distributions of principal until the full
amount of principal of the Class A
certificates has been paid on that
distribution date. Holders of the
certificates must rely for repayment upon
payments on the receivables, and, if and to
the extent available, amounts on deposit in
the reserve account. If funds in the reserve
account are exhausted, the trust will depend
solely on current distributions on the
receivables to make payments on the
certificates. Delinquent payments on the
receivables may result in a shortfall in the
distributions on the Class B certificates on
any distribution date due to the priority of
payments on the Class A certificates.
YOUR YIELD TO MATURITY MAY
BE REDUCED BY PREPAYMENTS,
DELINQUENCIES AND DEFAULTS The pre-tax yield to maturity on your
investment is uncertain and will depend on a
number of factors including the following:
THE RATE OF RETURN OF
PRINCIPAL IS UNCERTAIN. The amount of distributions of principal of
the certificates and the time when you
receive those distributions depends on the
amount and the times at which borrowers make
principal payments on the receivables. Those
principal payments may be regularly scheduled
payments or unscheduled payments resulting
from prepayments or defaults of the
receivables.
YOU MAY BE UNABLE TO
REINVEST DISTRIBUTIONS IN
COMPARABLE INVESTMENTS. Asset backed securities, like the
certificates, usually produce more returns of
principal to investors when market interest
rates fall below the interest rates on the
receivables and produce less returns of
principal when market interest rates are
above the interest rates on the receivables.
As a result, you are likely to receive more
money to reinvest at a time when other
investments generally are producing a lower
yield than that on the certificates, and are
likely to receive less money to reinvest when
other investments generally are producing a
higher yield than that on the certificates.
You will bear the risk that the timing and
amount of distributions on your certificates
will prevent you from attaining your desired
yield.
AN EARLY TERMINATION WILL
SHORTEN THE LIFE OF YOUR
INVESTMENT WHICH MAY REDUCE
YOUR YIELD TO MATURITY. If the receivables are sold upon exercise of
the servicer's optional termination, you will
receive the principal amount of your
certificates plus accrued interest through
the related interest period. Because your
certificates will no longer be outstanding,
you will not receive the additional interest
payments that you would have received had the
certificates remained outstanding. If you
bought your securities at a premium, your
yield to maturity will be lower than it would
have been if the optional termination had not
been exercised.
WITHDRAWAL OR DOWNGRADING OF
INITIAL RATINGS WILL REDUCE
THE PRICES FOR CERTIFICATES A security rating is not a recommendation to
buy, sell or hold securities. Similar ratings
on different types of securities do not
necessarily mean the same thing. We recommend
that you analyze the significance of each
rating independently from any other rating.
Any rating agency may change its rating of
the certificates after those certificates are
issued if that rating agency believes that
circumstances have changed. Any subsequent
withdrawal or downgrade in rating will likely
reduce the price that a subsequent purchaser
will be willing to pay for the certificates.
CLASS B CERTIFICATEHOLDERS
MAY HAVE TO PAY TAXES ON
AMOUNTS NOT ACTUALLY RECEIVED For federal income tax purposes, amounts
otherwise payable to the owners of the Class
B certificates that are paid to the owners of
the Class A certificates will be deemed to
have been received by the owners of the Class
B certificates and then paid by them to the
owners of the Class A certificates pursuant
to a guaranty. Accordingly, the owners of the
Class B certificates could be liable for
taxes on amounts not actually received. See
"Federal Income Tax Consequences" in this
prospectus supplement and "Material Federal
Income Tax Consequences -- Grantor Trusts"
in the prospectus.
THE CERTIFICATES ARE NOT
SUITABLE INVESTMENTS FOR
ALL INVESTORS The certificates are not a suitable
investment for any investor that requires a
regular or predictable schedule of payments
or payment on any specific date. The
certificates are complex investments that
should be considered only by investors who,
either alone or with their financial, tax and
legal advisors, have the expertise to analyze
the prepayment, reinvestment, default and
market risk, the tax consequences of an
investment, and the interaction of these
factors.
FORMATION OF THE TRUST
Pursuant to a pooling and servicing agreement (as amended and
supplemented, the "Agreement"), to be dated as of [.....] (the "Cutoff Date"),
among Ace Securities Corp., as depositor (the "Depositor"), [ ], as seller (in
this capacity, the "Seller") and as servicer (in this capacity, the "Servicer"),
[ ], as trustee (the "Trustee"), and [ ], as collateral agent (the "Collateral
Agent"), the Depositor will establish [ ] Auto Grantor Trust [ ] (the "Trust").
Pursuant to the Agreement, the Depositor will establish the Trust by selling and
assigning a pool of fixed rate simple interest and actuarial motor vehicle
retail installment sales contracts and other motor vehicle installment chattel
paper (the "Receivables") secured by new and used automobiles, recreational
vehicles, including motor homes, campers, boats, boat motors, motorcycles, jet
skis, waverunners, all-terrain vehicles and snowmobiles, vans trucks, buses and
trailers (the "Financed Vehicles") and the other Trust Property, as described
below under "The Trust Property" to the Trust in exchange for the $[ ], [ ]%
Class A certificates (the "Class A Certificates") and the $[ ], [ ]% Class B
certificates (the "Class B Certificates," and, together with the Class A
Certificates, the "Certificates"). The Depositor will sell the Certificates to [
] and Deutsche Banc Alex. Brown, (the "Underwriters") in exchange for cash. All
references in this prospectus supplement to sales, assignments and transfers to
the Trust refer to sales, assignments and transfers to the Trustee on behalf of
the Trust for the benefit of the holders of the Certificates (the
"Certificateholders").
The Servicer will, directly or through subservicers, hold the
Receivables and the certificates of title or ownership or other documents
evidencing the notation of the Seller's lien on the certificates of title or
ownership relating to the Financed Vehicles as custodian for the Trustee.
However, the Receivables will not be marked or stamped to indicate that they
have been sold to the Trust, and the certificates of title for the Financed
Vehicles will not be endorsed or otherwise amended to identify the Trustee as
the new secured party. Under the foregoing circumstances and in certain
jurisdictions, the Trust's interest in the Receivables and the Financed Vehicles
may be defeated. See "Risk Factors -- The trust's security interest in the
financed vehicles will not be noted on the certificates of title which may cause
losses" and "Certain Legal Aspects of the Receivables" in the Prospectus.
The Trust will not acquire any contracts or assets other than the
Trust Property, and it is not anticipated that the Trust will have any need for
additional capital resources. Because the Trust will have no operating history
upon its establishment and will not engage in any business activity other than
acquiring and holding the Trust Property, issuing the Certificates and
distributing payments on these Certificates, no historical or pro forma
financial statements or ratios of earnings to fixed charges with respect to the
Trust have been included in this prospectus supplement.
THE TRUST PROPERTY
Each Certificate represents a fractional undivided interest in the
Trust. The "Trust Property" will include the Receivables, which, except as
provided below, were originated by motor vehicle dealers (the "Dealers") and
purchased by the Seller pursuant to agreements with Dealers ("Dealer
Agreements"). Approximately [ ]% of the aggregate Principal Balance of the
Receivables as of the Cutoff Date (the "Initial Pool Balance") were directly
originated by the Seller in connection with referrals from an insurance company.
On the date of the issuance of the Certificates (the "Closing Date"), the
Depositor will buy the Receivables from the Seller and the Depositor will sell
the Receivables to the Trust. The Trust Property also includes:
o all monies received under the Receivables on and after the Cutoff Date
and, with respect to Actuarial Receivables, monies received under the
Actuarial Receivables prior to the Cutoff Date that are due on or
after the Cutoff Date;
o amounts as from time to time may be held in the Collection Account,
the Payahead Account, the Class A Distribution Account and the Class B
Distribution Account, established and maintained by the Servicer
pursuant to the Agreement as described below;
o security interests in the Financed Vehicles;
o the rights of the Seller to receive proceeds from claims under
particular insurance policies;
o the rights of the Trustee on behalf of the Certificateholders under
the Agreement;
o the rights of the Seller to refunds for the costs of extended service
contracts and to refunds of unearned premiums with respect to credit
life and credit accident and health insurance policies covering the
Financed Vehicles or the retail purchasers of, or other persons owing
payments on, the Financed Vehicles (the "Obligors");
o all right, title and interest of the Seller, other than with respect
to any Dealer commission, with respect to the Receivables under the
related Dealer Agreements;
o rights with respect to any repossessed Financed Vehicles; and
o all proceeds (within the meaning of the Uniform Commercial Code) of
the foregoing.
The Reserve Account will be maintained in the name of the Collateral
Agent for the benefit of the Certificateholders, but will not be part of the
Trust.
THE RECEIVABLES POOL
POOL COMPOSITION
The Receivables were selected from the Seller's portfolio by several
criteria, including, as of the Cutoff Date, the following:
1. each Receivable was originated in the United States of America;
2. each Receivable was originated by a Dealer and purchased by the
Seller pursuant to a Dealer Agreement; provided, that approximately [ ]% of
the Initial Pool Balance was comprised of Receivables originated directly
by the Seller in connection with referrals from an insurance company;
3. each Receivable is either a Simple Interest Receivable or an
Actuarial Receivable;
4. each Receivable has an original term to maturity of not more than [
] months and a remaining term to maturity of [ ] months or less as of the
Cutoff Date;
5. each Receivable provides for level monthly payments which fully
amortize the amount financed except for the last payment, which may be
different from the level payment;
6. each Receivable is not more than [ ] days contractually past due as
of the Cutoff Date and is not more than [ ] months paid ahead; and
7. each Receivable has an APR of no less than [ ]%.
As of the Cutoff Date, no Obligor on any Receivable was noted in the
records of the Servicer as being the subject of any pending bankruptcy or
insolvency proceeding. The latest scheduled maturity of any Receivable is not
later than [ ] (the "Final Scheduled Maturity Date"). The Receivables were
selected from the motor vehicle retail installment sales contracts and other
installment chattel paper secured by Financed Vehicles ("Motor Vehicle Loans")
in the portfolio of the Seller that met the above criteria. The Depositor and
the Seller believe that these selection procedures are not materially adverse to
Certificateholders.
The Depositor considers an account past due if any portion of the
payment due on a due date is not received by the succeeding due date for that
account.
The composition, distribution by remaining term, distribution by APR,
geographic distribution and distribution by remaining principal of the
Receivables, in each case, as of the Cutoff Date are set forth in the tables
below. The percentages in the following tables may not add to 100% due to
rounding.
COMPOSITION OF THE RECEIVABLES AS OF THE CUTOFF DATE
NEW FINANCED USED FINANCED
VEHICLES VEHICLES TOTAL
Aggregate Principal Balance.................. $[ ] $[ ] $[ ]
Number of Receivables........................ [ ] [ ] [ ]
Average Principal Balance.................... $[ ] $[ ] $[ ]
Average Original Balance..................... $[ ] $[ ] $[ ]
Weighted Average APR......................... [ ]% [ ]% [ ]%
APR (Range).................................. [ ]%- [ ]% [ ]%- [ ]% [ ]%- [ ]%
Weighted Average Original Term............... [ ] months [ ] months [ ] months
Original Term (Range)........................ [ ] to [ ] months [ ] to [ ] months [ ] to [ ]months
Weighted Average Remaining Term.............. [ ] months [ ] months [ ] months
Remaining Term (Range)....................... [ ] to [ ] months [ ] to [ ] months [ ] to [ ] months
DISTRIBUTION BY REMAINING TERM OF THE RECEIVABLES AS OF THE CUTOFF DATE
PERCENTAGE
REMAINING NUMBER OF AGGREGATE OF INITIAL
TERM (RANGE) RECEIVABLES PRINCIPAL BALANCE POOL BALANCE
1 - 12 months................ [ ] $ [ ] [ ]%
13 - 24 months............... [ ] [ ] [ ]
25 - 36 months............... [ ] [ ] [ ]
37 - 48 months............... [ ] [ ] [ ]
49 - 60 months............... [ ] [ ] [ ]
61 - 72 months............... [ ] [ ] [ ]
Total..................... [ ] $[ ] 100.00%
= ======
DISTRIBUTION BY ANNUAL PERCENTAGE RATE OF
THE RECEIVABLES AS OF THE CUTOFF DATE
PERCENTAGE
ANNUAL NUMBER OF AGGREGATE OF INITIAL
PERCENTAGE RATE (RANGE) RECEIVABLES PRINCIPAL BALANCE POOL BALANCE
7.75% - 7.99%........................ [ ] $ [ ] [ ]%
8.00% - 8.99%........................ [ ] [ ] [ ]
9.00% - 9.99%........................ [ ] [ ] [ ]
10.00% - 10.99%...................... [ ] [ ] [ ]
11.00% - 11.99%...................... [ ] [ ] [ ]
12.00% - 12.99%...................... [ ] [ ] [ ]
13.00% - 13.99%...................... [ ] [ ] [ ]
14.00% - 14.99%...................... [ ] [ ] [ ]
15.00% - 15.99%...................... [ ] [ ] [ ]
16.00%............................... [ ] [ ] [ ]
Total..................... [ ] $[ ] 100.00%
= ======
GEOGRAPHIC DISTRIBUTION OF THE RECEIVABLES AS OF THE CUTOFF DATE
PERCENTAGE
NUMBER OF AGGREGATE OF INITIAL
STATE(1) RECEIVABLES PRINCIPAL BALANCE POOL BALANCE
Pennsylvania......................... [ ] $[ ] [ ]%
Delaware............................. [ ] [ ] [ ]
New Jersey........................... [ ] [ ] [ ]
Maryland............................. [ ] [ ] [ ]
New York............................. [ ] [ ] [ ]
West Virginia........................ [ ] [ ] [ ]
Others(2)............................ [ ] [ ] [ ]
Total..................... [ ] $[ ] 100.00%
= ======
- ---------------
(1) Based on the state where the Obligors took initial title to the motor
vehicles, which may differ from the state of origination of the Receivable
and/or the billing addresses of the Obligors.
(2) Includes [ ] other states and the District of Columbia, none of which have
a concentration of Receivables in excess of [ ]% of the Initial Pool
Balance.
DISTRIBUTION BY REMAINING PRINCIPAL BALANCE
OF THE RECEIVABLES AS OF THE CUTOFF DATE
PERCENTAGE
REMAINING PRINCIPAL NUMBER OF AGGREGATE OF INITIAL
BALANCE (RANGE) RECEIVABLES PRINCIPAL BALANCE POOL BALANCE
Below $1,000......................... [ ] [ ] [ ]%
$1,000 to below $5,000............... [ ] [ ] [ ]
$5,000 to below $10,000.............. [ ] [ ] [ ]
$10,000 to below $15,000............. [ ] [ ] [ ]
$15,000 to below $20,000............. [ ] [ ] [ ]
$20,000 to below $25,000............. [ ] [ ] [ ]
$25,000 to below $30,000............. [ ] [ ] [ ]
$30,000 to below $35,000............. [ ] [ ] [ ]
$35,000 to below $40,000............. [ ] [ ] [ ]
$40,000 to below $45,000............. [ ] [ ] [ ]
$45,000 to below $50,000............. [ ] [ ] [ ]
$50,000 to below $55,000............. [ ] [ ] [ ]
Total..................... [ ] $[ ] 100.00%
= ======
As of the Cutoff Date, approximately [ ]% of the aggregate principal
balance of the Simple Interest Receivables, constituting [ ]% of the number of
Simple Interest Receivables, were between [ ] payment and [ ] payments
paid-ahead. See "Maturity and Prepayment Assumptions -- Paid-Ahead Receivables"
in the Prospectus.
As of the Cutoff Date, approximately [ ]% of the aggregate principal
balance of the Receivables are Simple Interest Receivables. "Simple Interest
Receivables" are receivables that provide for the amortization of the amount
financed under the receivable over a series of fixed level monthly payments.
Each monthly payment includes an installment of interest which is calculated on
the basis of the outstanding principal balance of the receivable multiplied by
the stated Annual Percentage Rate ("APR") and further multiplied by the period
elapsed, as a fraction of a calendar year, since the preceding payment of
interest was made. As payments are received under a Simple Interest Receivable,
the amount received is applied first to interest accrued to the date of payment
and the balance is applied to reduce the unpaid principal balance. Accordingly,
if an Obligor pays a fixed monthly installment before its scheduled due date,
the portion of the payment allocable to interest for the period since the
preceding payment was made will be less than it would have been had the payment
been made as scheduled, and the portion of the payment applied to reduce the
unpaid principal balance will be correspondingly greater. Conversely, if an
Obligor pays a fixed monthly installment after its scheduled due date, the
portion of the payment allocable to interest for the period since the preceding
payment was made will be greater than it would have been had the payment been
made as scheduled, and the portion of the payment applied to reduce the unpaid
principal balance will be correspondingly less. In either case, the Obligor pays
a fixed monthly installment until the final scheduled payment date, at which
time the amount of the final installment is increased or decreased as necessary
to repay the then outstanding principal balance.
As of the Cutoff Date, approximately [ ]% of the aggregate principal
balance of the Receivables are Actuarial Receivables. "Actuarial Receivables"
are receivables that provide for amortization of the amount financed over a
series of fixed, level-payment monthly installments. Each monthly installment,
including the monthly installment representing the final payment on a
Receivable, consists of an amount of interest equal to 1/12 of the APR of the
amount financed multiplied by the unpaid principal balance of the amount
financed, and an amount of principal equal to the remainder of the monthly
payment.
If an Actuarial Receivable is prepaid in full, with minor variations
based upon state law, under the terms of the motor vehicle retail installment
sale contract or loan agreement, as the case may be, a "refund" or "rebate"
(which may be netted from the prepayment) will be made to the borrower of the
portion of the total amount of payments then due and payable under this contract
or agreement allocable to "unearned" interest, calculated on the basis of a
constant interest rate. If a Simple Interest Receivable is prepaid, rather than
receive a rebate, the borrower is required to pay interest only to the date of
prepayment. The amount of a rebate under an Actuarial Receivable generally may
be less than the remaining scheduled payments of interest that would have been
due under a Simple Interest Receivable for which all payments were made on
schedule.
The Servicer may accede to an Obligor's request to pay scheduled
payments in advance, in which event the Obligor will not be required to make
another regularly scheduled payment until the time a scheduled payment not paid
in advance is due. The amount of any payment made, which are not amounts
representing Payaheads, in advance will be treated as a principal prepayment and
will be distributed as part of the Principal Distribution Amount in the month
following the Collection Period in which the prepayment was made. The
"Collection Period" with respect to a Distribution Date will be the calendar
month preceding the calendar month in which that Distribution Date occurs. See
"Maturity and Prepayment Assumptions" in the Prospectus.
THE SERVICER
The Servicer is [ ]. [Insert description of the Servicer.]
DELINQUENCY EXPERIENCE
(DOLLARS IN THOUSANDS)
AT DECEMBER 31,
[ ] [ ] [ ] [ ]
NUMBER NUMBER NUMBER NUMBER
OF LOANS DOLLARS OF LOANS DOLLARS OF LOANS DOLLARS OF LOANS
Principal Amount Outstanding (1)......... [ ] $[ ] [ ] $[ ] [........] $[ ] [........]
Delinquencies (2)
30-59 Days............................... [ ] [ ] [ ] [ ] [........] [ ] [........]
60-89 Days............................... [ ] [ ] [ ] [ ] [........] [ ] [........]
90-119 Days.............................. [ ] [ ] [ ] [ ] [........] [ ] [........]
over 120 days............................ [ ] [ ] [ ] [ ] [........] [ ] [........]
Total Delinquencies...................... [ ] $[ ] [ ] $[ ] [........] $[ ] [........]
[ ]
NUMBER
DOLLARS OF LOANS DOLLARS
Principal Amount Outstanding (1)......... $[ ] [........ ] $[.......]
Delinquencies (2)
30-59 Days............................... [ ] [........ ] [........]
60-89 Days............................... [ ] [........ ] [........]
90-119 Days.............................. [ ] [........ ] [........]
over 120 days............................ [ ] [........ ] [........]
Total Delinquencies...................... $[ ] [........ ] $[.......]
- ------------
(1) Principal Amount Outstanding is the aggregate remaining principal balance
of all Receivables serviced, net of unearned interest.
(2) The period of delinquency is based on the number of days scheduled payments
are contractually past due. Includes repossessions on hand which have not
been charged-off. A receivable is 30 days contractually past due if any
portion of a scheduled payment has not been received by the subsequent
calendar month's scheduled payment date.
(3) As a percent of Principal Amount Outstanding in dollars
(4) Percentages representing Total Delinquencies may not equal the sum of the
components thereof due to rounding.
HISTORICAL LOSS EXPERIENCE
(DOLLARS IN THOUSANDS)
For Year Ended December 31,
[........] [........] [........] [........] [........]
---------- ---------- ---------- ---------- ----------
Period End Principal Amount Outstanding (1)........... $[...... ] $[.......] $[....... ] $[.......] $[....... ]
Average Principal Amount Outstanding (2).. $[....... ] $[.......] $[....... ] $[.......] $[....... ]
Number of Loans Outstanding (as of period end)........ [........ ] [........] [...... ] [......] [........ ]
Average Number of Loans Outstanding (2)............... [........ ] [........] [...... ] [......] [........ ]
Gross Losses (3)...................................... $ [...... ] $ [......] $ [...... ] $ [......] $ [...... ]
Recoveries (4)........................................ [...... [.... [.. ] [...] [.. ]
-------- -------- ------ ----- ------
Net Losses (Gains) (5)................................ [........ ] [........] [........ ] [........ ] [........ ]
Gross Losses as a Percentage of Principal Amount
Outstanding......................................... [ ]% [ ]% [ ]% [ ]% [ ]%
Gross Losses as a Percentage of Average Principal
Amount Outstanding.................................. [ ]% [ ]% [ ]% [ ]% [ ]%
Net Losses (Gains) as a Percentage of Principal Amount
Outstanding......................................... [ ]% [ ]% [ ]% [ ]% [ ]%
Net Losses (Gains) as a Percentage of Average Principal
Amount Outstanding.................................. [ ]% [ ]% [ ]% [ ]% [ ]%
- --------------------
(1) Principal Amount Outstanding is the aggregate remaining principal balance
of all Receivables serviced, net of unearned interest.
(2) Average of the month-end balances for each of the twelve months in the
applicable calendar year.
(3) Gross Losses is the aggregate remaining principal balance charged-off after
the sale of the related vehicle, other than sales reflected in footnote
(4), adjusted for all costs of repossession and sale.
(4) Recoveries generally include amounts received on contracts following the
time at which the contract is charged off.
(5) Net Losses (Gains) is equal to Gross Losses less Recoveries. Net Losses
(Gains) may not equal the difference of the components thereof due to
rounding.
WEIGHTED AVERAGE LIFE OF THE CERTIFICATES
Prepayments on automotive receivables can be measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement, the
Absolute Prepayment Model ("ABS"), represents an assumed rate of prepayment each
month relative to the original number of receivables in a pool of receivables.
ABS further assumes that all the receivables are the same size and amortize at
the same rate and that each receivable in each month of its life will either be
paid as scheduled or be prepaid in full. For example, in a pool of receivables
originally containing 10,000 receivables, a 1% ABS rate means that 100
receivables prepay each month. ABS does not purport to be an historical
description of prepayment experience or a prediction of the anticipated rate of
prepayment of any pool of receivables, including the Receivables.
All the Receivables are prepayable at any time. For this purpose the
term "prepayments" includes prepayments by Obligors in full or in part, certain
partial prepayments related to liquidations due to default, including rebates of
extended warranty contract costs and insurance premiums, as well as receipts of
proceeds from physical damage, credit life, theft and disability insurance
policies and certain other Receivables, purchased or repurchased pursuant to the
terms of the Agreement. The rate of prepayments on the Receivables may be
influenced by a variety of economic, social and other factors, including changes
in interest rates and the fact that an Obligor generally may not sell or
transfer the Financed Vehicle securing a Receivable without the consent of the
secured party, which generally results in the repayment of the remaining
principal balance of the Receivable. In addition, under some circumstances, the
Seller is obligated to repurchase and the Servicer is obligated to purchase,
Receivables pursuant to the Agreement as a result of uncured breaches of
representations and warranties in the case of the Seller and uncured breaches of
covenants in the case of the Servicer. In addition, the Servicer has the option
to purchase the Receivables when the aggregate principal balance of the
Receivables is 10% or less of the Initial Pool Balance, at a purchase price
equal to the sum of the Class A Principal Balance and the Class B Principal
Balance plus accrued and unpaid interest. Accordingly, under some circumstances
it is likely that the Certificates will be repaid before the Final Scheduled
Distribution Date set forth in this prospectus supplement under "Summary of
Terms -- Final Scheduled Distribution Date." Reinvestment risk associated with
early payment of the Certificates will be borne exclusively by the
Certificateholders.
The table captioned "Percent of Initial Class A and Class B Principal
Balance at Various ABS Percentages" (the "ABS Table") has been prepared on the
basis of the characteristics of the Receivables. The ABS Table assumes that:
(1) the Receivables prepay in full at the specified constant
percentage of ABS monthly, with no defaults, losses or repurchases,
(2) each scheduled monthly payment on the Receivables is due and made
on the last day of each month and each month has 30 days,
(3) distributions on the Certificates are made on each Distribution
Date, and each Distribution Date is assumed to be the fifteenth day of each
applicable month,
(4) the balance in the Reserve Account on each Distribution Date is
equal to the Specified Reserve Account Balance, and
(5) the Servicer does not exercise its option to purchase the
Receivables.
The ABS Table sets forth the percent of the Initial Class A Principal
Balance and the percent of the Initial Class B Principal Balance that would be
outstanding after each of the Distribution Dates shown and the corresponding
weighted average lives at various constant ABS percentages.
The ABS Table also assumes that the Receivables have been aggregated
into six hypothetical pools with all of the Receivables within each pool having
the following characteristics and that the level scheduled monthly payment for
each of the six pools, which is based on its aggregate principal balance,
weighted average APR, weighted average original term to maturity and weighted
average remaining term to maturity as of the cutoff date, will be such that each
pool will fully amortize by the end of its remaining term to maturity.
WEIGHTED AVERAGE WEIGHTED AVERAGE
ORIGINAL TERM REMAINING TERM
AGGREGATE WEIGHTED AVERAGE TO MATURITY TO MATURITY
POOL PRINCIPAL BALANCE ANNUAL PERCENTAGE (IN MONTHS) (IN MONTHS)
- ---- ----------------- ------------------ --------- --------
RATE
----
1......................... $ [ ] [ ]% [ ] [ ]
2......................... [ ] [ ] [ ] [ ]
3......................... [ ] [ ] [ ] [ ]1
4......................... [ ] [ ] [ ] [ ]
5......................... [ ] [ ] [ ] [ ]
6......................... [ ] [ ] [ ] [ ]
The actual characteristics and performance of the Receivables will
differ from the assumptions used in constructing the ABS Tables. The assumptions
used are hypothetical and have been provided only to give a general sense of how
the principal cash flows might behave under varying prepayment scenarios. For
example, it is very unlikely that the Receivables will prepay at a constant
level of ABS until maturity or that all of the Receivables will prepay at the
same level of ABS. Moreover, the diverse terms of Receivables within each of the
hypothetical pools could produce slower or faster principal distributions than
indicated in the ABS Table at the various constant percentages of ABS specified,
even if the original and remaining terms to maturity of the Receivables are as
assumed. Any difference between assumptions and the actual characteristics and
performance of the Receivables, or actual prepayment experience, will affect the
percentages of initial balances outstanding over time and the weighted average
lives of the Class A Certificates and the Class B Certificates.
CERTIFICATES
------------------------------------------------------------------------
ASSUMED ABS PERCENTAGE
------------------------------------------------------------------------
DISTRIBUTION DATES [ ] [ ] [ ] [ ]
- ------------------
Closing Date..........................
[ ]...............................
[ ]...............................
[ ]...............................
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[ ]...............................
[ ]...............................
[ ]...............................
[ ]...............................
[ ]...............................
[ ]...............................
[ ]...............................
[ ]...............................
[ ]...............................
[ ]...............................
[ ]...............................
[ ]...............................
[ ]...............................
[ ]...............................
[ ]...............................
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Weighted Average Life
(years) (1).........................
Weighted Average Life to
Optional Clean-Up Call
(years) (1).........................
Optional Clean-Up Call
Date................................ [ ] [ ] [ ] [ ]
(1) The weighted average life of a Certificate is determined by (a) multiplying
the amount of each principal payment of the Certificate by the number of
years from the date of the issuance of the Certificate to the Distribution
Date on which the principal payment is made, (b) adding the results and (c)
dividing the sum by the initial principal balance of the Certificate.
* Less than 0.5% but greater than 0.0%.
THE ABS TABLE HAS BEEN PREPARED BASED ON THE ASSUMPTIONS DESCRIBED
ABOVE, 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 WITH THESE
ASSUMPTIONS.
USE OF PROCEEDS
The net proceeds from the sale of the Certificates will be applied by
the Depositor first, to deposit $[ ] into the Reserve Account and second, to
purchase the Receivables and the other Trust Property from the Seller.
DESCRIPTION OF THE CERTIFICATES
The Certificates will be issued pursuant to the Agreement,
substantially in the form filed as an exhibit to the Registration Statement. The
following information summarizes all material provisions of the Certificates and
the Agreement. The following summary supplements the description of the general
terms and provisions of the Certificates of any given Series and the related
Agreement set forth in the Prospectus, to which description reference is made by
this prospectus supplement.
OVERVIEW OF THE CERTIFICATES
The Class A Certificates will be issued in an initial aggregate
principal amount of $[ ] (the "Initial Class A Principal Balance") and the Class
B Certificates will be issued in an initial aggregate principal amount of $[ ]
(the "Initial Class B Principal Balance"). The Certificates will evidence
fractional undivided interests in the assets of the Trust to be created pursuant
to the Agreement. The Class A Certificates will evidence in the aggregate an
undivided ownership interest of approximately [ ]% of the Trust (the "Class A
Percentage") and the Class B Certificates will evidence in the aggregate an
undivided ownership interest of approximately [...]% of the Trust (the "Class B
Percentage").
The Certificates will constitute Fixed Rate Securities, as this term
is defined under "Certain Information Regarding the Securities -- Fixed Rate
Securities" in the Prospectus. Interest on the outstanding principal amount of
each class of Certificates will accrue at the fixed rate per annum specified for
that class on the cover page of this prospectus supplement (each rate, a
"Pass-Through Rate"). Interest on the outstanding principal amount of each class
of Certificates will accrue at the related Pass-Through Rate from and including
[ ], in the case of the first Distribution Date, or from and including the most
recent Distribution Date on which interest has been paid to but excluding the
following Distribution Date (each representing an "Interest Period"). Interest
on the Certificates will be calculated on the basis of a 360 day year consisting
of twelve 30 day months. Distributions of principal and interest will be made on
the [ ]th day of each month, or if the 15th day is not a business day on the
next succeeding Business Day (each, a "Distribution Date"), commencing [ ].
Distributions on a Distribution Date will be made to Certificateholders of
record on the Business Day prior to the applicable Distribution Date, or if
definitive Certificates have been issued, the last day of the month prior to a
Distribution Date (each date, a "Record Date"). A "Business Day" is a day other
than a Saturday, a Sunday or a day on which banking institutions or trust
companies in New York, New York, [ ] or [ ] are authorized by law, regulation,
executive order or governmental decree to be closed.
The Certificates will be available in book-entry form through the
facilities of The Depository Trust Company in the United States and Clearstream,
Luxembourg and the Euroclear System in Europe. See "Certain Information
Regarding the Securities--Book-Entry Registration" and "--Definitive Securities"
in the Prospectus and Annex I to the Prospectus.
THE POOLING AND SERVICING AGREEMENT
SALE AND ASSIGNMENT OF THE RECEIVABLES
Information regarding the conveyance of the Receivables by the Seller
to the Depositor and by the Depositor to the Trust on the Closing Date pursuant
to the Agreement is set forth in the Prospectus under "Description of the
Transfer and Servicing Agreements -- Sale and Assignment of Receivables."
ACCOUNTS
The Servicer will establish one or more segregated accounts (the
"Collection Account"), in the name of the Trustee on behalf of the Trust and the
Certificateholders, into which all payments made on or with respect to the
Receivables will be deposited. The Servicer will also establish a segregated
account (the "Class A Distribution Account"), in the name of the Trustee on
behalf of the Trust and the Class A Certificateholders, and a segregated account
(the "Class B Distribution Account"), in the name of the Trustee on behalf of
the Trust and the Class B Certificateholders, from which all distributions with
respect to the Class A Certificates and the Class B Certificates, respectively,
will be made. The Servicer will establish a segregated account (the "Reserve
Account"), in the name of [ ], as collateral agent, on behalf of the
Certificateholders. The Servicer will establish an additional account (the
"Payahead Account"), in the name of the Trustee on behalf of the Trust and the
Certificateholders, into which early payments by or on behalf of Obligors on
Actuarial Receivables will be deposited until the time the payment becomes due.
Until the time payments are transferred from the Payahead Account to the
Collection Account, they will not constitute collected interest or collected
principal and will not be available for distribution to the Certificateholders.
The Collection Account, the Class A Distribution Account, the Class B
Distribution Account, the Payahead Account and the Reserve Account are sometimes
referred to as the "Trust Accounts." The Reserve Account will be maintained for
the benefit of the Certificateholders, but will not be an asset of the Trust.
SERVICING COMPENSATION
The Servicer will be entitled to receive a fee (the "Base Servicing
Fee") for each Collection Period in an amount equal to the product of
one-twelfth of 0.50% per annum (the "Servicing Fee Rate") and the Pool Balance
as of the first day of the Collection Period. The "Base Servicing Fee" will also
include any late fees, other administrative fees or similar charges allowed by
applicable law with respect to the Receivables. The Base Servicing Fee, together
with any portion of the Base Servicing Fee that remains unpaid from prior
Distribution Dates (collectively, the "Servicing Fee"), will be paid on each
Distribution Date out of Interest Collections from the Receivables prior to
distributions to the Certificateholders. If [ ] or an affiliate of [ ] is no
longer the Servicer, a non-affiliated Servicer will also be entitled to receive
an additional fee (the "Non-Affiliated Servicing Fee") for each Collection
Period in an amount equal to the product of one-twelfth of 0.50% per annum and
the Pool Balance as of the first day of the Collection Period. The
Non-Affiliated Servicing Fee, together with any portion of the Non-Affiliated
Servicing Fee that remains unpaid from prior Distribution Dates, will be paid in
the order of priority described herein. See "Description of the Transfer and
Servicing Agreement -- Servicing Compensation and Payment of Expenses" in the
Prospectus.
DISTRIBUTIONS ON CERTIFICATES
DEPOSITS TO THE COLLECTION ACCOUNT. On or before the earlier of the
tenth Business Day of the month in which a Distribution Date occurs and the
fourth Business Day preceding that Distribution Date (the "Determination Date"),
the Servicer will provide the Trustee with information with respect to the
preceding Collection Period, including the aggregate amounts of the following:
o Collections on the Receivables
o Advances to be remitted by the Servicer
o Liquidated Receivables, if any
o Purchase Amounts of the Receivables to be repurchased by the
Seller or purchased by the Servicer with respect to the
Distribution Date
On or before the Business Day preceding each Distribution Date, the
Servicer will cause the Interest Collections and the Principal Collections for
the Distribution Date to be deposited into the Collection Account.
"COLLECTIONS" for any Distribution Date will equal the sum of Interest
Collections and Principal Collections for the related Distribution Date.
"INTEREST COLLECTIONS" for any Distribution Date will equal the sum of
the following amounts with respect to any Distribution Date, computed, with
respect to Simple Interest Receivables, in accordance with the simple interest
method, and, with respect to Actuarial Receivables, in accordance with the
actuarial method:
o that portion of all collections on the Receivables allocable to
interest in respect of the preceding Collection Period, including
with respect to Actuarial Receivables, amounts withdrawn from the
Payahead Account and allocable to interest and excluding amounts
deposited into the Payahead Account and allocable to interest, in
each case in respect of the related Collection Period;
o all proceeds, other than any proceeds from any Dealer commission
("Liquidation Proceeds") of the liquidation of Liquidated
Receivables, net of expenses incurred by the Servicer in
connection with the liquidation and any amounts required by law
to be remitted to the Obligor on the Liquidated Receivables, to
the extent attributable to interest due on the Liquidated
Receivables, which became Liquidated Receivables during the
Collection Period in accordance with the Servicer's customary
servicing procedures;
o the Purchase Amount of each Receivable that was repurchased by
the Seller or purchased by the Servicer during the preceding
Collection Period to the extent attributable to accrued interest
on that Receivable;
o all monies collected, from whatever source, other than any
proceeds from any Dealer commission, in respect to Liquidated
Receivables during any Collection Period following the Collection
Period in which the Receivable was written off, net of the sum of
any amounts expended by the Servicer for the account of the
Obligor and any amounts required by law to be remitted to the
Obligor ("Recoveries"); and
o all Advances with respect to interest for the related
Distribution Date.
In calculating the Interest Collections, all payments and proceeds,
including Liquidation Proceeds, of any Receivables repurchased by the Seller or
purchased by the Servicer the Purchase Amount of which has been included in the
Interest Collections on a prior Distribution Date shall be excluded.
"PRINCIPAL COLLECTIONS" for any Distribution Date will equal the sum
of the following amounts with respect to any Distribution Date, computed, with
respect to Simple Interest Receivables, in accordance with the simple interest
method, and with respect to Actuarial Receivables, in accordance with the
actuarial method:
o that portion of all collections on the Receivables allocable to
principal in respect of the preceding Collection Period, without
regard to any extensions or modifications effected after the
Cutoff Date, other than with respect to any extensions or
modifications in connection with Cram Down Losses during the
related Collection Period, including with respect to Actuarial
Receivables, amounts withdrawn from the Payahead Account and
allocable to principal and excluding amounts deposited into the
Payahead Account and allocable to principal, in each case in
respect of the related Collection Period;
o Liquidation Proceeds attributable to the principal amount of
Receivables which became Liquidated Receivables during the
preceding Collection Period in accordance with the Servicer's
customary servicing procedures with respect to the Liquidated
Receivables;
o all Advances made by the Servicer of principal due on the
Actuarial Receivables in respect of the preceding Collection
Period;
o to the extent attributable to principal, the Purchase Amount of
each Receivable repurchased by the Seller or purchased by the
Servicer during the preceding Collection Period; and
o partial prepayments on Receivables in respect of the preceding
Collection Period relating to refunds of extended service
contracts, or of physical damage, credit life, credit accident or
health insurance premium, disability insurance policy premiums,
but only if these costs or premiums were financed by the
respective Obligor and only to the extent not included in the
first bullet point above.
In calculating the Principal Collections, all payments and proceeds,
including Liquidation Proceeds, of any Receivables repurchased by the Seller or
purchased by the Servicer the Purchase Amount of which has been included in the
Principal Collections on a prior Distribution Date shall be excluded.
WITHDRAWALS FROM THE PAYAHEAD ACCOUNT. On or before the Business Day
preceding each Distribution Date, the Servicer will or will cause the Trustee to
(x) deposit into the Collection Account in immediately available funds, the
portion of Payaheads constituting scheduled payments on Actuarial Receivables or
that are to be applied to prepay Actuarial Receivables in full and (y)
distribute to the Depositor, in immediately available funds, all investment
earnings on funds in the Payahead Account with respect to the preceding
Collection Period. Monthly Withdrawals from the Collection Account. Except as
set forth under
"--Collections on Actuarial Receivables" below, on each Distribution
Date, the Servicer shall instruct the Trustee to withdraw from the Collection
Account and deposit in the Payahead Account in immediately available funds, the
aggregate Payaheads collected during the preceding Collection Period. On each
Distribution Date, the Servicer shall calculate the amounts set forth below and
shall instruct the Trustee to make the following deposits and distributions,
after payment to the Servicer from the Collection Account of amounts in
reimbursement of Advances previously made by the Servicer (as described below
under "--Advances"), to the extent of Interest Collections (and, in the case of
shortfalls occurring under clause (2) below in the Class A Interest
Distribution, the Class B Percentage of Principal Collections to the extent of
such shortfalls):
(1) to the Servicer, the Servicing Fee and if the Servicer is an
entity other than [ ], or [ ] or one of their affiliates, the
Non-Affiliated Servicing Fee;
(2) to the Class A Distribution Account, after the application of
clause (1), the Class A Interest Distribution; and
(3) to the Class B Distribution Account, after the application of
clauses (1) and (2), the Class B Interest Distribution.
On each Distribution Date, the Servicer shall calculate the amounts
set forth below and shall instruct the Trustee to make the following deposits
and distributions, to the extent of Principal Collections and Interest
Collections remaining after the application of clauses (1), (2) and (3) above:
(4) to the Class A Distribution Account, the Class A Principal
Distribution;
(5) to the Class B Distribution Account, after the application of
clause (4), the Class B Principal Distribution; and
(6) to the Reserve Account, any amounts remaining after the
application of clauses (1) through (5); these amounts to be distributed as
described below under "Credit Enhancement--Reserve Account."
To the extent necessary to satisfy the distributions described in
clauses (1) through (5) above, the Servicer shall calculate the amounts set
forth below and shall instruct the Trustee to withdraw from the Reserve Account
and deposit in the Class A Distribution Account or the Class B Distribution
Account as described below in the following order of priority on each
Distribution Date:
(1) an amount equal to the excess of the Class A Interest Distribution
over the sum of Interest Collections (net of amounts paid to the Servicer
pursuant to clause (1) of the preceding paragraph) and the Class B
Percentage of Principal Collections will be deposited into the Class A
Distribution Account;
(2) an amount equal to the excess of the Class B Interest Distribution
over the portion of Interest Collections (net of amounts paid to the
Servicer pursuant to clause (1) of the preceding paragraph) remaining after
the distribution of the Class A Interest Distribution will be deposited
into the Class B Distribution Account;
(3) an amount equal to the excess of the Class A Principal
Distribution over the portion of Principal Collections and Interest
Collections (net of amounts paid to the Servicer pursuant to clause (1) of
the preceding paragraph) remaining after the distribution of the Class A
Interest Distribution and the Class B Interest Distribution will be
deposited into the Class A Distribution Account; and
(4) an amount equal to the excess of the Class B Principal
Distribution over the portion of Principal Collections and Interest
Collections remaining (net of amounts paid to the Servicer pursuant to
clause (1) of the preceding paragraph) after the distribution of the Class
A Interest Distribution, the Class B Interest Distribution and the Class A
Principal Distribution will be deposited into the Class B Distribution
Account.
On each Distribution Date, all amounts on deposit in the Class A
Distribution Account will be distributed to the Class A Certificateholders and
all amounts on deposit in the Class B Distribution Account will be distributed
to the Class B Certificateholders.
RELATED DEFINITIONS
For purposes of this prospectus supplement, the following terms have
the following meanings:
"CRAM DOWN LOSS" means, with respect to a Receivable if a court of
appropriate jurisdiction in a bankruptcy or insolvency proceeding shall have
issued an order reducing the amount owed on the Receivable or otherwise
modifying or restructuring the scheduled payments to be made on the Receivable,
an amount equal to:
(1) the excess of the principal balance of the Receivable immediately
prior to the court order over the principal balance of the Receivable as so
reduced; and
(2) if the issuing court shall have issued an order reducing the
effective rate of interest on the Receivable, the net present value, using
as the discount rate the higher of the APR on the Receivable or the rate of
interest, if any, specified by the court in the order, of the scheduled
payments as so modified or restructured.
A "Cram Down Loss" shall be deemed to have occurred on the date of
issuance of the court order.
"CLASS A INTEREST CARRYOVER SHORTFALL" means, with respect to any
Distribution Date, the excess of Class A Monthly Interest for the preceding
Distribution Date and any outstanding Class A Interest Carryover Shortfall on
the preceding Distribution Date, over the amount in respect of interest that is
actually deposited in the Class A Distribution Account on the preceding
Distribution Date, plus 30 days of interest on that excess, to the extent
permitted by law, at the Class A Pass-Through Rate.
"CLASS A INTEREST DISTRIBUTION" means, with respect to any
Distribution Date, the sum of Class A Monthly Interest for the Distribution Date
and the Class A Interest Carryover Shortfall for the Distribution Date.
"CLASS A MONTHLY INTEREST" means, with respect to any Distribution
Date, the product of (x) one-twelfth of the Class A Pass-Through Rate and (y)
the Class A Principal Balance as of the immediately preceding Distribution Date,
after giving effect to any payments made on that Distribution Date, or, in the
case of the first Distribution Date, the Initial Class A Principal Balance.
"CLASS A MONTHLY PRINCIPAL" means, with respect to any Distribution
Date, the Class A Percentage of Principal Collections for the Distribution Date
plus the sum of (1) the Class A Percentage of Realized Losses with respect to
Receivables which became Liquidated Receivables during the related Collection
Period and (2) the Class A Percentage of the aggregate amount of Cram Down
Losses during the related Collection Period.
"CLASS A PASS-THROUGH RATE" means, with respect to the Class A
Certificates, % per annum.
"CLASS A PRINCIPAL BALANCE" equals the Initial Class A Principal
Balance, as reduced by all amounts allocable to principal on the Class A
Certificates previously distributed to Class A Certificateholders.
"CLASS A PRINCIPAL CARRYOVER SHORTFALL" means, with respect to any
Distribution Date, the excess of Class A Monthly Principal for the preceding
Distribution Date and any outstanding Class A Principal Carryover Shortfall on
the preceding Distribution Date over the amount in respect of principal that is
actually deposited in the Class A Distribution Account on the preceding
Distribution Date.
"CLASS A PRINCIPAL DISTRIBUTION" means, with respect to any
Distribution Date, the sum of Class A Monthly Principal for that Distribution
Date and the Class A Principal Carryover Shortfall for that Distribution Date;
provided, however, that the Class A Principal Distribution shall not exceed the
Class A Principal Balance immediately prior to that Distribution Date. In
addition, on the Final Scheduled Distribution Date, the principal required to be
deposited in the Class A Distribution Account will include the lesser of:
(a) any principal due and remaining unpaid on each Receivable in the
Trust as of the Final Scheduled Maturity Date; or
(b) the portion of the amount required to be deposited under clause
(a) above that is necessary, after giving effect to the other amounts to be
deposited in the Class A Distribution Account on the applicable
Distribution Date and allocable to principal, to reduce the Class A
Principal Balance to zero.
"CLASS B INTEREST CARRYOVER SHORTFALL" means, with respect to any
Distribution Date, the excess of Class B Monthly Interest for the preceding
Distribution Date and any outstanding Class B Interest Carryover Shortfall on
the preceding Distribution Date, over the amount in respect of interest that is
actually deposited in the Class B Distribution Account on the preceding
Distribution Date, plus 30 days of interest on this excess, to the extent
permitted by law, at the Class B Pass-Through Rate.
"CLASS B INTEREST DISTRIBUTION" means, with respect to any
Distribution Date, the sum of Class B Monthly Interest for that Distribution
Date and the Class B Interest Carryover Shortfall for that Distribution Date.
"CLASS B MONTHLY INTEREST" means, with respect to any Distribution
Date, the product of (x) one-twelfth of the Class B Pass-Through Rate and (y)
the Class B Principal Balance as of the immediately preceding Distribution Date,
after giving effect to any payments made on that Distribution Date, or, in the
case of the first Distribution Date, the Initial Class B Principal Balance.
"CLASS B MONTHLY PRINCIPAL" means, with respect to any Distribution
Date, the Class B Percentage of Principal Collections for that Distribution Date
plus the sum of (1) the Class B Percentage of Realized Losses with respect to
Receivables which became Liquidated Receivables during the related Collection
Period and (2) the Class B Percentage of the aggregate amount of Cram Down
Losses during the related Collection Period.
"CLASS B PASS-THROUGH RATE" means, with respect to the Class B
Certificates, [ ] % per annum.
"CLASS B PRINCIPAL BALANCE" equals the Initial Class B Principal
Balance, as reduced by all amounts allocable to principal on the Class B
Certificates previously distributed to Class B Certificateholders.
"CLASS B PRINCIPAL CARRYOVER SHORTFALL" means, with respect to any
Distribution Date, the excess of Class B Monthly Principal for the preceding
Distribution Date and any outstanding Class B Principal Carryover Shortfall on
the preceding Distribution Date over the amount in respect of principal that is
actually deposited in the Class B Distribution Account on the preceding
Distribution Date.
"CLASS B PRINCIPAL DISTRIBUTION" means, with respect to any
Distribution Date, the sum of Class B Monthly Principal for that Distribution
Date and the Class B Principal Carryover Shortfall for that Distribution Date;
provided, however, that the Class B Principal Distribution shall not exceed the
Class B Principal Balance immediately prior to that Distribution Date. In
addition, on the Final Scheduled Distribution Date, the principal required to be
distributed to Class B Certificateholders will include the lesser of:
(a) any principal due and remaining unpaid on each Receivable in the
Trust as of the Final Scheduled Maturity Date; or
(b) the portion of the amount required to be deposited under clause
(a) above that is necessary, after giving effect to the other amounts to be
deposited in the Class B Distribution Account on the Distribution Date and
allocable to principal, to reduce the Class B Principal Balance to zero,
and, in the case of clauses (a) and (b), remaining after any required
distribution of the amount described in clause (a) to the Class A
Distribution Account.
"LIQUIDATED RECEIVABLES" means, Receivables (x) which have been
liquidated by the Servicer through the sale of the related Financed Vehicle, (y)
as to which all or a portion representing 10% or more of a scheduled payment due
is 120 or more days delinquent or (z) with respect to which proceeds have been
received which, in the Servicer's judgment, constitute the final amounts
recoverable in respect of such Receivable. A Receivable first becomes a
Liquidated Receivable upon the earliest to occur of (x), (y) or (z) above.
The "POOL BALANCE" at any time will represent the aggregate principal
balance of the Receivables at the end of the preceding Collection Period, after
giving effect to all payments, other than Payaheads, received from Obligors and
Purchase Amounts to be remitted by the Servicer and the Seller, as the case may
be, all for the related Collection Period, all losses realized on Receivables
that became Liquidated Receivables during the related Collection Period and all
Cram Down Losses for the related Collection Period.
"REALIZED LOSSES" means, for any period, the excess of the principal
balance of a Liquidated Receivable over Liquidation Proceeds to the extent
allocable to principal.
ADVANCES
With respect to any Distribution Date, the Servicer may, in its sole
discretion, make a payment (an "Advance") with respect to each Receivable, other
than a Liquidated Receivable, equal to (A) with respect to Simple Interest
Receivables, the excess, if any, of (x) the product of the principal balance of
such Receivable as of the last day of the related Collection Period and
one-twelfth of its APR, over (y) the interest actually received by the Servicer
with respect to such Receivable from the Obligor or from the payment of the
Repurchase Amount during or with respect to such Collection Period and (B) with
respect to Actuarial Receivables, the scheduled payment of principal and
interest due during the related Collection Period but not received. The Servicer
may elect not to make any Advance with respect to a Receivable to the extent
that the Servicer, in its sole discretion, determines that such Advance is not
recoverable from subsequent payments on such Receivable or from funds in the
Reserve Account.
With respect to Simple Interest Receivables, to the extent that the
amount set forth in clause (y) above plus amounts withdrawn from the Reserve
Account during or with respect to the related Collection Period and allocable to
interest with respect to a Simple Interest Receivable is greater than the amount
set forth in clause (x) above with respect to a Simple Interest Receivable, this
amount shall be distributed to the Servicer on the related Distribution Date to
reimburse the Servicer for previous unreimbursed Advances with respect to that
Simple Interest Receivable. Before a Simple Interest Receivable becomes a
Liquidated Receivable, this reimbursement will only be from accrued interest due
from the Obligor under that Receivable. Collections on an Actuarial Receivable
made during a Collection Period shall be applied first to repay any unreimbursed
Advances on that Actuarial Receivable.
In addition, on the Business Day before each Distribution Date the
Trustee shall withdraw from the Reserve Account an amount equal to the amount of
any outstanding Advances on Liquidated Receivables to the extent not recovered
from Liquidation Proceeds.
The Servicer will deposit all Advances with respect to any
Distribution Date into the Collection Account on the Business Day before each
Distribution Date.
COLLECTIONS ON ACTUARIAL RECEIVABLES
To the extent that collections on an Actuarial Receivable during a
Collection Period exceed the outstanding Advances on the Actuarial Receivable,
the collections shall then first be applied to the scheduled payment on that
Receivable. If any collections remaining after the scheduled payment is made are
insufficient to prepay the Actuarial Receivable in full, then, the remaining
collections (the "Payaheads") shall be transferred to and kept in the Payahead
Account, until a later Collection Period where the collections may be
transferred to the Collection Account and applied either to the scheduled
payment or to prepay the Actuarial Receivable in full. The scheduled payment
with respect to an Actuarial Receivable is that portion of the payment required
to be made by the related Obligor during each calendar month sufficient to
amortize the principal balance of that Actuarial Receivable under the actuarial
method over the term of the Actuarial Receivable and to provide interest at the
APR of that Actuarial Receivable. Notwithstanding the foregoing, so long as the
Servicer is not required to remit collections to the Collection Account within
two Business Days of receipt, the Servicer will not be required to deposit
Payaheads to the Payahead Account but shall be required to deposit Payaheads to
the Collection Account as described above.
CREDIT ENHANCEMENT
SUBORDINATION OF THE CLASS B CERTIFICATES. The rights of the Class B
Certificateholders to receive distributions with respect to the Receivables will
be subordinated to the rights of the Class A Certificateholders to the extent
described below. This subordination is intended to enhance the likelihood of
timely receipt by Class A Certificateholders of the full amount of interest and
principal required to be paid to them, and to afford such Class A
Certificateholders limited protection against losses in respect of the
Receivables.
No distribution will be made to the Class B Certificateholders on any
Distribution Date in respect of interest until the full amount of interest on
the Class A Certificates payable on such Distribution Date has been distributed
to the Class A Certificateholders. No distribution will be made to the Class B
Certificateholders on any Distribution Date in respect of principal until the
full amount of interest on and principal of the Class A Certificates and
interest on the Class B Certificates payable on such Distribution Date has been
distributed to the Class A Certificateholders and the Class B
Certificateholders, respectively. Distributions of interest on the Class B
Certificates, however, to the extent of collections on or in respect of the
Receivables allocable to interest and certain available amounts on deposit in
the Reserve Account, will not be subordinated to the payment of principal of the
Class A Certificates.
RESERVE ACCOUNT. In the event of delinquencies or losses on the
Receivables, the protection afforded to the Class A Certificateholders will be
effected both by the preferential right of the Class A Certificateholders to
receive current distributions with respect to the Receivables, to the extent
described above under "-- Subordination of the Class B Certificates," prior to
any distribution being made on a Distribution Date to the Class B
Certificateholders, and to receive amounts on deposit in the Reserve Account.
Amounts on deposit in the Reserve Account will also be generally available to
cover shortfalls in required distributions to the Class B Certificateholders, in
respect of interest, after payment of interest on the Class A Certificates and,
in respect of principal, after payment of interest on and principal of the Class
A Certificates and interest on the Class B Certificates. The Reserve Account
will not be a part of or otherwise includible in the Trust and will be a
segregated trust account held by the Collateral Agent for the benefit of the
Certificateholders.
On the Closing Date, the Depositor will deposit $[ ] ([ ]% of the
Initial Pool Balance) (the "Reserve Account Initial Deposit") into the Reserve
Account. The Reserve Account Initial Deposit will be augmented on each
Distribution Date by deposit in the Reserve Account of Collections remaining
after distribution of the Servicing Fee and amounts to be paid to Class A
Certificateholders and Class B Certificateholders as described above under
"--Distributions on Certificates." To the extent that amounts on deposit in the
Reserve Account after distributions on a Distribution Date exceed the Specified
Reserve Account Balance, such excess will be released first, to the Servicer (if
the Servicer is [ ]), in an amount equal to the Non-Affiliated Servicing Fee,
together with any portion of the Non-Affiliated Servicing Fee that remains
unpaid from prior Distribution Dates, and second, to the Depositor. Upon any
such release to the Depositor of amounts from the Reserve Account, neither the
Class A Certificateholders nor the Class B Certificateholders will have any
further rights in, or claims to, such amounts.
"SPECIFIED RESERVE ACCOUNT BALANCE" with respect to any Distribution
Date will equal [ ]% of the Pool Balance as of the last day of the related
Collection Period, but in any event will not be less than the lesser of:
(1) [ ] ([ ]% of the Initial Pool Balance), and
(2) the Pool Balance;
PROVIDED, that if the Average Net Loss Ratio exceeds [ ]% or the
Average Delinquency Percentage exceeds [ ]% on a Distribution Date,
beginning with the [ ] Distribution Date, the Specified Reserve Account
Balance for the Distribution Date shall be calculated using a percentage of
[ ]%.
"AGGREGATE NET LOSSES" means, for any Distribution Date, the amount
equal to (1) the aggregate Principal Balance of all Receivables that became
Liquidated Receivables during the related Collection Period minus (2) the
Liquidation Proceeds allocable to principal collected during the related
Collection Period with respect to any Liquidated Receivables.
"AVERAGE DELINQUENCY PERCENTAGE" means, for any Distribution Date, the
average of the Delinquency Percentages for the Distribution Date and the
preceding two Distribution Dates.
"AVERAGE NET LOSS RATIO" means, for any Distribution Date, the average
of the Net Loss Ratios for the Distribution Date and the preceding two
Distribution Dates.
"DELINQUENCY PERCENTAGE" means, for any Distribution Date, the sum of
the outstanding Principal Balances of all Receivables which are 60 days or more
delinquent, including Receivables relating to Financed Vehicles that have been
repossessed, as of the close of business on the last day of the Collection
Period immediately preceding the Distribution Date, determined in accordance
with the Servicer's normal practices, this sum expressed as a percentage of the
Pool Balance as of the close of business on the last day of the related
Collection Period.
"LIQUIDATION PROCEEDS" means with respect to any Receivable,
(1) insurance proceeds,
(2) the monies collected during a Collection Period from whatever
source on a Liquidated Receivable and
(3) proceeds of a Financed Vehicle sold after repossession, in each
case, net of any liquidation expenses and payments required by law to be
remitted to the Obligor.
"NET LOSS RATIO" means, for any Distribution Date, an amount expressed
as a percentage, equal to the product of (A) twelve and (B) (1) the Aggregate
Net Losses for the Distribution Date, divided by (2) the average of the Pool
Balances on each of the first day of the related Collection Period and the last
day of the related Collection Period.
The Specified Reserve Account Balance may be reduced to a lesser
amount; provided, that the reduction may not adversely affect any rating of the
Certificates by a Rating Agency.
In no circumstances will the Depositor be required to deposit any
amounts in the Reserve Account other than the Reserve Account Initial Deposit to
be made on the Closing Date.
Amounts held from time to time in the Reserve Account will continue to
be held for the benefit of the Certificateholders and may be invested in
Eligible Investments. Any loss on an investment will be charged to the Reserve
Account. Any investment earnings, net of losses, will be paid to the Depositor.
The time necessary for the Reserve Account to reach and maintain the
Specified Reserve Account Balance at any time after the date of issuance of the
Certificates will be affected by the delinquency, credit loss and repossession
and prepayment experience of the Receivables and, therefore, cannot be
accurately predicted.
If on any Distribution Date the protection afforded the Class A
Certificates by the Class B Certificates and by the Reserve Account is
exhausted, the Class A Certificateholders will directly bear the risks
associated with ownership of the Receivables. If on any Distribution Date
amounts on deposit in the Reserve Account have been depleted, the protection
afforded the Class B Certificates by the Reserve Account will be exhausted and
the Class B Certificateholders will directly bear the risks associated with
ownership of the Receivables.
None of the Class B Certificateholders, the Trustee, the Servicer, the
Seller or the Depositor will be required to refund any amounts properly
distributed or paid to them, whether or not there are sufficient funds on any
subsequent Distribution Date to make full distributions to the Class A
Certificateholders.
TERMINATION
The Servicer will be permitted, at its option, in the event that the
Pool Balance as of the last day of a Collection Period has declined to 10% or
less of the Initial Pool Balance, to purchase from the Trust, on any
Distribution Date occurring in a subsequent Collection Period, all remaining
Receivables in the Trust at a purchase price equal to the sum of the Class A
Principal Balance and the Class B Principal Balance plus accrued and unpaid
interest at the applicable Pass-Through Rates. The exercise of this right will
effect an early retirement of the Certificates. See "Description of the Transfer
and Servicing Agreements -- Termination" in the Prospectus.
DUTIES OF THE TRUSTEE
The Trustee will make no representations as to the validity or
sufficiency of the Agreement, the Certificates, other than the execution and
authentication of the Certificates, the Receivables or any related documents,
and will not be accountable for the use or application by the Depositor or the
Servicer of any funds paid to the Depositor or the Servicer in respect of the
Certificates or the Receivables, or the investment of any monies by the Servicer
before the monies are deposited into the Collection Account. The Trustee will
not independently verify the Receivables. If no Event of Servicing Termination
(as described in the Prospectus) has occurred and is continuing, the Trustee
will be required to perform only those duties specifically required of it under
the Agreement. Generally, those duties are limited to the receipt of the various
certificates, reports or other instruments required to be furnished to the
Trustee under the Agreement, in which case it will only be required to examine
them to determine whether they conform to the requirements of the Agreement. The
Trustee will not be charged with knowledge of a failure by the Servicer to
perform its duties under the Agreement which failure constitutes an Event of
Servicing Termination unless a responsible officer of the Trustee obtains actual
knowledge of the failure as specified in the Agreement.
The Trustee will be under no obligation to exercise any of the rights
or powers vested in it by the Agreement or to make any investigation of matters
arising under the Agreement or to institute, conduct or defend any litigation
under the Agreement or in relation to the Agreement at the request, order or
direction of any of the Certificateholders, unless the Certificateholders have
offered the Trustee reasonable security or indemnity satisfactory to it against
the costs, expenses and liabilities which may be incurred in or by an exercise
of the Trustee's rights or powers or an investigation. No Class A
Certificateholder or Class B Certificateholder will have any right under the
Agreement to institute any proceeding with respect to the Agreement, unless the
holder has given the Trustee written notice of default and unless, with respect
to the Class A Certificates, the holders of Class A Certificates evidencing not
less than a majority of the aggregate outstanding principal balance of the Class
A Certificates or, with respect to the Class B Certificates, the holders of
Class B Certificates evidencing not less than a majority of the aggregate
outstanding principal balance of the Class B Certificates, have made a written
request to the Trustee to institute a proceeding in its own name as Trustee
under the Agreement and have offered to the Trustee reasonable indemnity, and
the Trustee for 30 days has neglected or refused to institute any proceedings.
THE TRUSTEE
[ ], a national banking association, will act as Trustee under the
Agreement. The Trustee, in its individual capacity or otherwise, and any of its
affiliates, may hold Certificates in their own names or as pledgee. In addition,
for the purpose of meeting the legal requirements of some jurisdictions, the
Servicer and the Trustee, acting jointly, or in some instances, the Trustee,
acting alone, will have the power to appoint co-trustees or separate trustees of
all or any part of the Trust. In the event of an appointment, all rights,
powers, duties and obligations conferred or imposed upon the Trustee by the
Agreement will be conferred or imposed upon the Trustee and the co-trustee or
separate trustee jointly, or, in any jurisdiction where the Trustee is
incompetent or unqualified to perform certain acts, singly upon the co-trustee
or separate trustee who shall exercise and perform these rights, powers, duties
and obligations solely at the direction of the Trustee.
The Trustee may resign at any time, in which event the Servicer will
be obligated to appoint a successor trustee. The Servicer may also remove the
Trustee if the Trustee ceases to be eligible to serve, becomes legally unable to
act, is adjudged insolvent or is placed in receivership or similar proceedings.
In these circumstances, the Servicer will be obligated to appoint a successor
trustee. However, any resignation or removal of the Trustee and appointment of a
successor trustee will not become effective until acceptance of the appointment
by the successor trustee.
The Agreement will provide that the Servicer will pay the Trustee's
fees. The Agreement will also provide that the Trustee will be entitled to
indemnification by the Depositor for, and will be held harmless against, any
loss, liability or expense incurred by the Trustee not resulting from the
Trustee's own willful misfeasance, bad faith or negligence. Indemnification will
be unavailable to the Trustee to the extent that any loss, liability or expense
results from a breach of any of the Trustee's representations or warranties set
forth in the Agreement, and for any tax, other than those for which the
Depositor or the Servicer is required to indemnify the Trustee.
The Trustee's Corporate Trust Office is located at [ ]. The Depositor,
the Servicer, the Seller and their respective affiliates may have other banking
relationships with the Trustee and its affiliates in the ordinary course of
their business.
In the Agreement, [ ] will agree to perform certain bond
administration, distribution obligations and custodial functions on behalf of
the Trustee and to act as successor servicer if [ ] is removed as servicer. In
performing these functions, [ ] will be entitled to all of the rights, powers
and indemnities afforded to the Trustee under the Agreement.
FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Certificates, Stroock & Stroock & Lavan LLP,
special tax counsel ("Federal Tax Counsel"), will deliver its opinion to the
effect that, under then current law, assuming compliance with the Agreement, the
Trust will be classified for federal income tax purposes as a grantor trust and
not as an association taxable as a corporation. Accordingly, each
Certificateholder will be subject to federal income taxation as if it owned
directly its interest in each asset owned by the Trust and paid directly its
share of expenses paid by the Trust. Certain individuals, estates, trusts and
partnerships may be limited in their ability to fully deduct the expenses of the
Trust. See "Material Federal Income Tax Consequences" in the Prospectus for a
discussion of those limits.
For federal income tax purposes, the Depositor will be deemed to have
retained a fixed portion of the interest due on each Receivable (the "Spread").
The Spread will be treated as "stripped coupons" within the meaning of Section
1286 of the Internal Revenue Code of 1986, as amended (the "Code"). The Servicer
may also be deemed to have retained a "stripped coupon" if and to the extent
that the Servicing Fee is determined to be unreasonable. In addition, because
the Class B Pass-Through Rate exceeds the Class A Pass-Through Rate, a portion
of the interest accrued on each Receivable will be treated as a "stripped
coupon" purchased by the Class B Certificateholders. Accordingly, each Class A
Certificateholder will be treated as owning its pro rata percentage interest in
the principal of, and interest payable on, each Receivable (minus the portion of
the interest payable on such Receivable that is treated as Spread, as a stripped
coupon retained by the Servicer or as a stripped coupon purchased by the Class B
Certificateholders), and such interest in each Receivable will be treated as a
"stripped bond" within the meaning of Section 1286 of the Code. Similarly, each
Class B Certificateholder will be treated as owning its pro rata percentage
interest in the principal of each Receivable, plus a disproportionate share of
the interest payable on each Receivable.
CLASS A CERTIFICATEHOLDERS
Because the Class A Certificates represent stripped bonds, they will
be subject to the original issue discount ("OID") rules of the Code.
Accordingly, the tax treatment of a Class A Certificateholder will depend upon
whether the amount of OID on a Class A Certificate is less than a statutorily
defined de minimis amount. See "Material Federal Income Tax Consequences --
Grantor Trusts -- Stripped Certificates" for a discussion regarding the
calculation of OID, if any, on stripped bonds.
If the amount of OID is de minimis under the OID provisions of the
Code, the Class A Certificates would not be treated as having OID. Each Class A
Certificateholder would be required to report on its federal income tax return
its share of the gross income of the Trust, including interest and certain other
charges accrued on the Receivables and any gain upon collection or disposition
of the Receivables (but not including any portion of the Receivables treated as
"stripped coupons" as described above that are treated as owned by other
parties). Such gross income attributable to interest on the Receivable would
exceed the Class A Pass-Through Rate by an amount equal to the Class A
Certificateholder's share of the expenses of the Trust for the period during
which it owns a Class A Certificate. As indicated above, a Class A
Certificateholder generally would be entitled to deduct its share of expenses of
the Trust, subject to certain limitations that apply in the case of
Certificateholders that are individuals, trusts, estates or
partnerships. Any amounts received by a Class A Certificateholder from the
Reserve Account or from the subordination of the Class B Certificates will be
treated for federal income tax purposes as having the same character as the
payments they replace. A Class A Certificateholder would report its share of the
income of the Trust under its usual method of accounting. Accordingly, interest
would be includable in a Certificateholder's gross income when it accrues on the
Receivables, or, in the case of Certificateholders who are cash basis taxpayers,
when received by the Servicer on behalf of Certificateholders. The actual amount
of discount on a Receivable would be includable in income as principal payments
are received on the Receivables.
If OID relating to a Class A Certificate is not de minimis, a Class A
Certificateholder will be required to include in income, in addition to the
amounts described above, any OID as it accrues, regardless of when cash payments
are received, using a method reflecting a constant yield on the Receivables.
Although the Trustee intends to account for OID, if any, reportable by
holders of Class A Certificates by reference to the price paid for a Class A
Certificate by an initial purchaser, the amount of OID will differ for
subsequent purchasers. Such subsequent purchasers should consult their tax
advisers regarding the proper calculation of OID on the interest in the
Receivables represented by a Class A Certificate.
CLASS B CERTIFICATEHOLDERS
IN GENERAL. Except as described below, it is believed that the Class B
Certificateholders will be subject to tax in the same manner as Class A
Certificateholders. However, no federal income tax authorities address the
precise method of taxation of an instrument such as the Class B Certificates and
Federal Tax Counsel cannot opine on this issue. In the absence of applicable
authorities, the Trustee intends to report income to Class B Certificateholders
in the manner described below.
Each Class B Certificateholder will be treated as owning (x) the Class
B Percentage of each Receivable plus (y) a disproportionate portion of the
interest on each Receivable (not including the Spread). Income will be reported
to a Class B Certificateholder based on the assumption that all amounts payable
to the Class B Certificateholders are taxable under the coupon stripping
provisions of the Code and treated as a single obligation. In applying those
provisions, the Trustee will take the position that a Class B
Certificateholder's entire share of the interest on a Receivable will qualify as
"qualified stated interest." Thus, except to the extent modified by the effects
of subordination of the Class B Certificates, as described below, income will be
reported to Class B Certificateholders in the manner described above for holders
of the Class A Certificates.
EFFECT OF SUBORDINATION
If the Certificateholders of one Class of Certificates receive
distributions of less than their share of the Trust's receipts of principal or
interest (the "Shortfall Amount") because of the subordination of the
Certificates, it is believed that such Certificateholders would probably be
treated for federal income tax purposes as if they had:
(1) received as distributions their full share of such receipts,
(2) paid over to the Certificateholders of the other Class of
Certificates an amount equal to such Shortfall Amount, and
(3) retained the right to reimbursement of such amounts to the extent
of future collections otherwise available for deposit in the Reserve
Account.
However, Federal Tax Counsel cannot opine to such treatment.
Under this treatment,
(x) Class B Certificateholders would be required to accrue as current
income any interest, OID income, or (to the extent paid on the Receivables)
accrued market discount of the Trust that was a component of the Shortfall
Amount, even though such amount was in fact paid to the Class A
Certificateholders,
(y) a loss would only be allowed to the Class B Certificateholders
when their right to receive reimbursement of such Shortfall Amount became
worthless (i.e., when it became clear that that amount would not be
available from any source to reimburse such loss), and
(z) reimbursement of such Shortfall Amount prior to such a claim of
worthlessness would not be taxable income to Class B Certificateholders
because such amount was previously included in income. Those results should
not significantly affect the inclusion of income for Class B
Certificateholders on the accrual method of accounting, but could
accelerate inclusion of income to Class B Certificateholders on the cash
method of accounting by, in effect, placing them on the accrual method.
Moreover, the character and timing of loss deductions are unclear and all
Class B Certificateholders are encouraged to consult their tax advisors
regarding such character and timing.
All Certificateholders should see "Material Federal Income Tax
Consequences" in the Prospectus for a more detailed discussion of the material
federal income tax consequences of the purchase, ownership and disposition of
the Certificates.
STATE AND LOCAL TAX CONSEQUENCES
The discussion under "Federal Income Tax Consequences" above does not
address the tax consequences of purchase, ownership or disposition of the
Certificates under any state or local tax law. We recommend that investors
consult their own tax advisors regarding state and local tax consequences.
ERISA CONSIDERATIONS
A fiduciary of a pension, profit-sharing, retirement or other employee
benefit plan subject to Title I of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), should consider the fiduciary standards under
ERISA in the context of the plan's particular circumstances before authorizing
an investment of a portion of such plan's assets in the Certificates.
Accordingly, pursuant to Section 404 of ERISA, such fiduciary should consider
among other factors:
(1) whether the investment is for the exclusive benefit of plan
participants and their beneficiaries;
(2) whether the investment satisfies the applicable diversification
requirements;
(3) whether the investment is in accordance with the documents and
instruments governing the plan; and
(4) whether the investment is prudent, considering the nature of the
investment. Fiduciaries of plans also should consider ERISA's prohibition
on improper delegation of control over, or responsibility for, plan assets.
In addition, benefit plans subject to ERISA, as well as individual
retirement accounts or certain types of Keogh plans not subject to ERISA but
subject to Section 4975 of the Code and any entity whose source of funds for the
purchase of Certificates includes plan assets by reason of a plan or account
investing in such entity (each, a "Plan"), are prohibited from engaging in a
broad range of transactions involving Plan assets and persons having certain
specified relationships to a Plan ("Parties in Interest" and "Disqualified
Persons"). Such transactions are treated as "prohibited transactions" under
Sections 406 and 407 of ERISA and excise taxes are imposed upon such persons by
Section 4975 of the Code.
An investment in Certificates by a Plan might result in the assets of
the Trust being deemed to constitute Plan assets, which in turn might mean that
certain aspects of such investment, including the operation of the Trust, might
be prohibited transactions under ERISA and the Code. Neither ERISA nor the Code
defines the term "plan assets." Under Section 2510.3-101 of the United States
Department of Labor ("DOL") regulations (the "Regulation"), a Plan's assets may
include an interest in the underlying assets of an entity (such as a trust) for
certain purposes, including the prohibited transaction provisions of ERISA and
the Code, if the Plan acquires an "equity interest" in such entity, unless
certain exceptions apply. The Depositor believes that the Certificates will give
Certificateholders an equity interest in the Trust for purposes of the
Regulation and can give no assurance that the Certificates will qualify for any
of the exceptions under the Regulation.
As a result, the assets of the Trust may be considered the assets of
any Plan which acquires a Certificate.
The DOL has issued an individual exemption, Prohibited Transaction
Exemption ("PTE") [ ] which was amended by PTE 97-34 and was recently further
amended by PTE 2000-58 to [ ] and its affiliates, including [ ] (the
"Exemption"). The Exemption generally exempts from the application of the
prohibited transaction provisions of Section 406 of ERISA and the excise taxes
imposed on such prohibited transactions pursuant to Section 4975(a) and (b) of
the Code and Section 502(i) of ERISA certain transactions relating to the
initial purchase, holding and subsequent resale by Plans of certificates in
pass-through trusts that consist of certain receivables, loans and other
obligations that meet the conditions and requirements set forth in the
Exemption. The receivables covered by the Exemption include motor vehicle
installment obligations such as the Receivables. The Depositor believes that the
Exemption will apply to the acquisition, holding and resale of the Class A
Certificates by a Plan and that all conditions of the Exemption other than those
within the control of the investors have been or will be met.
All Certificateholders should refer to "ERISA Considerations" in the
Prospectus for a detailed discussion of the general and specific conditions of
the Exemption.
If the general conditions of the Exemption are satisfied, the
Exemption may provide relief from the restrictions imposed by Sections 406(a)
and 407(a) of ERISA as well as the excise taxes imposed by Section 4975(a) and
(b) of the Code by reason of Section 4975(c)(1)(A) through (D) of the Code, in
connection with the direct or indirect sale, exchange, transfer or holding of
the Certificates by a Plan. However, no exemption is provided from the
restrictions of Sections 406(a)(1)(E), 406(a)(2) and 407 of ERISA for the
acquisition or holding of a Certificate on behalf of an "Excluded Plan" by any
person who has discretionary authority or renders investment advice with respect
to the assets of such Excluded Plan. For purposes of the Certificates an
Excluded Plan is a Plan sponsored by any member of the Restricted Group.
If certain specific conditions of the Exemption are also satisfied,
the Exemption may provide relief from the restrictions imposed by Sections
406(b)(l) and (b)(2) and 407(a) of ERISA and the taxes imposed by Section
4975(a) and (b) of the Code by reason of Section 4975(c)(1)(E) of the Code in
connection with the direct or indirect sale, exchange, transfer or holding of
Certificates in the initial issuance of Certificates between the Depositor or
the Underwriters and a Plan other than an Excluded Plan when the person who has
discretionary authority or renders investment advice with respect to the
investment of Plan assets in the Certificates is (a) an Obligor with respect to
5% or less of the fair market value of the Receivables or (b) an affiliate of
such person.
The Exemption also may provide relief from the restriction imposed by
Sections 406(a) and 407(a) of ERISA and the taxes imposed by Section
4975(c)(1)(A) through (D) of the Code if such restrictions are deemed to
otherwise apply merely because a person is deemed to be a party in interest or a
disqualified person with respect to an investing Plan by virtue of providing
services to a Plan (or by virtue of having certain specified relationships to
such a person) solely as a result of such Plan's ownership of Certificates.
Before purchasing a Certificate, a fiduciary of a Plan should itself
confirm (a) that the Certificates constitute "certificates" for purposes of the
Exemption and (b) that the specific conditions set forth in Section II of the
Exemption and the other requirements set forth in the Exemption will be
satisfied.
Any Plan fiduciary considering whether to purchase a Certificate on
behalf of a Plan are encouraged to consult with its counsel regarding the
applicability of the fiduciary responsibility and prohibited transaction
provisions of ERISA and the Code to such investment.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
agreement relating to the Certificates (the "Underwriting Agreement"), the
Depositor has agreed to sell to [ ] and Deutsche Banc Securities Inc. (together,
the "Underwriters"), and each of the Underwriters has severally agreed to
purchase, the principal amount of Class A Certificates and Class B Certificates
set forth opposite its name below, subject to the satisfaction of certain
conditions precedent.
PRINCIPAL AMOUNT OF CLASS A PRINCIPAL AMOUNT OF CLASS B
UNDERWRITER CERTIFICATES CERTIFICATES
[ ]...................................... $[....... ] $ [...... ]
Deutsche Banc Securities Inc....................... $[....... ] $ [...... ]
- --
Total.......................................... $[....... ] $[....... ]
= =
The Depositor has been advised by the Underwriters that the
Underwriters propose to offer the Certificates to the public initially at the
public offering prices set forth on the cover page of this Prospectus, and to
certain dealers at these prices less a concession of [ ]% per Class A
Certificate and [ ]% per Class B Certificate; that the Underwriters and these
dealers may allow a discount of [ ]% per Class A Certificate and [.]% per Class
B Certificate on the sale to certain other dealers; and that after the initial
public offering of the Certificates, the public offering prices and the
concessions and discounts to dealers may be changed by the Underwriters.
Until the distribution of the Certificates is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters and
certain selling group members to bid for and purchase the Certificates. As an
exception to these rules, the Underwriters are permitted to engage in certain
transactions that stabilize the prices of the Certificates. These transactions
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of such Certificates.
In general, purchases of a security for the purpose 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 purchases for these purposes.
Neither the Depositor nor either Underwriter makes any representation
or prediction as to the direction or magnitude of any effect that the
transactions described above may have on the prices of the Certificates. In
addition, neither the Depositor nor either Underwriter makes any representation
that either Underwriter will engage in these transactions or that these
transactions, once commenced, will not be discontinued without notice.
Deutsche Banc Securities Inc. is an affiliate of the Depositor and the
Seller.
This Prospectus Supplement may be used by Deutsche Banc Securities
Inc., an affiliate of the Depositor, in connection with offers and sales
relating to market-making transactions in the Certificates in which Deutsche
Banc Securities Inc. acts as principal. Deutsche Banc Securities Inc. may also
act as agent in such transactions. Sales will be made at prices related to the
prevailing prices at the time of sale.
The Depositor has agreed to indemnify the Underwriters against
particular liabilities, including civil liabilities under the Securities Act, or
contribute to payments which the Underwriters may be required to make in respect
of these liabilities. In the opinion of the Commission, this indemnification is
against public policy as expressed in the Securities Act and, may, therefore, be
unenforceable.
The Trustee or the Collateral Agent, as applicable, may, from time to
time, invest the funds in the Trust Accounts in Eligible Investments acquired
from either of the Underwriters.
RATINGS
It is a condition to the issuance of the Class A Certificates that the
Class A Certificates be rated "AAA" by Standard & Poor's Ratings Services, a
division of The McGraw-Hill Companies, Inc. ("S&P") and "Aaa" by Moody's
Investors Service, Inc. ("Moody's") (each, a "Rating Agency"). It is a condition
to the issuance of the Class B Certificates that the Class B Certificates be
rated at least "AA" by S&P and "A3" by Moody's. The ratings of the Class A
Certificates will be based primarily on the Receivables, the Reserve Account,
and the terms of the Certificates, including the subordination provided by the
Class B Certificates. The ratings of the Class B Certificates will be based
primarily on the Receivables and the Reserve Account. The ratings of the
Certificates should be evaluated independently from similar ratings on other
types of securities. The ratings do not address the possibility that
Certificateholders may suffer a lower than anticipated yield.
There can be no assurance that any rating will remain in effect for
any given period of time or that a rating will not be lowered or withdrawn by
the assigning Rating Agency if, in its judgment, circumstances so warrant. In
the event that the rating initially assigned to any of the Certificates is
subsequently lowered or withdrawn for any reason, no person or entity will be
obligated to provide any additional credit enhancement with respect to these
certificates. There can be no assurance whether any other rating agency will
rate any of the Certificates, or if one does, what rating would be assigned by
any other rating agency. A security rating is not a recommendation to buy, sell
or hold securities.
LEGAL MATTERS
Some legal matters relating to the Certificates and some related
federal income tax and other matters will be passed upon for the Seller by [ ].
Some legal matters relating to the Certificates will be passed upon for the
Underwriter and the Company by Stroock & Stroock & Lavan LLP, New York, New
York.
The information in this prospectus supplement is not complete and may be
changed. We may not sell these securities until the registration statement
filed with the Securities and Exchange Commission is effective. This
prospectus supplement is not an offer to sell these securities and it is not
soliciting an offer to buy these securities in any state where the offer or
sale is not permitted.
SUBJECT TO COMPLETION, [ ]
PROSPECTUS SUPPLEMENT (to prospectus dated [ ])
The information in this prospectus supplement is not complete and may be
changed. We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This prospectus
supplement is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sales is not
permitted.
$[ ]
[ ] AUTO TRUST [ ]-[ ]
ISSUER
ACE SECURITIES CORPORATION
DEPOSITOR
[ ]
SERVICER
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-[ ] OF THIS PROSPECTUS
SUPPLEMENT AND ON PAGE [ ] OF THE PROSPECTUS.
For a list of capitalized terms used in this prospectus supplement and the
prospectus, see the index of defined terms beginning on page S-[ ] of this
prospectus supplement and on page [ ] of the prospectus.
The notes will represent interests in the trust fund only and will not represent
interests in or obligations of any other entity.
This prospectus supplement may be used to offer and sell the notes only if
accompanied by the prospectus.
SECURITIES OFFERED
o $[ ], [ ]% asset backed notes
o $[ ], [ ]% asset backed certificates
ASSETS
o Retail automobile receivables
CREDIT ENHANCEMENT
o Subordination of the certificates
o Reserve account
EXPECTED RATINGS
o [ ] or equivalent for the notes
o [ ] or equivalent for the certificates
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS SUPPLEMENT OR THE ATTACHED PROSPECTUS IS ACCURATE OR COMPLETE. MAKING
ANY CONTRARY REPRESENTATION IS A CRIMINAL OFFENSE.
Subject to the satisfaction of certain conditions, the underwriter named
below is offering the notes and certificates at the price to public shown. The
securities will be delivered in book entry form only on or about [ ].
Underwriting
Price to Discounts and Proceeds to
Public Commissions the Depositor(1)
-------- ------------- ----------------
Per Note...................... [ ]% [ ]% [ ]%
Per Certificate............... [ ]% [ ]% [ ]%
Total.........................$[ ] $[ ] $[ ]
_______________
(1) Before deducting expenses, estimated to be $ [ ].
DEUTSCHE BANC ALEX. BROWN
The date of this prospectus supplement is [ ].
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS:
We provide information to you about the securities offered by this
prospectus supplement in two separate documents that progressively provide more
detail: (1) the accompanying prospectus, which provides general information,
some of which may not apply to your securities, and (2) this prospectus
supplement, which describes the specific terms of your securities.
IF INFORMATION VARIES BETWEEN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS, YOU SHOULD RELY ON THE INFORMATION IN THIS PROSPECTUS
SUPPLEMENT.
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We have
not authorized anyone to provide you with different information.
We are not offering the securities in any state where the offer is not
permitted. We do not claim that the information in this prospectus supplement
and prospectus is accurate as of any date other than the dates stated on their
respective covers.
___________________
Dealers will deliver a prospectus supplement and prospectus when acting as
underwriters of the securities and with respect to their unsold allotments or
subscriptions. In addition, all dealers selling the securities will be required
to deliver a prospectus supplement and prospectus for ninety days following the
date of this prospectus supplement.
___________________
We include cross-references in this prospectus supplement and the
accompanying prospectus to captions in these materials where you can find
further related discussions. The following table of contents and the table of
contents included in the accompanying prospectus provide the pages on which
these captions are located.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
Caption Page
- ------- ----
Summary of Terms..............................................................S-
Risk Factors..................................................................S-
Formation of the Trust........................................................S-
The Trust Property............................................................S-
The Receivables Pool..........................................................S-
The Servicer..................................................................S-
Weighted Average Life of the Securities.......................................S-
Use of Proceeds...............................................................S-
Description of the Notes......................................................S-
Description of the Certificates...............................................S-
Description of the Transfer and Servicing Agreements..........................S-
Federal Income Tax Consequences...............................................S-
State and Local Tax Consequences..............................................S-
Erisa Considerations..........................................................S-
Underwriting..................................................................S-
Legal Matters.................................................................S-
PROSPECTUS
Caption Page
- ------- ----
Risk Factors....................................................................
The Trusts......................................................................
The Trustee.....................................................................
The Receivables Pools...........................................................
The Collateral Certificates.....................................................
The Government Securities.......................................................
Weighted Average Life of the Securities.........................................
Pool Factors and Trading Information............................................
The Seller and the Servicer.....................................................
Use of Proceeds.................................................................
Description of Notes............................................................
Description of the Certificates.................................................
Certain information Regarding the Securities....................................
Description of the Transfer and Servicing Agreements............................
Certain Matters Regarding the Servicer..........................................
Certain Legal Aspects of the Receivables........................................
Material Federal Income Tax Consequences........................................
State and Local Tax Consequences................................................
ERISA Considerations............................................................
Plan of Distribution............................................................
Legal Matters...................................................................
Prospectus Supplement...........................................................
Reports to Securityholders......................................................
Available Information...........................................................
Incorporation of Certain Documents by Reference.................................
Index of Terms..................................................................
Annex 1 - Global Clearance, Settlement and Tax Documentation Procedures.........
SUMMARY OF TERMS
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROSPECTUS
SUPPLEMENT AND DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU NEED TO CONSIDER
IN MAKING YOUR INVESTMENT DECISION. TO UNDERSTAND ALL OF THE TERMS OF THE
OFFERING OF THE SECURITIES, IT IS NECESSARY THAT YOU READ CAREFULLY THIS ENTIRE
PROSPECTUS SUPPLEMENT AND ACCOMPANYING PROSPECTUS.
WHILE THIS SUMMARY CONTAINS AN OVERVIEW OF CERTAIN CALCULATIONS, CASH FLOW
PRIORITIES, AND OTHER INFORMATION TO AID YOUR UNDERSTANDING, YOU SHOULD READ
CAREFULLY THE FULL DESCRIPTION OF THESE CALCULATIONS, CASH FLOW PRIORITIES AND
OTHER INFORMATION IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
BEFORE MAKING ANY INVESTMENT DECISION.
ISSUER........................[ ] Auto Trust [ ]-[ ], a limited purpose Delaware
business trust.
DEPOSITOR.....................Ace Securities Corporation.
SERVICER......................[ ].
SELLER........................[ ].
OWNER TRUSTEE.................[ ].
INDENTURE TRUSTEE.............[ ].
CLOSING DATE..................On or about [ ].
CUT-OFF DATE..................The [close] [opening] of business on [ ].
DISTRIBUTION DATES............[ ] of each month or the next business day if the
[ ] day is not a business day, beginning in [ ].
RECORD DATES..................Last day of the month prior to a distribution
date.
MINIMUM DENOMINATIONS........$25,000.
FORM.........................Book-entry.
INTEREST ACCRUAL METHOD......30/360.
FINAL SCHEDULED
DISTRIBUTION DATE..........[ ] for the notes and [ ] for the certificates.
THE RECEIVABLES
The receivables are amounts owed by individuals under retail installment
sale contracts to purchase or refinance new or used automobiles, recreational
vehicles, including motor homes, campers, boats, boat motors, motorcycles, jet
skis, waverunners, all-terrain-vehicles and snowmobiles, vans trucks, buses and
trailers.
The depositor expects that the receivables will have the following
characteristics as of [ ]. As of the closing date, no more than 5% of the
receivables will have characteristics that differ from those described in this
prospectus supplement as of [ ].
Number of contracts [ ]
Principal Amount $[ ]
Annual Percentage Rates [ ]% to [ ]%
Weighted Average Annual Percentage Rate [ ]%
Original term [ ] months to [ ] months
Weighted Average original term [ ] months
Remaining term [ ] months to [ ] months
Weighted Average remaining term [ ] months
New [ ]%
Used [ ]%
States
[ ] [ ]%
[ ] [ ]%
Balloon Loans [ ]%
[For approximately [ ]% of the principal amount of the receivables, the amount
of the receivable was more than the value of the financed vehicle at the time
the loan was made.]
INTEREST DISTRIBUTIONS
On each distribution date, if the trust has sufficient cash, it will pay
you the interest accrued on your securities during the related interest period.
Interest periods begin on the prior distribution date and run through the day
before the current distribution date. The first interest period, however, begins
on the closing date and runs through the day before the first distribution date.
We will assume that each year has 360 days.
PRINCIPAL DISTRIBUTIONS
The trust will pay all principal collections to the noteholders until the
notes are paid in full. The trust will not pay any principal collections to the
certificateholders until the notes are paid in full.
RESERVE ACCOUNT
There will be a reserve account to help cover cash flow shortfalls.
Initially, the account will be $[ ]. On each distribution date amounts remaining
after distribution of the total servicing fee and amounts to be paid to the
noteholders and certificateholders will be deposited in the reserve account
until the amount equals a specified amount.
OPTIONAL TERMINATION
When the principal amount of the receivables is 10% or less than it was on
the cut-off date, the servicer may buy the receivables. If the servicer does not
do so, the indenture trustee will try to sell the receivables to another buyer.
In either case, you must receive the principal amount of your securities and all
accrued but unpaid interest or the receivables will not be sold.
TAX CONSEQUENCES
Stroock & Stroock & Lavan LLP, special federal tax counsel to the trust, is
of the opinion that, for federal income tax purposes the notes will constitute
indebtedness and the certificates will constitute interests in a trust fund that
will not be treated as an association taxable as a corporation or publicly
traded partnership taxable as a corporation. The trust and holders of the
certificates will agree by their purchase of certificates, if there is more than
one holder of the certificates, to treat the trust as a partnership for purposes
of federal and state income tax, franchise tax and any other tax measured in
whole or in part by income, with the assets of the partnership being the assets
held by the trust, the holders of the certificates as partners of the
partnership and the notes as debt of the partnership, and if there is one holder
of certificates, to treat that holder as the owner of the assets of the trust
and to treat the trust as a disregarded entity.
The tax code is complex, and we recommend that you and your tax advisors
review the information under the caption "Federal Income Tax Consequences" in
this prospectus supplement and under the caption "Material Federal Income Tax
Consequences" in the prospectus.
ERISA CONSIDERATIONS
The notes may be purchased by ERISA and other retirement plans if one or
more administrative exemptions apply. The certificates may not be purchased by
ERISA or other retirement plans. SEE "ERISA CONSIDERATIONS" IN THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS.
RISK FACTORS
THE FOLLOWING INFORMATION, WHICH YOU SHOULD CAREFULLY CONSIDER, IDENTIFIES
CERTAIN SIGNIFICANT SOURCES OF RISK ASSOCIATED WITH AN INVESTMENT IN THE
SECURITIES.
YOU MAY HAVE DIFFICULTY SELLING The securities will not be listed on any
YOUR SECURITIES securities exchange. As a result, if you
want to sell your securities you must
locate a purchaser that is willing to
purchase those securities. The
underwriter intends to make a secondary
market for the securities. The
underwriter will do so by offering to
buy the securities from investors that
wish to sell. However, the underwriter
will not be obligated to make offers to
buy the securities and may stop making
offers at any time. In addition, the
prices offered, if any, may not reflect
prices that other potential purchasers,
were they to be given the opportunity,
would be willing to pay. There have been
times in the past where there have been
very few buyers of asset backed
securities, and there may be such times
in the future. As a result, you may not
be able to sell your securities when you
want to do so or you may not be able to
obtain the price that you wish to
receive.
CERTAIN FEATURES OF THE RECEIVABLES There are a number of features of the
POOL MAY RESULT IN LOSSES. receivables in the pool that create
additional risk of loss, including the
following:
CERTAIN OBLIGORS HAVE LITTLE EQUITY For approximately [ ]% of the principal
IN THEIR FINANCED VEHICLES WHICH MAY amount of the receivables, the original
RESULT IN MORE SEVERE LOSSES. principal amount of the loan exceeded
the cost of the related vehicle.
Although each such obligor was required
to make a downpayment from the obligor's
own funds, those obligors have no equity
in their vehicles. While those borrowers
had excellent credit histories at the
time, the lack of any equity in the
vehicle may make it more likely that
those obligors will default if their
personal financial conditions change. In
addition, if such an obligor defaults
and the vehicle is repossessed, the
trust is likely to suffer a loss.
THE CONCENTRATION OF THE RECEIVABLES Economic conditions in the states where
IN SPECIFIC GEOGRAPHIC AREAS MAY obligors reside may affect the
INCREASE THE RISK OF LOSS. delinquency, loan loss and repossession
experience of the trust with respect to
the receivables. As of the cut-off date,
the billing addresses of the obligors
with respect to approximately [ ]%, [
]%, and [ ]% of the principal amount of
the receivables were located in [ ], [ ]
and [ ], respectively. Economic
conditions in any state or region may
decline over time and from time to time.
Because of the concentration of the
obligors in certain states, any adverse
economic conditions in those states may
have a greater effect on the performance
of the securities than if the
concentration did not exist.
NEWLY ORIGINATED LOANS MAY BE MORE Defaults on automobile loans tend to
LIKELY TO DEFAULT WHICH MAY CAUSE occur at higher rates during the early
LOSSES. years of the automobile loans.
Substantially all of the automobile
loans will have been originated within [
] months prior to the sale to the trust.
As a result, the trust may experience
higher rates of default than if the
automobile loans had been outstanding
for a longer period of time.
BALLOON LOANS MAY HAVE A HIGHER A balloon loan has monthly payments that
RATES OF DEFAULT WHICH MAY CAUSE will not fully pay off the loan balance
LOSSES. by the maturity date. As a result the
borrower usually will have to refinance
the balloon loan in order to pay the
amount due. The borrower may not be able
to refinance the balloon loan for any
number of reasons, including the level
of available interest rates, the age or
condition of the vehicle, or the
borrower's payment or credit history.
The trust will not have any funds to
refinance a balloon loan, and the seller
is not obligated to do so.
CERTIFICATES WILL ABSORB CASH The certificateholders will not receive
SHORTFALLS AND LOSSES BEFORE THE any distribution of interest until the
NOTES. full amount of interest on the notes has
been paid on each distribution date. The
certificateholders will not receive any
distributions of principal until the
notes have been repaid in full. Holders
of the certificates must rely for
repayment upon payments on the
receivables, and, if and to the extent
available, amounts on deposit in the
reserve account. If funds in the reserve
account are exhausted, the trust will
depend solely on current distributions
on the receivables to make payments on
the securities. Delinquent payments on
the receivables may result in a
shortfall in the distributions on the
certificates on any distribution date
due to the priority of payments on the
notes. Although on each distribution
date distributions of interest on the
certificates ranks senior to payments of
principal of the notes, after an event
of default or an acceleration of the
notes, the principal amount of the notes
must be paid in full prior to the
distribution of any amounts on the
certificates.
YOUR YIELD TO MATURITY MAY BE The pre-tax yield to maturity is
REDUCED BY PREPAYMENTS uncertain and will depend on a number of
factors including the following:
THE RATE OF RETURN OF PRINCIPAL IS The amount of distributions of principal
UNCERTAIN. of the securities and the time when you
receive those distributions depends on
the amount and the times at which
borrowers make principal payments on the
receivables. Those principal payments
may be regularly scheduled payments or
unscheduled payments resulting from
prepayments or defaults of the
receivables.
YOU MAY BE UNABLE TO REINVEST Asset backed securities, like the
DISTRIBUTIONS IN COMPARABLE securities, usually produce more returns
INVESTMENTS. of principal to investors when market
interest rates fall below the interest
rates on the receivables and produce
less returns of principal when market
interest rates are above the interest
rates on the receivables. As a result,
you are likely to receive more money to
reinvest at a time when other
investments generally are producing a
lower yield than that on the securities,
and are likely to receive less money to
reinvest when other investments
generally are producing a higher yield
than that on the securities. You will
bear the risk that the timing and amount
of distributions on your securities will
prevent you from attaining your desired
yield.
AN EARLY TERMINATION WILL SHORTEN If the receivables are sold upon
THE LIFE OF YOUR INVESTMENT WHICH exercise of the servicer's optional
MAY REDUCE YOUR YIELD TO MATURITY. termination or the auction call, you
will receive the principal amount of
your securities plus accrued interest
through the related interest period.
Because your securities will no longer
be outstanding, you will not receive the
additional interest payments that you
would have received had the securities
remained outstanding. If you bought your
securities at par or at a premium, your
yield to maturity will be lower than it
would have been if the optional
termination or auction call had not been
exercised.
WITHDRAWAL OR DOWNGRADING OF INITIAL A security rating is not a
RATINGS WILL REDUCE THE PRICES FOR recommendation to buy, sell or hold
SECURITIES securities. Similar ratings on different
types of securities do not necessarily
mean the same thing. You are encouraged
to analyze the significance of each
rating independently from any other
rating. Any rating agency may change its
rating of the securities after those
securities are issued if that rating
agency believes that circumstances have
changed. Any subsequent change in rating
will likely reduce the price that a
subsequent purchaser will be willing to
pay for the securities.
THE SECURITIES ARE NOT SUITABLE The securities are not a suitable
INVESTMENTS FOR ALL INVESTORS investment for any investor that
requires a regular or predictable
schedule of payments or payment on any
specific date. The securities are
complex investments that should be
considered only by investors who, either
alone or with their financial, tax and
legal advisors, have the expertise to
analyze the prepayment, reinvestment,
default and market risk, the tax
consequences of an investment, and the
interaction of these factors.
FORMATION OF THE TRUST
THE TRUST
[ ] Auto Trust [ ]-[ ] is a business trust to be formed by the Depositor
under the laws of the State of Delaware pursuant to the Trust Agreement for the
transactions described in the Prospectus. After its formation, the Trust will
not engage in any activity other than
(1) acquiring, holding and managing the Receivables and the other assets
of the Trust and proceeds therefrom,
(2) issuing the Certificates and the Notes,
(3) making payments on the Certificates and the Notes and
(4) engaging in other activities that are necessary, suitable or
convenient to accomplish the foregoing or are incidental thereto or
connected therewith.
The Trust will initially be capitalized with equity of $[ ], excluding
amounts deposited in the Reserve Account, representing the initial principal
balance of the Certificates. The Notes and Certificates will be transferred by
the Trust to the Depositor in exchange for the Receivables. The Certificates and
the Notes will be sold to the Underwriter for cash. The Servicer will initially
service the Receivables pursuant to a sale and servicing agreement, to be dated
as of [ ] (the "Sale and Servicing Agreement"), among the Seller, the Depositor,
the Trust and the Servicer, and will be compensated for acting as the Servicer.
See "Description of the Transfer and Servicing Agreements--Servicing
Compensation" in this prospectus supplement and "--Servicing Compensation and
Payment of Expenses" in the Prospectus. To facilitate servicing and to minimize
administrative burden and expense, the Servicer will be appointed custodian for
the Receivables by the Trust, but will not stamp the Receivables to reflect the
sale and assignment of the Receivables to the Trust, nor amend the certificates
of title of the Financed Vehicles.
If the protection provided to the investment of the Securityholders in the
Trust by the Reserve Account is insufficient, the Trust will look to the
Obligors on the Receivables, and the proceeds from the repossession and sale of
Financed Vehicles which secure defaulted Receivables. In such event, there may
not be sufficient funds to make distributions with respect to the Securities.
The Trust's principal offices are in [ ], in care of [ ], as Owner Trustee,
at the address listed below under "--The Owner Trustee."
CAPITALIZATION OF THE TRUST
The following table illustrates the capitalization of the Trust as of the
Cut-off Date, as if the issuance and sale of the Notes and the Certificates had
taken place on such date:
Notes .............................$[ ]
Certificates.......................$[ ]
Total.........................$[ ]
THE OWNER TRUSTEE
[ ] is the Owner Trustee under the Trust Agreement. [ ] is a [ ] and its
principal offices are located at [ ], [ ]. The Owner Trustee will perform
limited administrative functions under the Trust Agreement, including making
distributions from the Certificate Distribution Account. The Owner Trustee's
liability in connection with the issuance and sale of the Certificates and the
Notes is limited solely to the express obligations of the Owner Trustee set
forth in the Trust Agreement.
THE TRUST PROPERTY
The Notes will be collateralized by the Trust Property (other than the
Certificate Distribution Account). Each Certificate represents a fractional
undivided interest in the Trust. The "Trust Property" will include the
Receivables, which were originated indirectly by Dealers and purchased
indirectly by the Seller pursuant to agreements with Dealers ("Dealer
Agreements"). On the Closing Date, the Depositor will buy the Receivables from
the Seller and the Depositor will sell the Receivables to the Trust. The
Servicer will, directly or through subservicers, service the Receivables. The
Trust Property also includes:
o all monies received under the Receivables on and after the Cut-off
Date and, with respect to Receivables which are Actuarial Receivables,
monies received thereunder prior to the Cut-off Date that are due on
or after the Cut-off Date;
o such amounts as from time to time may be held in the Collection
Account, the Reserve Account, the Payahead Account, the Note
Distribution Account and the Certificate Distribution Account,
established and maintained by the Servicer pursuant to the Sale and
Servicing Agreement as described below;
o security interests in the Financed Vehicles;
o the rights of the Seller to receive proceeds from claims under certain
insurance policies;
o the rights of the Trust under the Sale and Servicing Agreement;
o the rights of the Seller to refunds for the costs of extended service
contracts and to refunds of unearned premiums with respect to credit
life and credit accident and health insurance policies covering the
Financed Vehicles or the retail purchasers of, or other persons owing
payments on, the Financed Vehicles (the "Obligors");
o all right, title and interest of the Seller (other than with respect
to any Dealer commission) with respect to the Receivables under the
related Dealer Agreements;
o rights with respect to any repossessed Financed Vehicles; and
o all proceeds (within the meaning of the UCC) of the foregoing.
The Reserve Account will be maintained in the name of the Indenture Trustee
for the benefit of the Noteholders and the Certificateholders.
THE RECEIVABLES POOL
POOL COMPOSITION
The Receivables were selected from the Seller's portfolio by several
criteria, including, as of the Cut-off Date, the following:
1. each Receivable has a scheduled maturity of not later than the Final
Scheduled Maturity Date;
2. each Receivable was originated in the United States of America;
3. each Receivable has an original term to maturity of not more than [ ]
months and a remaining term to maturity of [ ] months or less as of
the Cut-off Date;
4. approximately [ ]% of the Initial Pool Balance was secured by new
Financed Vehicles, and approximately [ ]% of the Initial Pool Balance
was secured by used Financed Vehicles;
5. each Receivable provides for level monthly payments which fully
amortize the amount financed except, in the case of Simple Interest
Receivables, for the last payment, which may be different from the
level payment;
6. each Receivable is not more than [ ] days contractually past due as of
the Cut-off Date and is not more than [ ] months paid ahead;
7. each Receivable has an outstanding principal balance between $[ ] and
$[ ];
8. and each Receivable has an APR of no less than [ ]%.
As of the Cut-off Date, no Obligor on any Receivable was noted in the
related records of the Servicer as being the subject of any pending bankruptcy
or insolvency proceeding. The latest scheduled maturity of any Receivable is not
later than [ ]. No selection procedures believed by the Depositor to be adverse
to Certificateholders or the Noteholders were used in selecting the Receivables.
The Depositor considers an account past due if any portion of the payment
due on a due date is not received by the succeeding due date for that account.
The composition, distribution by remaining term, distribution by APR,
geographic distribution and distribution by remaining principal of the
Receivables, in each case, as of the Cut-off Date are set forth in the tables
below. The percentages in the following tables may not add to 100% due to
rounding.
COMPOSITION OF THE RECEIVABLES AS OF THE CUT-OFF DATE
NEW FINANCED USED FINANCED
VEHICLES VEHICLES TOTAL
------------ ------------- -------------
Aggregate Principal Balance........$ $ $
Number of Receivables..............
Average Principal Balance..........$ $ $
Average Original Balance...........$ $ $
Weighted Average Contract Rate.....%
Contract Rate (Range)..............%- % %- % %- %
Weighted Average Original Term.....months months months
Original Term (Range)..............to months to months to months
Weighted Average Remaining Term....months months months
Remaining Term (Range).............to months to months to months
DISTRIBUTION BY REMAINING TERM OF THE RECEIVABLES AS OF THE CUT-OFF DATE
Remaining Term Number of Aggregate Principal Percentage of Original
(Range) Receivables Balance Pool Balance
- -------------- ----------- ------------------- ----------------------
Less than 30 months.... $ %
30 to 35 months........
36 to 41 months........
42 to 47 months........
48 to 53 months........
54 to 59 months........
60 to 65 months........
66 to 71 months........
72 to 77 months........
78 t o 89 months.......
----------- ------------------- ----------------------
Total.................. $ 100.00%
=========== =================== ======================
DISTRIBUTION BY ANNUAL PERCENTAGE RATE
OF THE RECEIVABLES AS OF THE CUT-OFF DATE
Annual Percentage Number of Aggregate Principal Percentage of Original
Rate Range Receivables Balance Pool Balance
- ----------------- ----------- ------------------- ----------------------
8.00% to below......... $ %
8.00% to 8.99%.........
9.00% to 9.99%.........
10.00% to 10.99%.......
11.00% to 11.99%.......
12.00% to 12.99%.......
13.00% to 13.99%.......
14.00% to 14.99%.......
15.00% to 15.99%.......
16.00% to 16.99%.......
17.00% to 17.99%.......
18.00% to 18.99%.......
19.00% to 19.99%.......
20.00% to 20.99%.......
21.00% to 21.99%.......
22.00% and above.......
----------- ------------------- ----------------------
Total.................. $ 100.00%
=========== =================== ======================
GEOGRAPHIC DISTRIBUTION OF THE RECEIVABLES AS OF THE CUT-OFF DATE
Number of Aggregate Principal Percentage of Original
State(1) Receivables Balance Pool Balance
- -------- ----------- ------------------- ----------------------
[ ]............... $ %
[ ]...............
[ ]...............
[ ]...............
[ ]...............
[ ]...............
[ ]...............
[ ]...............
Others (2).............
----------- ------------------- ----------------------
Total.................. $ 100.00%
=========== =================== ======================
______________
(1) Based on billing addresses of the Obligors as of the Cut-off Date, which
may differ from the state of origination of the Receivable.
(2) Includes [ ] other states and [ ] none of which have a concentration of
Receivables in excess of [ ]% of the aggregate principal balance.
DISTRIBUTION BY REMAINING PRINCIPAL BALANCE OF
THE RECEIVABLES AS OF THE CUT-OFF DATE
Remaining Principal Number of Aggregate Principal Percentage of Original
Balance (Range) Receivables Balance Pool Balance
- ------------------- ----------- ------------------- ----------------------
$ 2,500 to $ 4,999..... $ %
$ 5,000 to $ 7,499.....
$ 7,500 to $ 9,999.....
$10,000 to $12,499.....
$12,500 to $14,999.....
$15,000 to $17,499.....
$17,500 to $19,999.....
$20,000 to $22,499.....
$22,500 to $24,999.....
$25,000 to $27,499.....
$27,500 to $29,999.....
$30,000 to $32,499.....
$32,500 to $34,999.....
$35,000 to $37,499.....
$37,500 to $39,999.....
$40,000 to $41,499.....
$42,500 to $44,999.....
$45,000 to $47,499.....
$47,500 to $49,999.....
$50,000 to $52,499.....
$52,500 to $54,999.....
----------- ------------------- ----------------------
Total.................. $ 100.00%
=========== =================== ======================
As of the Cut-off Date, approximately [ ]% of the aggregate principal
balance of the Receivables, constituting [ ]% of the number of Receivables, were
between 1 payment and [ ] payments paid-ahead.
As of the Cut-off Date, approximately [ ]% of the aggregate principal
balance of the Receivables, constituting [ ]% of the number of Receivables, are
Actuarial Receivables. "Actuarial Receivables" are receivables that provide for
amortization of the amount financed over a series of fixed, level-payment
monthly installments. Each monthly installment, including the monthly
installment representing the final payment on the Receivable, consists of an
amount of interest equal to 1/12 of the Annual Percentage Rate ("APR") of the
amount financed multiplied by the unpaid principal balance of the amount
financed, and an amount of principal equal to the remainder of the monthly
payment.
As of the Cut-off Date, approximately [ ]% of the aggregate principal
balance of the Receivables, constituting [ ]% of the number of Receivables, are
Simple Interest Receivables. "Simple Interest Receivables" are receivables that
provide for the amortization of the amount financed under the receivable over a
series of fixed level monthly payments. However, unlike the monthly payment
under an Actuarial Receivable, each monthly payment includes an installment of
interest which is calculated on the basis of the outstanding principal balance
of the receivable multiplied by the stated APR and further multiplied by the
period elapsed (as a fraction of a calendar year) since the preceding payment of
interest was made. As payments are received under a Simple Interest Receivable,
the amount received is applied first to interest accrued to the date of payment
and the balance is applied to reduce the unpaid principal balance. Accordingly,
if an Obligor pays a fixed monthly installment before its scheduled due date,
the portion of the payment allocable to interest for the period since the
preceding payment was made will be less than it would have been had the payment
been made as scheduled, and the portion of the payment applied to reduce the
unpaid principal balance will be correspondingly greater. Conversely, if an
Obligor pays a fixed monthly installment after its scheduled due date, the
portion of the payment allocable to interest for the period since the preceding
payment was made will be greater than it would have been had the payment been
made as scheduled, and the portion of the payment applied to reduce the unpaid
principal balance will be correspondingly less. In either case, the Obligor pays
a fixed monthly installment until the final scheduled payment date, at which
time the amount of the final installment is increased or decreased as necessary
to repay the then outstanding principal balance.
If an Actuarial Receivable is prepaid in full, with minor variations based
upon state law, under the terms of the motor vehicle retail installment sale
contract or loan agreement, as the case may be, a "refund" or "rebate" will be
made to the borrower of the portion of the total amount of payments then due and
payable under such contract or agreement allocable to "unearned" interest,
calculated on the basis of a constant interest rate. If a Simple Interest
Receivable is prepaid, rather than receive a rebate, the borrower is required to
pay interest only to the date of prepayment. The amount of a rebate under an
Actuarial Receivable generally will be less than the remaining scheduled
payments of interest that would have been due under a Simple Interest Receivable
for which all payments were made on schedule.
The Servicer may accede to an Obligor's request to pay scheduled payments
in advance, in which event the Obligor will not be required to make another
regularly scheduled payment until the time a scheduled payment not paid in
advance is due. The amount of any payment (which are not amounts representing
Payaheads) made in advance will be treated as a principal prepayment and will be
distributed as part of the Principal Distribution Amount in the month following
the Collection Period in which the prepayment was made. See "Maturity and
Prepayment Considerations" in the Prospectus.
THE SERVICER
The Servicer is [ ]. [Insert description of the Servicer.]
DELINQUENCY EXPERIENCE
(DOLLARS IN THOUSANDS)
At December 31,
-------------------------------------------------------------------------------------------------------------
[ ] [ ] [ ] [ ] [ ]
--------------------- --------------------- --------------------- --------------------- ---------------------
Number Number Number Number Number
of of of of of
Loans Dollars Percent Loans Dollars Percent Loans Dollars Percent Loans Dollars Percent Loans Dollars Percent
----- ------- ------- ----- ------- ------- ----- ------- ------- ----- ------- ------- ----- ------- -------
Principal Amount
Outstanding (1)....
Delinquencies (2)...
30-59 Days.........
60-89 Days.........
90-119 Days........
over 120 days......
Total Delinquencies
as a Percentage of
the Total Amount
Outstanding........
______________
(1) Principal Amount Outstanding is the aggregate remaining principal balance
of all Receivables serviced, net of unearned interest.
(2) The period of delinquency is based on the number of days scheduled payments
are contractually past due. Includes repossessions on hand which have not
been charged-off. A receivable is 30 days contractually past due if a
scheduled payment has not been received by the subsequent calendar month's
scheduled payment date.
[WEIGHTED AVERAGE LIFE OF THE SECURITIES]
[Prepayments on automotive receivables can be measured relative to a
prepayment standard or model. The model used in this Prospectus, the Absolute
Prepayment Model ("ABS"), represents an assumed rate of prepayment each month
relative to the original number of receivables in a pool of receivables. ABS
further assumes that all the receivables are the same size and amortize at the
same rate and that each receivable in each month of its life will either be paid
as scheduled or be prepaid in full. For example, in a pool of receivables
originally containing 10,000 receivables, a 1% ABS rate means that 100
receivables prepay each month. ABS does not purport to be an historical
description of prepayment experience or a prediction of the anticipated rate of
prepayment of any pool of receivables, including the Receivables.
As the rate of payment of principal of the Notes and in respect of the
Certificate Balance will depend on the rate of payment (including prepayments)
of the principal balance of the Receivables, final payment of the Notes could
occur significantly earlier than the Final Scheduled Maturity Date for the
Notes. The final distribution in respect of the Certificates also could occur
prior to the Final Scheduled Distribution Date for the Certificates.
Reinvestment risk associated with early payment of the Notes and the
Certificates will be borne exclusively by the Noteholders and the
Certificateholders, respectively.
The table captioned "Percent of Initial Note Principal Balance or Initial
Certificate Balance at Various ABS Percentages" (the "ABS Table") has been
prepared on the basis of the characteristics of the Receivables. The ABS Table
assumes that
(1) the Receivables prepay in full at the specified constant percentage of
ABS monthly, with no defaults, losses or repurchases,
(2) each scheduled monthly payment on the Receivables is made on the last
day of each month and each month has 30 days,
(3) payments on the Notes and distributions on the Certificates are made
on each Distribution Date (and each such date is assumed to be the [ ]
day of each applicable month),
(4) the balance in the Reserve Account on each Distribution Date is equal
to the Specified Reserve Account Balance, and
(5) the Servicer does not exercise its option to purchase the Receivables.
The first two pools have an assumed cut-off date of [ ] and the
remaining pools have an assumed cut-off date of [ ].
The ABS Table sets forth the percent of the initial principal amount of the
Notes and the percent of the initial Certificate Balance that would be
outstanding after each of the Distribution Dates shown and the corresponding
weighted average lives thereof at various constant ABS percentages.
The ABS Table also assumes that the Receivables have been aggregated into
four hypothetical pools with all of the Receivables within each such pool having
the following characteristics and that the level scheduled monthly payment for
each of the four pools (which is based on its aggregate principal balance, APR,
original term to maturity as of the Cut-off Date) will be such that each pool
will fully amortize by the end of its remaining term to maturity.
REMAINING TERM WEIGHTED AVERAGE WEIGHTED AVERAGE
TO MATURITY WEIGHTED ORIGINAL TERM REMAINING TERM TO
RANGE AGGREGATE AVERAGE TO MATURITY MATURITY
POOL (IN MONTHS) PRINCIPAL BALANCE CONTRACT RATE (IN MONTHS) (IN MONTHS)
---- -------------- ----------------- ------------- ---------------- -----------------
1................. $ %
2................. $ %
3................. $ %
4................. $ %
The actual characteristics and performance of the Receivables will differ
from the assumptions used in constructing the ABS Table. The assumptions used
are hypothetical and have been provided only to give a general sense of how the
principal cash flows might behave under varying prepayment scenarios. For
example, it is very unlikely that the Receivables will prepay at a constant
level of ABS until maturity or that all of the Receivables will prepay at the
same level of ABS. Moreover, the diverse terms of Receivables within each of the
four hypothetical pools could produce slower or faster principal distributions
than indicated in the ABS Table at the various constant percentages of ABS
specified, even if the original and remaining terms to maturity of the
Receivables are as assumed. Any difference between such assumptions and the
actual characteristics and performance of the Receivables, or actual prepayment
experience, will affect the percentages of initial balances outstanding over
time and the weighted average lives of the Notes and the Certificates.]
PERCENT OF INITIAL NOTE PRINCIPAL BALANCE AT VARIOUS ABS PERCENTAGES
Notes
----------------------------------------
Assumed ABS Percentage(2)
----------------------------------------
DISTRIBUTION DATES [ ]% [ ]% [ ]% [ ]%
- ------------------ ---------- --------- --------- ---------
Closing Date......................... 100 100 100 100
[ ]...........
[ ]...........
[ ]...........
_________________....................
Weighted Average Life (years)(1).....
______________
(1) The weighted average life of a Note is determined by (i) multiplying the
amount of each principal payment of such Note by the number of years from
the date of the issuance of such Note to the Distribution Date on which
such principal payment is made, (ii) adding the results and (iii) dividing
the sum by the initial principal balance of such Note.
(2) An asterisk "*" means a percent of initial Note principal balance of more
than zero and less than 0.5%.
THE ABS TABLES HAVE BEEN PREPARED BASED ON THE ASSUMPTIONS DESCRIBED ABOVE
(INCLUDING THE ASSUMPTIONS REGARDING THE CHARACTERISTICS AND PERFORMANCE OF THE
RECEIVABLES WHICH WILL DIFFER FROM THE ACTUAL CHARACTERISTICS AND PERFORMANCE
THEREOF) AND SHOULD BE READ IN CONJUNCTION THEREWITH.
PERCENT OF INITIAL CERTIFICATE BALANCE AT VARIOUS ABS PERCENTAGES
Certificates
----------------------------------------
Assumed ABS Percentage
----------------------------------------
DISTRIBUTION DATES [ ]% [ ]% [ ]% [ ]%
- ------------------ ---------- --------- --------- ---------
Closing Date......................... 100 100 100 100
_______________......................
_______________......................
_______________......................
_______________......................
______________
THE ABS TABLES HAVE BEEN PREPARED BASED ON THE ASSUMPTIONS DESCRIBED ABOVE
(INCLUDING THE ASSUMPTIONS REGARDING THE CHARACTERISTICS AND PERFORMANCE OF THE
RECEIVABLES WHICH WILL DIFFER FROM THE ACTUAL CHARACTERISTICS AND PERFORMANCE
THEREOF) AND SHOULD BE READ IN CONJUNCTION THEREWITH.
USE OF PROCEEDS
The net proceeds from the sale of the Securities will be applied by the
Depositor first, to deposit approximately $[ ] into the Reserve Account and
second, the balance to purchase the Receivables and the other Trust Property
from the Seller.
DESCRIPTION OF THE NOTES
The Notes will be issued pursuant to the terms of the Indenture,
substantially in the form filed as an exhibit to the Registration Statement. The
following information summarizes all material provisions of the Notes and the
Indenture. The following summary supplements the description of the general
terms and provisions of the Notes of any given Series and the related Indenture
set forth in the Prospectus, to which description reference is hereby made.
THE NOTES
PAYMENTS OF INTEREST. The Notes will constitute [Fixed Rate] Securities, as
such term is defined under "Certain Information Regarding the Securities--Fixed
Rate Securities" in the Prospectus. Interest on the outstanding principal amount
of the Notes will accrue at the Interest Rate and will be payable to the
Noteholders monthly on each Distribution Date, commencing [ ]. Interest will
accrue from and including the Closing Date (in the case of the first
Distribution Date), or from and including the most recent Distribution Date on
which interest has been paid to but excluding the following Distribution Date
(each representing an "Interest Period"). Interest on the Notes will be
calculated on the basis of a 360 day year consisting of twelve 30 day months.
Interest payments on the Notes will generally be derived from the Total
Distribution Amount remaining after the payment of the Servicing Fee for the
related Collection Period and all accrued and unpaid Servicing Fees for prior
Collection Periods (the "Total Servicing Fee"). See "Description of the Transfer
and Servicing Agreements--Distributions" and "--Credit Enhancement--Reserve
Account" in this prospectus supplement. Interest payments to the Noteholders
will have the same priority. Under certain circumstances, the amount available
for interest payments could be less than the amount of interest payable on the
Notes on any Distribution Date. Interest accrued as of any Distribution Date but
not paid on such Distribution Date will be due on the next Distribution Date,
together with interest on such amount at the Interest Rate.
PAYMENTS OF PRINCIPAL. Principal payments will be made to the Noteholders
on each Distribution Date in an amount equal to the Noteholders' Percentage of
the Principal Distribution Amount in respect of such Collection Period, subject
to certain limitations. Principal payments on the Notes will be generally
derived from the Total Distribution Amount remaining after the payment of the
Total Servicing Fee, the Noteholders' Interest Distributable Amount and the
Certificateholders' Interest Distributable Amount; provided, however, that
following the occurrence and during the continuation of certain Events of
Default or an acceleration of the Notes, the Noteholders will be entitled to be
paid in full before the distributions may be made on the Certificates. See
"Description of the Transfer and Servicing Agreements--Distributions" and
"--Credit Enhancement--Reserve Account" in this prospectus supplement.
The principal balance of the Notes, to the extent not previously paid, will
be due on the Note Final Scheduled Distribution Date. The actual date on which
the aggregate outstanding principal amount of the Notes is paid may be earlier
than the Note Final Scheduled Distribution Date based on a variety of factors.
OPTIONAL REDEMPTION. The Notes will be redeemed in whole, but not in part,
on any Distribution Date on which the Servicer exercises its option to purchase
the Receivables. The Servicer may purchase the Receivables when the Pool Balance
has declined to 5% or less of the Initial Pool Balance. The redemption price
will be equal to the unpaid principal amount of the Notes and the Certificates
plus accrued and unpaid interest thereon. See "Description of the Transfer and
Servicing Agreements--Termination" in the Prospectus.
AUCTION SALE. In the event of an Auction Sale, the Notes will be redeemed
in an amount equal to the unpaid principal amount of the then outstanding Notes
plus accrued and unpaid interest thereon at the Interest Rate. See "Description
of the Transfer and Servicing Agreements--Termination" in the Prospectus.
THE INDENTURE TRUSTEE. [ ] will be the Indenture Trustee under the
Indenture. The Depositor maintains normal commercial banking relations with the
Indenture Trustee.
DESCRIPTION OF THE CERTIFICATES
The Certificates will be issued pursuant to the terms of the Trust
Agreement, substantially in the form filed as an exhibit to the Registration
Statement. The following information summarizes all material provisions of the
Certificates and the Trust Agreement. The following summary supplements the
description of the general terms and provisions of the Certificates of any given
Series and the related Trust Agreement set forth in the Prospectus, to which
description reference is hereby made.
THE CERTIFICATES
DISTRIBUTIONS OF INTEREST. Certificateholders will be entitled to
distributions of interest in an amount equal to accrued interest on the
Certificate Balance at the Pass-Through Rate. Such amounts will be distributable
monthly on each Distribution Date commencing [ ]. [The Certificates will
constitute Fixed Rate Securities, as such term is defined under "Certain
Information Regarding the Securities--Fixed Rate Securities"] in the Prospectus.
That interest entitlement will accrue from and including the Closing Date (in
the case of the first such Distribution Date) or from the most recent
Distribution Date on which interest distributions have been made to but
excluding such Distribution Date and will be calculated on the basis of a
360-day year of twelve 30-day months. Interest distributions with respect to the
Certificates will be funded from the portion of the Total Distribution Amount
remaining after the distribution of the Total Servicing Fee and the Noteholders'
Interest Distributable Amount. On any Distribution Date, the Certificateholders'
Interest Distributable Amount will equal 30 days' interest at the Pass-Through
Rate on the Certificate Balance (or, in the case of the first Distribution Date,
interest accrued from and including the Closing Date to but excluding the first
Distribution Date) plus any amounts due but not paid on previous Distribution
Dates with interest thereon at the Pass-Through Rate. See "Description of the
Transfer and Servicing Agreements--Distributions" and "--Credit
Enhancement--Reserve Account" herein.
DISTRIBUTIONS OF PRINCIPAL PAYMENTS. Certificateholders will be entitled to
distributions of principal on each Distribution Date commencing on the
Distribution Date on which the Notes have been paid in full, in an amount equal
to the Certificateholders' Percentage of the Principal Distribution Amount in
respect of the related Collection Period, subject to certain limitations.
Distributions with respect to principal payments will generally be funded from
the portion of the Total Distribution Amount remaining after the distribution of
the Total Servicing Fee, the Noteholders' Distributable Amount, if any, and the
Certificateholders' Interest Distributable Amount. See "Description of the
Transfer and Servicing Agreement--Distributions" and "--Credit
Enhancement--Reserve Account" in this prospectus supplement.
On and after any Distribution Date on which the Notes have been paid in
full, funds in the Reserve Account will be applied to reduce the Certificate
Balance to zero if, after giving effect to all distributions to the Servicer,
the Noteholders and the Certificateholders on such Distribution Date, the amount
on deposit in the Reserve Account is equal to or greater than the Certificate
Balance.
SUBORDINATION OF CERTIFICATES. The rights of Certificateholders to receive
distributions of interest are subordinated to the rights of Noteholders to
receive payments of interest. In addition, the Certificateholders have no right
to receive distributions of principal until the principal amount of the Notes
has been paid in full. Consequently, funds on deposit in the Collection Account
(including amounts deposited therein from the Reserve Account) will be applied
to the payment of interest on the Notes before distributions of interest on the
Certificates and will be applied to the payment of principal on the Notes before
distributions of principal on the Certificates. In addition, following the
occurrence of certain Events of Default or an acceleration of the Notes, the
Noteholders will be entitled to be paid in full before the Certificateholders
are entitled to any distributions.
OPTIONAL PREPAYMENT. If the Servicer exercises its option to purchase the
Receivables when the Pool Balance declines to 5% or less of the Initial Pool
Balance, Certificateholders will receive an amount in respect of the
Certificates equal to the Certificate Balance together with accrued and unpaid
interest thereon, which distribution will effect early retirement of the
Certificates. See "Description of the Transfer and Servicing
Agreements--Termination" in the Prospectus.
AUCTION SALE. In the event of an Auction Sale, the Certificates will be
prepaid at a price equal to the Certificate Balance plus accrued and unpaid
interest thereon at the Pass-Through Rate. See "Description of the Transfer and
Servicing Agreements--Termination" in the Prospectus.
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
The following information summarizes all material provisions of the Sale
and Servicing Agreement, substantially in the form filed as an exhibit to the
Registration Statement, pursuant to which the Trust is purchasing and the
Servicer is undertaking to service the Receivables and the Trust Agreement
pursuant to which the Trust will be created and the Certificates will be issued
(collectively the "Transfer and Servicing Agreements"). The following summary
supplements the description of the general terms and provisions of the Transfer
and Servicing Agreements set forth in the Prospectus, to which description
reference is hereby made.
SALE AND ASSIGNMENT OF RECEIVABLES
Certain information regarding the conveyance of the Receivables by the
Seller to the Depositor and by the Depositor to the Trust on the Closing Date
pursuant to the Sale and Servicing Agreement is set forth in the Prospectus
under "Description of the Transfer and Servicing Agreements--Sale and Assignment
of Receivables."
ACCOUNTS
[The assets of the Trust will not include a Pre-Funding Account.] All other
Accounts referred to under "Description of the Transfer and Servicing
Agreements--Accounts" in the Prospectus, as well as a Reserve Account, will be
established by the Servicer and maintained with the Indenture Trustee in the
name of the Indenture Trustee on behalf of the Noteholders and the
Certificateholders.
SERVICING COMPENSATION
The Servicer will be entitled to receive a fee (the "Servicing Fee") for
each Collection Period in an amount equal to the product of one-twelfth of [ ]%
per annum for so long as [ ] or an affiliate thereof is the Servicer, and [ ]%
per annum if [ ] or an affiliate thereof is no longer the Servicer (the
"Servicing Fee Rate") and the Pool Balance as of the first day of the Collection
Period. The "Servicing Fee" will also include such other amounts to be paid to
the Servicer as described in the Prospectus. The Servicing Fee, together with
any portion of the Servicing Fee that remains unpaid from prior Distribution
Dates (the "Total Servicing Fee"), will be paid from the Total Distribution
Amount. The Total Servicing Fee will be paid prior to the distribution of any
portion of the Interest Distribution Amount to the Noteholders or the
Certificateholders. See "Description of the Transfer and Servicing
Agreement--Servicing Compensation and Payment of Expenses" in the Prospectus.
DISTRIBUTIONS
DEPOSITS TO THE COLLECTION ACCOUNT. On or before the earlier of the eighth
business day of the month in which a Distribution Date occurs and the fourth
business day preceding such Distribution Date (the "Determination Date"), the
Servicer will calculate the Total Distribution Amount, the Interest Distribution
Amount, the Available Principal, the Principal Distribution Amount, the Total
Servicing Fee, the Noteholders' Interest Distributable Amount, the Noteholders'
Principal Distributable Amount, the Certificateholders' Interest Distributable
Amount, the Certificateholders' Principal Distributable Amount, the Advances, if
any, to be made by the Servicer of interest and principal due on the Actuarial
Receivables, the amount, if any, to be withdrawn from the Payahead Account and
deposited in the Collection Account, the amount, if any, to be withdrawn from
the Reserve Account and deposited in the Collection Account and the amount, if
any, to be withdrawn from the Reserve Account and paid to the Depositor, in each
case, with respect to such Distribution Date.
On or before each Distribution Date, the Servicer will cause the Indenture
Trustee to withdraw from the Payahead Account and
(1) deposit into the Collection Account in immediately available funds,
the portion of Payaheads constituting scheduled payments on Actuarial
Receivables or that are to be applied to prepay Actuarial Receivable
in full and
(2) distribute to the Depositor, in immediately available funds, all
investment earnings on funds in the Payahead Account with respect to
the preceding Collection Period. On or before each Distribution Date
the Servicer will deposit any advances for such Distribution Date into
the Collection Account.
On or before the business day preceding each Distribution Date, the Servicer
will cause the Interest Distribution Amount and the Available Principal for such
Distribution Date to be deposited into the Collection Account. On or before each
Distribution Date, the Servicer shall cause the Indenture Trustee to withdraw
from the Reserve Account and deposit in the Collection Account an amount (the
"Reserve Account Transfer Amount") equal to the lesser of
(x) the amount of cash or other immediately available funds in the
Reserve Account on such Distribution Date (before giving effect
to any withdrawals therefrom relating to such Distribution Date)
or
(y) the amount, if any, by which
(A) the sum of the Total Servicing Fee, the Noteholders'
Interest Distributable Amount, the Certificateholders'
Interest Distributable Amount, the Noteholders' Principal
Distributable Amount and the Certificateholders' Principal
Distributable Amount for such Distribution Date exceeds
(B) the sum of the Interest Distribution Amount and the
Available Principal for such Distribution Date.
The "Interest Distribution Amount" for a Distribution Date will be the sum
of the following amounts with respect to any Distribution Date, computed, with
respect to Simple Interest Receivables, in accordance with the simple interest
method, and with respect to Actuarial Receivables, in accordance with the
actuarial method:
o that portion of all collections on the Receivables allocable to
interest in respect of the preceding Collection Period (including,
with respect to Actuarial Receivables, amounts withdrawn from the
Payahead Account and allocable to interest and excluding amounts
deposited into the Payahead Account and allocable to interest, in each
case, in respect of the preceding Collection Period);
o all proceeds (other than any proceeds from any Dealer commission)
("Liquidation Proceeds") of the liquidation of Liquidated Receivables,
net of expenses incurred by the Servicer in connection with such
liquidation and any amounts required by law to be remitted to the
Obligor on such Liquidated Receivables, to the extent attributable to
interest due thereon, which became Liquidated Receivables during such
Collection Period in accordance with the Servicer's customary
servicing procedures;
o all advances made by the Servicer of interest due on the Actuarial
Receivables in respect of the preceding Collection Period;
o the Purchase Amount of each Receivable that was repurchased by the
Seller or purchased by the Servicer during the preceding Collection
Period to the extent attributable to accrued interest thereon;
o all monies collected, from whatever source (other than any proceeds
from any Dealer commission), in respect to Liquidated Receivables
during any Collection Period following the Collection Period in which
such Receivable was written off, net of the sum of any amounts
expended by the Servicer for the account of the Obligor and any
amounts required by law to be remitted to the Obligor ("Recoveries");
and
o investment earnings for such Distribution Date;
In calculating the Interest Distribution Amount, the following shall be
excluded: all payments and proceeds (including Liquidation Proceeds) of any
Receivables
(1) repurchased by the Seller or purchased by the Servicer, the Purchase
Amount of which has been included in the Interest Distribution Amount
on a prior Distribution Date and
(2) received on Actuarial Receivables and distributed to the Servicer,
with respect to such Distribution Date, as reimbursement for any
unreimbursed advances in accordance with the Sale and Servicing
Agreement.
The "Available Principal" for a Distribution Date will be the sum of the
following amounts with respect to any Distribution Date, computed, with respect
to Simple Interest Receivables, in accordance with the simple interest method,
and, with respect to Actuarial Receivables, in accordance with the actuarial
method:
o that portion of all collections on the Receivables allocable to
principal in respect of the preceding Collection Period (including,
with respect to Actuarial Receivables, amounts withdrawn from the
Payahead Account and allocable to principal and excluding amounts
deposited into the Payahead Account and allocable to principal, in
each case, in respect of the preceding Collection Period);
o Liquidation Proceeds attributable to the principal amount of
Receivables which became Liquidated Receivables during the preceding
Collection Period in accordance with the Servicer's customary
servicing procedures with respect to such Liquidated Receivables;
o all advances made by the Servicer of principal due on the Actuarial
Receivables in respect of the preceding Collection Period;
o to the extent attributable to principal, the Purchase Amount of each
Receivable repurchased by the Seller or purchased by the Servicer
during the preceding Collection Period; and
o partial prepayments on Receivables in respect of the preceding
Collection Period relating to refunds of extended service contracts,
or of physical damage, credit life, credit accident or health
insurance premium, disability insurance policy premiums, but only if
such costs or premiums were financed by the respective Obligor and
only to the extent not included in the first bullet point above.
In calculating the Available Principal, the following shall be excluded: all
payments and proceeds (including Liquidation Proceeds) of any Receivables
(1) repurchased by the Seller or purchased by the Servicer the
Purchase Amount of which has been included in the Available Principal
on a prior Distribution Date, and
(2) received on Actuarial Receivables and distributed to the Servicer,
with respect to such Distribution Date, as reimbursement for any
unreimbursed advances in accordance with the Sale and Servicing
Agreement.
The "Principal Distribution Amount" for a Distribution Date will be the sum
of the following amounts with respect to the preceding Collection Period:
(1) (a) with respect to Simple Interest Receivables, that portion of all
collections on the Receivable allocable to principal in respect of the
preceding Collection Period and (b) with respect to Actuarial
Receivables the sum of
(x) the amount of all scheduled payments allocable to principal due
during the preceding Collection Period and
(y) the portion of all prepayments in full allocable to principal
received during the preceding Collection Period,
in the case of both (a) and (b) without regard to any extensions or
modifications thereof effected after the Cut-off Date, other than with
respect to any extensions or modifications in connection with Cram
Down Losses during such Collection Period;
(2) the principal balance of each Receivable that was repurchased by the
Seller or purchased by the Servicer in each case during the preceding
Collection Period (except to the extent included in (1) above);
(3) the principal balance of each Liquidated Receivable which became such
during the preceding Collection Period (except to the extent included
in (1) above);
(4) partial prepayments on Receivables in respect of the preceding
Collection Period relating to refunds of extended service contracts,
or of physical damage, credit life, credit accident or health
insurance premium, disability insurance policy premiums, but only if
such costs or premiums were financed by the respective Obligor and
only to the extent not included in clause (1) above; and
(5) the aggregate amount of Cram Down Losses during such Collection
Period.
MONTHLY WITHDRAWALS FROM COLLECTION ACCOUNT. On each Distribution Date, the
Servicer shall instruct the Indenture Trustee to withdraw from the Collection
Account and deposit in the Payahead Account in immediately available funds, the
aggregate Payaheads collected during the preceding Collection Period. On each
Distribution Date, the Servicer shall instruct the Indenture Trustee to make the
following withdrawals, based upon the calculations set forth in "Deposits to the
Collection Account" above, deposits and distributions, in the amounts and in the
order of priority specified below, to the extent of the sum of the Interest
Distribution Amount and the Available Principal in respect of such Distribution
Date and the Reserve Account Transfer Amount in respect of such Distribution
Date (the "Total Distribution Amount"):
(1) from the Collection Account to the Servicer, from the Total
Distribution Amount, the Total Servicing Fee;
(2) from the Collection Account to the Note Distribution Account, from
the Total Distribution Amount remaining after the application of clause
(1), the Noteholders' Interest Distributable Amount;
(3) from the Collection Account to the Certificate Distribution
Account, from the Total Distribution Amount remaining after the application
of clauses (1) and (2), the Certificateholders' Interest Distributable
Amount;
(4) from the Collection Account to the Note Distribution Account, from
the Total Distribution Amount remaining after the application of clauses
(1) through (3), the Noteholders' Principal Distributable Amount;
(5) from the Collection Account to the Certificate Distribution
Account, from the Total Distribution Amount remaining after the application
of clauses (1) through (4), the Certificateholders' Principal Distributable
Amount; and
(6) from the Collection Account to the Reserve Account, any amounts
remaining after the application of clauses (1) through (5).
Notwithstanding the foregoing, following the occurrence and during the
continuation of certain Events of Default or an acceleration of the Notes, the
Total Distribution Amount remaining after the application of clauses (1) and (2)
above will be deposited in the Note Distribution Account to the extent necessary
to reduce the principal balance of the Notes to zero.
On each Distribution Date, all amounts on deposit in the Note Distribution
Account will be paid in the following order of priority:
(a) to the Noteholders, accrued and unpaid interest on the outstanding
principal balance of the Notes at the Interest Rate; and
(b) to the Noteholders in reduction of principal until the principal
balance of the Notes has been reduced to zero;
On each Distribution Date, all amounts on deposit in the Certificate
Distribution Account will be distributed to the Certificateholders in the
following order of priority:
(a) to the Certificateholders, accrued and unpaid interest on the
Certificate Balance at the Pass-Through Rate; and
(b) to the Certificateholders in reduction of principal until the
principal balance of the Certificates has been reduced to zero.
RELATED DEFINITIONS
For purposes hereof, the following terms have the following meanings:
"Collection Period" means, with respect to a Distribution Date, (x) in the
case of the initial Distribution Date, the period from and including the Cut-off
Date through and including [ ] and (y) thereafter, the calendar month preceding
the related Distribution Date.
"Cram Down Loss" means, with respect to a Receivable if a court of
appropriate jurisdiction in a bankruptcy or insolvency proceeding shall have
issued an order reducing the amount owed on such Receivable or otherwise
modifying or restructuring the scheduled payments to be made on such Receivable,
an amount equal to
(1) the excess of the principal balance of such Receivable immediately
prior to such order over the principal balance of such Receivable as
so reduced and/or
(2) if such court shall have issued an order reducing the effective rate
of interest on such Receivable, the net present value (using as the
discount rate the higher of the APR on such Receivable or the rate of
interest, if any, specified by the court in such order) of the
scheduled payments as so modified or restructured.
A "Cram Down Loss" shall be deemed to have occurred on the date of issuance of
such order.
The "Pool Balance" at any time will represent the aggregate principal
balance of the Receivables at the end of the preceding Collection Period, after
giving effect to all payments (other than Payaheads) received from Obligors,
Purchase Amounts and advances to be remitted by the Depositor, the Servicer and
the Seller, as the case may be, all for such Collection Period, all losses
realized on Receivables that became Liquidated Receivables during such
Collection Period and all Cram Down Losses for such Collection Period.
"Realized Losses" means the excess of the principal balance of a Liquidated
Receivable over Liquidation Proceeds to the extent allocable to principal.
"Liquidated Receivables" means, Receivables (1) which have been liquidated
by the Servicer through the sale of the related Financed Vehicle, (2) as to
which all or a portion representing 10% or more of a scheduled payment due is
[150] or more days delinquent or (3) with respect to which proceeds have been
received which, in the Servicer's judgment, constitute the final amounts
recoverable in respect of such Receivable.
"Noteholders' Distributable Amount" means, with respect to any Distribution
Date, the sum of the Noteholders' Principal Distributable Amount and the
Noteholders' Interest Distributable Amount.
"Noteholders' Interest Distributable Amount" means, with respect to any
Distribution Date, the sum of the Noteholders' Monthly Interest Distributable
Amount for such Distribution Date and the Noteholders' Interest Carryover
Shortfall for such Distribution Date.
"Noteholders' Monthly Interest Distributable Amount" means, with respect to
any Distribution Date, the product of (x) one-twelfth of the Interest Rate (or,
in the case of the first Distribution Date, the Interest Rate multiplied by a
fraction, the numerator of which is the number of days elapsed from and
including the Closing Date to but excluding such Distribution Date and the
denominator of which is 360) and (y) the outstanding principal balance of the
Notes on the immediately preceding Distribution Date, after giving effect to all
distributions of principal to the Noteholders on such Distribution Date (or, in
the case of the first Distribution Date, on the Closing Date).
"Noteholders' Interest Carryover Shortfall" means, with respect to any
Distribution Date, the excess of the Noteholders' Monthly Interest Distributable
Amount for the preceding Distribution Date and any outstanding Noteholders'
Interest Carryover Shortfall on such preceding Distribution Date over the amount
in respect of interest that is actually deposited in the Note Distribution
Account on such preceding Distribution Date, plus interest on the amount of
interest due but not paid to Noteholders on the preceding Distribution Date, to
the extent permitted by law, at the Interest Rate borne by the Notes from such
preceding Distribution Date through the current Distribution Date.
"Noteholders' Principal Distributable Amount" means, with respect to any
Distribution Date, the sum of the Noteholders' Monthly Principal Distributable
Amount for such Distribution Date and the Noteholders' Principal Carryover
Shortfall as of the close of the preceding Distribution Date; provided, however,
that the Noteholders' Principal Distributable Amount shall not exceed the
outstanding principal balance of the Notes. In addition, on the Note Final
Scheduled Distribution Date, the principal required to be deposited in the Note
Distribution Account will include the amount necessary (after giving effect to
the other amounts to be deposited in the Note Distribution Account on such
Distribution Date and allocable to principal) to reduce the outstanding
principal balance of the Notes to zero.
"Noteholders" Monthly Principal Distributable Amount" means, with respect
to any Distribution Date, the Noteholders' Percentage of the Principal
Distribution Amount.
"Noteholders' Percentage" means (a) for each Distribution Date until the
principal balance of the Notes is reduced to zero, 100%, and (b) zero for each
Distribution Date thereafter.
"Noteholders' Principal Carryover Shortfall" means, as of the close of any
Distribution Date, the excess of the Noteholders' Monthly Principal
Distributable Amount and any outstanding Noteholders' Principal Carryover
Shortfall from the preceding Distribution Date over the amount in respect of
principal that is actually deposited in the Note Distribution Account.
"Certificateholders' Distributable Amount" means, with respect to any
Distribution Date, the sum of the Certificateholders' Principal Distributable
Amount and the Certificateholders' Interest Distributable Amount.
"Certificateholders' Interest Distributable Amount" means, with respect to
any Distribution Date, the sum of the Certificateholders' Monthly Interest
Distributable Amount for such Distribution Date and the Certificateholders'
Interest Carryover Shortfall for such Distribution Date.
"Certificateholders' Monthly Interest Distributable Amount" means, with
respect to any Distribution Date, the product of (x) one-twelfth of the
Pass-Through Rate (or, in the case of the first Distribution Date, the
Pass-Through Rate multiplied by a fraction, the numerator of which is the number
of days elapsed from and including the Closing Date to but excluding such
Distribution Date) and the denominator of which is 360) and (y) the Certificate
Balance on the immediately preceding Distribution Date, after giving effect to
all payments of principal to the Certificateholders on or prior to such
Distribution Date (or, in the case of the first Distribution Date, on the
Closing Date).
"Certificateholders' Interest Carryover Shortfall" means, with respect to
any Distribution Date, the excess of the Certificateholders' Monthly Interest
Distributable Amount for the preceding Distribution Date and any outstanding
Certificateholders' Interest Carryover Shortfall on such preceding Distribution
Date, over the amount in respect of interest at the Pass-Through Rate that is
actually deposited in the Certificate Distribution Account on such preceding
Distribution Date, plus interest on such excess, to the extent permitted by law,
at the Pass-Through Rate from and including such preceding Distribution Date to
but excluding the current Distribution Date.
"Certificateholders' Principal Distributable Amount" means, with respect to
any Distribution Date, the sum of the Certificateholders' Monthly Principal
Distributable Amount for such Distribution Date and the Certificateholders'
Principal Carryover Shortfall as of the close of the preceding Distribution
Date; provided, however, that the Certificateholders' Principal Distributable
Amount shall not exceed the Certificate Balance. In addition, on the Certificate
Final Scheduled Distribution Date, the principal required to be distributed to
Certificateholders will include the lesser of
(a) any payments of principal due and remaining unpaid on each Receivable
in the Trust as of the Final Scheduled Maturity Date or
(b) the portion of the amount that is necessary (after giving effect to
the other amounts to be deposited in the Certificate Distribution
Account on such Distribution Date and allocable to principal) to
reduce the Certificate Balance to zero, in either case after giving
effect to any required distribution of the Noteholders' Principal
Distributable Amount to the Note Distribution Account. In addition, on
any Distribution Date on which, after giving effect to all
distributions to the Servicer, the Noteholders and the
Certificateholders on such Distribution Date,
(1) the outstanding principal balance of the Notes is zero and
(2) the amount on deposit in the Reserve Account is equal to or
greater than the Certificate Balance, the Certificateholders'
Principal Distributable Amount shall include an amount equal to
such Certificate Balance.
"Certificateholders' Monthly Principal Distributable Amount" means, with
respect to any Distribution Date, the Certificateholders' Percentage of the
Principal Distribution Amount or, with respect to any Distribution Date on or
after the Distribution Date on which the outstanding principal balance of the
Notes is reduced to zero, 100% of the Principal Distribution Amount (less any
amount required on the first such Distribution Date to reduce the outstanding
principal balance of the Notes to zero, which shall be deposited into the Note
Distribution Account).
"Certificateholders' Percentage" means 100% minus the Noteholders'
Percentage.
"Certificateholders' Principal Carryover Shortfall" means, as of the close
of any Distribution Date, the excess of the Certificateholders' Monthly
Principal Distributable Amount and any outstanding Certificateholders' Principal
Carryover Shortfall from the preceding Distribution Date, over the amount in
respect of principal that is actually deposited in the Certificate Distribution
Account on such Distribution Date.
"Certificate Balance" equals, initially, $[ ] and, thereafter, equals the
initial Certificate Balance, reduced by all amounts allocable to principal
previously distributed to Certificateholders.
"Pass-Through Rate" means, with respect to the Certificates, [ ]% per
annum.
CREDIT ENHANCEMENT
RESERVE ACCOUNT. Pursuant to the Sale and Servicing Agreement, the Reserve
Account will be created and maintained with the Indenture Trustee. On the
Closing Date, the Depositor will deposit $[ ] ([ ]% of aggregate initial
principal balance of the Notes plus the initial Certificate Balance) (the
"Reserve Account Initial Deposit") in the Reserve Account. The Reserve Account
Initial Deposit will be augmented on each Distribution Date by the deposit in
the Reserve Account of amounts remaining after distribution of the Total
Servicing Fee and amounts to be paid to the Noteholders and Certificateholders.
If the amount on deposit in the Reserve Account on any Distribution Date (after
giving effect to all deposits or withdrawals therefrom on such Distribution
Date) is greater than the Specified Reserve Account Balance for such
Distribution Date, the Servicer will instruct the Indenture Trustee to
distribute the amount of the excess to the Depositor. Upon any distribution to
the Depositor of amounts from the Reserve Account, neither the Noteholders nor
the Certificateholders will have any rights in, or claims to, such amounts. In
certain circumstances, funds in the Reserve Account will be used to reduce the
Certificate Balance to zero.
"Specified Reserve Account Balance" with respect to any Distribution Date
generally means the greater of
(a) [ ]% of the sum of the aggregate outstanding principal amount of the
Notes and the outstanding Certificate Balance on such Distribution
Date (after giving effect to all payments on the Notes and
distributions with respect to the Certificates to be made on such
Distribution Date) or
(b) [ ]% of the aggregate initial principal balance of the Notes plus the
initial Certificate Balance. In no circumstances will the Depositor be
required to deposit any amounts in the Reserve Account other than the
Reserve Account Initial Deposit to be made on the Closing Date.
SUBORDINATION OF THE CERTIFICATES. The rights of the Certificateholders to
receive distributions will be subordinated to the rights of the Noteholders
following the occurrence of certain Events of Default or an acceleration of the
Notes. The subordination of the Certificates is intended to enhance the
likelihood of receipt by Noteholders of amounts due them and to decrease the
likelihood that the Noteholders will experience losses. In addition, the Reserve
Account is intended to enhance the likelihood of receipt by Noteholders and
Certificateholders of amounts due them and to decrease the likelihood that the
Noteholders and Certificateholders will experience losses. However, in certain
circumstances, the Reserve Account could be depleted. If the amount required to
be withdrawn from the Reserve Account to cover shortfalls in collections on the
Receivables exceeds the amount on deposit in the Reserve Account a temporary
shortfall in the amounts distributed to the Noteholders or the
Certificateholders could result. In addition, depletion of the Reserve Account
ultimately could result in losses to Noteholders and Certificateholders.
FEDERAL INCOME TAX CONSEQUENCES
Stroock & Stroock & Lavan LLP is of the opinion that,
(x) based on the terms of the Notes and the transactions relating to the
Receivables as set forth herein, the Notes will be treated as debt for
federal income tax purposes and
(y) based on the applicable provisions of the Trust Agreement and Related
Documents, for federal income tax purposes, the Trust will not be classified as
an association taxable as a corporation and the Trust will not be treated as a
publicly traded partnership taxable as a corporation. The Trust and
Certificateholders will agree by their purchase of Certificates, if there is
more than one Certificateholders, to treat the Trust as a partnership for
purposes of federal and state income tax, franchise tax and any other tax
measured in whole or in part by income, with the assets of the partnership being
the assets held by the Trust, the Certificateholders as partners of the
partnership and the Notes as debt of the partnership, and if there is one
Certificateholder, to treat that holder as the owner of the assets of the Trust
and to treat the Trust as a disregarded entity. It is not anticipated that the
Notes will be treated as issued will original issue discount ("OID"). See
"Material Federal Income Tax Consequences" in the Prospectus.
STATE AND LOCAL TAX CONSEQUENCES
The discussion above does not address the tax consequences of purchase,
ownership or disposition of the Securities under any state or local tax law. We
recommend that investors consult their own tax advisors regarding state and
local tax consequences.
ERISA CONSIDERATIONS
THE NOTES
Section 406 of ERISA and Section 4975 of the Code prohibit a pension,
profit sharing, or other employee benefit plan, as well as individual retirement
accounts and particular types of Keogh Plans subject to those provisions, and
entities deemed to hold plan assets of these plans (each, a "Benefit Plan"),
from engaging in particular transactions involving "plan assets" with persons
that are "parties in interest" under ERISA or "disqualified persons" under the
Code with respect to the Benefit Plan. A violation of these "prohibited
transaction" rules may generate excise tax and other penalties and liabilities
under ERISA and the Code for these persons. ERISA also imposes particular duties
on persons who are fiduciaries of Benefit Plans subject to ERISA. Under ERISA,
any person who exercises any authority or control respecting the management or
disposition of the assets of a Benefit Plan is considered to be a fiduciary of
the Benefit Plan, subject to exceptions not here relevant.
Some transactions involving the Trust might be deemed to constitute
prohibited transactions under ERISA and the Code with respect to a Benefit Plan
that purchases [ ] Notes if assets of the Trust were deemed to be assets of the
Benefit Plan. Under a regulation issued by the United States Department of Labor
(the "Plan Assets Regulation"), the assets of the Trust would be treated as plan
assets of a Benefit Plan for the purposes of ERISA and the Code only if the
Benefit Plan acquired an equity interest in the Trust and none of the exceptions
contained in the Plan Assets Regulation was applicable. An "equity interest" is
defined under the Plan Assets 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 Trust believes that, at the time of their issuance the [ ] Notes should be
treated as indebtedness without substantial equity features for purposes of the
Plan Assets Regulation. The debt status of the [ ] Notes could be affected
subsequent to their issuance by particular types of changes in the financial
condition of the Trust.
Without regard to whether [ ] Notes are treated as an equity interest under
the Plan Assets Regulation, the acquisition or holding of the [ ] Notes by or on
behalf of a Benefit Plan could be considered to give rise to a prohibited
transaction if the Trust, the Seller, the Servicer, the Indenture Trustee or the
Owner Trustee is or becomes a party in interest or a disqualified person with
respect to a Benefit Plan or in the event that a subsequent transfer of a [ ]
Note occurs between a Benefit Plan and a party in interest or disqualified
person with respect to the Plan. Some exemptions from the prohibited transaction
rules could be applicable to the purchase and holding of [ ] Notes by a Benefit
Plan depending on the type and circumstances of the plan fiduciary making the
decision to acquire the [ ] Notes. Included among these exemptions, each of
which contains several conditions which must be satisfied before the exemption
applies, are: PTCE 90-1, regarding partiuclar transactions entered into by
insurance company pooled separate accounts; PTCE 95-60, regarding particular
transactions entered into by insurance company general accounts; PTCE 96-23,
regarding particular transactions effected by "in-house asset managers"; PTCE
91-38 regarding particular types of transactions entered into by bank collective
investment funds; and PTCE 84-14, regarding particular transactions effected by
"qualified professional asset managers." By acquiring a [ ] Note, each purchaser
and each transferee of a [ ] Note shall be deemed to represent and warrant that
either (1) it is not acquiring a [ ] Note with the assets of a Benefit Plan; or
(2) its purchase and holding of the [ ] Notes will qualify for prohibited
transaction exemptive relief under PTCE 95-60, PTCE 96-23, PTCE 91-38, PTCE
90-1, PTCE 84-14 or some other applicable exemption.
Employee benefit plans that are governmental plans (as defined in Section
3(32) of ERISA) and some church plans (as defined in Section 3(33) of ERISA) may
not be subject to ERISA requirements. However, governmental plans can be
subject, under federal, fiduciary, state or local law, to restrictions which are
similar to ERISA and church plans may be subject to other types of prohibited
transaction restrictions under the Code.
A Benefit Plan fiduciary considering the purchase of [ ] Notes should
consult its tax and/or legal advisors regarding whether the assets of the Trust
would be considered plan assets, the possibility of exemptive relief from the
prohibited transaction rules and other issues and their potential consequences.
THE CERTIFICATES
The Certificates may not be acquired (directly or indirectly) by or on
behalf of any Benefit Plan or any entity (including an insurance company general
account) whose underlying assets include plan assets of the Benefit Plan by
reason of a plan's investment in the entity. By acceptance of a Certificate,
each Certificateholder will be deemed to have represented and warranted that it
is not a Benefit Plan.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting agreement
relating to the Notes and the Certificates (the "Underwriting Agreement"), the
Depositor has agreed to sell to Deutsche Banc Securities Inc. (the
"Underwriter"), and the Underwriter has agreed to purchase, the Notes and the
Certificates, subject to the satisfaction of certain conditions precedent.
The Depositor has been advised by the Underwriter that the Underwriter
proposes to offer the Notes to the public initially at the public offering
prices set forth on the cover page of this prospectus supplement, and to certain
dealers at such prices less a concession of [ ]% per Note, that the Underwriter
and such dealers may allow a discount of [ ]% per Note on the sale to certain
other dealers; and that after the initial public offering of the Notes, the
public offering prices and the concessions and discounts to dealers may be
changed by the Underwriter.
The Depositor has been advised by the Underwriter that the Underwriter
proposes to offer the Certificates to the public initially at the public
offering price set forth on the cover page of this prospectus supplement, and to
certain dealers at such price less a concession of [ ]% per Certificate; that
the Underwriter and such dealers may allow a discount of [ ]% per Certificate on
the sale to certain other dealers; and that after the initial public offering of
the Certificates, the public offering price and the concession and discount to
dealers may be changed by the Underwriter.
Until the distribution of the Securities is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriter and
certain selling group members to bid for and purchase the Securities. As an
exception to these rules, the Underwriter is permitted to engage in certain
transactions that stabilize the prices of the Securities. Such transactions
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of such Securities.
In general, purchases of a security for the purpose 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.
Neither the Depositor nor the Underwriter makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the prices of the Securities. In addition, neither
the Depositor nor the Underwriter makes any representation that the Underwriter
will engage in such transactions or that such transactions, once commenced, will
not be discontinued without notice.
The Depositor has agreed to indemnify the Underwriter against certain
liabilities, including civil liabilities under the Securities Act, or contribute
to payments which the Underwriter may be required to make in respect thereof. In
the opinion of the Commission, such indemnification is against public policy as
expressed in the Securities Act and, may, therefore, be unenforceable.
The Trust may, from time to time, invest the funds in the Trust Accounts
and the Certificate Distribution Account in Eligible Investments acquired from
the Underwriter.
The closing of the sale of the Notes is conditioned on the closing of the
sale of the Certificates, and the closing of the sale of the Certificates is
conditioned on the closing of the sale of the Notes.
LEGAL MATTERS
Certain legal matters with respect to the Notes and the Certificates will
be passed upon for the Depositor by [ ]. Certain legal matters with respect to
the Notes and the Certificates will be passed upon for the Underwriter by
Stroock & Stroock & Lavan LLP, New York, New York. Stroock & Stroock & Lavan LLP
also will pass upon the material federal income tax consequences related to the
Notes and the Certificates. Certain legal matters under the laws of the State of
Delaware will be passed upon for the Depositor by [ ], [ ].
SUBJECT TO COMPLETION, [ ]
PROSPECTUS
ACE SECURITIES CORP.
COMPANY
ASSET BACKED CERTIFICATES
ASSET BACKED NOTES
(ISSUABLE IN SERIES)
AUTO RECEIVABLES AND RECEIVABLES SECURITIES TRUSTS
--------------------
THE TRUST:
Each trust will be established to hold assets transferred to it by ACE
Securities Corp. The assets in each trust will generally consist of one or more
of the following:
1. One or more pools of
o motor vehicle installment loan agreements or motor vehicle retail
installment sale contracts secured by new and used automobiles,
recreational vehicles, including motor homes, campers, boats,
boat motors, motorcycles, jet skis, waverunners,
all-terrain-vehicles, and snowmobiles, vans, trucks, buses and/or
trailers, and security interests in the vehicles financed by the
motor vehicle installment loan agreements or retail installment
sale contracts,
o private securities evidencing ownership interests in or secured
by loans similar to the types of loans described above;
2. Government Securities;
3. All monies due under the above assets, which may be net of amounts
payable to the servicer; and
4. Funds or accounts established for the related trust, or one or more
forms of enhancement.
The assets in your trust are specified in the prospectus supplement for
that particular trust, while the types of assets that may be included in a
trust, whether or not in your trust, are described in greater detail in this
prospectus.
THE SECURITIES:
ACE Securities Corp. Will sell the securities pursuant to a prospectus
supplement. The securities will be grouped into one or more series, each having
its own distinct designation. Each series will be issued in one or more classes
and will evidence beneficial ownership of, or be secured by, the assets in the
trust that the series relates to. A prospectus supplement for a series will
specify all of the terms of the series and of each of the classes in the series.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED
THE OFFERED SECURITIES OR DETERMINED IF THIS PROSPECTUS IS ACCURATE OR COMPLETE.
MAKING ANY CONTRARY REPRESENTATION IS A CRIMINAL OFFENSE.
The date of this prospectus is [ ]
TABLE OF CONTENTS
Risk Factors..............................................................1
The Trusts................................................................6
The Trustee...............................................................7
The Receivables Pools.....................................................7
The Collateral Certificates..............................................10
The Government Securities................................................11
Weighted Average Life of the Securities..................................20
Pool Factors and Trading Information.....................................21
The Seller and The Servicer..............................................22
Use of Proceeds..........................................................22
Description of the Notes.................................................22
Description of the Certificates..........................................28
Certain Information Regarding the Securities.............................30
Description of the Transfer and Servicing Agreements.....................34
Certain Matters Regarding the Servicer...................................43
Certain Legal Aspects of the Receivables.................................47
Material Federal Income Tax Consequences.................................53
State and Local Tax Considerations.......................................74
ERISA Considerations.....................................................76
Plan of Distribution.....................................................83
Legal Matters............................................................84
Prospectus Supplement....................................................84
Reports to Securityholders...............................................84
Available Information....................................................85
Incorporation of Certain Documents by Reference..........................85
Index of Terms...........................................................87
Annex I - Global Clearance, Settlement and Tax Documentation Procedures
RISK FACTORS
THE FOLLOWING INFORMATION, WHICH YOU SHOULD CAREFULLY CONSIDER,
IDENTIFIES CERTAIN SIGNIFICANT SOURCES OF RISK ASSOCIATED WITH AN INVESTMENT IN
THE CERTIFICATES. YOU SHOULD ALSO CAREFULLY CONSIDER THE INFORMATION SET FORTH
UNDER "RISK FACTORS" IN THE PROSPECTUS SUPPLEMENT.
LIMITED LIQUIDITY MAY RESULT
IN DELAYS IN YOUR ABILITY TO
SELL SECURITIES OR LOWER
RETURNS............................There will be no market for the securities of
any series prior to their issuance, and there
can be no assurance that a secondary market
will develop. If a secondary market does
develop, there can be no assurance that it
will provide holders with liquidity of
investment or that the market will continue
for the life of the securities of the related
series. Deutsche Banc Alex. Brown presently
expects to make a secondary market in the
securities, but has no obligation to do so.
Absent a secondary market for the securities
you may experience a delay if you choose to
sell your securities or the price you receive
may be less than you would receive for a
comparable liquid security.
LIMITED ASSETS FOR PAYMENTS -
NO RECOURSE TO COMPANY, SELLER
OR SERVICER........................The company does not have, nor is it expected
to have, any significant assets. The
securities of a series will be payable solely
from the assets of the trust fund for that
series. Except for any related insurance
policies or credit support, there will be no
recourse to the company or any other person
for any default on the notes or any failure
to receive distributions on the certificates
with respect to any series. Consequently,
holders of securities of each series must
rely solely upon payments with respect to the
assets constituting the trust fund for a
series of securities, including, if
applicable, any amounts available pursuant to
any enhancement for that series, for the
payment of principal of and interest on the
securities of that series.
The only obligations, if any, of the company
with respect to the securities of any series
will be with respect to its breach of
specific representations and warranties. The
company does not have, and is not expected in
the future to have, any significant assets
with which to meet any obligation to
repurchase assets with respect to which there
has been a breach of any representation or
warranty. If, for example, the company were
required to repurchase a receivable, its only
sources of funds to make the repurchase would
be from funds obtained from the enforcement
of a corresponding obligation, if any, on the
part of the originator of the receivable, or
the seller, as the case may be, or from a
reserve fund established to provide funds for
repurchases. If the company does not have
sufficient assets and no other party is
obligated to repurchase defective assets, you
may experience a loss.
LIMITS ON ENHANCEMENT MAY
RESULT IN LOSSES TO YOU............Although we intend the enhancement for the
securities to reduce the risk of delinquent
payments or losses to holders of a series of
securities entitled to the benefit of the
enhancement, the amount of the enhancement
will be limited, as set forth in the related
prospectus supplement. In addition, the
amount available will decline and could be
depleted prior to the payment in full of the
related series of securities, and losses on
the primary assets could result in losses to
holders of those securities.
TIMING AND RATE OF PREPAYMENTS
MAY RESULT IN LOWER YIELD..........The yield to maturity experienced by a holder
of securities may be affected by the rate and
timing of payments of principal of the
receivables or of the underlying receivables
relating to the private securities. The rate
and timing of principal payments of the
securities of a series will be affected by a
number of factors, including the following:
o the extent of prepayments, which may be
influenced by a variety of factors,
o the manner of allocating principal
payments among the classes of securities
of a series as specified in the related
prospectus supplement, and
o the exercise of any right of optional
termination.
Prepayments may also result from repurchases
of receivables or underlying receivables, as
applicable, due to material breaches of the
seller's or the company's representations or
warranties.
Interest payable on the securities of a
series on a distribution date will include
all interest accrued during the period
specified in the related prospectus
supplement. In the event interest accrues
during the calendar month prior to a
distribution date, the effective yield to
holders will be reduced from the yield that
would otherwise be obtainable if interest
payable on the security were to accrue
through the day immediately preceding each
distribution date, and the effective yield at
par to holders will be less than the
indicated coupon rate.
RISKS OF SUBORDINATED SECURITIES...To the extent specified in the applicable
prospectus supplement, distributions of
interest on and principal of one or more
classes of securities of a series may be
subordinated in priority of payment to
interest and principal due on one or more
other classes of securities of the related
series. Any subordinated securities will be
affected to a greater degree by any losses on
the receivables or of the underlying
receivables relating to the private
securities.
POTENTIAL LACK OF SECURITY.........The company will assign security interests in
the financed vehicles securing the
receivables to the related trust. Due to
administrative burden and expense, however,
we will not cause the certificates of title
to the financed vehicles to be amended to
reflect the assignment to the trust unless
otherwise specified in the prospectus
supplement. In the absence of amendment, a
trust may not have a perfected security
interest in the financed vehicles securing
the receivables in some states. If a trust
does not have a perfected security interest
in a financed vehicle, its ability to realize
in the event of a default on that financed
vehicle may be adversely affected.
To the extent that the trust's security
interest in a financed boat is perfected, the
trust will have a prior claim over subsequent
purchasers of such financed boat and holders
of subsequently perfected security interests
in such financed boat. Under the laws of many
states, certain possessory liens for repairs
on a boat and storage, as well as certain
rights in favor of federal and state
governmental authorities arising from the use
of a boat in connection with illegal
activities, may take priority even over a
perfected security interest. Under the Ship
Mortgage Statutes, certain preferred maritime
liens will have priority over security
interests in financed boats perfected under
federal law. Certain federal tax liens may
have priority over the lien of a secured
party. In addition, through fraud or
negligence, the trust could lose its security
interest or the priority of its security
interest in a financed boat. If a security
interest in a financed boat is initially
perfected (by titling or UCC filing) under
applicable state law and the financed boat
subsequently is federally documented, the
trust could lose the priority of its security
interest in such financed boat to a purchaser
thereof or to the holder of a subsequently
perfected Preferred Mortgage covering such
financed boat. See "Certain Legal Aspects of
the Receivables--Security Interests in the
Financed Vehicles." Ace Securities Corp.
shall not have an obligation to repurchase a
contract as to which any of the
aforementioned occurrences result in the
trust's losing the priority of its security
interest or its security interest in such
financed boat after the date such security
interest was conveyed to the trust (other
than through fraud or negligence of the
seller or the servicer).
RISK OF COMMINGLING................We will require the servicer to deposit all
payments on the receivables collected during
each collection period into the related
collection account within two business days
of receipt of the payments. However, if a
servicer satisfies particular requirements
for less frequent remittances we will not
require the servicer to deposit the amounts
into the collection account until the
business day preceding each distribution
date.
Pending deposit into the collection account,
collections may be invested by the servicer
at its own risk and for its own benefit and
will not be segregated from funds of the
servicer. If the servicer were unable to
remit the funds, the applicable
securityholders might incur a loss. To the
extent set forth in the related prospectus
supplement, the servicer may, in order to
satisfy the requirements described above,
obtain a letter of credit or other security
for the benefit of the related trust to
secure timely remittances of collections on
the receivables.
REMOVAL OF A SERVICER AFTER
A SERVICER DEFAULT.................The related prospectus supplement may provide
that with respect to a series of securities
issued by an owner trust, upon the occurrence
of a servicer default, the related indenture
trustee or noteholders may remove the
servicer without the consent of the related
trustee or any certificateholders. The
trustee or the certificateholders with
respect to a series may not have the ability
to remove the servicer if a servicer default
occurs. In addition, the noteholders with
respect to a series have the ability, with
specified exceptions, to waive defaults by
the servicer, including defaults that could
materially adversely affect the
certificateholders of the series.
BOOK-ENTRY REGISTRATION--
BENEFICIAL OWNERS NOT
RECOGNIZED BY TRUST................Issuance of the securities in book-entry form
may reduce the liquidity of these securities
in the secondary trading market since
investors may be unwilling to purchase
securities for which they cannot obtain
physical certificates. Since transactions in
the securities can be effected only through
The Depository Trust Company and any other
entities set forth in the related prospectus
supplement, your ability to pledge a security
to persons or entities that do not
participate in The Depository Trust Company
or any other entities or otherwise to take
actions in respect of the related securities
may be limited due to lack of a physical
certificate representing the securities.
You may experience some delay in the receipt
of distributions of interest and principal on
the securities since the distributions will
be forwarded by the trustee to The Depository
Trust Company and The Depository Trust
Company will credit the distributions to the
accounts of its participants which will
subsequently credit them to your account
either directly or indirectly through
indirect participants.
THE TRUSTS
With respect to each series of securities, ACE Securities Corp., the
company, and/or [ ], the seller, or one of its affiliates will establish a
separate trust (each, a "Trust") pursuant to a trust agreement (a "Trust
Agreement") between the company and the related trustee or pooling and servicing
agreement (a "Pooling and Servicing Agreement") among the company, the servicer
and the trustee for the related Trust, as applicable, for the transactions
described in this prospectus and in the related prospectus supplement. The
property of each Trust will include Primary Assets and all payments due under
the Primary Assets on and after the applicable cutoff date in the case of
Precomputed Receivables and all payments received under the Precomputed
Receivables on and after the applicable cutoff date or closing date, as
specified in the related prospectus supplement, in the case of Simple Interest
Receivables, Collateral Certificates, Government Securities and Private Label
Custody Receipt Securities. On the applicable closing date, after the issuance
of the notes and/or certificates of a given series, the company will transfer or
sell Primary Assets to the Trust in the outstanding principal amount specified
in the related prospectus supplement. The property of each Trust may also
include:
o amounts as from time to time may be held in separate trust accounts
established and maintained pursuant to the related Trust Agreement,
sale and servicing agreement (a "Sale and Servicing Agreement") among
the company, the servicer and the related Trust or Pooling and
Servicing Agreement, as applicable, and the proceeds of these
accounts, as described in this prospectus and in the related
prospectus supplement;
o security interests in vehicles financed by the Receivables (the
"Financed Vehicles") and any other interest of a seller in the
Financed Vehicles;
o the rights to proceed from claims on physical damage, credit life and
disability insurance policies covering Financed Vehicles or the
obligors, as the case may be;
o any property that has secured a Receivable and that has been acquired
by the applicable Trust; and
o any and all proceeds of the Primary Assets or the foregoing.
To the extent specified in the related prospectus supplement, a Reserve Account
or other form of credit enhancement may be a part of the property of a given
Trust or may be held by the trustee for the benefit of holders of the related
securities.
The servicer specified in the related prospectus supplement, as
servicer under the Pooling and Servicing Agreement or Sale and Servicing
Agreement, as applicable, will service the Receivables held by each Trust and
will receive fees for these services. See "Description of the Transfer and
Servicing Agreements--Servicing Compensation and Payment of Expenses" in this
prospectus and "Description of the Transfer and Sale and Servicing
Agreement--Servicing Compensation" in the related prospectus supplement. To
facilitate the servicing of Receivables and unless otherwise specified in the
related prospectus supplement, each seller and each trustee will authorize the
servicer to retain physical possession of the Receivables held by each Trust and
other documents relating to possession of the Receivables as custodian for each
Trust. Due to the administrative burden and expense, the certificates of title
to the Financed Vehicles will not be amended to reflect the sale and assignment
of the security interest in the Financed Vehicles to a Trust. In the absence of
an amendment, a Trust may not have a perfected security interest in some of the
Financed Vehicles in some states. See "Certain Legal Aspects of the Receivables"
and "Description of the Transfer and Servicing Agreements--Sale and Assignment
of Primary Assets". In the case of Primary Assets consisting of Collateral
Certificates, Government Securities and/or Private Label Custody Receipt
Securities, the trustee specified in the related prospectus supplement will
manage the Collateral Certificates, Government Securities and/or Private Label
Custody Receipt Securities.
If the protection provided to (1) holders of notes issued by an owner
trust by the subordination of the related certificates and by the Reserve
Account, if any, or any other available form of credit enhancement for the
series or (2) certificateholders by any Reserve Account or other form of credit
enhancement is insufficient, the noteholders or certificateholders, as the case
may be, will have to look to payments by or on behalf of obligors on Receivables
or on the Collateral Certificates, the Government Securities, and the Private
Label Custody Receipt Securities, as applicable, and the proceeds from the
repossession and sale of Financed Vehicles that secure defaulted Receivables for
distributions of principal and interest on the securities. In this event, some
factors, such as the applicable Trust's not having perfected security interests
in all of the Financed Vehicles, may limit the ability of a Trust to realize on
the collateral securing the related Primary Assets, or may limit the amount
realized to less than the amount due under Receivables. Securityholders may be
subject to delays in payment on, or may incur losses on their investment in, the
securities as a result of defaults or delinquencies by obligors and depreciation
in the value of the related Financed Vehicles. See "Description of the Transfer
and Servicing Agreements--Credit and Cash Flow Enhancement" and "Certain Legal
Aspects of the Receivables".
The principal offices of each Trust and the related trustee will be
specified in the applicable prospectus supplement.
THE TRUSTEE
The trustee for each Trust will be specified in the related prospectus
supplement. The trustee's liability in connection with the issuance and sale of
the related securities is limited solely to the express obligations of the
trustee set forth in the related Trust Agreement and Sale and Servicing
Agreement or the related Pooling and Servicing Agreement, as applicable. A
trustee may resign at any time, in which event the servicer will be obligated to
appoint a successor trustee. The servicer may also remove the related trustee if
the trustee ceases to be eligible to continue as trustee under the related Trust
Agreement or Pooling and Servicing Agreement, as applicable, and will be
obligated to appoint a successor trustee. Any resignation or removal of a
trustee and appointment of a successor trustee will not become effective until
the acceptance of the appointment by the successor trustee.
THE RECEIVABLES POOLS
The motor vehicle installment loan agreements or motor vehicle retail
installment sale contracts secured by new and used automobiles, recreational
vehicles, including motor homes, campers, boats, boat motors, motorcycles, jet
skis, waverunners, all-terrain-vehicles and snowmobiles, vans, trucks, buses
and/or trailers (the "Receivables") in a Receivables Pool have been or will be
originated or acquired by a seller in the ordinary course of business, in
accordance with its credit and underwriting standards as described in the
related prospectus supplement.
The Receivables to be sold to each Trust will be selected from a
seller's portfolio for inclusion in a Receivables Pool based on several
criteria, which criteria include that, subject to particular limitations which,
if applicable, will be specified in the related prospectus supplement, each
Receivable
o is secured by a new or used vehicle,
o was originated or acquired, either from a motor vehicle dealer or
a financial institution, by the seller,
o provides for level monthly payments, except for the last payment,
which may be different from the level payments, that, unless
otherwise provided in the related prospectus supplement, amortize
the amount financed over the original term to maturity of the
related Receivable,
o is a Precomputed Receivable or a Simple Interest Receivable and
o satisfies the other criteria, if any, set forth in the related
prospectus supplement. No selection procedures believed by the
seller to be adverse to Securityholders were or will be used in
selecting the Receivables.
"Precomputed Receivables" consist of either (1) monthly actuarial
receivables ("Actuarial Receivables") or (2) receivables that provide for
allocation of payments according to the "sum of periodic balances" or "sum of
monthly payments" method, similar to the "Rule of 78s" ("Rule of 78S
Receivables"). An Actuarial Receivable provides for amortization of the loan
over a series of fixed level monthly installment payments. Each monthly
installment, including the monthly installment representing the final payment on
the Receivable, consists of (x) an amount of interest equal to 1/12 of the
stated contract interest rate under the related Receivable multiplied by the
unpaid principal balance of the loan, plus (y) an amount allocable to principal
equal to the remainder of the monthly payment. A Rule of 78s Receivable provides
for the payment by the obligor of a specified total amount of payments, payable
in equal monthly installments on each due date, which total represents the
principal amount financed plus add-on interest in an amount calculated at the
stated contract interest rate under the related Receivable for the term of the
receivable. The rate at which the amount of add-on interest is earned and,
correspondingly, the amount of each fixed monthly payment allocated to reduction
of the outstanding principal amount are calculated in accordance with the Rule
of 78s.
"Simple Interest Receivables" are receivables that provide for the
amortization of the amount financed under them over a series of fixed level
monthly payments. However, unlike the monthly payment under an Actuarial
Receivable, each monthly payment consists of an installment of interest that is
calculated on the basis of the outstanding principal balance of the receivable
multiplied by the stated contract interest rate under the related Receivable and
further multiplied by the period elapsed, as a fraction of a calendar year,
since the preceding payment of interest was made. As payments are received under
a Simple Interest Receivable, the amount received generally is applied first to
interest accrued to the date of payment and the balance is applied to reduce the
unpaid principal balance. Accordingly, if an obligor pays a fixed monthly
installment before its scheduled due date, the portion of the payment allocable
to interest for the period since the preceding payment was made will be less
than it would have been had the payment been made as scheduled, and the portion
of the payment applied to reduce the unpaid principal balance will be
correspondingly greater. Conversely, if an obligor pays a fixed monthly
installment after its scheduled due date, the portion of the payment allocable
to interest for the period since the preceding payment was made will be greater
than it would have been had the payment been made as scheduled, and the portion
of the payment applied to reduce the unpaid principal balance will be
correspondingly less. In either case, the obligor is obligated to pay a fixed
monthly installment until the final scheduled payment date, at which time the
amount of the final installment may be increased or decreased as necessary to
repay the then outstanding principal balance.
In the event of the prepayment in full, voluntarily or by
acceleration, of a Rule of 78s Receivable, under the terms of the contract a
"refund" or "rebate" will be made to the obligor of the portion of the total
amount of payments then due and payable allocable to "unearned" add-on interest,
calculated in accordance with a method equivalent to the Rule of 78s. If an
Actuarial Receivable is prepaid in full, with minor variations based upon state
law, the Actuarial Receivable requires that the rebate be calculated on the
basis of a constant interest rate. If a Simple Interest Receivable is prepaid,
rather than receive a rebate, the obligor is required to pay interest only to
the date of prepayment. The amount of a rebate under a Rule of 78s Receivable
generally will be less than the amount of a rebate on an Actuarial Receivable
and generally will be less than the remaining scheduled payments of interest
that would have been due under a Simple Interest Receivable for which all
payments were made on schedule.
To the extent provided in the related prospectus supplement, each
Trust will account for the Rule of 78s Receivables as if the Receivables were
Actuarial Receivables. Amounts received upon prepayment in full of a Rule of 78s
Receivable in excess of the then outstanding principal balance of the Receivable
and accrued interest on the Receivable, calculated pursuant to the actuarial
method, will not be paid to noteholders or passed through to certificateholders
of the applicable series, but will be paid to the servicer as additional
servicing compensation.
Information with respect to each Receivables Pool will be set forth in
the related prospectus supplement, including, to the extent appropriate, the
composition and distribution by annual percentage rate and by states of
origination of the Receivables, the portion of each Receivables Pool consisting
of Precomputed Receivables and of Simple Interest Receivables, and the portion
of each Receivables Pool secured by new vehicles and by used vehicles.
DELINQUENCIES, REPOSSESSIONS AND NET LOSSES
Information concerning the experience of a seller pertaining to
delinquencies, repossessions and net losses with respect to Receivables will be
set forth in each prospectus supplement. There can be no assurance that the
delinquency, repossession and net loss experience on any Receivables Pool will
be comparable to prior experience or to the information.
NEW AND USED FINANCED VEHICLES
The extension of credit to an obligor on a Receivable is based on an
assessment of an applicant's ability to repay the amounts due on the Receivable
and the adequacy of the related Financed Vehicle. An assessment generally does
not distinguish between new or used vehicles. Rather, the amount advanced under
a motor vehicle loan generally will not exceed 100% of the value of the
collateral unless otherwise specified in the related prospectus supplement. For
new motor vehicles, the value equals the dealer invoice for the motor vehicle
that serves as collateral, plus sales tax, license fee, title fee, the cost of
service and warranty contracts, and any premium for credit life and disability
insurance obtained in connection with the loan. For used motor vehicles, the
value equals the wholesale price reported in the most recent edition of the
National Automotive dealers Association Used Car Guide, the National Auto
Research Division Black Book or any other industry guide as specified in the
related prospectus supplement, plus sales tax, license fee, title fee, the cost
of service and warranty contracts, and any premium for credit life and
disability insurance obtained in connection with the loan. The maximum age of
any used motor vehicle acceptable as collateral generally is ten model years.
Additional information with respect to delinquencies, repossessions and net
losses with respect to Receivables secured by new or used Financed Vehicles will
be set forth in each prospectus supplement.
THE COLLATERAL CERTIFICATES
The primary assets ("Primary Assets") for a series will include
Receivables or Collateral Certificates, which include certificates evidencing an
undivided interest in, or notes or loans secured by, Receivables. These
Collateral Certificates will have previously been offered and distributed to the
public pursuant to an effective registration statement or are being registered
under the securities Act in connection with the offering of a series of
securities, which offering, distribution and registration may have been
undertaken, or may be undertaken, by the company and/or one or more affiliates
of the company, in each case, subject to exceptions which, if applicable, will
be described in the related prospectus supplement. Collateral Certificates will
have been issued pursuant to a pooling and servicing agreement, a sale and
servicing agreement, a trust agreement, an indenture or similar agreement (an
"Underlying Trust Agreement"). The servicer (the "Underlying Servicer") of the
underlying motor vehicle installment loans or sale contracts will have entered
into the Underlying Trust Agreement with a trustee (the "Underlying Trustee").
The issuer of the Collateral Certificates (the "Underlying Issuer")
will be
o a financial institution, corporation or other entity engaged
generally in the business of purchasing or originating motor
vehicle installment loan agreements and motor vehicle retail
installment sale contracts,
o a limited purpose corporation organized for the purpose of, among
other things, establishing trusts, acquiring and selling
receivables to the trusts and selling beneficial interests in
these trusts, or
o one of the trusts.
If so specified in the related prospectus supplement, the Underlying Issuer may
be the company and/or one or more affiliates of the company. The obligations of
the Underlying Issuer will generally be limited to specific representations and
warranties with respect to the assets conveyed by it to the related trust. The
related prospectus supplement will, subject to exceptions which, if applicable,
will be described in the related prospectus supplement, provide that the
Underlying Issuer will not have guaranteed any of the assets conveyed to the
related trust or any of the Collateral Certificates issued under the Underlying
Trust Agreement.
Distributions of principal and interest will be made on the Collateral
Certificates on the dates specified in the related prospectus supplement. The
Collateral Certificates may be entitled to receive nominal or no principal
distribution or nominal or no interest distributions. Principal and interest
distributions will be made on the Collateral Certificates by the Underlying
Trustee or the Underlying Servicer. The Underlying Issuer or the Underlying
Servicer may have the right to repurchase assets underlying the Collateral
Certificates after a specific date or under other circumstances specified in the
related prospectus supplement.
ENHANCEMENT RELATING TO COLLATERAL CERTIFICATES
Enhancement in the form of reserve funds, subordination of other
securities issued in connection with the Collateral Certificates, guarantees,
letters of credit, cash collateral accounts, insurance policies or other types
of enhancement may be provided with respect to the Receivables underlying the
Collateral Certificates or with respect to the Collateral Certificates
themselves. The type, characteristics and amount of enhancement will be a
function of particular characteristics of the Receivables and other factors and
will have been established for the Collateral Certificates on the basis of
requirements of rating agencies.
ADDITIONAL INFORMATION
The related prospectus supplement for a series for which the Primary
Assets include Collateral Certificates will specify, to the extent relevant and
to the extent the information is reasonably available to the company and the
company reasonably believes the information to be reliable:
o the aggregate approximate principal amount and type of the
Collateral Certificates to be included in the Primary Assets;
o the characteristics of the receivables which comprise the
underlying assets for the Collateral Certificates;
o the expected and final maturity of the Collateral Certificates;
o the interest rate of the Collateral Certificates;
o the Underlying Issuer, the Underlying Servicer, if other than the
Underlying Issuer, and the Underlying Trustee for the Collateral
Certificates;
o characteristics of the enhancement, if any, such as reserve
funds, insurance funds, insurance policies, letters of credit or
guarantees relating to the receivables underlying the Collateral
Certificates or to the Collateral Certificates themselves;
o the terms on which the underlying receivables for the Collateral
Certificates may, or are required to, be purchased prior to their
stated maturity or the stated maturity of the Collateral
Certificates; and
o the terms on which receivables may be substituted for those
originally underlying the Collateral Certificates.
THE GOVERNMENT SECURITIES
Primary Assets for a series may include, but will not consist entirely
of, any combination of
o receipts or other instruments created under the Department of the
Treasury's Separate Trading of Registered Interest and Principal
of securities, or STRIPS, program ("Treasury Strips"), which
interest and/or principal strips evidence ownership of specific
interest and/or principal payments to be made on particular
United States Treasury Bonds ("Treasury Bonds"),
o Treasury Bonds and
o other debt securities ("GSEs Bonds") of United States government
sponsored enterprises ("GSEs"; and together with Treasury Strips
and Treasury Bonds, collectively, "Government Securities").
The Government Securities, if any, included in a Trust are intended to
assure investors that funds are available to make specified payments of
principal and/or interest due on the related securities. Accordingly, the
Government Securities, if any, included in a Trust are intended both to (1)
support the ratings assigned to these securities, and (2) perform a function
similar to that described in this prospectus under "Description of the Transfer
and Servicing Agreements--Credit and Cash Flow Enhancement". A description of
the respective general features of Treasury Bonds, Treasury Strips and GSE Bonds
is set forth below.
The prospectus supplement for each series of securities the Trust with
respect to which contains Government Securities will contain information as to:
(1) the title and series of each Government Security, the aggregate
principal amount, denomination and form of each Government
Security;
(2) the limit, if any, upon the aggregate principal amount of the
Government Security;
(3) the dates on which, or the range of dates within which, the
principal of, and premium, if any, on, the Government Security
will be payable;
(4) the rate or rates, or the method of determination of the rate or
rates, at which the Government Security will bear interest, if
any, the date or dates from which the interest will accrue, and
the dates on which the interest will be payable;
(5) whether the Government Security was issued at a price lower than
the principal amount of that Government Security;
(6) material events of default or restrictive covenants provided for
with respect to the Government Security;
(7) the rating of the Government Security, if any;
(8) the issuer of each Government Security;
(9) the material risks, if any, posed by any Government Securities
and issuers of the Government Securities (which risks, if
appropriate, will be described in the "Risk Factors" section of
the related prospectus supplement); and
(10) any other material terms of the Government Security.
With respect to a Trust which includes a pool of Government Securities, the
related prospectus supplement will, to the extent applicable, describe the
composition of the Government Securities' pool, particular material events of
default or restrictive covenants common to the Government Securities, and, on an
aggregate, percentage or weighted average basis, as applicable, the
characteristics of the pool with respect to the terms set forth in (3), (4) and
(5) of the preceding sentence and any other material terms regarding the pool.
The Government Securities included in a Trust will be senior, unsecured,
nonredeemable obligations of the issuer of the Government Securities, will be
denominated in United States dollars and, if rated, will be rated at least
investment grade by at least one nationally recognized rating agency. In
addition, the inclusion of Government Securities in a Trust with respect to a
series of securities is conditioned upon their characteristics being in form and
substance satisfactory to the Rating Agency rating the related series of
securities.
TREASURY BONDS
Treasury Bonds are issued by and are the obligations of the United
States of America. Accordingly, the payment of principal and interest on each
Treasury Bond will be guaranteed by the full faith and credit of the United
States of America. Interest is typically payable on the Bonds semiannually.
Treasury Bonds are issued in registered form in denominations of $1,000, $5,000,
$10,000, $100,000 and $1,000,000 and in book-entry form in integral multiples of
these amounts.
TREASURY STRIPS
In general, Treasury Strips are created by separating, or stripping,
the principal and interest components of Treasury Bonds that have an original
maturity of 10 or more years from the date of issue. A particular Treasury Strip
evidences ownership of the principal payment or one of the periodic interest
payments, generally semiannual, due on the Treasury Bond to which the Treasury
Strip relates.
In 1985 the Department of the Treasury announced that all new issues
of Treasury Bonds with maturities of 10 years or more would be transferable in
their component pieces on the Federal Reserve wire system. In so doing, the
Treasury created a generic, book-entry Treasury Strip named STRIPS (Separate
Trading of Registered Interest and Principal of Securities) which, unlike
private label Treasury Strips, can be issued without the need for a custodial
arrangement. The STRIPS program has eclipsed the private sector programs (which
are described below under "--Private Label Custody Receipt Securities"), and
investment banks no longer sponsor new issues of custodial receipts.
Treasury Strips may be either "serial" or "callable". A serial
Treasury Strip evidences ownership of one of the periodic interest payments to
be made on a Treasury Bond. No payments are made on the Treasury Strip, nor is
it redeemable, prior to its maturity, at which time the holder becomes entitled
to receive a single payment of the face amount of the Treasury Strip. Callable
Treasury Strips relate to payments scheduled to be made after the related
Treasury Bonds have become subject to redemption. These Treasury Strips evidence
ownership of both principal of the related Treasury Bonds and each of the
related interest payments commencing, typically, on the first interest payment
date following the first optional redemption date. If the underlying Treasury
Bonds are actually redeemed, holders of callable Treasury Strips generally
receive a payment equal to the principal portion of the total face amount of the
Treasury Strips plus the interest payment represented by the Treasury Strips
maturing on the redemption date. No callable Treasury Strips will be included in
a Trust. The face amount of any Treasury Strip is the aggregate of all payments
scheduled to be received on the Treasury Strip. Treasury Strips are available in
registered form and generally may be transferred and exchanged by the holders of
the Treasury Strips in accordance with procedures applicable to the particular
issue of the Treasury Strips.
A holder of a private label Treasury Strip, as opposed to a STRIP,
cannot enforce payment on that Treasury Strip against the Treasury. Instead, the
holder must look to the custodian for payment. The custodian, and the holder of
a Treasury Strip that obtains ownership of the underlying Treasury Bond, can
enforce payment of the underlying Treasury Bond against the Treasury. If any
private label Treasury Strips are included in a Trust with respect to any series
of securities, the prospectus supplement for the series will include the
identity and a brief description of each custodian that issued the Treasury
Strips. If the company knows that the company of the Treasury Bonds underlying
the Treasury Strips is the company or any of its affiliates, the company will
disclose that fact in the related prospectus supplement.
GSE BONDS
As specified in the applicable prospectus supplement, the obligations
of one or more of the following GSEs may be included in a Trust: Federal
National Mortgage Association ("Fannie Mae"), Federal Home Loan Mortgage
Association ("Freddie Mac"), Student Loan Marketing Association ("Sallie Mae"),
REFCO, Tennessee Valley Authority ("TVA"), Federal Home Loan Banks ("FHLB"), to
the extent the obligations represent the joint and several obligations of the
twelve Federal Home Loan Banks, and Federal Farm Credit Banks ("FFCB"). GSE debt
securities are exempt from registration under the securities Act pursuant to
Section 3(a)(2) of the securities Act, or are deemed by statute to be so exempt,
and are not required to be registered under the Exchange Act. The securities of
any GSE, including a GSE Guaranteed Bond, will be included in a Trust only to
the extent that (1) its obligations are supported by the full faith and credit
of the United States government or (2) the organization makes publicly available
its annual report which shall include financial statements or similar financial
information with respect to the organization (a "GSE Issuer"). Unless otherwise
specified in the related prospectus supplement, the GSE Bonds will not be
guaranteed by the United States and do not constitute a debt or obligation of
the United States or of any agency or instrumentality of the United States other
than the related GSE.
Unless otherwise specified in the related prospectus supplement, none
of the GSE Bonds will have been issued pursuant to an indenture, and no trustee
is provided for with respect to any GSE Bonds. There will generally be a fiscal
agent ("Fiscal Agent") for an issuer of GSE Bonds whose actions will be governed
by a fiscal agency agreement. A Fiscal Agent is not a trustee for the holders of
the GSE Bonds and does not have the same responsibilities or duties to act for
the holders as would a trustee.
GSE Bonds may be subject to particular contractual and statutory
restrictions which may provide some protection to securityholders against the
occurrence or effects of specified events. Unless otherwise specified in the
related prospectus supplement, each GSE is limited to activities as will promote
its statutory purposes as set forth in the publicly available information with
respect to the issuer. A GSE's promotion of its statutory purposes, as well as
its statutory, structural and regulatory relationships with the federal
government, may cause or require the GSE to conduct its business in a manner
that differs from what an enterprise which is not a GSE might employ.
THE FEDERAL NATIONAL MORTGAGE ASSOCIATION
Fannie Mae is a federally chartered and stockholder owned corporation
organized and existing under the Federal National Mortgage Association Charter
Act. It is the largest investor in home mortgage loans in the United States.
Fannie Mae originally was established in 1938 as a corporation wholly owned by
the United States government to provide supplemental liquidity to the mortgage
market and was transformed into a stockholder owned and privately managed
corporation by legislation enacted in 1968 and 1970. Fannie Mae provides funds
to the mortgage market by purchasing mortgage loans from lenders, thus
replenishing their funds for additional lending. Fannie Mae acquires funds to
purchase loans from many capital market investors that ordinarily may not invest
in mortgage loans, therefore expanding the total amount of funds available for
housing. Operating nationwide, Fannie Mae helps to redistribute mortgage funds
from capital-surplus to capital-short areas. Fannie Mae also issues
mortgage-backed securities ("MBS"). Fannie Mae receives guaranty fees for its
guaranty of timely payment of principal of and interest on MBS. Fannie Mae
issues MBS primarily in exchange for pools of mortgage loans from lenders. The
issuance of MBS enables Fannie Mae to further its statutory purpose of
increasing the liquidity of residential mortgage loans.
Fannie Mae prepares an Information Statement annually which describes
Fannie Mae, its business and operations and contains Fannie Mae's audited
financial statements. From time to time Fannie Mae prepares supplements to its
Information Statement which include specific unaudited financial data and other
information concerning the business and operations of Fannie Mae. Unless
otherwise specified in the applicable prospectus supplement, these documents can
be obtained without charge from the Office of Investor Relations, Fannie Mae,
3900 Wisconsin Avenue, N.W., Washington, D.C. 20016, telephone (202) 752-7115.
Fannie Mae is not subject to the periodic reporting requirements of the Exchange
Act.
THE FEDERAL HOME LOAN MORTGAGE CORPORATION
Freddie Mac is a publicly held government-sponsored enterprise created
on July 24, 1970 pursuant to the Federal Home Loan Mortgage Corporation Act,
Title III of the Emergency Home Finance Act of 1970, as amended (the "FHLMC
Act"). Freddie Mac's statutory mission is to provide stability in the secondary
market for home mortgages, to respond appropriately to the private capital
market and to provide ongoing assistance to the secondary market for home
mortgages, including mortgages secured by housing for low- and moderate-income
families involving a reasonable economic return to Freddie Mac, by increasing
the liquidity of mortgage investments and improving the distribution of
investment capital available for home mortgage financing. The principal activity
of Freddie Mac consists of the purchase of conventional residential mortgages
and participation interests in those mortgages from mortgage lending
institutions and the sale of guaranteed mortgage securities backed by the
mortgages so purchased. Freddie Mac generally matches and finances its purchases
of mortgages with sales of guaranteed securities. Mortgages retained by Freddie
Mac are financed with short- and long-term debt, cash temporarily held pending
disbursement to security holders, and equity capital.
Freddie Mac prepares an Information Statement annually which describes
Freddie Mac, its business and operations and contains Freddie Mac's audited
financial statements. From time to time Freddie Mac prepares supplements to its
Information Statement which include specific unaudited financial data and other
information concerning the business and operations of Freddie Mac. Unless
otherwise specified in the applicable prospectus supplement, these documents can
be obtained from Freddie Mac by writing or calling Freddie Mac's Investor
Inquiry Department at 8200 Jones Branch Drive, McLean, Virginia, 22102; outside
Washington, D.C. metropolitan area, telephone (800) 336-3672; within Washington,
D.C. metropolitan area, telephone (703) 759-8160. Freddie Mac is not subject to
the periodic reporting requirements of the Exchange Act.
THE STUDENT LOAN MARKETING ASSOCIATION
Sallie Mae is a stockholder-owned corporation established by the 1972
amendments to the Higher Education Act of 1965, as amended, to provide
liquidity, primarily through secondary market and warehousing activities, for
lenders participating in federally sponsored student loan programs, primarily
the Federal Family Education Loan ("FFEL") program and the Health Education
Assistance Loan Program. Under the Higher Education Act, Sallie Mae is
authorized to purchase, warehouse, sell and offer participations or pooled
interests in, or otherwise deal in, student loans, including, but not limited
to, loans insured under the FFEL program, and to make commitments for any of the
foregoing. Sallie Mae is also authorized to buy, sell, hold, underwrite and
otherwise deal in obligations of eligible lenders, if the obligations are issued
by the eligible lenders for the purpose of making or purchasing federally
guaranteed student loans under the Higher Education Act. As a federally
chartered corporation, Sallie Mae's structure and operational authorities are
subject to revision by amendments to the Higher Education Act or other federal
enactments.
Sallie Mae prepares an Information Statement annually which describes
Sallie Mae, its business and operations and contains Sallie Mae's audited
financial statements. From time to time Sallie Mae prepares supplements to its
Information Statement which include specific unaudited financial data and other
information concerning the business and operations of Sallie Mae. Unless
otherwise specified in the applicable prospectus supplement, these documents can
be obtained without charge upon written request to the Corporate and Investor
Relations Division of Sallie Mae at 1050 Thomas Jefferson Street, N.W.,
Washington, D.C. 20007, telephone (202) 298-3010. Sallie Mae is not subject to
the periodic reporting requirements of the Exchange Act.
THE RESOLUTION FUNDING CORPORATION
REFCO is a mixed-ownership government corporation established by Title
V of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA"). The sole purpose of REFCO is to provide financing for the Resolution
Trust Corporation (the "RTC"). REFCO is to be dissolved, as soon as practicable,
after the maturity and full payment of all obligations issued by it. REFCO is
subject to the general oversight and direction of the Oversight Board, which is
comprised of the Secretary of the Treasury, the Chairman of the Board of
Governors of the Federal Reserve System, the Secretary of Housing and Urban
Development and two independent members to be appointed by the President with
the advice and consent of the Senate. The day-to-day operations of REFCO are
under the management of a three-member Directorate comprised of the Director of
the Office of Finance of the FHLB and two members selected by the Oversight
Board from among the presidents of the twelve FHLB.
The RTC was established by FIRREA to manage and resolve cases
involving failed savings and loan institutions pursuant to policies established
by the Oversight Board. The RTC was granted authority to issue nonvoting capital
certificates to REFCO in exchange for the funds transferred from REFCO to the
RTC. Pursuant to FIRREA, the net proceeds of these obligations are used to
purchase nonvoting capital certificates issued by the RTC or to retire
previously issued REFCO obligations.
Information concerning REFCO may be obtained from the
Secretary/Treasurer, Resolution Funding Corporation, Suite 1000, 11921 Freedom
Drive, Reston, Virginia 22090; telephone (703) 487-9517. REFCO is not subject to
the periodic reporting requirements of the Exchange Act.
THE FEDERAL HOME LOAN BANKS
The Federal Home Loan Banks constitute a system of twelve federally
chartered corporations (collectively, the "FHLB"), each wholly owned by its
member institutions. The mission of the FHLB is to enhance the availability of
residential mortgage credit by providing a readily available, low-cost source of
funds to their member institutions. A primary source of funds for the FHLB is
the proceeds from the sale to the public of debt instruments issued as
consolidated obligations, which are the joint and several obligations of all the
FHLB. The FHLB are supervised and regulated by the Federal Housing Finance
Board, which is an independent federal agency in the executive branch of the
United States government, but obligations of the FHLB are not obligations of the
United States government.
The Federal Home Loan Bank System produces annual and quarterly
financial reports in connection with the original offering and issuance by the
Federal Housing Finance Board of consolidated bonds and consolidated notes of
the FHLB. Unless otherwise specified in the applicable prospectus supplement,
questions regarding financial reports should be directed to the Deputy Director,
Financial Reporting and Operations Division, Federal Housing Finance Board, 1777
F Street, N.W., Washington, D.C. 20006; telephone (202) 408-2901. Unless
otherwise specified in the applicable prospectus supplement, copies of financial
reports may be obtained by written request to Capital Markets Division, Office
of Finance, Federal Home Loan Banks, Suite 1000, 11921 Freedom Drive, Reston,
Virginia 22090, telephone (703) 487-9500. The FHLB are not subject to the
periodic reporting requirements of the Exchange Act.
TENNESSEE VALLEY AUTHORITY
TVA is a wholly owned corporate agency and instrumentality of the
United States of America established pursuant to the Tennessee Valley Authority
Act of 1933, as amended (the "TVA Act"). TVA's objective is to develop the
resources of the Tennessee Valley region in order to strengthen the regional and
national economy and the national defense. The programs of TVA consist of power
and nonpower programs. For the fiscal year ending September 30, 1995, TVA
received $139 million in congressional appropriations from the federal
government for the nonpower programs. The power program is required to be
self-supporting from revenues it produces. The TVA Act authorizes TVA to issue
evidences of indebtedness that may be serviced only from proceeds of its power
program. TVA bonds are not obligations of or guaranteed by the United States
government.
TVA prepares an Information Statement annually which describes TVA,
its business and operations and contains TVA's audited financial statements.
From time to time TVA prepares supplements to its Information Statement which
include specific unaudited financial data and other information concerning the
business and operations of TVA. Unless otherwise specified in the applicable
prospectus supplement, these documents can be obtained by writing or calling
Tennessee Valley Authority, 400 West Summit Hill Drive, Knoxville, Tennessee
37902-1499, Attention: Vice President and Treasurer, telephone (423) 632-3366.
TVA is not subject to the periodic reporting requirements of the Exchange Act.
FEDERAL FARM CREDIT BANKS
The Farm Credit System is a nationwide system of lending institutions
and affiliated service and other entities (the "System"). Through its Banks
("FCBs") and related associations, the System provides credit and related
services to farmers, ranchers, producers and harvesters of aquatic products,
rural homeowners, some farm-related businesses, agricultural and aquatic
cooperatives and rural utilities. System institutions are federally chartered
under the Farm Credit Act of 1971, as amended (the "Farm Credit Act"), and are
subject to regulation by a Federal agency, the Farm Credit Administration (the
"FCA"). The FCBs and associations are not commonly owned or controlled. They are
cooperatively owned, directly or indirectly, by their respective borrowers.
Unlike commercial banks and other financial institutions that lend to the
agricultural sector in addition to other sectors of the economy, under the Farm
Credit Act the System institutions are restricted solely to making loans to
qualified borrowers in the agricultural sector, to some related businesses and
to rural homeowners. Moreover, the System is required to make credit and other
services available in all areas of the nation. In order to fulfill its broad
statutory mandate, the System maintains lending units in all 50 states and the
Commonwealth of Puerto Rico.
The System obtains funds for its lending operations primarily from the
sale of debt securities issued under Section 4.2(d) of the Farm Credit Act
("Systemwide Debt Securities"). The FCBs are jointly and severally liable on all
Systemwide Debt Securities. Systemwide Debt Securities are issued by the FCBs
through the Federal Farm Credit Banks Funding Corporation, as agent for the FCBs
(the "Funding Corporation").
Information regarding the FCBs and the Farm Credit System, including
combined financial information, is contained in disclosure information made
available by the Funding Corporation. This information consists of the most
recent Farm Credit System Annual Information Statement and any Quarterly
Information Statements issued subsequent to the Farm Credit System Annual
Information Statement and particular press releases issued from time to time by
the Funding Corporation. Unless otherwise specified in the applicable prospectus
supplement, this information and the Farm Credit System Annual Report to
Investors for the current and two preceding fiscal years are available for
inspection at the Federal Farm Credit Banks Funding Corporation, Investment
Banking Services Department, 10 Exchange Place, Suite 1401, Jersey City, New
Jersey 07302, telephone (201) 200-8000. Upon request, the Funding Corporation
will furnish, without charge, copies of the above information. The FCBs are not
subject to the periodic reporting requirements of the Exchange Act.
PRIVATE LABEL CUSTODY RECEIPT SECURITIES
If so specified in the applicable prospectus supplement, the Trust for
a series may include, but will not consist entirely of, any combination of (1)
receipts or other instruments, other than Treasury Strips, evidencing ownership
of specific interest and/or principal payments to be made on particular Treasury
Bonds held by a custodian ("Private Label Custody Strips") and (2) receipts or
other instruments evidencing ownership of specific interest and/or principal
payments to be made on specific Resolution Funding Corporation ("REFCO") bonds
("REFCO Strips"; and together with Private Label Custody Strips, "Private Label
Custody Receipt Securities"). The Private Label Custody Receipt Securities, if
any, included in a Trust are intended to assure investors that funds are
available to make specified payments of principal and/or interest due on the
related securities. Accordingly, the Private Label Custody Receipt Securities,
if any, included in a Trust are intended both to (1) support the ratings
assigned to the securities, and (2) perform a function similar to that described
in this prospectus under "Description of the Transfer and Servicing
Agreements--Credit and Cash Flow Enhancement". A description of the respective
general features of Private Label Custody Strips and REFCO Strips is set forth
below.
The prospectus supplement for each series of securities the Trust with
respect to which contains Private Label Custody Receipt Securities will contain
information as to:
(1) the title and series of each Private Label Custody Receipt
Security, the aggregate principal amount, denomination and form
of each Private Label Custody Receipt Security;
(2) the limit, if any, upon the aggregate principal amount of each
Private Label Custody Receipt Security;
(3) the dates on which, or the range of dates within which, the
principal of, and premium, if any, on, each Private Label Custody
Receipt Security will be payable;
(4) the rate or rates, or the method of determination of the rate or
rates, at which each Private Label Custody Receipt Security will
bear interest, if any, the date or dates from which the interest
will accrue, and the dates on which the interest will be payable;
(5) whether each Private Label Custody Receipt Security was issued at
a price lower than the principal amount of that Private Label
Custody Receipt Security;
(6) material events of default or restrictive covenants provided for
with respect to each Private Label Custody Receipt Security;
(7) the rating of each Private Label Custody Receipt Security, if
any;
(8) the issuer of each Private Label Custody Receipt Security;
(9) the material risks, if any, posed by each Private Label Custody
Receipt Security and the issuer of each Private Label Custody
Receipt Security, which risks, if appropriate, will be described
in the "Risk Factors" section of the related prospectus
supplement; and
(10) any other material terms of each Private Label Custody Receipt
Security.
With respect to a Trust which includes a pool of Private Label Custody Receipt
Securities, the related prospectus supplement will, to the extent applicable,
describe the composition of the Private Label Custody Receipt Securities' pool,
particular material events of default or restrictive covenants common to the
Private Label Custody Receipt Securities, and, on an aggregate, percentage or
weighted average basis, as applicable, the characteristics of the pool with
respect to the terms set forth in (3), (4) and (5) of the preceding sentence and
any other material terms regarding the pool.
The Private Label Custody Receipt Securities included in a Trust will
be senior, unsecured, nonredeemable obligations of the issuers of the Private
Label Custody Receipt Securities, will be denominated in United States dollars
and, if rated, will be rated at least investment grade by at least one
nationally recognized rating agency. In addition, the inclusion of Private Label
Custody Receipt Securities in a Trust with respect to a series of securities is
conditioned upon their characteristics being in form and substance satisfactory
to the Rating Agency rating the related series of securities. Each Trust will be
provided with an opinion of Federal Tax Counsel to the effect that the Private
Label Custody Receipt Securities included in the Trust are exempt from the
registration requirements of the securities Act. A copy of the opinion will be
filed with the SEC in a Current Report on Form 8-K or in a post-effective
amendment to the Registration Statement.
PRIVATE LABEL CUSTODY STRIPS
The first "stripping" of Treasury Bonds occurred in the 1970s when
government securities dealers physically separated coupons from definitive
certificates and offered them to investors as tax-deferred investments.
Investors were able to purchase the "strip" at a deep discount and pay no
federal income tax until resale or maturity. This tax treatment was limited in
1982 by the Tax Equity and Fiscal Responsibility Act ("TEFRA") which required
holders of strips to accrue a portion of the discount toward par annually and
report this accrual, even though unrealized, as taxable income. TEFRA also
required that all new Treasury issues be made available only in book-entry form.
The shift to "book-entry only" Treasury Bonds created a shortage of
the physical certificates needed for stripping. In response, various dealers
created custodial receipt programs in which Treasury Bonds in book-entry form
were deposited with custodians who would then issue certificates evidencing
rights in principal and interest payments. Some of the better known programs
first came to market in 1982 and 1983. Although available eventually in
denominations as small as $1,000, these custodial receipts lacked the liquidity
of the physical strips. While physical strips had multiple market-makers,
custodial receipts were proprietary and, as such, the sole market-maker would
usually be an affiliate of the program's sponsor. As a result, the market that
developed for the receipts was segmented.
In early 1984, a group of dealers sought to enhance the liquidity of
custodial receipts by developing a generic, multiple market-maker security known
as a TR (Treasury Receipt). A large secondary market quickly developed in these
generic Treasury Strips.
Treasury Receipts, physical strips and the proprietary receipts trade
at varying discounts from STRIPS which reflect, among other things, lower levels
of liquidity and the structuring difference discussed above.
A holder of a Private Label Custody Strip, as opposed to a STRIP,
cannot enforce payment on a Treasury Strip against the Treasury, instead, the
holder must look to the custodian for payment. The custodian, and the holder of
a Private Label Custody Strip that obtains ownership of the underlying Treasury
Bond, can enforce payment of the underlying Treasury Bond against the Treasury.
If any Private Label Custody Strips are included in a Trust with respect to any
series of securities, the prospectus supplement for the series will include the
identity and a brief description of each custodian that issued the Private Label
Custody Strips. If the company knows that the company of the Treasury Bonds
underlying the Private Label Custody Strips is the company or any of its
affiliates, the company will disclose this fact in the related prospectus
supplement.
REFCO STRIPS
A REFCO Bond may be divided into its separate components, consisting
of: (1) each future semiannual interest distribution (an "Interest Component");
and (2) the principal payment (the "Principal Component") (each component
individually referred to in this prospectus as a "REFCO Strip"). REFCO Strips
are not created by REFCO. Instead, third parties such as investment banking
firms create them. Each REFCO Strip has an identifying designation and CUSIP
number. REFCO Strips generally trade in the market for Treasury Strips at yields
of a few basis points over Treasury Strips of similar maturities. REFCO Strips
are viewed generally by the market as liquid investments.
For a REFCO Bond to be separated into its components, the par amount
of the REFCO Bond must be in an amount which, based on the stated interest rate
of the REFCO Bond, will produce a semiannual interest payment of $1,000 or an
integral multiple of $1,000. REFCO Bonds may be separated into their components
at any time from the issue date until maturity. Once created, REFCO Strips are
maintained and transferred in integral multiples of $1,000.
A holder of a REFCO Strip cannot enforce payment on the REFCO Strip
against REFCO. Instead, the holder must look to the custodian for payment. The
custodian, and the holder of a REFCO Strip that obtains ownership of the
underlying REFCO Bond, can enforce payment of the underlying REFCO Bond against
REFCO. The identity and a brief description of each custodian that has issued
any REFCO Strip included in a Trust will be set forth in the related prospectus
supplement. If the company knows that the company of the REFCO Bonds underlying
the REFCO Strips included in the Trust is the company or any of its affiliates,
the company will disclose this fact in the related prospectus supplement.
WEIGHTED AVERAGE LIFE OF THE SECURITIES
The weighted average life of the notes, if any, and the certificates
of any series generally will be influenced by the rate at which the principal
balances of the related Primary Assets are paid, which payment may be in the
form of scheduled amortization or prepayments. With respect to securities backed
by Receivables and to receivables underlying Collateral Certificates, the term
"prepayments" includes prepayments in full, partial prepayments, including those
related to rebates of extended warranty contract costs and insurance premiums,
liquidations due to defaults, as well as receipts of proceeds from physical
damage, credit life and disability insurance policies, or the Repurchase Amount
of Receivables and/or Collateral Certificates repurchased by the company or a
seller or purchased by a servicer for administrative reasons. With respect to
securities backed by Government Securities and/or Private Label Custody Receipt
Securities, as applicable, the term "prepayments" means the Repurchase Amount of
Government Securities and/or Private Label Custody Receipt Securities
repurchased by the company or purchased by a servicer for administrative
reasons. Substantially all of the Receivables and receivables underlying
Collateral Certificates are prepayable at any time without penalty to the
obligor. The rate of prepayment of automotive receivables is influenced by a
variety of economic, social and other factors, including the fact that an
obligor generally may not sell or transfer the Financed Vehicle securing a
receivable without the consent of the related seller. The rate of prepayment on
receivables may also be influenced by the structure of the loan. In addition,
under some circumstances, the related seller will be obligated to repurchase
Receivables from a given Trust pursuant to the related Receivables Purchase
Agreement as a result of breaches of representations and warranties, and the
servicer will be obligated to purchase Receivables from the Trust pursuant to
the Sale and Servicing Agreement or Pooling and Servicing Agreement as a result
of breaches of specific covenants. See "Description of the Transfer and
Servicing Agreements--Sale and Assignment of Primary Assets" and "Servicing
Procedures". See also "Certain Matters Regarding the Servicer--Termination"
regarding the servicer's option to purchase Primary Assets from a given Trust.
In light of the above considerations, there can be no assurance as to
the amount of principal payments to be made on the notes and/or certificates of
a series on each Distribution Date since the amount will depend, in part, on the
amount of principal collected on the related Primary Assets during the
applicable Collection Period. Any reinvestment risks resulting from a faster or
slower incidence of payment of Primary Assets will be borne entirely by the
noteholders and certificateholders. The related prospectus supplement may set
forth some additional information with respect to the maturity and prepayment
considerations applicable to particular Primary Assets and the related series of
securities.
POOL FACTORS AND TRADING INFORMATION
The "Note Pool Factor" for each class of notes will be a seven-digit
decimal which the servicer or trustee will compute prior to each distribution
with respect to the class of notes indicating the remaining outstanding
principal balance of that class of notes, as of the applicable Distribution
Date, after giving effect to payments to be made on the applicable Distribution
Date, as a fraction of the initial outstanding principal balance of the class of
notes. The "Certificate Pool Factor" for each class of certificates will be a
seven-digit decimal which the servicer or trustee will compute prior to each
distribution with respect to the class of certificates indicating the remaining
certificate balance of the class of certificates, as of the applicable
Distribution Date, after giving effect to distributions to be made on the
applicable Distribution Date, as a fraction of the initial certificate balance
of the class of certificates. Each Note Pool Factor and each Certificate Pool
Factor will be 1.0000000 as of the related closing date, and after will decline
to reflect reductions in the outstanding principal balance of the applicable
class of notes or the reduction of the certificate balance of the applicable
class of certificates. A noteholder's portion of the aggregate outstanding
principal balance of the related class of notes will be the product of (1) the
original denomination of the noteholder's Note and (2) the applicable Note Pool
Factor at the time of determination. A certificateholder's portion of the
aggregate outstanding certificate balance for the related class of certificates
will be the product of (a) the original denomination of the certificateholder's
Certificate and (b) the applicable Certificate Pool Factor at the time of
determination.
As provided in the related prospectus supplement, the noteholders, if
any, and the certificateholders will receive reports on or about each
Distribution Date concerning payments received on the Receivables, the Pool
Balance and each Note Pool Factor or Certificate Pool Factor, as applicable. In
addition, Securityholders of record during any calendar year will be furnished
information for tax reporting purposes not later than the latest date permitted
by law. See "Certain Information Regarding the Securities-- Statements to
Securityholders".
THE SELLER AND THE SERVICER
Information with respect to the seller and the servicer will be set
forth in the related prospectus supplement.
USE OF PROCEEDS
If so provided in the related prospectus supplement, the net proceeds
from the sale of the securities of a series will be applied by the applicable
Trust to the purchase of the Primary Assets from the company or the seller, as
applicable. The company will use the portion of the net proceeds paid to it to
purchase the Primary Assets.
DESCRIPTION OF THE NOTES
Each owner trust will issue one or more classes of notes pursuant to
an indenture (an "Indenture") between the related owner trust and the indenture
trustee, a form of which has been filed as an exhibit to the Registration
Statement of which this prospectus forms a part. The following summary describes
the material provisions of each Indenture which are anticipated to be common to
any notes included in a series of securities. The following summary does not
purport to be a complete description of all terms of the related notes or
Indenture and therefore is subject to, and is qualified in its entirely by
reference to, the provisions of the related notes and Indenture.
If so specified in the related prospectus supplement, each class of
notes will initially be represented by one or more certificates registered in
the name of the nominee of DTC (together with any successor company selected by
the Trust, the "Depository"). The notes will be available for purchase in
minimum denominations of $1,000 or any other minimum denomination as shall be
specified in the related prospectus supplement and integral multiples of $1,000
or any other minimum denomination so specified in the related prospectus
supplement in book-entry form or any other form as shall be specified in the
related prospectus supplement. If the notes are available in book-entry form
only, the company has been informed by DTC that DTC's nominee will be Cede
unless another nominee is specified in the related prospectus supplement.
Accordingly, the nominee is expected to be the holder of record of the notes of
each class. If the notes are available in book-entry form only, unless and until
Definitive notes are issued under the limited circumstances described in this
prospectus or in the related prospectus supplement, no noteholder will be
entitled to receive a physical certificate representing a Note. If the notes are
available in book-entry form only, all references in this prospectus and in the
related prospectus supplement to actions by noteholders refer to action taken by
DTC upon instructions from it participating organizations, and all references in
this prospectus and in the related prospectus supplement to distributions,
notices, reports and statements to noteholders refer to distributions, notices,
reports and statements to DTC or its nominee, as registered holder of the notes,
for distribution to noteholders in accordance with DTC's procedures with respect
to distributions. See "Certain Information Regarding the Securities--Book-Entry
Registration" and "--Definitive Securities".
DISTRIBUTION OF PRINCIPAL AND INTEREST
The timing and priority of payment, seniority, allocations of losses,
interest rate and amount of or method of determining payments of principal and
interest on each class of notes of a series will be described in the related
prospectus supplement. The right of holders of any class of notes to receive
payments of principal and interest may be senior or subordinate to the rights of
holders of one or more other class or classes of notes of the series, as
described in the related prospectus supplement. The related prospectus
supplement may provide that payments of interest on the notes will be made prior
to payments of principal on the notes. If so provided in the related prospectus
supplement, a series of notes may include one or more classes of strip notes
entitled to (1) principal payments with disproportionate, nominal or no interest
payments or (2) interest payments with disproportionate, nominal or no principal
payments. Each class of notes may have a different interest rate, which may be a
fixed, variable or adjustable interest rate, and which may be zero for some
classes of strip notes, or any combination of the foregoing. The related
prospectus supplement will specify the interest rate for each class of notes of
a series or the method for determining the interest rate. One or more classes of
notes of a series may be redeemable in whole or in part under the circumstances
specified in the related prospectus supplement, including as a result of the
exercise by the servicer of its option to purchase the related Receivable Pool.
See "Certain Matters Regarding the Servicer--Termination".
To the extent specified in any prospectus supplement, one or more
classes of notes of a given series may have fixed principal payment schedules,
as set forth in the prospectus supplement. Holders of any notes will be entitled
to receive payments of principal on any given Distribution Date in the
applicable amount set forth on the schedule with respect to the notes, in the
manner and to the extent set forth in the related prospectus supplement.
The related prospectus supplement may also provide that payment of
interest to noteholders of all classes within a series will have the same
priority. Under some circumstances, the amount available for payments could be
less than the amount of interest payable on the notes on a Distribution Date, in
which case each class of notes will receive its ratable share, based upon the
aggregate amount of interest due to the class of notes, of the aggregate amount
available to be distributed on the date as interest on the notes of the series.
See "Description of the Transfer and Servicing Agreements--Distributions" and
"--Credit and Cash Flow Enhancement".
In the case of a series of securities issued by an owner trust that
includes two or more classes of notes, the sequential order and priority of
payment in respect of principal and interest, and any schedule or formula or
other provisions applicable to the determination of the sequential order and
priority of payment in respect of principal and interest, of each class will be
set forth in the related prospectus supplement. Payments in respect of principal
of and interest on any class of notes will be made on a pro rata basis among all
the noteholders of the class or by any other method as is specified in the
prospectus supplement.
If specified in the related prospectus supplement, the Trust may issue
securities from time to time and use the proceeds of this issuance to make
principal payments with respect to a series.
PROVISIONS OF THE INDENTURE
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT. "Events of Default"
in respect of a series of notes under the related Indenture will consist of:
(1) a default for five days or more in the payment of any interest on
any Note;
(2) a default in the payment of the principal of, or any installment
of the principal of, any Note when the same becomes due and
payable;
(3) a default in the observance or performance of any material
covenant or agreement of the related Trust made in the related
Indenture and the continuation of any default for a period of 30
days, or for a longer period, not in excess of 90 days, as may be
reasonably necessary to remedy the default; provided that the
default is capable of remedy within 90 days or less and servicer
on behalf of the related trustee delivers an Officer's
Certificate to the related indenture trustee to the effect that
the trustee has commenced, or will promptly commence and
diligently pursue, all reasonable efforts to remedy the default,
after notice of the default is given to the related Trust by the
applicable indenture trustee or to the Trust and the related
indenture trustee by the holders of 25% of the aggregate
outstanding principal amount of the notes;
(4) any representation or warranty made by the Trust in the related
Indenture or in any certificate delivered pursuant to the related
Indenture or in connection with the related Indenture having been
incorrect in a material respect as of the time made, if the
breach is not cured with 30 days, or for a longer period, not in
excess of 90 days, as may be reasonably necessary to remedy the
default; provided that the default is capable of remedy within 90
days or less and servicer on behalf of the related trustee
delivers an Officer's Certificate to the related indenture
trustee to the effect that the trustee has commenced, or will
promptly commence and diligently pursue, all reasonable efforts
to remedy the default, after notice of the breach is given to the
Trust by the applicable indenture trustee or to the Trust and the
indenture trustee by the holder of 25% of the aggregate
outstanding principal amount of the notes;
(5) particular events of bankruptcy, insolvency, receivership or
liquidation with respect to the Trust or a substantial part of
the property of the Trust and
(6) any other events as may be specified in the prospectus
supplement.
The amount of principal required to be paid to noteholders of each series under
the related Indenture on any Distribution Date generally will be limited to
amounts available to be deposited in the applicable Note Distribution 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 applicable final
scheduled Distribution Date for the class of notes.
If an Event of Default should occur and be continuing with respect to
the notes of any series, the related indenture trustee or holders of a majority
in principal amount of the notes may declare the principal of the notes to be
immediately due and payable. This declaration may, under some circumstances, be
rescinded by the holders of a majority in principal amount of the notes then
outstanding.
If the notes of any series are declared due and payable following an
Event of Default, the related indenture trustee may institute proceedings to
collect amounts due on the notes, foreclose on the property of the Trust,
exercise remedies as a secured party, sell the related Primary Assets or elect
to have the applicable Trust maintain possession of the Primary Assets and
continue to apply collections on these Primary Assets as if there had been no
declaration of acceleration. Subject to particular limitations that, if
applicable, will be specified in the related prospectus supplement, the
indenture trustee will be prohibited from selling the Primary Assets following
an Event of Default, other than a default in the payment of any principal of, or
a default for five days or more in the payment of any interest on, any Note of
the series, unless
o the holders of all outstanding notes consent to the sale,
o the proceeds of the sale are sufficient to pay in full the
principal of and the accrued interest on the outstanding notes at
the date of sale or
o the indenture trustee determines that the proceeds of the Primary
Assets would not be sufficient on an ongoing basis to make all
payments on the notes as these payments would have become due if
these 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 the notes.
Subject to the provisions of the applicable Indenture relating to the
duties of the related indenture trustee, if an Event of Default occurs and is
continuing with respect to a series of notes, the indenture trustee will be
under no obligation to exercise any of the rights or powers under the Indenture
at the request or direction of any of the holders of the notes if it reasonably
believes it will not be adequately indemnified against the costs, expenses and
liabilities that might be incurred by it in complying with the request. Subject
to the provisions for indemnification and particular limitations contained in
the related Indenture, the holders of a majority of the aggregate outstanding
principal amount of the notes of a series will have the right to direct the
time, method and place of conducting any proceeding or exercising any remedy
available to the related indenture trustee. In addition, the holders of notes
representing a majority of the aggregate outstanding principal amount of the
notes may, in some cases, waive any default with respect to the notes, except a
default in the payment of principal of or interest on any Note or a default in
respect of a covenant or provision of the Indenture that cannot be modified or
amended without the waiver or consent of the holders of all the outstanding
notes of the series.
Except to the extent provided in the related prospectus supplement, no
holder of a Note will have the right to institute any proceeding with respect to
the related Indenture, unless:
o the holder previously has given to the applicable indenture
trustee written notice of a continuing Event of Default;
o the holders of not less than 25% of the outstanding principal
amount of the notes have made written request to the indenture
trustee to institute a proceeding in its own name as indenture
trustee;
o the holder or holders have offered the indenture trustee
reasonable indemnity;
o the indenture trustee has for 60 days failed to institute a
proceeding; and
o no direction inconsistent with a written request has been given
to the indenture trustee during the 60-day period by the holders
of a majority of the outstanding principal amount of the notes of
the series.
With respect to any owner trust, none of the related indenture trustee
in its individual capacity, the related trustee in its individual capacity, any
holder of a Certificate representing an ownership interest in the Trust, or any
of their respective 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 related notes or for the agreements of the Trust contained in
the applicable Indenture.
No Trust may engage in any activity other than as described in this
prospectus or in the related prospectus supplement. No Trust will incur, assume
or guarantee any indebtedness other than indebtedness incurred pursuant to the
related notes and the related Indenture, pursuant to any Advances made to it by
the servicer or otherwise in accordance with the Related Documents.
CERTAIN COVENANTS. Each Indenture will provide that the related Trust
may not consolidate with or merge into any other entity, unless
o the entity formed by or surviving the consolidation or merger is
organized under the laws of the United States, any state or the
District of Columbia;
o the entity expressly assumes the Trust's obligation to make due
and punctual payments upon the notes of the related series and to
perform or observe every agreement and covenant of the Trust
under the Indenture;
o no Event of Default shall have occurred and be continuing
immediately after the merger or consolidation;
o the Trust has been advised by each Rating Agency that the merger
or consolidation will not result in the qualification, reduction
or withdrawal of its then-current rating of any class of the
notes or certificates of the series;
o the Trust has received an opinion of counsel to the effect that
the consolidation or merger would have no material adverse tax
consequence to the Trust or to any related noteholder or
certificateholder;
o any action as is necessary to maintain the lien and security
interest created by the Indenture has been taken; and
o the Trust has delivered to the related indenture trustee an
Officer's Certificate and an opinion of counsel that the merger
complies with the requirements and conditions precedent of the
Indenture.
No owner trust will:
o except as expressly permitted by the applicable Indenture, the
applicable Transfer and Servicing Agreements or other documents
with respect to the Trust (the "Related Documents"), sell,
transfer, exchange or otherwise dispose of any of the assets of
the Trust;
o claim any credit on or make any deduction from the principal and
interest payment in respect to the related notes, other than
amounts withheld under the Code or applicable state tax laws, or
assert any claim against any present or former holder of the
notes because of the payment of taxes levied or assessed upon the
Trust;
o dissolve or liquidate in whole or in part;
o permit the validity or effectiveness of the related Indenture to
be impaired or permit any person to be released from any
covenants or obligations with respect to the related notes under
the Indenture except as may be expressly permitted by the related
Indenture;
o permit any lien, charge, excise, claim, security interest,
mortgage or other encumbrance to be created on or extent to or
otherwise arise upon or burden the assets of the Trust or any
part of the Trust, or any interest in the Trust or the proceeds
of the Trust; or
o permit the lien of the related Indenture not to constitute a
valid first priority security interest, other than with respect
to a tax, mechanics' or similar lien, in the asset of the Trust.
Each indenture trustee and the related noteholders, by accepting the
related notes, will covenant that they will not at any time institute against
the applicable Trust any bankruptcy, reorganization or other proceeding under
any federal or state bankruptcy or similar law.
MODIFICATION OF INDENTURE. Each trustee and the related indenture
trustee may, with the consent of the holders of a majority of the aggregate
outstanding principal amount of the notes of the related series, execute a
supplemental indenture to add provisions to, change in any manner or eliminate
any provisions of, the related Indenture, or modify (except as provided below)
in any manner the rights of the related noteholders. Except as otherwise
provided in the related Indenture, without the consent of the holder of each
outstanding Note affected by the related supplemental indenture, no supplemental
indenture will:
o change the due date of any installment of principal of or
interest on any Note or reduce the principal amount of any Note,
the interest rate specified on any Note or the redemption price
with respect to any Note, change the provisions of the related
Indenture relating to the application of collections on, or the
proceeds of the sale of, the property of the related Trust to
payment of principal or interest on the notes of the series, or
change any place of payment where or the coin or currency in
which any Note or any interest on any Note is payable;
o impair the right to institute suit for the enforcement of
specific provisions of the related Indenture;
o reduce the percentage of the aggregate amount of the outstanding
notes of the series, the consent of the holders of which is
required for any supplemental indenture or for any waiver of
compliance with specific provisions of the related Indenture or
of particular defaults under the related Indenture and their
consequences as provided for in the related Indenture;
o modify or alter the provisions of the related Indenture regarding
the voting of notes held by the applicable owner trust, any other
obligor on the notes, the seller or an affiliate of any of them;
o reduce the percentage of the aggregate outstanding amount of the
notes, the consent of the holders of which is required to direct
the related indenture trustee to sell or liquidate the Primary
Assets if the proceeds of the sale would be insufficient to pay
the principal amount and accrued and unpaid interest on the
outstanding notes of the series;
o decrease the percentage of the aggregate principal amount of the
notes required to amend the sections of the related Indenture
that specify the percentage of the aggregate principal amount of
the notes of the series necessary to amend the related Indenture
or other related agreements; or
o permit the creation of any lien ranking prior to or on a parity
with the lien of the related Indenture with respect to any of the
collateral for the notes or, except as otherwise permitted or
contemplated in the Indenture, terminate the lien of the related
Indenture on any of the collateral or deprive the holder of any
Note of the security afforded by the lien of the related
Indenture.
An owner trust and the related indenture trustee may also enter into
supplemental indentures, without obtaining the consent of the noteholders of the
related series,
(1) to cure any ambiguity;
(2) to correct or supplement any provisions in the Indenture; or
(3) for the purpose of, among other things, adding any provisions to
or changing in any manner or eliminating any of the provisions of
the related Indenture;
provided that the action referred to in clause (3) above will not materially and
adversely affect the interest of any noteholder.
ANNUAL COMPLIANCE STATEMENT. Each owner trust will be required to file
annually with the related indenture trustee a written statement as to the
fulfillment of its obligations under the Indenture.
INDENTURE TRUSTEE'S ANNUAL REPORT. If required by the Trust Indenture
Act, the indenture trustee for each owner trust will mail each year to all
related noteholders a brief report relating to its eligibility and qualification
to continue as indenture trustee under the related Indenture, any amounts
advanced by it under the Indenture, the amount, interest rate and maturity date
of particular indebtedness, if any, owing by the owner trust to the applicable
Indenture Trust in its individual capacity, the property and funds physically
held by the indenture trustee as indenture trustee and any action taken by it
that materially affects the related notes that has not been previously reported.
SATISFACTION AND DISCHARGE OF INDENTURE. Each Indenture will be
discharged with respect to the collateral securing the related notes upon the
delivery to the related indenture trustee for cancellation of all of the notes
or, with limitations, upon deposit with the indenture trustee of funds
sufficient for the payment in full of all the notes.
THE INDENTURE TRUSTEE
The indenture trustee for a series of notes will be specified in the
related prospectus supplement. The indenture trustee for any series may resign
at any time, in which event the related owner trust will be obligated to appoint
a successor indenture trustee for the series. Additionally, the Holders of a
majority of the outstanding amount of the notes of a series may remove the
related indenture trustee and appoint a successor indenture trustee. An owner
trust may also remove the related indenture trustee if the indenture trustee
ceases to be eligible to continue in that capacity under the related Indenture,
if particular insolvency events occur with respect to the indenture trustee or
if the indenture trustee otherwise becomes incapable of acting as indenture
trustee. In these circumstances, the owner trust will be obligated to appoint a
successor indenture trustee for the applicable series of notes. No resignation
or removal of the indenture trustee and appointment of a successor indenture
trustee for a series of notes will become effective until the acceptance of the
appointment by the successor indenture trustee for the series and payment of all
fees and expenses owed to the outgoing indenture trustee.
DESCRIPTION OF THE CERTIFICATES
Each Trust will issue one or more classes of certificates pursuant to
a Trust Agreement or Pooling and Servicing Agreement, as applicable. A form of
each of the Trust Agreement and the Pooling and Servicing Agreement has been
filed as an exhibit to the Registration Statement of which this prospectus forms
a part. The following summary describes the material provisions of the Trust
Agreement and the Pooling and Servicing Agreement, in each case, which are
anticipated to be common to any certificates included in a series of securities.
The following summary does not purport to be a complete description of all terms
of the related notes, Trust Agreement or Pooling and Servicing Agreement and
therefore is subject to, and is qualified in its entirety by reference to, the
provisions of the related certificates and Trust Agreement or Pooling and
Servicing Agreement, as applicable.
If so specified in the related prospectus supplement and except for
the certificates, if any, of a series purchased by the company, a seller or any
of their respective affiliates, each class of certificates will initially be
represented by one or more certificates registered in the name of the
Depository. The certificates will be available for purchase in minimum
denominations of $10,000 or any other minimum denomination as shall be specified
in the related prospectus supplement and integral multiples of $1,000 in excess
of $10,000 or any other minimum denomination so specified in the related
prospectus supplement in book-entry form only, or any other form as shall be
specified in the related prospectus supplement. If the certificates are
available in book-entry form only, the company has been informed by DTC that
DTC's nominee will be Cede. Accordingly, the nominee is expected to be the
holder of record of the certificates of any series. If the certificates are
available in book-entry form only, unless and until Definitive certificates are
issued under the limited circumstances described in this prospectus or in the
related prospectus supplement, no certificateholder, other than the company, a
seller or any of their respective affiliates, will be entitled to receive a
physical certificate representing a Certificate. If the certificates are
available in book-entry form only, all references in this prospectus and in the
related prospectus supplement to actions by certificateholders refer to actions
taken by DTC upon instructions from the Participants, and all references in this
prospectus and in the related prospectus supplement to distributions, notices,
reports and statements to certificateholders refer to distributions, notices,
reports and statements to DTC or its nominee, as the case may be, as the
registered holder of the certificates, for distribution to certificateholders in
accordance with DTC's procedures with respect to distributions. See "Certain
Information Regarding the Securities--Book-Entry Registration" and "--Definitive
Securities". Any Certificate of a series owned by the company, a seller or any
of their respective affiliates will be entitled to equal and proportionate
benefits under the applicable Trust Agreement or Pooling and Servicing
Agreement, as applicable, except that, unless otherwise provided in the related
Trust Agreement, the certificates will be deemed not to be outstanding for the
purpose of determining whether the requisite percentage of certificateholders
has given any request, demand, authorization, direction, notice, or consent or
taken any other action under the Related Documents.
DISTRIBUTIONS OF PRINCIPAL AND INTEREST
The timing and priority of distributions, seniority, allocations of
losses, certificate pass-through rate and amount of or method of determining
distributions with respect to principal and interest on each class of
certificates of a series will be described in the related prospectus supplement.
Distributions of interest on these certificates will be made on the dates
specified in the related prospectus supplement (the "Distribution Date") and
will be made prior to distributions with respect to principal of the
certificates. To the extent provided in the related prospectus supplement, a
series of certificates may include one or more classes of strip certificates
entitled to (1) principal distributions with disproportionate, nominal or no
interest distributions or (2) interest distributions with disproportionate,
nominal or no principal distributions. Each class of certificates may have a
different certificate pass-through rate, which may be a fixed, variable or
adjustable certificate pass-through rate, and which may be zero for some classes
of strip certificates, or any combination of the foregoing. The related
prospectus supplement will specify the certificate pass-through rate for each
class of certificates of a series or the method for determining the certificate
pass-through rate.
In the case of a series of securities that includes two or more
classes of certificates, the timing, sequential order, priority of payment or
amount of distributions in respect of interest and principal, and any schedule
or formula or other provisions applicable to the determination of the timing,
sequential order, priority of payment or amount of distributions in respect of
interest and principal, of each class will be as set forth in the related
prospectus supplement. In the case of certificates issued by an owner trust,
distributions in respect of these certificates will be subordinated to payments
in respect of the notes of the related series and to the extent described in the
related prospectus supplement. Distributions in respect of interest on and
principal of any class of certificates will be made on a pro rata basis among
all holders of certificates of the class.
CERTAIN INFORMATION REGARDING THE SECURITIES
BOOK-ENTRY REGISTRATION
If so specified in the related prospectus supplement, DTC will act as
securities company for each class of securities offered by this prospectus. Each
class of securities initially will be represented by one or more certificates
registered in the name of Cede, the nominee of DTC. As the nominee of DTC, it is
anticipated that the only "noteholder" and/or "certificateholder" with respect
to a series of securities will be Cede. Beneficial owners of the securities
("Security Owners") will not be recognized as "noteholders" by the related
indenture trustee, as the term is used in each Indenture, or as
"certificateholders" by the related trustee, as the term is used in each Trust
Agreement or Pooling and Servicing Agreement, as applicable, and Security Owners
will be permitted to exercise the rights of noteholders or certificateholders
only indirectly through DTC and its participating members ("Participants").
DTC is a limited purpose trust company organized under the laws of the
State of New York, 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 Uniform Commercial Code (the "UCC") in effect in the
State of New York, and a "clearing agency" registered pursuant to the provisions
of Section 17A of the Exchange Act. DTC was created to hold securities for the
Participants and to facilitate the clearance and settlement of securities
transactions between Participants through electronic book-entries, thus
eliminating the need for physical movement of certificates. Participants include
securities brokers and dealers, banks, trust companies and clearing
corporations. Indirect access to the DTC system also is available to banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly (the "Indirect
Participants").
Security Owners that are not Participants or Indirect Participants but
desire to purchase, sell or otherwise transfer ownership of, or an interest in,
the securities may do so only through Participants and Indirect Participants. In
addition, all Security Owners will receive all distributions of principal and
interest from the related indenture trustee or the related trustee, as
applicable, through Participants or Indirect Participants. Under a book-entry
format, Security Owners may experience some delay in their receipt of payments,
since these payments will be forwarded by the applicable trustee or indenture
trustee to DTC's nominee. DTC will then forward the payments to the
Participants, which will then forward them to Indirect Participants or Security
Owners.
Under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC is required to make book-entry transfers
among Participants on whose behalf it acts with respect to the securities and to
receive and transmit distributions of principal of and interest on the
securities. Participants and Indirect Participants with which Security Owners
have accounts with respect to the securities similarly are required to make
book-entry transfers and to receive and transmit the payments on behalf of their
respective Security Owners. Accordingly, although Security Owners will not
possess physical certificates representing the securities, the Rules provide a
mechanism by which Participants and Indirect Participants will receive payments
and transfer or exchange interests, directly or indirectly, on behalf of
Security Owners.
Because DTC can act only on behalf of Participants, who in turn may
act on behalf of Indirect Participants, the ability of a Security Owner to
pledge securities to persons or entities that do not participate in the DTC
system, or otherwise take actions with respect to the securities, may be limited
due to the lack of a physical certificate representing the securities.
DTC has advised the company that it will take any action permitted to
be taken by a Security Owner under the Indenture, Trust Agreement or Pooling and
Servicing Agreement, as applicable, only at the direction of one or more
Participants to whose account with DTC the securities are credited. DTC may take
conflicting actions with respect to other undivided interests to the extent that
these actions are taken on behalf of Participants whose holdings include the
undivided interests.
Clearstream Banking, societe anonyme, 67 Bd Grande-Duchesse Charlotte,
L-2967 Luxembourg ("Clearstream, Luxembourg"), was incorporated in 1970 as
"Cedel S.A.", a company with limited liability under Luxembourg law (a societe
anonyme). Cedel S.A. subsequently changed its name to Cedelbank. On January 10,
2000, Cedelbank's parent company, Cedel International, societe anonyme ("CI")
merged its clearing, settlement and custody business with that of Deutsche Borse
Clearing AG ("DBC"). The merger involved the transfer by CI of substantially all
of its assets and liabilities (including its shares in CB) to a new Luxembourg
company, New Cedel International, societe anonyme ("New CI"), which is 50% owned
by CI and 50% owned by DBC's parent company Deutsche Borse AG. The shareholders
of these two entities are banks, securities dealers and financial institutions.
Cedel International currently has 92 shareholders, including U.S. financial
institutions or their subsidiaries. No single entity may own more than 5 percent
of Cedel International's stock.
Further to the merger, the Board of Directors of New Cedel
International decided to rename the companies in the group in order to give them
a cohesive brand name. The new brand name that was chosen is "Clearstream". With
effect from January 14, 2000 New CI has been renamed "Clearstream International,
societe anonyme". On January 18, 2000, Cedelbank was renamed "Clearstream
Banking, societe anonyme", and Cedel Global Services was renamed "Clearstream
Services, societe anonyme".
On January 17, 2000 DBC was renamed "Clearstream Banking AG". This
means that there are now two entities in the corporate group headed by
Clearstream International which share the name "Clearstream Banking", the entity
previously named "Cedelbank" and the entity previously named "Deutsche Brse
Clearing AG".
Clearstream, Luxembourg holds securities for its customers
("Clearstream, Luxembourg Participants") and facilitates the clearance and
settlement of securities transactions between Clearstream, Luxembourg customers
through electronic book-entry changes in accounts of Clearstream, Luxembourg
customers, thereby eliminating the need for physical movement of certificates.
Transactions may be settled by Clearstream, Luxembourg in any of 36 currencies,
including United States Dollars. Clearstream, Luxembourg provides to its
customers, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Clearstream, Luxembourg also deals with domestic
securities markets in over 30 countries through established depository and
custodial relationships. Clearstream, Luxembourg is registered as a bank in
Luxembourg, and as such is subject to regulation by the Commission de
Surveillance du Secteur Financier, "CSSF", which supervises Luxembourg banks.
Clearstream, Luxembourg's customers are world-wide financial institutions
including underwriters, securities brokers and dealers, banks, trust companies
and clearing corporations. Clearstream, Luxembourg's U.S. customers are limited
to securities brokers and dealers, and banks. Currently, Clearstream, Luxembourg
has approximately 2,000 customers located in over 80 countries, including all
major European countries, Canada, and the United States. Indirect access to
Clearstream, Luxembourg is available to other institutions that clear through or
maintain a custodial relationship with an account holder of Clearstream,
Luxembourg. Clearstream, Luxembourg has established an electronic bridge with
Morgan Guaranty Trust Company of New York as the Operator of the Euroclear
System (MGT/EOC) in Brussels to facilitate settlement of trades between
Clearstream, Luxembourg and MGT/EOC.
Except as required by law, none of Deutsche Banc Alex. Brown, the
company, the related seller, the related servicer, or related indenture trustee,
if any, or the related trustee will have any liability for any aspect of the
records relating to or payments made on account of beneficial ownership
interests of securities of any series held by DTC's nominee, or for maintaining,
supervising or reviewing any records relating to the beneficial ownership
interests.
DEFINITIVE SECURITIES
If so stated in the related prospectus supplement, the notes and/or
certificates of a given series will be issued in fully registered, certificated
form ("Definitive notes" and "Definitive certificates", respectively, and,
collectively, "Definitive Securities") to noteholders or certificateholders or
their respective nominees, rather than to DTC or its nominee, only if
o the related trustee of a grantor trust or the related indenture
trustee in the case of an owner trust, as applicable, determines
that DTC is no longer willing or able to discharge properly its
responsibilities as Depository with respect to the related
securities and the indenture trustee or trustee, as applicable,
is unable to locate a qualified successor,
o the indenture trustee or trustee, as applicable, elects, at its
option, to terminate the book-entry system through DTC or
o after the occurrence of an Event of Default or Servicer Default,
Security Owners representing at least a majority of the
outstanding principal amount of the notes or certificates, as
applicable, of the series, advise the related trustee through DTC
that the continuation of a book-entry system through DTC, or a
successor to DTC, is no longer in the best interests of the
related Security Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the related trustee or indenture trustee, as applicable,
will be required to notify the related Security Owners, through Participants, of
the availability of Definitive Securities. Upon surrender by DTC of the
certificates representing all securities of any affected class and the receipt
of instructions for re-registration, the trustee will issue Definitive
Securities to the related Security Owners. Distributions on the related
Definitive Securities will subsequently be made by the related trustee or
indenture trustee, as applicable, directly to the holders in whose name the
related Definitive Securities are registered at the close of business on the
applicable record date, in accordance with the procedures set forth in this
prospectus and in the related Indenture or the related Trust Agreement or
Pooling and Servicing Agreement, as applicable. Distributions will be made by
check mailed to the address of the holders as they appear on the register
specified in the related Indenture, Trust Agreement or Pooling and Servicing
Agreement, as applicable; however, the final payment on any securities, whether
Definitive Securities or securities registered in the name of a Depository or
its nominee, will be made only upon presentation and surrender of the securities
at the office or agency as specified in the notice of final distribution to
Securityholders.
Definitive Securities will be transferable and exchangeable at the
offices of the related trustee or indenture trustee, or any security registrar
appointed by the related trustee or the indenture trustee, as applicable. No
service charge will be imposed for any registration of transfer or exchange, but
the trustee or indenture trustee may require payment of a sum sufficient to
cover any tax or other governmental charge imposed in connection with a
registration of transfer or exchange.
STATEMENTS TO SECURITYHOLDERS
With respect to each series of securities, on or prior to each
Distribution Date, the related servicer will prepare and forward to the related
indenture trustee or trustee to be included with the distribution to each
Securityholder of record a statement setting forth for the related Collection
Period the following information, and any other information specified in the
related prospectus supplement:
(1) the amount of the distribution allocable to principal of each
class of securities of the series;
(2) the amount of the distribution allocable to interest on each
class of securities of the series;
(3) if applicable, the amount of the Servicing Fee paid to the
related servicer with respect to the related Collection Period;
(4) the outstanding principal balance and Note Pool Factor for each
class of notes, if any, and the certificate balance and
Certificate Pool Factor for each class of certificates of the
series as of the related record date;
(5) the balance of any Reserve Account or other form of credit
enhancement, after giving effect to any additions to the balance
of the Reserve Account or withdrawals from the Reserve Account or
reductions to the Reserve Account to be made on the following
Distribution Date; and
(6) the aggregate amount of realized losses, if any, in respect of
Receivables and any other loss, delinquency or other ratios set
forth in the related prospectus supplement for the related
Collection Period.
Items (1), (2) and (4) above with respect to the notes or certificates of a
series will be expressed as a dollar amount per $1,000 of initial principal
balance of the notes or the initial certificate balance of the certificates, as
applicable.
In addition, within the prescribed period of time for tax reporting
purposes after the end of each calendar year during the term of each Trust, the
related trustee or indenture trustee, as applicable, will mail to each person
who at any time during the related calendar year shall have been a registered
Securityholder a statement containing information for the purposes of the
Securityholder's preparation of federal income tax returns. See "Material
Federal Income Tax Consequences".
LIST OF SECURITYHOLDERS
Three or more holders of the notes of any series or one or more
holders of the notes evidencing not less than 25% of the aggregate outstanding
principal balance of the notes of the series may, by written request to the
related indenture trustee, obtain access to the list of all noteholders
maintained by the indenture trustee for the purpose of communicating with other
noteholders with respect to their rights under the related 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 of the series.
Three or more holders of the certificates of any series or one or more
holders of the certificates evidencing not less than 25% of the certificate
balance of the certificates may, by written request to the related trustee,
obtain access to the list of all certificateholders maintained by the trustee
for the purpose of communicating with other certificateholders with respect to
their rights under the related Trust Agreement or Pooling and Servicing
Agreement, as applicable, or under the certificates.
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
The following summary describes the material provisions, in each case,
to the extent anticipated to be common to any series of securities, of:
o each Receivables Purchase Agreement pursuant to which the seller
will transfer Receivables to the company,
o each Trust Agreement or Pooling and Servicing Agreement pursuant
to which a Trust will be created, Collateral Certificates,
Government Securities and/or Private Label Custody Receipt
Securities, as applicable, may be sold or transferred to the
Trust, certificates will be issued, and the servicer will service
Receivables and the trustee will manage Government Securities, if
any and Private Label Custody Receipt Securities, if any, in the
case of a grantor trust,
o each Sale and Servicing Agreement pursuant to which the company
will transfer Receivables to a Trust and the servicer will
service Receivables, in the case of an owner trust, or
o in the case of securities backed by Collateral Certificates, each
Trust Agreement pursuant to which a Trust will be created,
Collateral Certificates will be sold or transferred to the Trust,
Government Securities and Private Label Custody Receipt
Securities may be sold or transferred to the Trust and a trustee
will manage Collateral Certificates, Government Securities, if
any, and Private Label Custody Receipt Securities, if any
(collectively, the "Transfer and Servicing Agreements").
Forms of the Transfer and Servicing Agreements have been filed as exhibits to
the Registration Statement of which this prospectus forms a part. The following
summary does not purport to be a complete description of all of the terms of the
Transfer and Servicing Agreements and therefore is subject to, and is qualified
in its entirety by reference to, the provisions of the related Transfer and
Servicing Agreement.
SALE AND ASSIGNMENT OF PRIMARY ASSETS
In the case of Primary Assets consisting of Receivables, on or prior
to the related closing date, a seller will transfer and assign to the company,
pursuant to a Receivables Purchase Agreement, without recourse, all of its
right, title and interest in and to Receivables in the outstanding principal
amount specified in the related prospectus supplement, including its security
interests in the related Financed Vehicles. Each Receivable will be identified
in a schedule appearing as an exhibit to the related Receivables Purchase
Agreement (the "Schedule of Receivables").
In each Receivables Purchase Agreement the seller will represent and
warrant to the company, among other things, that
o the information set forth in the Schedule of Receivables is
correct in all material respects as of the applicable cutoff
date;
o the obligor on each Receivable is contractually required to
maintain physical damage insurance covering the related Financed
Vehicle in accordance with the seller's normal requirements;
o on the closing date, the Receivables are free and clear of all
security interests, liens, charges and encumbrances, and no
offsets, defenses or counterclaims have been asserted or
threatened;
o at the closing date, each of the Receivables is secured by a
perfected, first-priority security interest in the related
Financed Vehicle in favor of the seller;
o each Receivable, at the time it was originated, complied and, on
the closing date complies, in all material respects with
applicable federal and state laws, including, without limitation,
consumer credit, truth-in-lending, equal credit opportunity and
disclosure laws; and
o any other representations and warranties that may be set forth in
the related prospectus supplement.
To the extent specified in the related prospectus supplement, as of
the last day of the second Collection Period, or, if the seller so elects, the
last day of the first Collection Period, following the discovery by or notice to
the seller of any breach of a representation and warranty of the seller that
materially and adversely affects the interests of the related Trust in any
Receivable, the seller will be obligated to repurchase the Receivable, unless
the seller cures the breach in a timely fashion. The purchase price for any of
these Receivables will be equal to the unpaid principal balance owed by the
obligor on the Receivable, plus accrued and unpaid interest on the unpaid
principal balance at the applicable APR to the last day of the month of
repurchase (the "Repurchase Amount"). This repurchase obligation will constitute
the sole remedy available to the Securityholders, the related trustee and any
related indenture trustee for any uncured breach.
On the related closing date, the company will transfer and assign to
the related Trust, pursuant to a Sale and Servicing Agreement or Pooling and
Servicing Agreement, as applicable, without recourse, all of its right, title
and interest in and to Primary Assets in the outstanding principal amount
specified in the related prospectus supplement. Concurrently with the transfer
and assignment of Primary Assets to the related Trust, the related trustee or
indenture trustee, as applicable, will execute, authenticate and deliver the
related securities.
Pursuant to the terms of the Sale and Servicing Agreement or the
Pooling and Servicing Agreement, as applicable, the company will assign to the
related Trust the representations and warranties made by the related seller
under the related Receivables Purchase Agreement for the benefit of the related
Securityholders and will make limited representations and warranties with
respect to the other Primary Assets included in the Trust. To the extent that
the related seller does not repurchase a Primary Asset in the event of a breach
of its representations and warranties with respect to the Primary Asset, the
company will not be required to repurchase the Primary Asset unless the breach
also constitutes a breach of one of the company's representations and warranties
under the related Sale and Servicing Agreement or Pooling and Servicing
Agreement, as applicable, with respect to that Primary Asset, if any, and the
breach materially and adversely affects the interests of the Securityholders in
any Primary Asset. Neither the seller nor the company will have any other
obligation with respect to the Primary Assets or the securities.
TRUST ACCOUNTS
With respect to each owner trust, the servicer will establish and
maintain with the related indenture trustee, or the trustee will establish and
maintain, (a) one or more accounts, on behalf of the related Securityholders,
into which all payments made on or in respect of the related Primary Assets will
be deposited (the "Collection Account") and (b) an account, in the name of the
indenture trustee on behalf of the noteholders, into which amounts released from
the Collection Account and any Reserve Account or other form of credit
enhancement for payment to the noteholders will be deposited and from which all
distributions to the noteholders will be made (the "Note Distribution Account").
With respect to each owner trust and grantor trust, the servicer or the related
trustee will establish and maintain an account, in the name of the trustee on
behalf of the certificateholders, into which amounts released from the
Collection Account and any Reserve Account or other form of credit enhancement
for distribution to the certificateholders will be deposited and from which all
distributions to the certificateholders will be made (the "Certificate
Distribution Account"). With respect to any grantor trust, the servicer or the
related trustee will also establish and maintain the Collection Account and any
other Trust Account in the name of the related trustee on behalf of the related
certificateholders.
If so provided in the related prospectus supplement, the servicer will
establish for each series of securities an additional account (the "Payahead
Account"), in the name of the related indenture trustee, in the case of an owner
trust, or trustee, in the case of a grantor trust, into which, to the extent
required in the related Sale and Servicing Agreement or Pooling and Servicing
Agreement, as applicable, early payments made by or on behalf of obligors on
Precomputed Receivables will be deposited until the time these payments become
due. Until the time payments are transferred from the Payahead Account to the
Collection Account, they will not constitute collected interest or collected
principal and will not be available for distribution to noteholders or
certificateholders. Any other accounts to be established with respect to a Trust
will be described in the related prospectus supplement.
For each series of securities, funds in the Collection Account, Note
Distribution Account, Certificate Distribution Account and any Reserve Account
or other accounts identified in the related prospectus supplement (collectively,
the "Trust Accounts") will be invested as provided in the related Sale and
Servicing Agreement or Pooling and Servicing Agreement, as applicable, in
Eligible Investments. "Eligible Investments" will generally be limited to
investments acceptable to the Rating Agencies as being consistent with the
rating of the related securities. Eligible Investments will generally be limited
to obligations or securities that mature on or before the date of the next
scheduled distribution to Securityholders of the series. However, to the extent
permitted by the Rating Agencies, funds in any Reserve Account may be invested
in securities that will not mature prior to the date of the next scheduled
distribution with respect to the notes or certificates and will not be sold
prior to maturity to meet any shortfalls. Thus, the amount of available funds on
deposit in a Reserve Account at any time may be less than the balance of that
Reserve Account. If the amount required to be withdrawn from a Reserve Account
to cover shortfalls in collections on the related Receivables (as provided in
the related prospectus supplement) exceeds the amount of available funds on
deposit in the Reserve Account, a temporary shortfall in the amounts distributed
to the related noteholders or certificateholders could result, which could, in
turn, increase the average life of the related notes or certificates. Unless
otherwise and to the extent provided in the related prospectus supplement,
investment earnings on funds deposited in the Trust Accounts, net of losses and
investment expenses (collectively, "Investment Earnings"), will be deposited in
the applicable Collection Account on each Distribution Date and will be treated
as collections of interest on the related Receivables.
The Trust Accounts will be maintained as Eligible Deposit Accounts.
"Eligible Deposit Account" means either (a) a segregated account with an
Eligible Institution or (b) a segregated trust account with the corporate trust
department of a company institution organized under the laws of the United
States of America or any one of the states of the United States of America 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 the account,
so long as any of the securities of the company institution have a credit rating
from each Rating Agency in one of its generic rating categories that signifies
investment grade. "Eligible Institution" means, with respect to a Trust, (a) the
corporate trust department of the related indenture trustee or trustee, as
applicable, or (b) a company institution organized under the laws of the United
States of America or any one of the states of the United States of America or
the District of Columbia, or any domestic branch of a foreign bank, (1) that has
either (A) a long-term unsecured debt rating acceptable to the Rating Agencies
or (B) a short-term unsecured debt rating or certificate of deposit rating
acceptable to the Rating Agencies and (2) whose deposits are insured by the
FDIC.
PRE-FUNDING
If so specified in the related prospectus supplement, a portion of the
issuance proceeds of the securities of a particular series (this amount, the
"Pre-Funded Amount") will be deposited in an account (the "Pre-Funding Account")
to be established with the trustee, which will be used to acquire additional
Receivables from time to time during the time period specified in the related
prospectus supplement (the "Pre-Funding Period"). Prior to the investment of the
Pre-Funded Amount in additional Receivables, the Pre-Funded Amount may be
invested in one or more Eligible Investments. Except as otherwise provided in
the applicable Agreement, an "Eligible Investment" is any of the following, in
each case as determined at the time of the investment or contractual commitment
to invest in the relevant Eligible Investment, to the extent these investments
would not require registration of the Trust Fund as an investment company
pursuant to the Investment Company Act of 1940:
(a) negotiable instruments or securities represented by instruments
in bearer or registered or book-entry form which evidence
(1) obligations which have the benefit of the full faith and
credit of the United States of America, including company
receipts issued by a bank as custodian with respect to any
instrument or security held by the custodian for the benefit
of the holder of the company receipt,
(2) demand deposits or time deposits in, or bankers' acceptances
issued by, any depositary institution or trust company
incorporated under the laws of the United States of America
or any state of the United States of America and subject to
supervision and examination by Federal or state banking or
depositary institution authorities; provided that at the
time of the trustee's investment or contractual commitment
to invest in the relevant Eligible Investment, the
certificates of deposit or short-term deposits, if any, or
long-term unsecured debt obligations, other than the
obligations whose rating is based on collateral or on the
credit of a Person other than the institution or trust
company, of the depositary institution or trust company has
a credit rating in the highest rating category from each
Rating Agency,
(3) certificates of deposit having a rating in the highest
rating category from each Rating Agency or
(4) investments in money market funds which are, or which are
composed of instruments or other investments which are,
rated in the highest rating category from each Rating
Agency;
(b) demand deposits in the name of the trustee in any depositary
institution or trust company referred to in clause (a)(2) above;
(c) commercial paper, having original or remaining maturities of no
more than 270 days, having a credit rating in the highest rating
category from each Rating Agency;
(d) Eurodollar time deposits that are obligations of institutions
whose time deposits carry a credit rating in the highest rating
category from each Rating Agency;
(e) repurchase agreements involving any Eligible Investment described
in any of clauses (a)(1), (a)(3) or (d) above, so long as the
other party to the repurchase agreement has its long-term
unsecured debt obligations rated in the highest rating category
from each Rating Agency; and
(f) any other investment with respect to which each Rating Agency
rating the securities indicates will not result in the reduction
or withdrawal of its then existing rating of the securities.
Except as otherwise provided in the applicable Agreement, any
Eligible Investment must mature no later than the Business Day
prior to the next Distribution Date.
During any Pre-Funding Period, the seller or any other party specified
in the related prospectus supplement will be obligated, subject only to the
availability of additional Receivables, to transfer to the related Trust Fund
additional Receivables from time to time during the related Pre-Funding Period.
Additional Receivables will be required to satisfy specific eligibility criteria
more fully set forth in the related prospectus supplement, which eligibility
criteria will be consistent with the eligibility criteria of the Receivables
included in the Trust Fund as of the closing date subject to exceptions as are
expressly stated in the related prospectus supplement.
Although the specific parameters of the Pre-Funding Account with
respect to any issuance of securities will be specified in the related
prospectus supplement, it is anticipated that:
o the Pre-Funding Period will not exceed 90 days from the related
closing date;
o that the additional loans to be acquired during the Pre-Funding
Period will be subject to the same representations and warranties
as the Receivables included in the related Trust Fund on the
closing date, although additional criteria may also be required
to be satisfied, as described in the related prospectus
supplement; and
o the Pre-Funded Amount will not exceed 25% of the principal amount
of the securities issued pursuant to a particular offering.
SERVICING PROCEDURES
To assure uniform quality in servicing the Receivables and to reduce
administrative costs, the company and each Trust will designate the servicer as
custodian to maintain possession, as the Trust's agent, of the related
Receivables and any other documents relating to the Receivables. The seller's
and the servicer's accounting records and computer systems will be marked to
reflect the sale and assignment of the related Receivables to each Trust, and
UCC financing statements reflecting the sale and assignment will be filed.
The servicer will make reasonable efforts to collect all payments due
with respect to the Receivables and will, consistent with the related Sale and
Servicing Agreement or Pooling and Servicing Agreement, as applicable, follow
the collection procedures as it follows with respect to comparable Receivables
it services for itself and others. The prospectus supplement will specify that
the servicer may, in its discretion, arrange with the obligor on a Receivable to
extend or modify the payment schedule, but no arrangement will, if inconsistent
with its normal procedures, for purposes of any Sale and Servicing Agreement or
Pooling and Servicing Agreement, reduce the contract rate of, the amount of the
scheduled payments under, or extend the final payment date of, any Receivable
beyond the "Final Scheduled Maturity Date" (as the term is defined with respect
to any Receivables Pool in the related prospectus supplement). Some arrangements
may result in the servicer purchasing the Receivables for the Repurchase Amount,
while others may result in the servicer making Advances. The servicer may sell
the related Financed Vehicle securing any Receivable at a public or private
sale, or take any other action permitted by applicable law. See "Certain Legal
Aspects of the Receivables".
COLLECTIONS
With respect to each Trust, the servicer or the trustee will deposit
all payments on the related Primary Assets, from whatever source, and all
proceeds of the related Primary Assets, collected during the period specified in
the related prospectus supplement (a "Collection Period") into the related
Collection Account not later than two business days after receipt of payments
and proceeds of the related Primary Assets or any other period as specified in
the related prospectus supplement. However, notwithstanding the foregoing, these
amounts may be remitted to the Collection Account by the servicer on a monthly
basis on or prior to the applicable Distribution Date if no Servicer Default
exists and each other condition to making deposits less frequently than daily as
may be specified by the Rating Agencies or set forth in the related prospectus
supplement is satisfied. Pending deposit into the Collection Account, the
collections may be invested by the servicer at its own risk and for its own
benefit and will not be segregated from its own funds. If the servicer were
unable to remit the funds to the Collection Account on any Distribution Date,
Securityholders might incur a loss. To the extent set forth in the related
prospectus supplement, the servicer may, in order to satisfy the requirements
described above, obtain a letter of credit or other security for the benefit of
the related Trust to secure timely remittances of collections on the related
Primary Assets and payment of the aggregate Repurchase Amount with respect to
Receivables repurchased by the servicer.
Collections on a Precomputed Receivable during any Collection Period
will be applied first to the repayment of any outstanding Precomputed Advances
made by the servicer with respect to the Receivable, as described below, and
then to the scheduled monthly payment due on the Receivable. Any portion of the
collections remaining after the scheduled monthly payment has been made (these
excess amounts, the "Payaheads") will, unless the remaining amount is sufficient
to prepay the Precomputed Receivable in full, and subject to limitations which,
if applicable, will be specified in the related prospectus supplement, be
transferred to and kept in the Payahead Account until a later Distribution Date
on which the Payaheads may be applied either to the scheduled monthly payment
due during the related Collection Period or to prepay the Receivable in full.
ADVANCES
If specified in the related prospectus supplement, to the extent the
collections of interest and principal on a Precomputed Receivable for a
Collection Period fall short of the related scheduled payment, the servicer
generally will advance the shortfall (a "Precomputed Advance"). The servicer
will be obligated to make a Precomputed Advance on a Precomputed Receivable only
to the extent that the servicer, in its sole discretion, expects to recoup the
Advance from subsequent collections or recoveries on the Receivable or other
Precomputed Receivables in the related Receivables Pool. The servicer will
deposit the Precomputed Advance in the applicable Collection Account on or
before the business day preceding the applicable Distribution Date. The servicer
will recoup its Precomputed Advance from subsequent payments by or on behalf of
the related obligor or from insurance or liquidation proceeds with respect to
the related Receivable and will release its right to reimbursement in
conjunction with its purchase of the Receivable as servicer or, upon determining
that reimbursement from the preceding sources is unlikely, will recoup its
Precomputed Advance from any collections made on other Precomputed Receivables
in the related Receivables Pool.
If specified in the related prospectus supplement, on or before the
business day prior to each Distribution Date, the servicer will deposit into the
related Collection Account an amount equal to the amount of interest that would
have been due on the related Simple Interest Receivables at their respective
annual percentage rates for the related Collection Period, assuming that the
Simple Interest Receivables are paid on their respective due dates, minus the
amount of interest actually received on the Simple Interest Receivables during
the applicable Collection Period (a "Simple Interest Advance", and together with
Precomputed Advances, "Advances"). If the calculation results in a negative
number, an amount equal to the amount shall be paid to the servicer in
reimbursement of outstanding Simple Interest Advances. In addition, if specified
in the related prospectus supplement, if a Simple Interest Receivable becomes a
Liquidated Receivable (as the term is defined in the related prospectus
supplement), the amount of accrued and unpaid interest on the Simple Interest
Receivable that became a Liquidated Receivable, but not including interest for
the then current collection Period, will be withdrawn from the Collection
Account and paid to the servicer in reimbursement of outstanding Simple Interest
Advances. No advances of principal will be made with respect to Simple Interest
Receivables.
NET DEPOSITS
For administrative convenience, unless the servicer or the trustee is
required to remit collections to the Collection Account on a daily basis as
described under "Collections" above, the servicer or the trustee will be
permitted to make deposits of collections, aggregate Advances and Repurchase
Amounts for any Trust for or in respect of each Collection Period net of
distributions to be made to the servicer with respect to the Collection Period.
The servicer also may cause a single, net transfer to be made from the
Collection Account to the Payahead Account, or vice versa.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
To the extent provided in the related prospectus supplement, with
respect to each Trust the related servicer will be entitled to receive, out of
interest collected on or in respect of the related Primary Assets serviced by
the servicer, a fee for each Collection Period (the "Servicing Fee") in an
amount equal to the percentage per annum specified in the related prospectus
supplement (the "Servicing Fee Rate") of the Pool Balance related to the Primary
Assets as of the first day of the related Collection Period. Unless otherwise
provided in the related prospectus supplement, the Servicing Fee, together with
any portion of the Servicing Fee that remains unpaid from prior Distribution
Dates, will be paid solely to the extent of the Interest Distribution Amount;
however, the Servicing Fee will be paid prior to the distribution of any portion
of the Interest Distribution Amount to the holders of the notes or certificates
of any series.
To the extent provided in the related prospectus supplement, the
servicer will also collect and retain any late fees, prepayment charges and
other administrative fees or similar charges allowed by applicable law with
respect to Receivables and will be entitled to reimbursement from each Trust for
some liabilities. Payments by or on behalf of obligors will be allocated to
scheduled payments under the related Receivable and late fees and other charges
in accordance with the servicer's normal practices and procedures.
If applicable, the Servicing Fee will compensate the servicer for
performing the functions of a third party servicer of motor vehicle receivables
as an agent for the related Trust, including collecting and posting all
payments, responding to inquiries of obligors on the Receivables, investigating
delinquencies, sending payment statements and reporting the collateral. The
Servicing Fee will also compensate the servicer for administering the
Receivables, including making Advances, accounting for collection, furnishing
monthly and annual statements to the related Indenture Trust and/or trustee, and
generating federal income tax information for the Trust and for the related
noteholders and/or certificateholders as well as the Trust's compliance with the
reporting provisions under the Exchange Act. The Servicing Fee may also
reimburse the servicer for particular taxes, the fees of the related indenture
trustee and/or trustee, accounting fees, outside auditor fees, date processing
cost and other costs incurred in connection with administering the Primary
Assets.
DISTRIBUTIONS
With respect to each series of securities, beginning on the
Distribution Date specified in the related prospectus supplement, distributions
of principal and interest, or, where applicable, principal only or interest
only, on each class of securities entitled to these distributions will be made
by the related trustee or indenture trustee, as applicable, to the
certificateholders and noteholders of the series. The timing, calculation,
allocation, order, source and priorities of, and requirements for, all payments
to the holders of each class of notes and/or distributions to holders of each
class of certificates will be set forth in the related prospectus supplement.
With respect to each Trust, on each Distribution Date collections on
or in respect of the related Primary Assets will be transferred from the
Collection Account to the Note Distribution Account or Certificate Distribution
Account, as applicable, for distribution to the noteholders and
certificateholders to the extent provided in the related prospectus supplement.
Credit enhancement, such as a Reserve Account, will be available to cover
shortfalls in the amount available for distribution on the date to the extent
specified in the related prospectus supplement. As and to the extent described
in the related prospectus supplement, distributions in respect of principal of a
class of securities of a series may be subordinate to distributions in respect
of interests on the class, and distributions in respect of one or more classes
of certificates of the series may be subordinate to payments in respect of the
notes, if any, of the series or other classes of certificates. Distributions of
principal on the securities of a series may be based on the amount of principal
collected or due, or the amount of realized losses incurred, in a Collection
Period.
CREDIT AND CASH FLOW ENHANCEMENT
The amounts and types of any credit and cash flow enhancement
arrangements and the provider of the credit and cash flow enhancement
arrangements, if applicable, with respect to each class of securities of a
series will be set forth in the related prospectus supplement. To the extent
provided in the related prospectus supplement, credit or cash flow enhancement
may be in the form of subordination of one or more classes of securities,
Reserve Accounts, spread accounts, letters of credit, surety bonds, insurance
policies, over-collateralization, credit or liquidity facilities, guaranteed
investment contracts, swaps or other interest rate protection agreements,
repurchase obligations, other agreements with respect to third party payments or
other support, cash deposits, or any other arrangements that are incidental to
or related to the Primary Assets included in a Trust as may be described in the
related prospectus supplement, or any combination of the foregoing. If specified
in the applicable prospectus supplement, credit or cash flow enhancement for a
class of securities may cover one or more other classes of securities of the
same series, and credit enhancement for a series of securities may cover one or
more other series of securities.
The existence of a Reserve Account or other form of credit enhancement
for the benefit of any class or series of securities is intended to enhance the
likelihood of receipt by the Securityholders of the class or series of the full
amount of principal and interest due on the applicable class or series and to
decrease the likelihood that the Securityholders will experience losses. The
credit enhancement for a class or series of securities will not, as a general
rule, provide protection against all types of loss and will not guarantee
repayment of all principal and interest on a class or series of securities. If
losses occur which exceed the amount covered by credit enhancement or which are
not covered by the credit enhancement, Securityholders will bear their allocable
share of these losses, as described in the prospectus supplement. In addition,
if a form of credit enhancement covers more than one series of securities,
Securityholders of any series will be subject to the risk that credit
enhancement may be exhausted by the claims of Securityholders of other series.
RESERVE ACCOUNT. If so provided in the related prospectus supplement,
pursuant to the related Transfer and Servicing Agreement, the company or the
seller will establish for a series or class or classes of securities an account
(the "Reserve Account"), which will be maintained with the related indenture
trustee or trustee, as applicable. A Reserve Account will be funded by an
initial deposit by the company or the seller, as applicable, on the closing date
in the amount set forth in the related prospectus supplement. As further
described in the related prospectus supplement, the amount on deposit in the
Reserve Account may be increased or reinstated on each Distribution Date, to the
extent described in the related prospectus supplement, by the deposit there of
amounts from collections on the Primary Assets. The related prospectus
supplement will describe the circumstances under which and the manner in which
distributions may be made out of the Reserve Account, either to holders of the
securities covered by the Reserve Account or to the company, the seller or to
any other entity.
EVIDENCE AS TO COMPLIANCE
Each Sale and Servicing Agreement or Pooling and Servicing Agreement,
as applicable, will provide that a firm of independent public accountants will
furnish annually to the related Trust and indenture trustee and/or trustee a
statement as to compliance by the Sale and servicer during the preceding twelve
months, or, in the case of the first statement, during a shorter period that
shall have elapsed since the applicable closing date, with particular standards
relating to the servicing of the Receivables, the servicer's accounting records
and computer files with respect to the servicer's compliance and other matters.
Each Sale and Servicing Agreement or Pooling and Servicing Agreement,
as applicable, will also provide for delivery to the related Trust and indenture
trustee and/or trustee each year of a certificate signed by an officer of the
servicer stating that the servicer has fulfilled it obligations under the
related Sale and Servicing Agreement or Pooling and Servicing Agreement, as
applicable, throughout the preceding twelve months, or, in the case of the first
certificate, during a shorter period that shall have elapsed since the
applicable closing date, or, if there has been a default in the fulfillment of
any obligation, describing each default. The servicer will agree to give each
indenture trustee and/or trustee, as applicable, notice of particular Servicer
Defaults under the related Sale and Servicing Agreement or Pooling and Servicing
Agreement, as applicable.
Copies of the foregoing statements and certificates may be obtained by
Securityholders by a request in writing addressed to the related trustee or
indenture trustee, as applicable, at the Corporate Trust Office for the trustee
or indenture trustee specified in the related prospectus supplement.
STATEMENTS TO TRUSTEES AND THE TRUST
Prior to each Distribution Date with respect to each series of
securities, the servicer will provide to the applicable indenture trustee, if
any, and the applicable trustee as of the close of business on the last day of
the preceding Collection Period a statement setting forth substantially the same
information as is required to be provided in the periodic reports provided to
Securityholders of the series as described under "Certain Information Regarding
the Securities--Statements to Securityholders".
CERTAIN MATTERS REGARDING THE SERVICER
Each Sale and Servicing Agreement and Pooling and Servicing Agreement
will provide that the servicer may not resign from its obligations and duties as
servicer under the applicable Agreement, except upon determination that the
servicer's performance of his duties is no longer permissible under applicable
law or if resignation is required by regulatory authorities. No resignation will
become effective until the related indenture trustee or trustee, as applicable,
or a successor servicer has assumed the servicing obligations and duties under
the related Sale and Servicing Agreement or Pooling and Servicing Agreement, as
applicable.
Each Sale and Servicing Agreement and Pooling 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 related Trust
or Securityholders for taking any action or for refraining from taking any
action pursuant to the related Sale and Servicing Agreement or Pooling and
Servicing Agreement, as applicable, or for errors in judgment; provided, that
neither the servicer nor any person will be protected against any liability that
would otherwise be imposed by reason of wilful misfeasance, bad faith or gross
negligence in the performance of the servicer's duties or by reason of reckless
disregard of its obligations and duties under the applicable Agreement. In
addition, each Sale and Servicing Agreement and Pooling 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 its servicing responsibilities
under the related Sale and Servicing Agreement or Pooling and Servicing
Agreement, as applicable, and that, in its opinion, may cause it to incur any
expense or liability.
Under the circumstances specified in each Sale and Servicing Agreement
and Pooling 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, or any corporation which
assumes the obligations of the servicer, will be the successor to the servicer
under the related Sale and Servicing Agreement or Pooling and Servicing
Agreement, as applicable.
SERVICER DEFAULTS
A "Servicer Default" under each Sale and Servicing Agreement and
Pooling and Servicing Agreement will consist of:
(1) any failure by the servicer to deliver to the related trustee or
indenture trustee, as applicable, for deposit in any of the Trust
Accounts any required payment or to direct the related trustee or
Indenture Trust, as applicable, to make any required
distributions from the Trust Accounts, which failure continues
unremedied for five business days after discovery by an officer
of the servicer or written notice of failure is given (a) to the
servicer by the related trustee or indenture trustee, as
applicable, or (b) to the servicer and to the related trustee or
indenture trustee, as applicable, by holders of notes, if any,
evidencing not less that 25% of the aggregate outstanding
principal amount of the notes or, in the event a series of
securities includes no notes or if the notes have been paid in
full, by holders of certificates evidencing not less that 25% of
the certificate balance;
(2) any failure by the servicer duly to observe or perform in any
material respect any covenant or agreement in the related Sale
and Servicing Agreement or Pooling and Servicing Agreement, as
applicable, which failure materially and adversely affects the
rights of the related Securityholders and which continues
unremedied for 60 days after written notice of failure is given
to the servicer in the same manner described in clause (1) above;
(3) specific events of bankruptcy, insolvency, readjustment of debt,
marshaling of assets and liabilities or similar proceedings and
particular actions by the servicer indicating its insolvency,
reorganization pursuant to bankruptcy proceedings or inability to
pay its obligations; and
(4) any other events as may be set forth in the related prospectus
supplement.
RIGHTS UPON SERVICER DEFAULT
Generally, in the case of an owner trust, as long as a Servicer
Default under the related Sale and Servicing Agreement remains unremedied, the
related indenture trustee or holders of notes of the related series evidencing
not less than 50% of the aggregate principal amount of the notes then
outstanding may terminate all the rights and obligations of the servicer under
the related Sale and Servicing Agreement, and upon this termination 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 related Sale and Servicing Agreement and will be entitled to similar
compensation arrangements. Generally, in the case of any grantor trust, as long
as a Servicer Default under the related Pooling and Servicing Agreement remains
unremedied, the related trustee or holders of certificates of the related series
evidencing not less than 25% of the certificate balance may terminate all the
rights and obligations of the servicer under the related Pooling and Servicing
Agreement, and upon this termination the trustee or a successor servicer
appointed by the trustee will succeed to all the responsibilities, duties and
liabilities of the servicer under the related Pooling and Servicing Agreement
and will be entitled to similar compensation arrangements. If, however, a
bankruptcy trustee or similar official has been appointed for the servicer, and
no Servicer Default other than the appointment has occurred, the trustee or
official may have the power to prevent any indenture trustee or the related
noteholders or the trustee or the related certificateholders from effecting a
transfer of servicing. If the related indenture trustee, if any, or the related
trustee is unwilling or unable to act as successor to the servicer, the
indenture trustee or trustee, as applicable, may appoint, or may petition a
court of competent jurisdiction to appoint, a successor with a net worth of at
least $100,000,000 and whose regular business includes the servicing of motor
vehicle receivables. The indenture trustee, if any, or the trustee may arrange
for compensation to be paid to the successor servicer, which in no event may be
greater than the compensation payable to the servicer under the related Sale and
Servicing Agreement or Pooling and Servicing Agreement, as applicable.
WAIVER OF PAST DEFAULTS
To the extent provided in the related prospectus supplement, (1) in
the case of each owner trust, holders of the related notes evidencing not less
than a majority of the aggregate outstanding principal amount of the notes, or
of certificates evidencing not less than a majority of the outstanding
certificate balance, in the case of any default that does not adversely affect
the indenture trustee or noteholders, and (2) in the case of each grantor trust,
holders of certificates evidencing not less than a majority of the certificate
balance, may, on behalf of all the noteholders and certificateholders, waive any
default by the servicer in the performance of its obligations under the related
Sale and Servicing Agreement or Pooling and Servicing Agreement, as applicable,
and its consequences, except a default in making any required deposits to or
payments from any Trust Account or in respect of a covenant or provision in the
Sale and Servicing Agreement or Pooling and Servicing Agreement, as applicable,
that cannot be modified or amended without the consent of each Securityholder,
in which event the related waiver will require the approval of holders of all of
the securities of the series. No waiver will impair the Securityholders' right
with respect to any subsequent Servicer Default.
AMENDMENT
Unless otherwise provided in the related prospectus supplement, each
of the Transfer and Servicing Agreements may be amended by the parties to the
Transfer and Servicing Agreements without the consent of the related noteholders
or certificateholders:
(1) to cure any ambiguity,
(2) to correct or supplement any provisions in the related Transfer
and Servicing Agreement, or
(3) for the purpose of adding any provisions to, or changing in any
manner or eliminating any of the provisions of, the related
Transfer and Servicing Agreement;
provided, that any action in this clause (3) will not, in the opinion
of counsel satisfactory to the related trustee or indenture trustee, as
applicable, adversely affect in any material respect the interests of the
company or any noteholder.
The Transfer and Servicing Agreements may also be amended from time to
time by the parties to the Transfer and Servicing Agreements with the consent of
the holders of notes evidencing at least a majority of the aggregate principal
amount of the then outstanding notes, if any, and with the consent of the
holders of certificates evidencing at least a majority of the aggregate
principal amount of the then outstanding certificates, for the purpose of adding
any provisions to or changing in any manner or eliminating any of the provisions
of the related Transfer and Servicing Agreement or of modifying in any manner
the rights of the noteholders or certificateholders, as applicable; provided
that no amendment may (1) increase or reduce in any manner the amount of, or
accelerate or delay the timing of, collections of payments on or in respect of
the related Primary Assets or distributions that are required to be made for the
benefit of the noteholders or certificateholders or (2) reduce the aforesaid
percentage of the notes or certificates of the series the holders of which are
required to consent to any amendment, without the consent of the holders of all
of the outstanding notes or certificates, as the case may be, of the series.
PAYMENT IN FULL OF THE NOTES
Upon the payment in full of all outstanding notes of a given series
and the satisfaction and discharge of the related Indenture, the related trustee
will succeed to all the rights of the indenture trustee, and the
certificateholders of the series generally will succeed to the rights of the
noteholders of the series under the related Sale and Servicing Agreement.
TERMINATION
The obligations of the related servicer, the related trustee and the
related indenture trustee, if any, with respect to a Trust pursuant to the
related Transfer and Servicing Agreement will terminate upon the latest to occur
of
o the maturity or other liquidation of the last Primary Asset and
the disposition of any amounts received upon liquidation of any
remaining Primary Asset,
o the payment to noteholders, if any, and certificateholders of all
amounts required to be paid to them pursuant to the Transfer and
Servicing Agreements and
o the occurrence of either event described below.
In order to avoid excessive administrative expenses, the related
servicer will be permitted, at its option, to purchase from a Trust all
remaining Primary Assets as of the end of any Collection Period, if the then
outstanding Pool Balance is 10%, or, if any seller is a bank, 5%, or less of the
Pool Balance as of the related cutoff date, at a purchase price equal to the
price specified in the related prospectus supplement.
If and to the extent provided in the related prospectus supplement,
the indenture trustee or trustee, as applicable, will, within ten days following
a Distribution Date as of which the Pool Balance is equal to or less than the
percentage of the original Pool Balance specified in the related prospectus
supplement, solicit bids for the purchase of the Primary Assets remaining in the
Trust, in the manner and subject to the terms and conditions set forth in the
related prospectus supplement. If the indenture trustee or trustee receives
satisfactory bids as described in the related prospectus supplement, then the
Primary Assets remaining in the Trust will be sold to the highest bidder.
CERTAIN LEGAL ASPECTS OF THE RECEIVABLES
SECURITY INTERESTS IN FINANCED VEHICLES
In states in which retail installment contracts such as the
Receivables evidence the credit sale of automobiles, recreational vehicles,
vans, trucks, buses and trailers by dealers to obligors, the contracts also
constitute personal property security agreements and include grants of security
interests in the vehicles under the UCC as in effect in these states. Perfection
of security interests in the automobiles, recreational vehicles, vans, trucks,
buses and trailers financed, directly or indirectly, by a seller is generally
governed by the motor vehicle registration laws of the state in which the
vehicle is located. In general, a security interest in automobiles, recreational
vehicles, vans, trucks, buses and trailers is perfected by obtaining the
certificate of title to the financed vehicle or notation of the secured party's
lien on the vehicles' certificate of title. However, security interests in boats
may be perfected in one of three ways: in certificate of title states, a
security interest is perfected as described above; in other states, a security
interest may be perfected by filing a UCC-1 financing statement, however, a
purchase money lien in consumer goods is perfected without any filing
requirement and if a boat is required to be documented under Federal law, a
preferred mortgage may be obtained under the Ship Mortgage Act by filing the
mortgage with the Coast Guard, which is the exclusive method for perfecting
security interests in documented boats.
The contracts may represent marine retail installment sale contracts
purchased from Dealers or direct loans to Obligors secured by boats (the
"Financed Boats"). When originated, each contract may have granted a security
interest in the Financed Boat financed thereby. Each such security interest
would be required to be perfected under applicable state law and, in the case of
certain Financed Boats described below, under applicable federal law. Generally,
security interests in boats may be perfected in one of three ways: (i) in
"title" states, by notation of the secured party's lien on the certificate of
title issued by an applicable state motor vehicle or wildlife department or
other appropriate state agency; (ii) in non-title states, by filing a UCC-1
financing statement; and (iii) in respect of a boat eligible for documentation
under federal law, by filing all documents necessary to create a first preferred
ship mortgage (a "Preferred Mortgage") under the Ship Mortgage Act of 1920 (1988
Recodification) ss. 30101 et seq. (the "Ship Mortgage Statutes"). Vessels that
meet the federal five net ton standard (determined in a manner prescribed by 46
CFR Part 69 (Measurement of Vessels)) qualify for documentation under federal
law ("U.S. Documentable Boats"). However, federal documentation of vessels used
exclusively for recreational purposes is discretionary.
In the event that the originator of a contract failed to perfect the
security interest in a Financed Boat (for example, by complying with the UCC
rather than the applicable certificate of title statute, or by failing to comply
with applicable state title law, or the Ship Mortgage Statutes or applicable
United States Coast Guard (the "Coast Guard") regulations), such originator
would not have a perfected first priority security interest in such Financed
Boat. In this event, if third party liens equal or exceed the value of the
Financed Boat, the only recourse of the Trust would be against the Obligor on an
unsecured basis, or, if applicable, against a Dealer or financial intermediary
pursuant to its repurchase obligation or against the Seller.
Under the Ship Mortgage Statutes, in the absence of an assignment of
record of a Preferred Mortgage, the assignment of the related contract by itself
will not convey the perfected preferred mortgage lien on the Financed Boat
subject to such Preferred Mortgage and neither the Seller (if not the secured
party of record) nor the Trust will have a perfected security interest in such
Financed Boat. However, to the extent specified in the related Prospectus
Supplement, pursuant to the Sale and Servicing Agreement, the Seller will agree
to cause filings of the assignments to the Trust of certain specified Preferred
Mortgages (each a "Designated Preferred Mortgage") showing the chain of
ownership of each such Preferred Mortgage from the originator of each such
contract to the Trust, within the time period specified in the related
Prospectus Supplement. However, due to administrative burden and expense,
assignments may not be made of all Preferred Mortgages relating to the
contracts. Under the Ship Mortgage Statutes, in the absence of an assignment of
a Preferred Mortgage, or in the event an assignment of a Preferred Mortgage is
not effective, the Trust will not have a perfected security interest in the
related Financed Boat as against third parties without knowledge of the
transfer. In such case, if third party liens equal or exceed the value of such
Financed Boat, the only recourse of the Trust would be against the related
Obligor on an unsecured basis.
Under the laws of many states, certain possessory liens for repairs
performed on a Financed Boat and storage, as well as certain rights in favor of
federal and state governmental authorities arising from the use of a boat in
connection with illegal activities, may take priority over a security interest
perfected under state law. Certain U.S. federal tax liens may also have priority
over the security interest of a secured party. Under the Ship Mortgage Statutes,
a Preferred Mortgage supersedes a perfected state law security interest, a state
or federally created lien or forfeiture rights (so long as the secured party is
innocent of wrongdoing) other than preferred maritime liens such as those
arising under federal statutory or common-law for captain's or crew's wages,
tort claims (so-called "general average" claims) and salvage claims. Maritime
liens arising under federal law or state laws for repair, storage or supplies
which are subordinate to a preferred ship mortgage lien typically have priority
over state security interests under federal law or under applicable law of the
state where the contract was originated or under applicable law of the state to
which the related Financed Boats may have been relocated. Preferred federal
maritime liens are, of course, also prior to all state created security
interests or liens. The Seller will represent in the Sale and Servicing
Agreement that, as of the Initial Cut-off Date or Subsequent Cut-off Date, as
the case may be, it has no knowledge of any such liens with respect to any
Financed Boat related to a contract. However, such liens could arise at any time
during the term of a contract. No notice will be given to the Owner Trustee or
the Indenture Trustee in the event such a lien arises.
Generally all of the Receivables name the seller as obligee or
assignee and as the secured party. The seller will take all actions necessary
under the laws of the state in which the financed vehicle is located to perfect
the seller's security interest in the financed vehicle, including, where
applicable, having a notation of its lien recorded on the vehicle's certificate
of title or file a UCC-1 Financing Statement. If the seller, because of clerical
error or otherwise, has failed to take action with respect to financed vehicle,
it will not have a perfected security interest and its security interest may be
subordinate to the interest of, among others, subsequent purchasers of the
financed vehicle that give value without notice of the seller's security
interest and to whom a certificate of ownership is issued in the purchaser's
name, holders of perfected security interests in the financed vehicle and the
trustee in bankruptcy of the obligor. The seller's security interest may also be
subordinate to third parties in the event of fraud or forgery by the obligor or
administrative error by state recording officials or in the circumstances noted
below.
Pursuant to each Sale and Servicing Agreement and Pooling and
Servicing Agreement, the seller will assign its interests in the Financed
Vehicles securing the related Receivables to the related Trust. However, because
of administrative burden and expense, neither the seller nor the related trustee
will amend any certificate of title to identify the Trust as the new secured
party on the certificates of title relating to the Financed Vehicles. Unless
otherwise specified in the related prospectus supplement, the servicer will hold
certificates of title relating to the Financed Vehicles in its possession as
custodian for the Trust pursuant to the related Sale and Servicing Agreement or
Pooling and Servicing Agreement, as applicable. See "Description of the Transfer
and Servicing Agreements--Sale and Assignment of Primary Assets".
In most states, assignments such as those under the related Trust
Agreement or Pooling and Servicing Agreement, as applicable, are effective
conveyances of a security interest in the related financed vehicle without
amendment of any lien noted on the vehicle's certificate of title, and the
assignee succeeds by assignment to the assignor's rights as secured party.
Although re-registration of the motor vehicle is not necessary in these states
to convey a perfected security interest in the Financed Vehicles to a Trust,
because the related Trust will not be listed as legal owner on the certificates
of title to the Financed Vehicles, a Trust's security interest could be defeated
through fraud or negligence. However, in the absence of fraud or forgery by the
vehicle owner or the servicer or administrative error by state of local
agencies, the notation of the seller's lien on a certificate of title will be
sufficient to protect a Trust against the rights of subsequent purchasers of a
Financed Vehicle or subsequent creditors who take a security interest in a
Financed Vehicle. If there are any Financed Vehicles as to which the seller
fails to obtain a first-priority perfected security interest, the Trust's
security interest would be subordinate to, among others, subsequent purchasers
of Financed Vehicles and holders of perfected security interests in Financed
Vehicles. A failure, however, would constitute a breach of the seller's
representations and warranties under the related Receivables Purchase Agreement
and the seller will be required to repurchase the Receivable from the Trust
unless the breach is cured in a timely manner. See "Description of the Transfer
and Servicing Agreements--Sale and Assignment of Primary Assets" and "Risk
Factors--Certain Legal Aspects--Lack of Security Interests in Financed
Vehicles".
Under the laws of most states in which a perfected security interest
is governed by a certificate of title statute, a perfected security interest in
a motor vehicle continues for four months after the vehicle is moved to a new
state from the one in which it is initially registered and after until the owner
re-registers the motor vehicle in the new state. A majority of these states
require surrender of a certificate of title to re-register a vehicle.
Accordingly, a secured party must surrender possession if it holds the
certificate of title of the vehicle or, 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, the secured party would have the opportunity to
reperfect 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, an obligor somehow 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 vehicle, re-registration could defeat perfection. In the
ordinary course of servicing the Receivables, the servicer 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 and the purchaser of that Financed Vehicle attempts to re-register the
vehicle, the seller must surrender possession of the certificate of title or
will receive notice as a result of having its lien noted on the certificate of
title and accordingly will have an opportunity to require satisfaction of the
related Receivable before its lien is released. Under each Sale and Servicing
Agreement and Pooling and Servicing Agreement, the servicer will be obligated to
take appropriate steps, at its own expense, to maintain perfection of security
interests in the related Financed Vehicles and is obligated to purchase the
related Receivable if it fails to do so.
In states which the perfection of a security interest is governed by
the filing of a UCC-1 financing statement, or the obligor moves from a title
state to a non-title state, the servicer will file a UCC-1 financing statement
in the new state of the obligor as soon as possible after receiving notice of
the obligor's change of residence. UCC-1 financing statements expire after five
years. When the term of a loan exceeds five years, the filing must be continued
in order to maintain the servicer's perfected security interest. The servicer
takes steps to effect continuation. In the event that an obligor moves to a
state other than the state in which the UCC-1 financing statement is filed or in
some states to a different county in the state, under the laws of most states
the perfection of the security interest in the boat would continue for four
months after relocation, unless the perfection in the original jurisdiction
would have expired earlier. A new financing statement must be filed in the state
of relocation or, if the state is a title state, a notation on the certificate
of title must be made in order to continue the security interest. The servicer
generally takes steps to effect re-perfection upon notification of an address
change. Generally, in both title states and in non-title states, the servicer
will not re-perfect a state law security interest which has expired or where the
obligor has moved if the Receivable has a small balance, a short remaining term
and the obligor has a good payment record.
Under the laws of most states, liens for repairs performed on a motor
vehicle and liens for unpaid taxes take priority over even a perfected,
first-priority security interest in the vehicle. The Code also grants priority
to particular federal tax liens over the lien of a secured party. The laws of
some states and federal law permit the confiscation of motor 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 a confiscated motor vehicle. In each Receivables Purchase Agreement,
the seller will represent and warrant that, as of the date any Receivable is
sold to the Trust, the security interest in the related Financed Vehicle is or
will be prior to all other present liens, other than tax liens and other liens
that arise by operation of law, upon and security interests in the 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 related trustee, the related indenture trustee, if
any, or related Securityholders in the event a lien arises or confiscation
occurs. Any lien or confiscation arising or occurring after the closing date
will not give rise to a repurchase obligation of the seller under the related
Receivables Purchase Agreement.
REPOSSESSION
In the event of default by an obligor, the holder of the related
retail installment sale contract has all the remedies of a secured party under
the UCC, except where specifically limited by other state laws. The UCC remedies
of a secured party include the right to repossession by self-help means, unless
these means would constitute a breach of the peace. Self-help repossession is
the method employed by the servicer in most cases and is accomplished simply by
taking possession of the related motor vehicle. In cases where the 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 the vehicle must then be recovered in accordance with that order. In
some jurisdictions, the secured party is required to notify an obligor debtor of
the default and the intent to repossess the collateral and to give the obligor a
period of time within which to cure the default prior to repossession.
Generally, the right to cure may only be exercised on a limited number of
occasions during the term of the related contract.
NOTICE OF SALE; REDEMPTION RIGHTS
The UCC and other state laws require the secured party to provide the
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 may be held. The
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 unpaid principal balance of 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 or, in some states, by payment of delinquent installments or the unpaid
principal balance of the related obligation.
DEFICIENCY JUDGMENTS AND EXCESS PROCEEDS
The proceeds of the resale of any Financed Vehicle generally will be
applied first to the expenses of resale and repossession and then to the
satisfaction of the related indebtedness. While some states impose prohibitions
or limitations on deficiency judgments if the net proceeds from any resale do
not cover the full amount of the indebtedness, a deficiency judgment can be
sought in other states that do not prohibit or limit deficiency judgments.
However, the deficiency judgment would be a personal judgment against the
obligor for the shortfall, and a defaulting obligor can be expected to have very
little capital or sources of income available following repossession; in many
cases, therefore, 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 to the notice requirement, 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. In addition, the UCC permits the debtor 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 debtor or other interested person to
restrain 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 the resale of a motor vehicle and payment of all
related 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 the related vehicle or, if no subordinate
lienholder exists, to the former owner of the vehicle.
CONSUMER PROTECTION LAWS
Numerous federal and state consumer protection laws and related
regulations impose substantial requirements upon creditors and servicers
involved in consumer finance. These laws include the Truth-in-Lending Act, the
Equal Credit Opportunity Act, the Federal Trade Commission Act, the Fair Credit
Billing Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices
Act, the Magnuson-Moss Warranty Act, the Federal Reserve Board's Regulations B
and Z, the Soldiers' and Sailors' Relief Act, state adaptations of the National
Consumer Act and of the Uniform Consumer Credit Code, and state motor vehicle
retail installment sales acts, retail installment sales acts and other similar
laws. Also, the laws of some states impose finance charge ceilings and other
restrictions on consumer transactions and require contract disclosures in
addition to those required under 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 the
ability of an assignee, such as a Trust, to enforce consumer finance contracts
such as Receivables.
The so-called "Holder-in-Due-Course" rule of the Federal Trade
Commission (the "FTC Rule"), the provisions of which are generally duplicated by
the Uniform Consumer Credit Code, other statutes or the common law, has the
effect of subjecting a seller in a consumer credit transaction, and some related
creditors and their assignees, to all claims and defenses that the obligor in
the transaction could assert against the seller of the goods. Liability under
the FTC Rule is limited to the amounts paid by the obligor under the contract,
and the holder of the contract may also be unable to collect any balance
remaining due under the contract from the obligor. Most of the Receivables will
be subject to the requirements of the FTC Rule. Accordingly, each Trust, as
holder of the related Receivables, will be subject to any claims or defenses
that the purchasers of the related Financed Vehicles may assert against the
sellers of those Financed Vehicles. If an obligor were successful in asserting
any claims or defenses, the claim or defense would constitute a breach of the
seller's warranties under the related Receivables Purchase Agreement and would
create an obligation of the seller to repurchase the Receivable unless the
breach is cured in a timely manner. See "Description of the Transfer and
Servicing Agreements--Sale and Assignment of Primary Assets".
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.
In several cases, consumers have asserted that the self-help remedies
of secured parties under the UCC and related laws violate the due process
protections of the Fourteenth Amendment to the Constitution of the United
States. Courts have generally either upheld the notice provisions of the UCC and
related laws as reasonable or have found that the creditors' repossession and
resale do not involve sufficient state action to afford constitutional
protection to borrowers.
Under each Receivables Purchase Agreement the seller will represent
and warrant that each Receivable complies in all material respects with all
applicable federal and state laws. Accordingly, if an obligor has a claim
against a Trust for a violation of any law and that claim materially and
adversely affects the interests of the Trust in a Receivable, the violation
would constitute a breach of the seller's representation and warranty and would
create an obligation of the seller to repurchase the Receivable unless the
breach is cured. See "Description of the Transfer and Servicing Agreements--Sale
and Assignment of Primary Assets".
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 creditor to
realize upon collateral or enforce a deficiency judgment. For example, in a
Chapter 13 proceeding under the federal bankruptcy law, a court may prevent a
creditor from repossessing a motor vehicle and, as part of the rehabilitation
plan, may reduce the amount of the secured indebtedness to the market value of
the motor vehicle at the time of bankruptcy, as determined by the court, leaving
the party providing financing as a general unsecured creditor for the remainder
of the indebtedness. A bankruptcy court may also reduce the monthly payments due
under the related contract or change the rate of interest and time of repayment
of the indebtedness.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the anticipated material
United States federal income tax consequences of the purchase, ownership and
disposition of securities. The summary does not purport to deal with federal
income tax consequences applicable to all categories of holders, some of which
may be subject to special rules. For example, it does not discuss the tax
treatment of beneficial owners of notes ("Note Owners") or certificates
("Certificate Owners") that are insurance companies, regulated investment
companies or dealers in securities. Moreover, there are no cases or Internal
Revenue Service ("IRS") rulings on similar transactions involving both debt and
equity interests issued by a trust with terms similar to those of the notes and
the certificates. As a result, the IRS might disagree with all or part of the
discussion below. Prospective investors are urged to consult their own tax
advisors in determining the federal, state, local, foreign and any other tax
consequences to them of the purchase, ownership and disposition of the notes and
the certificates.
The following summary is based upon current provisions of the Internal
Revenue Code of 1986, as amended (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. Each Trust will be provided
with an opinion of tax counsel specified in the related prospectus supplement
("Federal Tax Counsel") regarding some related federal income tax matters
discussed below. An opinion of Federal 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. The opinion of Federal Tax Counsel specifically addresses
only those issues specifically identified below as being covered by that
opinion; however, the opinion also states that the additional discussion set
forth below accurately sets forth the advice of Federal Tax Counsel with respect
to material federal income tax issues. For purposes of the following summary,
references to the Trust, the notes, the certificates and related terms, parties
and documents shall be deemed to refer, unless otherwise specified in this
prospectus, to each Trust and the notes, certificates and related terms, parties
and documents applicable to the Trust.
TRUSTS WHICH ARE NOT TREATED AS GRANTOR TRUSTS
TAX CHARACTERIZATION OF THE TRUSTS. In the case of a Trust which is
not intended to be treated as a grantor trust (an "owner trust"), Federal Tax
Counsel will deliver its opinion that the Trust will not be an association, or
publicly traded partnership, taxable as a corporation for federal income tax
purposes. The opinion of Federal Tax Counsel will be based on the assumption
that the terms of the Trust Agreement and related documents will be complied
with, and on counsel's conclusions that the nature of the income of the Trust,
or restrictions, if any, on transfers of the certificates, will exempt the Trust
from the rule that some publicly traded partnerships are taxable as
corporations.
If a Trust were taxable as a corporation for federal income tax
purposes, the Trust would be subject to corporate income tax on its taxable
income. The Trust's taxable income would include all of its income on the
related Primary Assets, which might be reduced by its interest expense on the
notes. Any corporate income tax could materially reduce cash available to make
payments on the notes and distributions on the certificates, and Certificate
Owners, and possibly Note Owners, could be liable for any resulting corporate
income tax that is unpaid by the Trust.
TAX CONSEQUENCES TO NOTE OWNERS.
TREATMENT OF THE NOTES AS INDEBTEDNESS. The Trust will agree, and the
Note Owners will agree by their purchase of notes, to treat the notes as debt
for federal tax purposes. Federal Tax Counsel will, subject to exceptions which,
if applicable, will be specified in the related prospectus supplement, advise
the owner trust that the notes will be classified as debt for federal income tax
purposes, or classified in any other manner as shall be provided in the related
prospectus supplement. If, contrary to the opinion of Federal Tax Counsel, the
IRS successfully asserted that one or more of the notes did not represent debt
for federal income tax purposes, the notes might be treated as equity interests
in the Trust. If so treated, the Trust might be treated as a publicly traded
partnership that would be taxable as a corporation unless it met particular
qualifying income tests, and the resulting taxable corporation would not be able
to reduce its taxable income by deductions for interest expense on notes
recharacterized as equity. Treatment of the notes as equity interests in a
partnership could have adverse tax consequences to some holders, even if the
Trust were not treated as a publicly traded partnership taxable as a
corporation. For example, income allocable to foreign holders might be subject
to United States tax and United States tax return filing and withholding
requirements, income allocable to tax-exempt holders might constitute "unrelated
business taxable income" (if some, but not all, of the notes were
recharacterized as equity in a partnership), individual holders might be subject
to limitations on their ability to deduct their share of Trust expenses, and
income from the Trust's assets would be taxable to Note Owners without regard to
whether cash distributions are made to such Note Owners and without regard to
the Note Owner's method of tax accounting. The discussion below assumes that the
notes will be characterized as debt for federal income tax purposes.
INTEREST INCOME ON THE NOTES-GENERAL. Expect as discussed below,
interest on a note generally is includable in a Note Owner's income as ordinary
interest income when actually or constructively received, if the Note Owner uses
the cash method of accounting for federal income tax purposes, or when accrued,
if the Note Owner uses an accrual method of accounting for federal income tax
purposes.
Notes of certain series may be issued with "original issue discount"
within the meaning of Section 1273(a) of the Code. Holders of notes issued with
original issue discount generally must include original issue discount in gross
income for federal income tax purposes as it accrues, in advance of receipt of
the cash attributable to such income, under a method that takes account of the
compounding of interest. The Code requires that information with respect to the
original issue discount accruing on any note be reported periodically to the IRS
and to certain categories of Note Owners.
Each Trust will report original issue discount, if any, to the Note
Owners based on the Treasury regulations relating to original issue discount
(the "OID Regulations"). The OID Regulations concerning contingent payment debt
instruments do not apply to the prepayable debt instruments, such as the notes.
The OID Regulations provide that, in the case of debt instruments such
as the notes, (i) the amount and rate of accrual of original issue discount will
be calculated based on a reasonable assumed prepayment rate (the "Prepayment
Assumption"), and (ii) adjustments will be made in the amount and rate of
accrual of such discount to reflect differences between the actual prepayment
rate and the Prepayment Assumption. The method for determining the appropriate
assumed prepayment rate will eventually be set forth in Treasury regulations,
but those regulations have not yet been issued. The applicable legislative
history indicates, however, that such regulations will provide that the assumed
prepayment rate for securities such as the notes will be the rate used in
pricing the initial offering of those securities. If the notes of a series are
issued with original issue discount, the Prospectus Supplement for that series
of notes will specify the Prepayment Assumption. However, no representation is
made that the notes of that series will, in fact, prepay at a rate based on the
Prepayment Assumption or at any other rate.
In general, a note will be considered to be issued with original issue
discount if its stated redemption price at maturity exceeds its issue price.
Except as discussed below under "--Payment Lag Notes; Initial Period
Considerations," and "--Qualified Stated Interest," and in the case of certain
Variable Rate Notes (as defined below) and accrual notes, the stated redemption
price at maturity of a note is its principal amount. The issue price of a note
is the initial offering price to the public (excluding bond houses and brokers)
at which a substantial amount of the class of notes is sold. Notwithstanding the
general definition of original issue discount, such discount will be considered
to be zero for any note on which such discount is less than 0.25% of its stated
redemption price at maturity multiplied by its weighted average life. The
weighted average life of a note apparently is computed for purposes of this DE
MINIMIS rule as the sum, for all distributions included in the stated redemption
price at maturity of the note, of the amounts determined by multiplying (i) the
number of complete years (rounding down for partial years) from the applicable
closing date to the date on which each such distribution is expected to be made,
determined under the Prepayment Assumption, by (ii) a fraction, the numerator of
which is the amount of such distribution and the denominator of which is the
note's stated redemption price at maturity. The OID Regulations provide that
holders will include any DE MINIMIS original issue discount ratably as payments
of stated principal are made on the notes.
The Note Owner of a note issued with original issue discount must
include in gross income the sum of the "daily portions" of such original issue
discount for each day during its taxable year on which it held such note. In the
case of an original Note Owner, the daily portions of original issue discount
are determined first by calculating the portion of the original issue discount
that accrued during each period (an "accrual period") that begins on the day
following a Distribution Date (or in the case of the first such period, begins
on the applicable closing date) and ends on the next succeeding Distribution
Date. The original issue discount accruing during each accrual period is then
allocated ratably to each day during such period to determine the daily portion
of original issue discount for that day.
The portion of the original issue discount that accrues in any accrual
period will equal the excess, if any, of (i) the sum of (A) the present value,
as of the end of the accrual period, of all of the distributions to be made on
the note, if any, in future periods and (B) the distributions made on the note
during the accrual period that are included in such note's stated redemption
price at maturity, over (ii) the adjusted issue price of such note at the
beginning of the accrual period. The present value of the remaining
distributions referred to in the preceding sentence will be calculated (i)
assuming that the notes will be prepaid in future periods at a rate computed in
accordance with the Prepayment Assumption and (ii) using a discount rate equal
to the original yield to maturity of the notes. For these purposes, the original
yield to maturity of the notes will be calculated based on their issue price and
assuming that the notes will be prepaid in accordance with the Prepayment
Assumption. The adjusted issue price of a note at the beginning of any accrual
period will equal the issue price of such note, increased by the portion of the
original issue discount that has accrued during prior accrual periods, and
reduced by the amount of any distributions made on such note in prior accrual
periods that were included in such note's stated redemption price at maturity.
The daily portions of original issue discount may increase or decrease
depending on the extent to which the actual rate of prepayments diverges from
the Prepayment Assumption. If original issue discount accruing during any
accrual period computed as described above is negative, a Note Owner may only be
entitled to offset such amount against positive original issue discount accruing
on such note in future accrual periods. Such a Note Owner may be entitled to
deduct a loss to the extent that its remaining basis would exceed the maximum
amount of future payments to which such Note Owner is entitled. However,
Treasury regulations do not address this issue.
A subsequent Note Owner that purchases a note issued with original
issue discount at a cost that is less than its remaining stated redemption price
at maturity will also generally be required to include in gross income, for each
day on which it holds such note, the daily portions of original issue discount
with respect to the note, calculated as described above. However, if (i) the
excess of the remaining stated redemption price at maturity over such cost is
less than (ii) the aggregate amount of such daily portions for all days after
the date of purchase until final retirement of such note, then such daily
portions will be reduced proportionately in determining the income of such Note
Owner.
QUALIFIED STATED INTEREST. Interest payable on a note which qualifies
as "qualified stated interest" for purposes of the OID Regulations will not be
includable in the stated redemption price at maturity of the note. Conversely,
if the interest on a note does not constitute "qualified stated interest," such
interest will be includable in the stated redemption price at maturity of the
note and the note, consequently, will have original issue discount. Interest
payments will not qualify as qualified stated interest unless the interest
payments are "unconditionally payable." The OID Regulations state that interest
is unconditionally payable if reasonable legal remedies exist to compel timely
payment, or the debt instrument otherwise provides terms and conditions that
make the likelihood of late payment (other than a late payment that occurs
within a reasonable grace period) or nonpayment of interest a remote
contingency, as defined in the OID Regulations. Any terms or conditions that do
not reflect arm's length dealing or that the Note Owner does not intend to
enforce are not considered.
PREMIUM. A purchaser of a note that purchases such note at a cost
greater than its remaining stated redemption price at maturity will be
considered to have purchased such note at a premium, and may, under Section 171
of the Code, elect to amortize such premium under a constant yield method over
the life of the note. The Prepayment Assumption is probably taken into account
in determining the life of the note for this purpose. Except as provided in
regulations, amortizable premium will be treated as an offset to interest income
on the note.
PAYMENT LAG NOTES; INITIAL PERIOD CONSIDERATIONS. Certain notes may
provide for distributions of interest based on a period that is the same length
as the interval between Distribution Dates but ends prior to each Distribution
Date. Any interest that accrues prior to the applicable closing date may be
treated under the OID Regulations either (i) as part of the issue price and the
stated redemption price at maturity of the notes or (ii) as not included in the
issue price or the stated redemption price. The OID Regulations provide a
special application of the DE MINIMIS rule for debt instruments with long first
accrual periods where the interest payable for the first period is at a rate
which is effectively less than that which applies in all other periods. In such
cases, for the sole purpose of determining whether original issue discount is DE
MINIMIS, the OID Regulations provide that the stated redemption price is equal
to the instrument's issue price plus the greater of the amount of foregone
interest or the excess (if any) of the instrument's stated principal amount over
its issue price.
VARIABLE RATE NOTES. Under the OID Regulations, notes paying interest
at a variable rate (each, a "Variable Rate Note") are subject to special rules.
A Variable Rate Note will qualify as a "variable rate debt instrument" if (i)
its issue price does not exceed the total noncontingent principal payments due
under the Variable Rate Note by more than a specified DE MINIMIS amount; (ii) it
provides for stated interest, paid or compounded at least annually, at a current
value of (a) one or more qualified floating rates, (b) a single fixed rate and
one or more qualified floating rates, (c) a single objective rate or (d) a
single fixed rate and a single objective rate that is a qualified inverse
floating rate; and (iii) it does not provide for any principal payments that are
contingent, as defined in the OID Regulations, except as provided in (i), above.
Because the OID Regulations relating to contingent payment debt instruments do
not apply to prepayable debt instruments, such as the notes, principal payments
on the notes should not be considered contingent for this purpose.
A "qualified floating rate" is any variable rate where variations in
the value of such rate can reasonably be expected to measure contemporaneous
variations in the cost of newly borrowed funds in the currency in which the
Variable Rate Note is denominated. A multiple of a qualified floating rate will
generally not itself constitute a qualified floating rate for purposes of the
OID Regulations. However, a variable rate equal to (i) the product of a
qualified floating rate and a fixed multiple that is greater than 0.65 but not
more than 1.35 or (ii) the product of a qualified floating rate and a fixed
multiple that is greater than 0.65 but not more than 1.35, increased or
decreased by a fixed rate will constitute a qualified floating rate for purposes
of the OID Regulations. In addition, under the OID Regulations, two or more
qualified floating rates that can reasonably be expected to have approximately
the same values throughout the term of the Variable Rate Note will be treated as
a single qualified floating rate (a "Presumed Single Qualified Floating Rate").
Two or more qualified floating rates with values within 25 basis points of each
other as determined on the Variable Rate Note's issue date will be conclusively
presumed to be a Presumed Single Qualified Floating Rate. Notwithstanding the
foregoing, a variable rate that would otherwise constitute a qualified floating
rate, but which is subject to one or more restrictions such as a cap or floor,
will not be a qualified floating rate for purposes of the OID Regulations unless
the restriction is fixed throughout the term of the Variable Rate Note or the
restriction is not reasonably expected as of the issue date to significantly
affect the yield of the Variable Rate Note.
An "objective rate" is a rate that is not itself a qualified floating
rate but which is determined using a single fixed formula and which is based
upon objective financial or economic information. The OID Regulations also
provide that other variable rates may be treated as objective rates if so
designated by the IRS in the future. Despite the foregoing, a variable rate of
interest on a Variable Rate Note will not constitute an objective rate if it is
reasonably expected that the average value of such rate during the first half of
the Variable Rate Note's term will be either significantly less than or
significantly greater than the average value of the rate during the final half
of the Variable Rate Note's term. Further, an objective rate does not include a
rate that is based on information that is within the control of the issuer (or a
party related to the issuer) or that is unique to the circumstances of the
issuer (or a party related to the issuer). An objective rate will qualify as a
"qualified inverse floating rate" if such rate is equal to a fixed rate minus a
qualified floating rate and variations in the rate can reasonably be expected to
inversely reflect contemporaneous variations in the qualified floating rate. The
OID Regulations also provide that if a Variable Rate Note provides for stated
interest at a fixed rate for an initial period of less than one year followed by
a variable rate that is either a qualified floating rate or an objective rate
and if the variable rate on the Variable Rate Note's issue date is intended to
approximate the fixed rate, then the fixed rate and the variable rate together
will constitute either a single qualified floating rate or objective rate, as
the case may be (a "Presumed Single Variable Rate"). If the value of the
variable rate and the initial fixed rate are within 25 basis points of each
other as determined on the Variable Rate Note's issue date, the variable rate
will be conclusively presumed to approximate the fixed rate.
For Variable Rate Notes that qualify as "variable rate debt
instruments" under the OID Regulations and provide for interest at either a
single qualified floating rate, a single objective rate, a Presumed Single
Qualified Floating Rate or a Presumed Single Variable Rate throughout the term
(a "Single Variable Rate Note"), original issue discount is computed as
described above in "--Interest Income on the Notes--Original Issue Discount"
based on the following: (i) stated interest on the Single Variable Rate Note
which is unconditionally payable in cash or property (other than debt
instruments of the issuer) at least annually will constitute qualified stated
interest; (ii) by assuming that the variable rate on the Single Variable Rate
Note is a fixed rate equal to: (a) in the case of a Single Variable Rate Note
with a qualified floating rate or a qualified inverse floating rate, the value,
as of the issue date, of the qualified floating rate or the qualified inverse
floating rate or (b) in the case of a Single Variable Rate Note with an
objective rate (other than a qualified inverse floating rate), a fixed rate
which reflects the reasonably expected yield for such Single Variable Rate Note;
and (iii) the qualified stated interest allocable to an accrual period is
increased (or decreased) if the interest actually paid during an accrual period
exceeds (or is less than) the interest assumed to be paid under the assumed
fixed rate described in (ii), above.
In general, any Variable Rate Note other than a Single Variable Rate
Note (a "Multiple Variable Rate Note") that qualifies as a "variable rate debt
instrument" will be converted into an "equivalent" fixed rate debt instrument
for purposes of determining the amount and accrual of original issue discount
and qualified stated interest on the Multiple Variable Rate Note. The OID
Regulations generally require that such a Multiple Variable Rate Note be
converted into an "equivalent" fixed rate debt instrument by substituting any
qualified floating rate or qualified inverse floating rate provided for under
the terms of the Multiple Variable Rate Note with a fixed rate equal to the
value of the qualified floating rate or qualified inverse floating rate, as the
case may be, as of the Multiple Variable Rate Note's issue date. Any objective
rate (other than a qualified inverse floating rate) provided for under the terms
of the Multiple Variable Rate Note is converted into a fixed rate that reflects
the yield that is reasonably expected for the Multiple Variable Rate Note. (A
Multiple Variable Rate Note may not bear more than one objective rate.) In the
case of a Multiple Variable Rate Note that qualifies as a "variable rate debt
instrument" and provides for stated interest at a fixed rate in addition to
either one or more qualified floating rates or a qualified inverse floating
rate, the fixed rate is initially converted into a qualified floating rate (or a
qualified inverse floating rate, if the Multiple Variable Rate Note provides for
a qualified inverse floating rate). Under such circumstances, the qualified
floating rate or qualified inverse floating rate that replaces the fixed rate
must be such that the fair market value of the Multiple Variable Rate Note as of
the Multiple Variable Rate Note's issue date is approximately the same as the
fair market value of an otherwise identical debt instrument that provides for
either the qualified floating rate or qualified inverse floating rate rather
than the fixed rate. Subsequent to converting the fixed rate into either a
qualified floating rate or a qualified inverse floating rate, the Multiple
Variable Rate Note is then converted into an "equivalent" fixed rate debt
instrument in the manner described above.
Once the Multiple Variable Rate Note is converted into an "equivalent"
fixed rate debt instrument pursuant to the foregoing rules, the amounts of
original issue discount and qualified stated interest, if any, are determined
for the "equivalent" fixed rate debt instrument by applying the original issue
discount rules to the "equivalent" fixed rate debt instrument in the manner
described above in "--Interest Income on the Notes--Original Issue Discount." A
holder of the Multiple Variable Rate Note will account for such original issue
discount and qualified stated interest as if the holder held the "equivalent"
fixed rate debt instrument. In each accrual period, appropriate adjustments will
be made to the amount of qualified stated interest or original issue discount
assumed to have been accrued or paid with respect to the "equivalent" fixed rate
debt instrument in the event that such amounts differ from the actual amount of
interest accrued or paid on the Multiple Variable Rate Note during the accrual
period.
If a Variable Rate Note does not qualify as a "variable rate debt
instrument" under the OID Regulations, then the Variable Rate Note would be
treated as a contingent payment debt obligation. The manner in which a Variable
Rate Note would be taxed if such note were treated as a contingent payment debt
obligation is not governed by the OID Regulations relating to contingent payment
debt obligations which do not apply to prepayable debt instruments, such as the
notes, and Treasury regulations do not otherwise address this point.
MARKET DISCOUNT. A Note Owner that acquires a note at a market
discount (that is, a discount that exceeds any unaccrued original issue
discount) will recognize gain upon receipt of a principal distribution,
regardless of whether the distribution is scheduled or is a prepayment. In
particular, the Note Owner will be required to allocate that principal
distribution first to the portion of the market discount on such note that has
accrued but has not previously been includable in income, and will recognize
ordinary income to that extent. In general terms, unless Treasury regulations
when issued provide otherwise, market discount on a note may be treated, at the
election of the holder of the note, as accruing either (i) under a constant
yield method, taking into account the Prepayment Assumption, or (ii) in
proportion to accruals of original issue discount (or, if there is no original
issue discount, in proportion to stated interest on the note).
In addition, a Note Owner may be required to defer deductions for a
portion of the Note Owner's interest expense on any debt incurred or continued
to purchase or carry a note purchased with market discount. The deferred portion
of any interest deduction would not exceed the portion of the market discount on
the note that accrues during the taxable year in which such interest would
otherwise be deductible and, in general, would be deductible when such market
discount is included in income upon receipt of a principal distribution on, or
upon the sale of, the note. The Code requires that information necessary to
compute accruals of market discount be reported periodically to the IRS and to
certain categories of Note Owners.
Notwithstanding the above rules, market discount on a note will be
considered to be zero if such discount is less than 0.25% of the remaining
stated redemption price at maturity of such note multiplied by its weighted
average remaining life. Weighted average remaining life presumably is calculated
in a manner similar to weighted average life (described above under "--Interest
Income on the Notes--Original Issue Discount"), taking into account
distributions (including prepayments) prior to the date of acquisition of such
note by the subsequent purchaser. If market discount on a note is treated as
zero under this rule, the actual amount of such discount must be allocated to
the remaining principal distributions on such note in proportion to the amounts
of such principal distributions, and when each such distribution is made, gain
equal to the discount, if any, allocated to the distribution will be recognized.
ELECTION TO TREAT ALL INTEREST UNDER THE CONSTANT YIELD RULES. The OID
Regulations provide that the holder of a debt instrument issued after April 4,
1994 may elect to include in gross income all interest that accrues on such debt
instrument using the constant yield method. For purposes of this election,
interest includes stated interest, original issue discount, and market discount,
as adjusted to account for any premium. Note Owners should consult their own tax
advisors regarding the availability or advisability of such an election.
SALES OF NOTES. If a note is sold, the seller will recognize gain or
loss equal to the difference between the amount realized on the sale and its
adjusted basis in the note. A holder's adjusted basis in a note generally equals
the cost of the note to the holder, increased by income reported by the holder
with respect to the note and reduced (but not below zero) by distributions on
the note (other than qualified stated interest) received by the holder and by
amortized premium. While any such gain or loss generally will be capital gain or
loss provided the Note is held as a capital asset, gain recognized on the sale
of a note by a seller who purchased the note at a market discount would be
taxable as ordinary income in an amount not exceeding the portion of such
discount that accrued during the period the note was held by such seller,
reduced by any market discount includable in income under the rules described
above under "--Interest Income on the Notes--Market Discount." Further, the
notes will be "evidences of indebtedness" within the meaning of Section
582(c)(1) of the Code, so that gain or loss recognized from a sale of a note by
a bank or other financial institution to which such section applies would be
ordinary income or loss.
SHORT-TERM NOTES. In the case of a Note with a maturity of one year or
less from its issue date (a "Short-Term Note"), no interest is treated as
qualified stated interest, and therefore all interest is included in original
issue discount. Note Owners that report income for federal income tax purposes
on an accrual method and some other Note Owners, including banks and certain
dealers in securities, (collectively, "Short-Term Accruers") are required to
include original issue discount in income on Short-Term Notes on a straight-line
basis, unless an election is made to accrue the original issue discount
according to a constant yield method based on daily compounding.
Any other Note Owner of a Short Term Note is not required to accrue
original issue discount for federal income tax purposes, unless it elects to do
so. In the case of a Note Owner that is not required, and does not elect, to
include original issue discount in income currently, any gain realized on the
sale, exchange or retirement of a Short-Term Note is ordinary income to the
extent of the original issue discount accrued on a straight-line basis, or, if
elected, according to a constant yield method based on daily compounding,
through the date of sale, exchange or retirement. In addition, Note Owners that
are not required, and do not elect, to include original issue discount in income
currently are required to defer deductions for any interest paid on indebtedness
incurred or continued to purchase or carry a Short-Term Note in an amount not
exceeding the deferred interest income with respect to the Short-Term Note,
which includes both the accrued original issue discount and accrued interest
that are payable but that have not been included in gross income, until the
deferred interest income is realized. A Note Owner may elect to apply the
foregoing rules, except for the rule characterizing gain on sale, exchange or
retirement as ordinary, with respect to "acquisition discount" rather than
original issue discount. Acquisition discount is the excess of the stated
redemption price at maturity of the Short-Term Note over the Note Owner's basis
in the Short-Term Note. This election applies to all obligations acquired by the
taxpayer on or after the first day of the first taxable year to which the
election applies, unless revoked with the consent of the IRS. A Note Owner's tax
basis in a Short-Term Note is increased by the amount included in the Note
Owner's income with respect to the Note.
FOREIGN INVESTORS IN NOTES. Except as discussed below, a Note Owner
that is not a "United States person" (as defined below) generally will not be
subject to United States income or withholding tax in respect of a distribution
on a note provided that (i) the holder complies to the extent necessary with
certain certification requirements, which generally relate to the identity of
the beneficial owner and the status of the beneficial owner as a person that is
not a United States person (as defined below), (ii) the holder is not a
"10-percent shareholder" within the meaning of Section 871(h)(3)(B) of the Code,
which could be interpreted to include a person that directly or indirectly owns
10% or more of the certificates in the Trust, (iii) the holder is not a
"controlled foreign corporation" (as defined in the Code) related to the Trust
or related to a 10 percent holder of certificates in the Trust, and (iv) the
holder is not engaged in a United States trade or business, or otherwise subject
to federal income tax as a result of any direct or indirect connection to the
United States other than through its ownership of a note. For these purposes,
the term "United States person" means (i) a citizen or resident of the United
States, (ii) a corporation or partnership (or other entity properly treated as a
corporation or partnership for federal income tax purposes) created or organized
in or under the laws of the United States or any political subdivision thereof,
(iii) an estate whose income is includable in gross income for United States
federal income taxation regardless of its source, and (iv) a trust for which one
or more United States fiduciaries have the authority to control all substantial
decisions and for which a court of the United States can exercise primary
supervision over the trust's administration. A "Foreign Person" is any person
that is not a United States person. Each Note Owner should consult its tax
advisors regarding the tax documentation and certifications that must be
provided to secure the exemption from United States withholding taxes.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a note by a Foreign Person generally will be exempt from
United States federal income and withholding tax, provided that (i) such gain is
not effectively connected with the conduct of a trade or business in the United
States by the Foreign Person and (ii) in the case of an individual Foreign
Person, the Foreign Person is not present in the United States for 183 days or
more in the taxable year.
If the interest, gain or income on a note held by a Foreign Person is
effectively connected with the conduct of a trade or business in the United
States by the Foreign Person (although exempt from the withholding tax
previously discussed if the holder provides an appropriate statement
establishing that such income is so effectively connected), the holder generally
will be subject to United States federal income tax on the interest, gain or
income at regular federal income tax rates. In addition, if the Foreign Person
is a foreign corporation, it may be subject to a branch profits tax equal to 30%
of its "effectively connected earnings and profits," within the meaning of the
Code, for the taxable year, as adjusted for certain items, unless it qualifies
for a lower rate under an applicable tax treaty (as modified by the branch
profits tax rules).
BACKUP WITHHOLDING ON NOTES. Distributions made on the notes and
proceeds from the sale of notes to or through certain brokers may be subject to
a "backup" withholding tax of 31 percent of "reportable payments" (including
interest accruals, original issue discount, and, under certain circumstances,
distributions in reduction of principal amount) if the holder of the notes fails
to comply with certain identification procedures, unless the Note Owner is an
exempt recipient under applicable provisions of the Code and, if necessary,
demonstrates such status. Any amounts so withheld from distributions on the
notes would be refunded by the IRS or allowable as a credit against the Note
Owner's federal income tax.
TAX CONSEQUENCES TO CERTIFICATE OWNERS OF OWNER TRUST.
TREATMENT OF THE TRUST AS A PARTNERSHIP. The Trust will agree, and the
related Certificate Owners will agree by their purchase of certificates, if
there is more than one Certificate Owner, to treat the Trust as a partnership
for purposes of federal and state income tax, franchise tax and any other tax
measured in whole or in part by income, with the assets of the partnership being
the assets held by the Trust, the partners of the partnership being the
Certificate Owners, including, to the extent relevant, the seller in its
capacity as recipient of distributions from any reserve fund, and the notes
being debt of the partnership, and if there is one Certificate Owner, to treat
the Certificate Owner as the owner of the assets of the Trust and to treat the
Trust as a disregarded entity. However, the proper characterization of the
arrangement involving the Trust, the certificates, the notes, the seller, the
company and the servicer is not certain because there is no authority on
transactions closely comparable to that contemplated in this prospectus.
A variety of alternative characterizations are possible. For example,
because the certificates have certain features characteristic of debt, the
certificates might be considered debt of the Trust. Generally, provided such
certificates are issued at or close to face value, any such characterization
would not result in materially adverse tax consequences to holders of
Certificates as compared to the consequences from treatment of the certificates
as equity in a partnership, described below.
The following discussion assumes that the certificates represent
equity interests in a partnership. The following discussion also assumes that
all payments on the certificates are denominated in U.S. dollars, none of the
Certificates have interest rates which would qualify as contignent under the
Treasury regulations relating to original issue discount, and that a series of
securities includes a single class of certificates. If these conditions are not
satisfied with respect to any given series of certificates, additional tax
considerations with respect to such certificates will be disclosed in the
applicable Prospectus Supplement.
PARTNERSHIP TAXATION. As a partnership, the Trust will not be subject
to federal income tax. Rather, each Certificate Owner will be required to take
into account separately the Certificate Owner's allocable share of income,
gains, losses, deductions and credits of the Trust, whether or not there is a
corresponding cash distribution. Thus, cash basis holders will in effect be
required to report income from the certificates on the accrual basis and
Certificate Owners may become liable for taxes on Trust income even if they have
not received cash from the Trust to pay the taxes. The Trust's income will
consist primarily of interest and finance charges earned on the related Primary
Assets, including appropriate adjustments for market discount, original issue
discount and bond premium, and any gain upon collection or disposition of the
Primary Assets.
The Trust's deductions will consist primarily of interest accruing
with respect to the notes, servicing and other fees, and losses or deductions
upon collection or disposition of Primary Assets.
The federal income tax treatment of any Collateral Certificates held
by the Trust will depend on the terms of the Collateral Certificates and their
characterization (for example, as indebtedness) for federal income tax purposes.
The tax items of a partnership are allocable to the partners in
accordance with the Code, Treasury regulations and the partnership agreement
(i.e., the Trust Agreement and related documents). The Trust Agreement will
provide, in general, that the Certificate Owners will be allocated taxable
income of the Trust for each month equal to the sum of:
o the interest or other income that accrues on the certificates in
accordance with their terms for the relevant month including, as
applicable, interest accruing at the related certificate pass-through
rate for that month and interest on amounts previously due on the
certificates but not yet distributed;
o any Trust income attributable to discount on the related Primary
Assets that corresponds to any excess of the principal amount of the
certificates over their initial issue price;
o any prepayment premium payable to the Certificate Owners for the
applicable month; and
o any other amounts of income payable to the Certificate Owners for the
applicable month.
The allocation will be reduced by any amortization by the Trust of premium on
Primary Assets that corresponds to any excess of the issue price of certificates
over their principal amount. Losses will generally be allocated in the manner in
which they are borne.
Based on the economic arrangement of the parties, the foregoing
approach for allocating Trust income should be permissible under applicable
Treasury regulations, although no assurance can be given that the IRS would not
require a greater amount of income to be allocated to Certificate Owners.
Moreover, even under the foregoing method of allocation, Certificate Owners may
be allocated income equal to the entire certificate pass-through rate plus the
other items described above, even though the Trust might not have sufficient
cash to make current cash distributions of the amount. In addition, because tax
allocations and tax reporting will be done on a uniform basis for all
Certificate Owners, but Certificate Owners may be purchasing certificates at
different times and at different prices, Certificate Owners may be required to
report on their tax returns taxable income that is greater or less than the
amount reported to them by the Trust.
Assuming notes are also issued, all or substantially all of the
taxable income allocated to a Certificate Owner that is a pension, profit
sharing or employee benefit plan or other tax-exempt entity, including an
individual retirement account, will constitute "unrelated business taxable
income" generally taxable to the holder under the Code.
An individual taxpayer's share of expenses of the Trust, including
fees to the servicer, but not interest expense, would be miscellaneous itemized
deductions and thus deductible only to the extent such expenses plus all other
miscellaneous itemized deductions exceeds two percent of the individual's
adjusted gross income. An individual taxpayer will be allowed no deduction for
his share of expenses of the Trust, other than interest, in determining his
liability for alternative minimum tax. In addition, Section 68 of the Code
provides that the amount of itemized deductions otherwise allowable for the
taxable year for an individual whose adjusted gross income exceeds a prescribed
threshold amount will be reduced by the lesser of (1) 3% of the excess of
adjusted gross income over the specified threshold amount or (2) 80% of the
amount of itemized deductions otherwise allowable for the applicable taxable
year. Accordingly, deductions might be disallowed to the individual in whole or
in part and might result in the Certificate Owner being taxed on an amount of
income that exceeds the amount of cash actually distributed to the holder over
the life of the Trust. In the case of a partnership that has 100 or more
partners and elects to be treated as an "electing large partnership;" 70% of
that partnership's miscellaneous itemized deductions will be disallowed,
although the remaining deductions will generally be allowed at the partnership
level and will not be subject to the 2% floor that would otherwise be applicable
to individual partners.
The Trust intends to make all tax calculations relating to income and
allocations to Certificate Owners on an aggregate basis to the extent relevant.
If the IRS were to require that the calculations be made separately for each
Primary Asset, the calculations may result in some timing and character
differences under some circumstances.
DISCOUNT AND PREMIUM. The purchase price paid by the Trust for the
related Primary Assets may be greater or less than the remaining principal
balance of the Primary Assets at the time of purchase. If so, the Primary Assets
will have been acquired at a premium or market discount, as the case may be. See
"Tax Consequences to Note Owners--Premium" and "--Market Discount". As indicated
above, the Trust will make this calculation on an aggregate basis, but it is
possible that the IRS might require that it be recomputed on a Primary
Asset-by-Primary Asset basis. Further, to the extent a Primary Asset is a
Treasury Strip, Private Label Custody Strip, REFCO Strip or other instrument
evidencing ownership of specific interest and/or principal of a particular
bond, it will be subject to the rules relating to original issue discount (in
lieu of the rules relating to market discount). See "Tax Consequences to Note
Owners--Original Issue Discount" above.
If the Trust acquires the Primary Assets at a market discount or
premium, the Trust will elect to include any market discount in income currently
as it accrues over the life of the Primary Assets or to offset any premium
against interest income on the Primary Assets. As indicated above, a portion of
the market discount income or premium deduction may be allocated to Certificate
Owners.
SECTION 708 TERMINATION. Under Section 708 of the Code, the Trust will
be deemed to terminate for federal income tax purposes if 50% or more of the
capital and profits interests in the Trust are sold or exchanged within a
12-month period. If a termination occurs under Section 708 of the Code, the
Trust will be considered to contribute its assets to a new Trust, which would be
treated as a new partnership, in exchange for certificates in the new Trust. The
original Trust will then be deemed to distribute the certificates in the new
Trust to each of the owners of certificates in the original Trust in liquidation
of the original Trust. The Trust will not comply with particular technical
requirements that might apply when a constructive termination occurs. As a
result, the Trust may be subject to some tax penalties and may incur additional
expenses if it is required to comply with those requirements. Furthermore, the
Trust might not be able to comply with these requirements due to lack of data.
DISPOSITION OF CERTIFICATES. Generally, capital gain or loss will be
recognized on a sale of certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the certificates sold.
Any gain or loss would be long-term capital gain or loss if the Certificate
Owner's holding period exceeded one year. A Certificate Owner's tax basis in a
Certificate will generally equal its cost, increased by its share of Trust
income allocable to the Certificate Owner and decreased by any distributions
received or losses allocated with respect to the certificate. In addition, both
the tax basis in the certificates and the amount realized on a sale of a
certificate would include the Certificate Owner's share, determined under
Treasury Regulations, of the notes and other liabilities of the Trust. A
Certificate Owner acquiring certificates at different prices will generally be
required to maintain a single aggregate adjusted tax basis in the certificates
and, upon a sale or other disposition of some of the certificates, allocate a
portion of the aggregate tax basis to the certificates sold, rather than
maintaining a separate tax basis in each certificate for purposes of computing
gain or loss on a sale of that certificate.
If a Certificate Owner is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the certificates that exceeds the aggregate
cash distributions with respect to the certificates, the excess will generally
give rise to a capital loss upon the retirement of the certificates.
ALLOCATIONS BETWEEN TRANSFERORS AND TRANSFEREES. In general, the
Trust's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the Certificate Owners
in proportion to the principal amount of certificates owned by them as of the
close of the last day of the applicable month. As a result, a Certificate Owner
purchasing certificates may be allocated tax items, which will affect the
purchaser's tax liability and tax basis, attributable to periods before the
actual transaction.
The use of a monthly convention may not be permitted by existing
Treasury regulations. If a monthly convention is not allowed, or only applies to
transfers of less than all of the partner's interest, taxable income or losses
of the Trust might be reallocated among the Certificate Owners. The Trust's
method of allocation between transferors and transferees may be revised to
conform to a method permitted by future laws, regulations or other IRS guidance.
DISTRIBUTIONS. In the case of any distribution to a
Certificate Owner, no gain will be recognized to that Certificate Owner to the
extent that the amount of any money distributed for that Certificate exceeds the
adjusted basis of that Certificate Owner's interest in the Certificate. To the
extent that the amount of money distributed exceeds that Certificate Owner's
adjusted basis, gain will be currently recognized. In the case of any
distribution to a Certificate Owner, no loss will be recognized except upon a
distribution in liquidation of a Certificate Owner's interest. Any gain or loss
recognized by a Certificate Owner generally will be capital gain or loss.
SECTION 754 ELECTION. In the event that a Certificate Owner sells its
certificates at a profit (or loss), the purchasing Certificate Owner will have a
higher (or lower) basis in the certificates than the selling Certificate Owner
had. The tax basis of the Trust's assets will not be adjusted to reflect that
higher (or lower) basis unless the Trust were to file an election under Section
754 of the Code. In order to avoid the administrative complexities that would be
involved in keeping accurate accounting records, as well as potentially onerous
information reporting requirements, the Trust current does not intend to make an
election under Section 754 of the Code. As a result, Certificate Owners might be
allocated a greater or lesser amount of Trust income than would be appropriate
based on their own purchase price for certificates.
ADMINISTRATIVE MATTERS. The trustee is required to keep or cause to be
kept complete and accurate books of the Trust. The trustee will file a
partnership information return (IRS Form 1065) with the IRS for each taxable
year of the Trust and will report each Certificate Owner's allocable share of
items of Trust income and expense to Certificate Owners and the IRS on Schedule
K-1. The Trust will provide the Schedule K-1 information to nominees that fail
to provide the Trust with the information statement described below and the
nominees will be required to forward this information to the beneficial owners
of the certificates. Generally, holders must timely file tax returns that are
consistent with the information return filed by the Trust or be subject to
penalties unless the holder notifies the IRS of all the inconsistencies.
Under Section 6031 of the Code, any person that holds certificates as
a nominee at any time during a calendar year is required to furnish the Trust
with a statement containing specific information on the nominee, the beneficial
owners and the certificates so held. The information includes (1) the name,
address and taxpayer identification number of the nominee and (2) as to each
beneficial owner
o the name, address and identification number of such person,
o whether such person is a United States person, a tax-exempt entity or
a foreign government, an international organization, or any wholly
owned agency or instrumentality of either of the foregoing, and
o particular information on certificates that were held, bought or sold
on behalf of the person throughout the year.
In addition, brokers and financial institutions that hold certificates through a
nominee are required to furnish directly to the Trust information as to
themselves and their ownership of certificates. A clearing agency registered
under Section 17A of the Exchange Act is not required to furnish any information
statement to the Trust. The information referred to above for any calendar year
must be furnished to the Trust on or before the following January 31. Nominees,
brokers and financial institutions that fail to provide the Trust with the
information described above may be subject to penalties.
The company ordinarily will be designated as the tax matters partner
for each Trust in the related Trust Agreement and, as the tax matters partner,
will be responsible for representing the Certificate Owners in some specific
disputes with the IRS. The Code provides for administrative examination of a
partnership as if the partnership were a separate and distinct taxpayer.
Generally, the statute of limitations for partnership items does not expire
before the later of three years after the date on which the partnership
information return is filed or the last day for filing the return for the
applicable year, determined without regard to extensions. Any adverse
determination following an audit of the return of the Trust by the appropriate
taxing authorities could result in an adjustment of the returns of the
Certificate Owners, and, under some circumstances, a Certificate Owner may be
precluded from separately litigating a proposed adjustment to the items of the
Trust. An adjustment could also result in an audit of a Certificate Owner's
returns and adjustments of items not related to the income and losses of the
Trust.
A special audit system exists for qualifying large partnerships that
have elected to apply a simplified flow-through reporting system under Sections
771 through 777 of the Code. Unless otherwise specified in the applicable
Prospectus Supplement, a Trust will not elect to apply the simplified
flow-through reporting system.
TAXATION OF CERTAIN FOREIGN CERTIFICATE OWNERS. As used below, the
term "Non-United States Owner" means a Certificate Owner that is not a United
States person, as defined under "Tax Consequences to Note Owners--Foreign
Investors in Note" above.
It is not clear whether the Trust would be considered to be engaged in
a trade or business in the United States for purposes of federal withholding
taxes with respect to Non-United States Owners because there is no clear
authority dealing with that issue under facts substantially similar to those
described in this Prospectus. Although it is not expected that the Trust would
be engaged in a trade or business in the United States for these purposes, the
Trust will withhold as if it were so engaged in order to protect the Trust from
possible adverse consequences of a failure to withhold. The Trust expects to
withhold on the portion of its taxable income that is allocable to Non-United
States Owners pursuant to Section 1446 of the Code, as if the income were
effectively connected to a U.S. trade or business, at a rate of 35% for
Non-United States Owners that are taxable as corporations and 39.6% for all
other Non-United States Owners.
Subsequent adoption of Treasury regulations or the issuance of other
administrative pronouncements may require the Trust to change its withholding
procedures.
Each Non-United States Owner might be required to file a U.S.
individual or corporate income tax return on its share of the Trust's income
including, in the case of a corporation, a return in respect of the branch
profits tax. Assuming the Trust is not engaged in a U.S. trade or business, a
Non-United States Owner would be entitled to a refund with respect to all or a
portion of taxes withheld by the Trust if, in particular, the Owner's allocable
share of interest from the Trust constituted "portfolio interest" under the
Code.
The interest, however, may not constitute "portfolio interest" if,
among other reasons, the underlying obligation is not in registered form or if
the interest is determined without regard to the income of the Trust, in the
later case, the interest being properly characterized as a guaranteed payment
under Section 707(c) of the Code. If this were the case, Non-United States
Owners would be subject to a United States federal income and withholding tax at
a rate of 30 percent on the Trust's gross income, without any deductions or
other allowances for costs and expenses incurred in producing the income, unless
reduced or eliminated pursuant to an applicable treaty. In this case, a
Non-United States Owner would only be entitled to a refund for that portion of
the taxes, if any, in excess of the taxes that should have been withheld with
respect to the interest.
BACKUP WITHHOLDING. Distributions made on the certificates and
proceeds from the sale of the certificates will be subject to a "backup"
withholding tax of 31% if, in general, the Certificate Owner fails to comply
with particular identification procedures, unless the holder is an exempt
recipient under applicable provisions of the Code and, if necessary, demonstate
such status. Any amounts so withheld would be refunded by the IRS or allowable
as a credit against the Certificate Owner's federal income tax.
GRANTOR TRUSTS
CHARACTERIZATION. In the case of a grantor trust, Federal Tax Counsel
will deliver its opinion that the Trust will not be classified as an association
taxable as a corporation and that the Trust will be classified as a grantor
trust under subpart E, Part I of subchapter J of the Code. In this case,
beneficial owners of certificates (referred to in this Prospectus as "grantor
trust certificateholders") will be treated for federal income tax purposes as
owners of a portion of the Trust's assets as described below. The certificates
issued by a Trust that is treated as a grantor trust are referred to in this
Prospectus as "grantor trust certificates".
TAXATION OF GRANTOR TRUST CERTIFICATEHOLDERS. Subject to the
discussion below under "Stripped Certificates" and "Subordinated Certificates,"
each grantor trust certificateholder will be treated as the owner of a pro rata
undivided interest in the Primary Assets and other assets of the Trust.
Accordingly, and subject to the discussion below of the recharacterization of
the Servicing Fee, each grantor trust certificateholder must include in income
its pro rata share of the interest and other income from the Primary Assets,
including any interest, original issue discount, market discount, prepayment
fees, assumption fees, and late payment charges with respect to the assets, and,
subject to limitations discussed below, may deduct its pro rata share of the
fees and other deductible expenses paid by the Trust, at the same time and to
the same extent as these items would be included or deducted by the grantor
trust certificateholder if the grantor trust certificateholder held directly a
pro rata interest in the assets of the Trust and received and paid directly the
amounts received and paid by the Trust. Any amounts received by a grantor trust
certificateholder in lieu of amounts due with respect to any Primary Asset
because of a default or delinquency in payment will be treated for federal
income tax purposes as having the same character as the payments they replace.
Each grantor trust certificateholder will be entitled to deduct its
pro rata share of servicing fees, prepayment fees, assumption fees, any loss
recognized upon an assumption and late payment charges retained by the servicer,
provided that these amounts are reasonable compensation for services rendered to
the Trust. Grantor trust certificateholders that are individuals, estates or
trusts will be entitled to deduct their share of expenses only to the extent
these expenses plus all other miscellaneous itemized deductions exceed two
percent of the grantor trust certificateholder's adjusted gross income, and will
be allowed no deduction for these expenses in determining their liabilities for
alternative minimum tax. In addition, Section 68 of the Code provides that the
amount of itemized deductions otherwise allowable for the taxable year for an
individual whose adjusted gross income exceeds a prescribed threshold amount
will be reduced by the lesser of (1) 3% of the excess of adjusted gross income
over the specified threshold amount or (2) 80% of the amount of itemized
deductions otherwise allowable for the applicable taxable year. In the case of a
partnership that has 100 or more partners and elects to be treated as an
"electing large partnership," 70% of the partnership's miscellaneous itemized
deductions will be disallowed, although the remaining deductions will generally
be allowed at the partnership level and will not be subject to the 2% floor that
would otherwise be applicable to individual partners.
The servicing compensation to be received by the servicer may be
questioned by the IRS as exceeding a reasonable fee for the services being
performed in exchange for the servicing compensation, and a portion of the
servicing compensation could be recharacterized as an ownership interest
retained by the servicer or other party in a portion of the interest payments to
be made with respect to the Trust's assets. In this event, a certificate might
be treated as a Stripped Certificate subject to the stripped bond rules of
Section 1286 of the Code and the original issue discount provisions rather than
to the market discount and premium rules. See the discussion below under
"Stripped Certificates". Except as discussed below under "--Stripped
Certificates" or "--Subordinated certificates," this discussion assumes that the
servicing fees paid to the servicer do not exceed reasonable servicing
compensation.
A purchaser of a grantor trust certificate will be treated as
purchasing an interest in each Primary Asset in the Trust at a price determined
by allocating the purchase price paid for the certificate among all Primary
Assets in proportion to their fair market values at the time of the purchase of
the certificate. To the extent that the portion of the purchase price of a
grantor trust certificate allocated to a Primary Asset is less than or greater
than the portion of the stated redemption price at maturity of the Primary
Asset, the interest in the Primary Asset will have been acquired at a discount
or premium. See "--Market Discount" and "--Premium," below.
The treatment of any discount on a Primary Asset will depend on
whether the discount represents original issue discount or market discount.
Except as indicated otherwise in the applicable Prospectus Supplement, it is not
expected that any Primary Asset (other than Primary Asset that is a Treasury
Strip, Private Label Interest and/or principal of a particular bond) will have
original issue discount (except as discussed below under "Stripped Certificates"
or "Subordinated Certificates"). For the rules governing original issue
discount, see "Trusts Which Are Not Treated as Grantor Trusts--Tax Consequences
to Note Owners--Original Issue Discount" above. However, in the case of Primary
Assets that constitute short-term Government Securities the rules set out above
dealing with short-term obligations (see "Trusts Which Are Not Treated as
Grantor Trusts--Tax Consequences to Note Owners--Short-Term Notes" above) are
applied with reference to acquisition discount rather than original issue
discount, if the obligations constitute "short-term Government obligations"
within the meaning of Section 1271(a)(3)(B) of the Code. Further, if 20
percent or more of the grantor trust certificateholders are Short-Term Accruers,
all holders of grantor trust certificates may be required to accrue acquisition
discount or original issue discount, as the case may be, with respect to
short-term obligations held by the Trust in the same manner as a Short-Term
Accruer would accrue such discount. See "Trusts Which Are Not Treated as
Grantor Trusts--Tax Consequences to Note Owners--Short-Term Notes" above.
The information provided to grantor trust certificateholders will not
include information necessary to compute the amount of discount or premium, if
any, at which an interest in each Primary Asset is acquired.
MARKET DISCOUNT. A grantor trust certificateholder that acquires an
undivided interest in Primary Assets may be subject to the market discount rules
of Sections 1276 through 1278 to the extent an undivided interest in a Primary
Asset is considered to have been purchased at a "market discount". For a
discussion of the market discount rules under the Code, see "Trusts Which Are
Not Treated as Grantor Trusts--Consequences to Note Owners--Market Discount"
above. As discussed above, to the extent a Primary Asset is a Treasury Strip,
Private Label Custody Strip, REFCO Strip or other instrument evidencing
ownership of specific interest and/or principal of a particular bond, it will be
subject to the rules relating to original issue discount (in lieu of the rules
relating to the market discount). See "Tax Consequences to Note Owners--Original
Issue Discount" above.
PREMIUM. To the extent a grantor trust certificateholder is considered
to have purchased an undivided interest in a Primary Asset for an amount that is
greater than the stated redemption price at maturity of the interest, the
grantor trust certificateholder will be considered to have purchased the
interest in the Primary Asset with "amortizable bond premium" equal in amount to
the excess. For a discussion of the rules applicable to amortizable bond
premium, see "Trusts Which Are Not Treated as Grantor Trusts--Tax Consequences
to Note Owners--Premium" above.
STRIPPED CERTIFICATES. Some classes of certificates may be subject to
the stripped bond rules of Section 1286 of the Code and for purposes of this
discussion will be referred to as "Stripped Certificates." In general, a
Stripped Certificate will be subject to the stripped bond rules where there has
been a separation of ownership of the right to receive some or all of the
principal payments on a Primary Asset from ownership of the right to receive
some or all of the related interest payments. In general, where a separation has
occurred, under the stripped bond rules of Section 1286 of the Code the holder
of a right to receive a principal or interest payment on the bond is required to
accrue into income, on a constant yield basis under rules governing original
issue discount (see "Trusts Which Are Not Treated As Grantor Trusts--Tax
Consequences to Note Owners--Original Issue Discount"), the difference between
the holder's initial purchase price for the right to receive and the principal
or interest payment to be received with respect to that right.
Certificates will constitute Stripped Certificates and will be subject
to these rules under various circumstances, including the following:
o if any servicing compensation is deemed to exceed a reasonable
amount (see "Taxation of Grantor Trust Certificateholders,"
above);
o if the company or any other party retains a retained yield with
respect to the Primary Assets held by the Trust;
o if two or more classes of certificates are issued representing
the right to non-pro rata percentages of the interest or
principal payments on the Trust's assets; or
o if certificates are issued which represent the right to
interest-only payments or principal-only payments.
The tax treatment of the Stripped Certificates with respect to the
application of the original issue discount provisions of the Code is currently
unclear. However, the trustee intends to treat each Stripped Certificate as a
single debt instrument issued on the day it is purchased for purposes of
calculating any original issue discount. Original issue discount with respect to
a Stripped Certificate must be included in ordinary gross income for federal
income tax purposes as it accrues in accordance with the constant yield method
that takes into account the compounding of interest and this accrual of income
may be in advance of the receipt of any cash attributable to that income. See
"Trusts Which Are Not Treated as Grantor Trusts--Tax Consequences to Note
Owners--Original Issue Discount" above. For purposes of applying the original
issue discount provisions of the Code, the issue price of a Stripped Certificate
will be the purchase price paid by each holder of the Stripped Certificate and
the stated redemption price at maturity may include the aggregate amount of all
payments to be made with respect to the Stripped Certificate whether or not
denominated as interest. The amount of original issue discount with respect to a
Stripped Certificate may be treated as zero under the original issue discount de
minimis rules described above.
SUBORDINATED CERTIFICATES. In the event the Trust issues two classes
of grantor trust certificates that are identical except that one class is a
subordinate class, with a relatively high Certificate Pass Through Rate, and the
other is a senior class, with a relatively low Certificate Pass Through Rate
(referred to in this Prospectus as the "Subordinate Certificates" and "Senior
Certificates", respectively), the grantor trust certificateholders in the
aggregate will be deemed to have acquired the following assets: (1) the
principal portion of each Primary Asset plus a portion of the interest due on
each Primary Asset (the "Trust Stripped Bond"), and (2) a portion of the
interest due on each Primary Asset equal to the difference between the
certificate pass through rate on the Subordinate Certificates and the
certificate pass through rate on the Senior Certificates, if any, which
difference is then multiplied by the Subordinate Class Percentage (the "Trust
Stripped Coupon"). The "Subordinate Class Percentage" equals the initial
aggregate principal amount of the Subordinate Certificates divided by the sum of
the initial aggregate principal amount of the Subordinate Certificates and the
Senior Certificates. The "Senior Class Percentage" equals the initial aggregate
principal amount of the Senior Certificates divided by the sum of the initial
aggregate principal amount of the Subordinate Certificates and the Senior
Certificates.
The Senior Certificateholders in the aggregate will own the Senior
Class Percentage of the Trust Stripped Bond and accordingly each Senior
Certificateholder will be treated as owning its pro rata share of such asset.
The Senior Certificateholders will not own any portion of the Trust Stripped
Coupon. The Subordinate Certificateholders in the aggregate own both the
Subordinate Class Percentage of the Trust Stripped Bond plus 100% of the Trust
Stripped Coupon, if any, and accordingly each Subordinate Certificateholder will
be treated as owning its pro rata share in both assets. The Trust Stripped Bond
will be treated as a "stripped bond" and the Trust Stripped Coupon will be
treated as "stripped coupons" within the meaning of Section 1286 of the Code.
Although not entirely clear, the interest income on the Subordinate
Certificates and the portion of the Servicing Fee allocable to such certificates
that does not constitute excess servicing will be treated by the Trust as
qualified state interest, assuming the interest with respect to the Primary
Assets would otherwise qualify as qualified stated interest. Accordingly, except
to the extent modified below, the income of the Subordinate Certificates will be
reported in the same manner as described generally above for holders of Senior
Certificates.
If the Subordinate Certificateholders receive distribution of less
than their share of the Trust's receipts of principal or interest (the
"Shortfall Amount") because of the subordination of the Subordinate
Certificates, holders of Subordinate Certificates would probably be treated for
federal income tax purposes as if they had
o received as distributions their full share of receipts,
o paid over to the Senior Certificateholders an amount equal to the
Shortfall Amount and
o retained the right to reimbursement of the relevant amounts to
the extent these amounts are otherwise available as a result of
collections on the Primary Assets or amounts available from a
reserve account or other form of credit enhancement, if any.
Under this analysis,
o Subordinate Certificateholders would be required to accrue as
current income any interest income, original issue discount, or
(to the extent paid on assets of the Trust) accrued market
discount of the Trust that was a component of the Shortfall
Amount, even though that amount was in fact paid to the Senior
Certificateholders,
o a loss would only be allowed to the Subordinate
Certificateholders when their right to receive reimbursement of
the Shortfall Amount became worthless (i.e., when it becomes
clear that amount will not be available from any source to
reimburse the loss) and
o reimbursement of the Shortfall Amount prior to a claim of
worthlessness would not be taxable income to Subordinate
Certificateholders because the amount was previously included in
income.
Those results should not significantly affect the inclusion of income for
Subordinate Certificateholders on the accrual method of accounting, but could
accelerate inclusion of income to Subordinate Certificateholders on the cash
method of accounting by, in effect, placing them on the accrual method.
Moreover, the character and timing of loss deductions are unclear. Subordinate
Certificateholders are strongly urged to consult their own tax advisors
regarding the appropriate timing, amount and character of any losses sustained
with respect to the Subordinate Certificates including any loss resulting from
the failure to recover previously accrued interest or discount income.
Election to Treat All Interest as Original Issue Discount. The
Treasury Regulations relating to original issue discount permit a grantor trust
certificateholder to elect to accrue all interest, discount, including de
minimis market or original issue discount, reduced by any premium, in income as
interest, based on a constant yield method. If an election were to be made with
respect to an interest in a Primary Asset with market discount, the Certificate
Owner would be deemed to have made an election to include in income currently
market discount with respect to all other debt instruments having market
discount that the grantor trust certificateholder acquires during the year of
the election or afterward. See "--Market Discount" above. Similarly, a grantor
trust certificateholder that makes this election for an interest in a Primary
Asset that is acquired at a premium will be deemed to have made an election to
amortize bond premium with respect to all debt instruments having amortizable
bond premium that the grantor trust certificateholder owns at the beginning of
the first taxable year to which the election applies or acquires afterward. See
"--Premium" above. The election to accrue interest, discount and premium on a
constant yield method with respect to a grantor trust certificate is
irrevocable.
PREPAYMENTS. The Taxpayer Relief Act of 1997 (the "1997 Act") contains
a provision requiring original issue discount on any pool of debt instruments
the yield on which may be affected by reason of prepayments be calculated taking
into account the Prepayment Assumption and requiring the discount to be taken
into income on the basis of a constant yield to assumed maturity taking account
of actual prepayments. The legislative history to the 1986 Act states that
similar rules apply with respect to market discount and amortizable bond premium
on debt instruments.
SALE OR EXCHANGE OF A GRANTOR TRUST CERTIFICATE. Sale or exchange of a
grantor trust Certificate prior to its maturity will result in gain or loss
equal to the difference, if any, between the amount realized, exclusive of
amounts attributable to accrued and unpaid interest, which will be treated as
ordinary income, allocable to the Primary Asset and the owner's adjusted basis
in the grantor trust certificate. The adjusted basis generally will equal the
seller's cost for the grantor trust certificate, increased by the original issue
discount and any market discount included in the seller's gross income with
respect to the grantor trust certificate, and reduced, but not below zero, by
any premium amortized by the seller and by principal payments on the grantor
trust certificate previously received by the seller. The gain or loss will,
except as discussed below, be capital gain or loss to an owner for which the
Primary Assets represented by a grantor trust certificate are "capital assets"
within the meaning of Section 1221. A capital gain or loss will be long-term or
short-term depending on whether or not the grantor trust certificate has been
owned for the long-term capital gain holding period, currently more than one
year.
Notwithstanding the foregoing, any gain realized on the sale or
exchange of a grantor trust certificate will be ordinary income to the extent of
the seller's interest in accrued market discount on Primary Assets not
previously taken into income. See "--Market Discount," above. Further,
"evidences of indebtedness" within the meaning of Section 582(c)(1), so that
gain or loss recognized from the sale of a grantor trust certificate by a bank
or thrift institution to which such section applied will be treated as ordinary
gain or loss.
FOREIGN INVESTORS IN GRANTOR TRUST CERTIFICATES. A holder of grantor
trust certificate who is not a "United States person" (as defined above at
"Trusts Which Are Not Treated As Grantor Trusts--Tax Consequences to Note
Owners--Foreign Investors in Notes") and is not subject to federal income tax as
a result of any direct or indirect connection to the United States other than
its ownership of a grantor trust certificate generally will not be subject to
United States income or withholding tax in respect of payments of interest or
original issue discount on its grantor trust certificate to the extent
attributable to debt obligations held by the Trust that were originated after
July 18, 1984, provided that the grantor trust certificateholder complies to the
extent necessary with certain certification requirements which generally relate
to the identity of the beneficial owner and the status of the beneficial owner
as a person that is not a United States person. Interest or original issue
discount on a grantor trust certificate attributable to debt obligations held by
the Trust that were originated prior to July 19, 1984 will be subject to a 30%
withholding tax (unless such tax is reduced or eliminated by an applicable tax
treaty). All holders of grantor trust certificates should consult their tax
advisors regarding the tax documentation and certifications that must be
provided to secure any applicable exemptions from United States withholding
taxes.
Any capital gain realized on the sale or other taxable disposition of a
grantor trust certificate by a Foreign Person (as defined above at "Trusts Which
Are Not Treated As Grantor Trusts--Tax Consequences to Note Owners--Foreign
Investors in Notes") generally will be exempt from United States federal income
and withholding tax, provided that (i) such gain is not effectively connected
with the conduct of a trade or business in the United States by the Foreign
Person and (ii) in the case of an individual Foreign Person, the Foreign Person
is not present in the United States for 183 days or more in the taxable year.
If the interest, gain or income with respect to a grantor trust
certificate held by a Foreign Person is effectively connected with the conduct
of a trade or business in the United States by the Foreign Person (although
exempt from the withholding tax previously discussed if the holder provides an
appropriate statement establishing that such income is so effectively
connected), the holder generally will be subject to United States federal income
tax on the interest, gain or income at regular federal income tax rates. In
addition, if the Foreign Person is a foreign corporation, it may be subject to a
branch profits tax equal to 30% of its "effectively connected earnings and
profits," within the meaning of the Code, for the taxable year, as adjusted for
certain items, unless it qualifies for a lower rate under an applicable tax
treaty (as modified by the branch profits tax rules).
BACKUP WITHHOLDING. Distributions made on the grantor trust
certificates and proceeds from the sale of the grantor trust certificates will
be subject to a "backup" withholding tax of 31% if, in general, the grantor
trust certificateholder fails to comply with particular identification
procedures, unless the holder is an exempt recipient under applicable provisions
of the Code and, if necessary, demonstrates such status. Any amounts so
withheld, would be refunded by the IRS or allowable as a credit against the
grantor trust certificateholder's federal income tax.
STATE AND LOCAL TAX CONSIDERATIONS
The discussion above does not address the tax consequences of
purchase, ownership or disposition of certificates or notes under any state or
local tax laws. We recommend that investors consult their own tax advisors
regarding TAX DISCUSSIONS SET FORTH ABOVE ARE INCLUDED FOR GENERAL INFORMATION
ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A NOTEOWNERS'S OR CERTIFICATE
OWNER'S PARTICULAR TAX SITUATION. PROSPECTIVE PURCHASERS OF NOTES OR
CERTIFICATES SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE TAX
CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF NOTES AND
CERTIFICATES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL AND FOREIGN AND
OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX LAWS.
ERISA CONSIDERATIONS
GENERAL
A fiduciary of a pension, profit-sharing, retirement or other employee
benefit plan subject to Title I of ERISA should consider the fiduciary standards
under the Employee Retirement Income Security Act of 1974, as amended ("ERISA")
in the context of the plan's particular circumstances before authorizing an
investment of a portion of such plan's assets in the Securities. Accordingly,
pursuant to Section 404 of ERISA, such fiduciary should consider among other
factors (i) whether the investment is for the exclusive benefit of plan
participants and their beneficiaries; (ii) whether the investment satisfies the
applicable diversification requirements; (iii) whether the investment is in
accordance with the documents and instruments governing the plan; and (iv)
whether the investment is prudent, considering the nature of the investment.
Fiduciaries of plans also should consider ERISA's prohibition on improper
delegation of control over, or responsibility for, plan assets.
In addition, employee benefit plans or other retirement arrangements
subject to ERISA, as well as individual retirement accounts, certain types of
Keogh plans not subject to ERISA but subject to Section 4975 of the Code, or any
entity (including insurance company separate or general accounts) whose
underlying assets include plan assets by reason of such plans, arrangements or
accounts investing in the entity (each, a "Plan") are prohibited from engaging
in a broad range of transactions involving Plan assets and persons having
certain specified relationships to a Plan ("parties in interest" and
"disqualified persons"). Such transactions are treated as "prohibited
transactions" under Sections 406 of ERISA and excise taxes and/or other
penalties are imposed upon such persons under ERISA and/or Section 4975 of the
Code unless an exemption applies. The seller, underwriter of the Securities, the
servicer, the trustee, the indenture trustee and certain of their affiliates
might be considered "parties in interest" or "disqualified persons" with respect
to a Plan. If so, the acquisition, holding or disposition of Securities by or on
behalf of such Plan could be considered to give rise to a "prohibited
transaction" within the meaning of ERISA and the Code unless a statutory,
regulatory or administrative exception or exemption is available.
ERISA CONSIDERATIONS RELATING TO CERTIFICATES
PLAN ASSETS. In 29 C.R.F ss.2510.3-101 (the "Plan Asset Regulations"),
the U.S. Department of Labor ("DOL") has defined what constitutes "plan assets"
for purposes of ERISA and Section 4975 of the Code. The Plan Asset Regulations
provide that if a Plan makes an investment in an "equity interest" in an entity,
an undivided portion of the assets of the entity will be considered the assets
of such Plan unless certain exceptions set forth in such Regulations apply. The
Certificates will be deemed an equity interest for purposes of the Plan Asset
Regulations, and the seller can give no assurance that the Certificates will
qualify for any of the exceptions under the Plan Asset Regulations. As a result,
(i) a Plan may be deemed to have acquired an interest in the assets of the Trust
and not merely an interest in the Certificates, (ii) the fiduciary investment
standards of ERISA could apply to such assets and (iii) transactions occurring
in the course of managing, operating and servicing the Trust and its assets
might constitute prohibited transactions, unless a statutory, regulatory or
administrative exemption applies.
UNDERWRITER EXEMPTION
GENERAL DISCUSSION. The DOL has granted to Deutsche Bank Alex. Brown
an individual exemption, Prohibited Transaction Exemption 94-84, and to Deutsche
Morgan Grenfell/C.J. Lawrence Inc., similar approval (FAN 97-03E), which were
both amended by Prohibited Transaction Exemption 97-34 ("PTE 97-34") and further
recently amended pursuant to Prohibited Transaction Exemption 2000-58 ("PTE
2000-58") (collectively, the "Exemption") which is applicable to Certificates
which meet its requirements whenever Deutsche Banc Alex. Brown or its affiliate
is the sole underwriter, manager or co-manager of an underwriting syndicate or
is the selling or placement agent. The Exemption generally exempts certain
transactions from the application of certain of the prohibited transaction
provisions of ERISA and the Code provided that the conditions set forth in the
Exemption are satisfied. These transactions include the servicing, managing and
operation of investment trusts holding fixed (generally non-revolving pools) of
enumerated categories of assets which include the Receivables and the purchase,
sale and holding of Certificates which represent beneficial ownership interests
in the assets of such trusts.
GENERAL CONDITIONS OF EXEMPTION. The Exemption sets forth general
conditions which must be satisfied for a transaction involving the purchase,
sale and holding of the Certificates to be eligible for exemptive relief
thereunder. First, the acquisition of Certificates by Plans must be on terms
that are at least as favorable to the Plan as they would be in an arm's-length
transaction with an unrelated party. Second, the assets held by the Trust must
be secured. Third, unless the Certificates are issued in "designated
transactions" (as described below) and are backed by fully-secured Receivables,
they may not be subordinated. Fourth, the Certificates at the time of
acquisition by the Plan must be rated in one of the three (or in the case of
designated transactions, four) highest generic rating categories by Standard &
Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc., Moody's
Investors Services, Inc. or Fitch, Inc. (each, a "Rating Agency"). Fifth, the
trustee and the indenture trustee generally cannot be affiliates of any member
of the "Restricted Group" which consists of any (i) underwriter as defined in
the Exemption, (ii) the seller, (iii) the servicer, (iv) the counterparty of any
"interest swap" (as described below) held as an asset of the Trust and (v) any
obligor with respect to Receivables constituting more than 5% of the aggregate
unamortized principal balance of the Receivables held in the Trust as of the
date of initial issuance of the Certificates. Sixth, the sum of all payments
made to, and retained by, such underwriters must represent not more than
reasonable compensation for underwriting the Certificates; the sum of all
payments made to, and retained by, the seller pursuant to the assignment of the
Receivables to the related Trust must represent not more than the fair market
value of such Receivables; and the sum of all payments made to, and retained by,
the servicer must represent not more than reasonable compensation for such
person's services under the Agreement and reimbursement of such person's
reasonable expenses in connection therewith. Seventh, (i) the investment pool
must consist only of assets of the type enumerated in the Exemption and which
have been included in other investment pools; (ii) Certificates evidencing
interests in such other investment pools must have been rated in one of the
three (or in the case of designated transactions, four) highest generic rating
categories by one of the Rating Agencies for at least one year prior to a Plan's
acquisition of Certificates; and (iii) Certificates evidencing interests in such
other investment pools must have been purchased by investors other than Plans
for at least one year prior to a Plan's acquisition of Certificates. Finally,
the investing Plan must be an accredited investor as defined in Rule 501(a)(1)
of Regulation D of the Commission under the Securities Act of 1933, as amended.
The seller assumes that only Plans which are accredited investors under the
federal securities laws will be permitted to purchase the Certificates.
RECENT AMENDMENTS TO EXEMPTION. PTE 2000-58 (the "Amendment") recently
amended the Exemption to make the acquisition of Certificates by Plans in an
initial offering or in a secondary market transaction, the holding or transfer
of Certificates and the servicing, management and operation of the Trust and its
assets on or after November 13, 2000 eligible for exemptive relief to a broader
range of Certificates. Prior to such amendment, the Exemption generally
permitted Plans to purchase only unsubordindated Certificates rated within the
highest three generic rating categories backed by secured collateral. Such
Certificates had to be issued by a Trust which was a grantor trust, REMIC or a
FASIT whose corpus could not include certain types of assets such as
interest-rate swaps.
TYPES OF TRUSTS. The Amendment has expanded the types of permitted
Trusts to include owner-trusts, as well as grantor trusts, REMICs and FASITs.
Owner-trusts are subject to certain restrictions in their governing documents to
ensure that their assets may not be reached by the creditors of the seller in
the event of bankruptcy or other insolvency and must provide certain legal
opinions.
DESIGNATED TRANSACTIONS. In the case where the Certificates are backed
by Trust assets such as the Receivables which are secured motor vehicle
receivables, credit instruments or obligations that bear interest or are
purchased a discount as described and defined in the Exemption as designated
transactions ("Designated Transactions"), the Amendment permits the Certificates
issued by the Trust in such transactions to be rated in one of the highest four
generic rating categories by a Rating Agency and/or to be subordinated. The
Receivables are the type of assets which qualify for Designated Transaction
treatment unless otherwise specified in the Prospectus Supplement.
INSURANCE COMPANY GENERAL ACCOUNTS. In the event that Certificates do
not meet the requirements of the Exemption solely because they are Subordinate
Certificates or fail to meet a minimum rating requirement under the Exemption,
certain Plans may be eligible to purchase Certificates pursuant to Section III
of Prohibited Transaction Class Exemption 95-60 ("PTCE 95-60") which permits
insurance company general accounts as defined in PTCE 95-60 to purchase such
Certificates if they otherwise meet all of the other requirements of the
Exemption.
PERMITTED ASSETS. The Amendment permits an interest-rate swap to be an
asset of a Trust which issues Certificates acquired by Plans in an initial
offering or in the secondary market on or after November 13, 2000 and clarifies
the requirements regarding yield supplement agreements. An interest-rate swap
(or if purchased by or on behalf of the Trust) an interest-rate cap contract
(collectively, a "Swap" or "Swap Agreement") is a permitted Trust asset if it:
(a) is an "eligible Swap;" (b) is with an "eligible counterparty;" (c) is
purchased by a "qualified plan investor;" (d) meets certain additional specific
conditions which depend on whether the Swap is a "ratings dependent Swap" or a
"non-ratings dependent Swap" and (e) permits the Trust to make termination
payments to the Swap (other than currently scheduled payments) solely from
excess spread or amounts otherwise payable to the servicer or seller.
An "eligible Swap" is one which: (a) is denominated in U.S. dollars;
(b) pursuant to which the Trust pays or receives, on or immediately prior to the
respective payment or distribution date for the class of Certificates to which
the Swap relates, a fixed rate of interest or a floating rate of interest based
on a publicly available index (E.G., LIBOR or the U.S. Federal Reserve's Cost of
Funds Index (COFI)), with the Trust receiving such payments on at least a
quarterly basis and obligated to make separate payments no more frequently than
the counterparty, with all simultaneous payments being netted ("Allowable
Interest Rate"); (c) has a notional amount that does not exceed either: (i) the
principal balance of the class of Certificates to which the Swap relates, or
(ii) the portion of the principal balance of such class represented by
obligations ("Allowable Notional Amount"); (d) is not leveraged (I.E., payments
are based on the applicable notional amount, the day count fractions, the fixed
or floating rates permitted above, and the difference between the products
thereof, calculated on a one-to-one ratio and not on a multiplier of such
difference) ("Leveraged"); (e) has a final termination date that is either the
earlier of the date on which the issuer terminates or the related class of
Certificates are fully repaid and (f) does not incorporate any provision which
could cause a unilateral alteration in the interest rate requirements described
above or the prohibition against leveraging.
An "eligible counterparty" means a bank or other financial institution
which has a rating at the date of issuance of the Certificates, which is in one
of the three highest long-term credit rating categories or one of the two
highest short-term credit rating categories, utilized by at least one of the
Rating Agencies rating the Certificates; provided that, if a counterparty is
relying on its short-term rating to establish eligibility hereunder, such
counterparty must either have a long-term rating in one of the three highest
long-term rating categories or not have a long-term rating from the applicable
Rating Agency.
A "qualified plan investor" is a Plan or Plans where the decision to
buy such class of Certificates is made on behalf of the Plan by an independent
fiduciary qualified to understand the Swap transaction and the effect the Swap
would have on the rating of the Certificates and such fiduciary is either (a) a
"qualified professional asset manager" ("QPAM") under Prohibited Transaction
Class Exemption 84-14 ("PTCE 84-14") (see below), (b) an "in-house asset
manager" under Prohibited Transaction Class Exemption 96-23 ("PTCE 96-23") (see
below) or (c) has total assets (both Plan and non-Plan) under management of at
least $100 million at the time the Certificates are acquired by the Plan.
In "ratings dependent Swaps" (where the rating of a class of
Certificates is dependent on the terms and conditions of the Swap), the Swap
Agreement must provide that if the credit rating of the counterparty is
withdrawn or reduced by any Rating Agency below a level specified by the Rating
Agency, the servicer must, within the period specified under the Swap Agreement:
(a) obtain a replacement Swap Agreement with an eligible counterparty which is
acceptable to the Rating Agency and the terms of which are substantially the
same as the current Swap Agreement (at which time the earlier Swap Agreement
must terminate); or (b) cause the Swap counterparty to establish any
collateralization or other arrangement satisfactory to the Rating Agency such
that the then current rating by the Rating Agency of the particular class of
Certificates will not be withdrawn or reduced (and the terms of the Swap
Agreement must specifically obligate the counterparty to perform these duties
for any class of Certificates with a term of more than one year). In the event
that the servicer fails to meet these obligations, Plan certificateholders must
be notified in the immediately following periodic report which is provided to
certificateholders but in no event later than the end of the second month
beginning after the date of such failure. Sixty days after the receipt of such
report, the exemptive relief provided under the Exemption will prospectively
cease to be applicable to any class of Certificates held by a Plan which
involves such ratings dependent Swap.
"Non-ratings dependent Swaps" (those where the rating of the
Certificates does not depend on the terms and conditions of the Swap) are
subject to the following conditions. If the credit rating of the counterparty is
withdrawn or reduced below the lowest level permitted above, the servicer will,
within a specified period after such rating withdrawal or reduction: (a) obtain
a replacement Swap Agreement with an eligible counterparty, the terms of which
are substantially the same as the current Swap Agreement (at which time the
earlier Swap Agreement must terminate); (b) cause the counterparty to post
collateral with the Trust in an amount equal to all payments owed by the
counterparty if the Swap transaction were terminated; or (c) terminate the Swap
Agreement in accordance with its terms.
An "eligible yield supplement agreement" is any yield supplement
agreement or similar arrangement (or if purchased by or on behalf of the Trust)
an interest rate cap contract to supplement the interest rates otherwise payable
on obligations held by the Trust ("EYS Agreement"). If the EYS Agreement has a
notional principal amount and/or is written on an International Swaps and
Derivatives Association, Inc. (ISDA) form, the EYS Agreement may only be held as
an asset of the Trust with respect to Certificates purchased by Plans on or
after April 7, 1998 if it meets the following conditions: (a) it is denominated
in U.S. dollars; (b) it pays an Allowable Interest Rate; (c) it is not
Leveraged; (d) it does not allow any of these three preceding requirements to be
unilaterally altered without the consent of the trustee; (e) it is entered into
between the Trust and an eligible counterparty and (f) it has an Allowable
Notional Amount.
PRE-FUNDING ACCOUNTS. The Exemption was amended by PTE 97-34 to extend
exemptive relief to Certificates issued in transactions using pre-funding
accounts whereby a portion of the Receivables backing the Certificates are
transferred to the Trust within a specified period following the Closing Date
("DOL Pre-Funding Period") (see below) instead of requiring that all such
Receivables be either identified or transferred on or before the Closing Date.
The relief is effective for transactions occurring on or after May 23, 1997
provided that the following conditions are met. First, the ratio of the amount
allocated to the Pre-Funding Account to the total principal amount of the
Certificates being offered ("Pre-Funding Limit") must not exceed twenty-five
percent (25%). Second, all Receivables transferred after the Closing Date
(referred to here as "Additional Receivables") must meet the same terms and
conditions for eligibility as the original Receivables used to create the Trust,
which terms and conditions have been approved by the Rating Agency. Third, the
transfer of such Additional Receivables to the Trust during the DOL Pre-Funding
Period must not result in the Certificates receiving a lower credit rating from
the Rating Agency upon termination of the DOL Pre-Funding Period than the rating
that was obtained at the time of the initial issuance of the Certificates by the
Trust. Fourth, solely as a result of the use of pre-funding, the weighted
average annual percentage interest rate (the "average interest rate") for all of
the Receivables in the Trust at the end of the DOL Pre-Funding Period must not
be more than 100 basis points lower than the average interest rate for the
Receivables which were transferred to the Trust on the Closing Date. Fifth,
either: (i) the characteristics of the Additional Receivables must be monitored
by an insurer or other credit support provider which is independent of the
seller; or (ii) an independent accountant retained by the seller must provide
the seller with a letter (with copies provided to the Rating Agency, the
underwriter and the trustee) stating whether or not the characteristics of the
Additional Receivables conform to the characteristics described in the
Prospectus, Prospectus Supplement, Private Placement Memorandum ("Offering
Documents") and/or the Agreement. In preparing such letter, the independent
accountant must use the same type of procedures as were applicable to the
Receivables which were transferred as of the Closing Date. Sixth, the DOL
Pre-Funding Period must end no later than three months or 90 days after the
Closing Date or earlier, in certain circumstances, if the amount on deposit in
the Pre-Funding Account is reduced below the minimum level specified in the
Agreement or an event of default occurs under the Agreement. Seventh, amounts
transferred to any Pre-Funding Account and/or Capitalized Interest Account used
in connection with the pre-funding may be invested only in investments which are
permitted by the Rating Agency and (i) are direct obligations of, or obligations
fully guaranteed as to timely payment of principal and interest by, the United
States or any agency or instrumentality thereof (provided that such obligations
are backed by the full faith and credit of the United States); or (ii) have been
rated (or the obligor has been rated) in one of the three highest generic rating
categories by the Rating Agency ("Acceptable Investments"). Eighth, certain
disclosure requirements must be met.
LIMITATIONS ON SCOPE OF THE EXEMPTION. If the general conditions of
the Exemption are satisfied, the Exemption may provide an exemption from the
restrictions imposed by ERISA and the Code in connection with the initial
acquisition, transfer or holding, and the acquisition or disposition in the
secondary market, of the Certificates by Plans. However, no exemption is
provided from the restrictions of ERISA for the acquisition or holding of a
Certificates on behalf of an "Excluded Plan" by any person who is a fiduciary
with respect to the assets of such Excluded Plan. For those purposes, an
Excluded Plan is a Plan sponsored by any member of the Restricted Group.
Exemptive relief may also be provided for the acquisition, holding and
disposition of Certificates by Plans if the fiduciary or its affiliate is the
obligor with respect to 5% or less of the fair market value of the Receivables
in the Trust provided that: (i) the Plan is not an Excluded Plan, (ii) each
Plan's investment in each class of Certificates does not exceed 25% of the
outstanding Certificates in the class, (iii) after the Plan's acquisition of the
Certificates, no more than 25% of the assets over which the fiduciary has
investment authority are invested in Certificates of a trust containing assets
which are sold or serviced by the same entity and (iv) in the case of initial
issuance (but not secondary market transactions), at least 50% of each class of
Certificates and at least 50% of the aggregate interests in the Trust are
acquired by persons independent of the Restricted Group.
ERISA CONSIDERATIONS RELATING TO NOTES
Under the Plan Asset Regulations, the assets of the Trust would be
treated as "plan assets" of a Plan for the purposes of ERISA and the Code only
if the Plan acquires an "equity interest" in the Trust and none of the
exceptions contained in the Plan Asset Regulations is applicable. An equity
interest is defined under the Plan Asset Regulations as an interest other than
an instrument which is treated as indebtedness under applicable local law and
which has no substantial equity features. Assuming that the Notes are treated as
indebtedness without substantial equity features for purposes of the Plan Asset
Regulations, then such Notes will be eligible for purchase by Plans. However,
without regard to whether the Notes are treated as an "equity interest" for such
purposes, the acquisition or holding of Notes by or on behalf of a Plan could be
considered to give rise to a prohibited transaction if the Trust or any of its
affiliates is or becomes a party in interest or disqualified person with respect
to such Plan, or in the event that a Note is purchased in the secondary market
and such purchase constitutes a sale or exchange between a Plan and a party in
interest or disqualified person with respect to such Plan. There can be no
assurance that the Trust or any of its affiliates will not be or become a party
in interest or a disqualified person with respect to a Plan that acquires Notes.
The Amendment to the Exemption permits Trust which are grantor trusts,
owner-trusts, REMICs or FASITs to issue Notes, as well as Certificates, provided
a legal opinion is received to the effect that the noteholders have a perfected
security interest in the Trust's assets. The exemptive relief provided under the
Exemption for any prohibited transactions which could be caused as a result of
the operation, management or servicing of the Trust and its assets would not be
necessary with respect to Notes with no substantial equity features which are
issued as obligations of the Trust. However, effective for the acquisition,
holding or transfer of Notes between a Plan and a party in interest which occurs
on or after November 13, 2000, the Exemption would provide prohibited
transaction exemptive relief, provided that the same conditions of the Exemption
described above relating to Certificates are met with respect to the Notes. The
same limitations of such exemptive relief relating to acquisitions of
Certificates by fiduciaries with respect to Excluded Plans would also be
applicable to the Notes as described herein in "LIMITATIONS ON SCOPE OF THE
EXEMPTION."
In the event that the Exemption is not applicable to the Notes, one or
more other prohibited transactions exemptions may be available to Plans
purchasing or transferring the Notes depending in part upon the type of Plan
fiduciary making the decision to acquire the Notes and the circumstances under
which such decision is made. These exemptions include, but are not limited to,
Prohibited Transaction Class Exemption 90-1 (regarding investments by insurance
company pooled separate accounts), Prohibited Transaction Class Exemption 91-38
(regarding investments by bank collective investments funds), PTCE 84-14
(regarding transactions effected by "qualified professional asset managers"),
PTCE 95-60 (regarding investments by insurance company general accounts) and
PTCE 96-23 (regarding transactions effected by "in-house asset managers")
(collectively, the "Investor-Based Exemptions"). However, even if the conditions
specified in these Investor-Based Exemptions are met, the scope of the relief
provided under such Exemptions might or might not cover all acts which might be
construed as prohibited transactions.
EACH PROSPECTUS SUPPLEMENT WILL CONTAIN INFORMATION CONCERNING
CONSIDERATIONS RELATING TO ERISA AND THE CODE THAT ARE APPLICABLE TO THE RELATED
SECURITIES. BEFORE PURCHASING SECURITIES IN RELIANCE ON THE EXEMPTION, THE
INVESTOR-BASED EMEMPTIONS OR ANY OTHER EXEMPTION, A FIDUCIARY OF A PLAN SHOULD
ITSELF CONFIRM THAT REQUIREMENTS SET FORTH IN SUCH EXEMPTION WOULD BE SATISFIED.
ANY PLAN INVESTOR WHO PROPOSES TO USE "PLAN ASSETS" OF ANY PLAN TO
PURCHASE SECURITIES OF ANY SERIES OR CLASS SHOULD CONSULT WITH ITS COUNSEL WITH
RESPECT TO THE POTENTIAL CONSEQUENCES UNDER ERISA AND SECTION 4975 OF THE CODE
OF THE ACQUISITION AND OWNERSHIP OF SUCH SECURITIES.
Governmental plans and church plans as defined in ERISA are not
subject to ERISA or Code Section 4975, although they may elect to be qualified
under Section 401(a) of the Code and exempt from taxation under Section 501(a)
of the Code and would then be subject to the prohibited transaction rules set
forth in Section 503 of the Code. In addition, governmental plans may be subject
to federal, state and local laws which are to a material extent similar to the
provisions of ERISA or a Code Section 4975 ("Similar Law"). A fiduciary of a
governmental plan should make its own determination as to the propriety of an
investment in Securities under applicable fiduciary or other investment
standards and the need for the availability of any exemptive relief under any
Similar Law.
Plan of Distribution
On the terms and conditions set forth in an underwriting agreement
with respect to the notes, if any, of a given series and an underwriting
agreement with respect to the certificates of the series (collectively, the
"Underwriting Agreements"), the company will agree to cause the related Trust to
sell to the underwriters named in the Underwriting Agreement and in the related
prospectus supplement, and each of these underwriters will severally agree to
purchase, the principal amount of each class of notes and certificates, as the
case may be, of the related series set forth in the related Underwriting
Agreement and in the related prospectus supplement.
In the Underwriting Agreements with respect to any given series of
securities, the several underwriters will agree, subject to the terms and
conditions set forth in the related Underwriting Agreement, to purchase all of
the notes and certificates, as the case may be, described in the related
Underwriting Agreement that are offered by this prospectus and by the related
prospectus supplement if any of the notes and certificates, as the case may be,
are purchased.
Each prospectus supplement will either (1) set forth the price at
which each class of notes and certificates, as the case may be, being offered by
the related prospectus supplement will be offered to the public and any
concessions that may be offered to particular dealers participating in the
offering of the notes and certificates, as the case may be, or (2) specify that
the related notes and certificates, as the case may be, are to be resold by the
underwriters in negotiated transactions at varying prices to be determined at
the time of sale. After the initial public offering of any notes and
certificates, as the case may be, public offering prices and concessions may be
changed.
Pursuant to the Receivables Purchase Agreement between the seller, or
its affiliate, and the company, the seller will indemnify the company and the
related underwriters against specific civil liabilities, including liabilities
under the securities Act, or contribute to payments the company and the several
underwriters may be required to make in respect of the Receivables Purchase
Agreement.
Each Trust may, from time to time, invest the funds in its Trust
Accounts in Eligible Investments acquired from the underwriters.
Pursuant to each of the Underwriting Agreements with respect to a
given series of securities, the closing of the sale of any class of securities
will be conditioned on the closing of the sale of all other classes under the
related Underwriting Agreement.
The place and time of delivery for the notes and certificates, as the
case may be, in respect of which this prospectus is delivered will be set forth
in the related prospectus supplement.
If and to the extent required by applicable law or regulation, this
prospectus and the prospectus supplement will also be used by the Underwriter
after the completion of the offering in connection with offers and sales related
to market-making transactions in the offered securities in which the Underwriter
acts as principal. The Underwriter may also act as agent in these transactions.
Sales will be made at negotiated prices determined at the time of sale.
LEGAL MATTERS
Some legal matters relating to the securities of any series will be
passed upon by the law firms specified in the related prospectus supplement.
Some related federal income tax and other matters will be passed upon for the
Trust and the seller, by the law firms specified in the related prospectus
supplement.
PROSPECTUS SUPPLEMENT
The prospectus supplement relating to a series of securities to be
offered under this prospectus will, among other things, set forth with respect
to each class of securities:
o the interest rate and authorized denominations, as applicable, of
each class of securities;
o specific information concerning the Primary Assets and the
related seller and servicer, as applicable;
o the terms of any Credit or Cash Flow Enhancement applicable to
any class or classes of securities;
o information concerning any other assets in the related Trust;
o the expected date or dates on which the principal amount, if any,
of each class of securities will be paid to holders of the
securities;
o the extent to which any class within a series is subordinated to
any other class of the same series; and
o additional information with respect to the plan of distribution
of the securities.
REPORTS TO SECURITYHOLDERS
With respect to each series of securities, the servicer of the related
Primary Assets will prepare for distribution to the related Securityholders
monthly and annual reports concerning the securities and the related Trust. See
"Certain Information Regarding the Securities--Statements to Securityholders."
AVAILABLE INFORMATION
The company, as originator of the Trusts, has filed with the Securities
and Exchange Commission (the "Commission") a Registration Statement on Form S-3
(together with all amendments and exhibits to the Registration Statement, the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the securities being offered by this
prospectus. This prospectus does not contain all of the information set forth in
the Registration Statement, some parts of which have been omitted in accordance
with the rules and regulations of the Commission. In addition, company is
subject to the informational requirements of the securities Exchange Act of
1934, as amended (the "Exchange Act"), and in accordance with the Exchange Act
files reports and other information with the Commission. The Registration
Statement, reports and other information are available for inspection without
charge at the public reference facilities of the Commission at Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, and the regional offices of the
Commission at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511, and Seven World Trade Center, Suite 1300, New York, New
York 10048. Copies of this information can be obtained from the Public Reference
Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Commission maintains a Web site
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. The address
of the site is http://www.sec.gov.
Upon receipt of a request by an investor who has received an
electronic prospectus supplement and prospectus from the Underwriter or a
request by the investor's representative within the period during which there is
an obligation to deliver a prospectus supplement and Prospectus, the Underwriter
will promptly deliver, or cause to be delivered, without charge, to the investor
a paper copy of the prospectus supplement and prospectus.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by the company on behalf of the Trust referred to
in the accompanying prospectus supplement with the Commission pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
Prospectus and prior to the termination of the offering of the securities
offered by the Trust shall be deemed to be incorporated by reference in this
prospectus and to be a part of this prospectus from the dates of filing of the
documents. Any statement contained in this prospectus or in a document
incorporated or deemed to be incorporated by reference in this prospectus shall
be deemed to be modified or superseded for purposes of this prospectus to the
extent that a statement contained in this prospectus, or in the accompanying
prospectus supplement, or in any subsequently filed document that also is or is
deemed to be incorporated by reference in this prospectus modifies or supersedes
the statement. Any statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this prospectus.
The company on behalf of any Trust will provide without charge to each
person to whom a copy of this prospectus is delivered, on the written or oral
request of the person, a copy of any or all of the documents incorporated in
this prospectus by reference, except the exhibits to these documents. Requests
for copies should be directed to: Secretary, ACE Securities Corp., [ ],
telephone, [ ].
INDEX OF TERMS
PAGE
1996 Contingent Debt Regulations............................................54
1997 Act....................................................................74
1997 Withholding Regulations................................................60
accrual period..............................................................57
Actuarial Receivables........................................................7
Additional Loans............................................................82
adjusted issue price........................................................57
Advances....................................................................41
average interest rate.......................................................82
Cede.........................................................................1
Certificate Distribution Account............................................36
Certificate Owners..........................................................53
Certificate Pool Factor.....................................................21
Check-the-Box Regulations...................................................64
Code........................................................................53
Collection Account..........................................................36
Collection Period...........................................................40
Definitive certificates.....................................................32
Definitive notes............................................................32
Definitive Securities.......................................................32
Depository..................................................................22
Distribution Date...........................................................29
DOL.........................................................................78
DOL Regulation..............................................................78
DTC..........................................................................1
Eligible Deposit Account....................................................37
Eligible Institution........................................................37
Eligible Investment.........................................................38
Eligible Investments........................................................37
ERISA.......................................................................77
Events of Default...........................................................23
Exchange Act................................................................86
Fannie Mae..................................................................13
Farm Credit Act.............................................................17
FCA.........................................................................17
FCBs........................................................................17
Federal Tax Counsel.........................................................53
FFCB........................................................................13
FFEL........................................................................15
FHLB........................................................................13
FHLMC Act...................................................................14
Final Scheduled Maturity Date...............................................39
Financed Vehicles............................................................5
financial institution.......................................................61
FIRREA......................................................................15
Fiscal Agent................................................................13
Freddie Mac.................................................................13
FTC Rule....................................................................51
Funding Corporation.........................................................17
Government Securities.......................................................11
grantor trust certificateholders............................................70
grantor trust certificates..................................................70
GSE Issuer..................................................................13
GSEs........................................................................11
GSEs Bonds..................................................................11
Indenture...................................................................22
Indirect Participants.......................................................30
Interest Component..........................................................19
Investment Earnings.........................................................37
Investor Based Exemptions...................................................83
IRS.........................................................................53
issue price.................................................................55
Loans.......................................................................82
MBS.........................................................................14
Non-United States Holder....................................................60
Non-United States Owner.....................................................69
Non-United States Person....................................................60
Note Distribution Account...................................................36
Note Owners.................................................................52
Note Pool Factor............................................................21
objective rate..............................................................54
Offering Documents..........................................................83
OID Regulations.............................................................54
Other Pools.................................................................80
Participants................................................................30
Payahead Account............................................................36
Payaheads...................................................................40
Plan........................................................................77
Plan Fiduciary..............................................................77
Pooling Agreement...........................................................83
Pooling and Servicing Agreement..............................................5
Precomputed Advance.........................................................40
Precomputed Receivables......................................................7
Pre-Funded Amount...........................................................37
Pre-Funding Account.........................................................37
Pre-Funding Limit...........................................................82
Pre-Funding Period..........................................................38
Prepayment Assumption.......................................................56
Principal Component.........................................................19
Private Label Custody Receipt Securities....................................17
Private Label Custody Strips................................................17
PTCE........................................................................83
qualified inverse floating rate.............................................54
qualified stated interest...................................................54
Receivables..................................................................6
REFCO.......................................................................17
REFCO Strip.................................................................19
Registration Statement......................................................86
Related Documents...........................................................26
Repurchase Amount...........................................................35
Reserve Account.............................................................43
Restricted Group............................................................82
RTC.........................................................................15
Rule of 78S Receivables......................................................7
Rules.......................................................................30
Sale and Servicing Agreement.................................................5
Sallie Mae..................................................................13
Schedule of Receivables.....................................................35
Securities Act..............................................................86
Security Owners.............................................................30
Senior Certificates.........................................................72
Senior Class Percentage.....................................................73
Servicer Default............................................................44
Servicing Fee...............................................................41
Servicing Fee Rate..........................................................41
Shortfall Amount............................................................73
Short-Term Note.............................................................59
Simple Interest Advance.....................................................41
Simple Interest Receivables..................................................7
stated redemption price at maturity.........................................56
Stripped Certificates.......................................................71
Subordinate Certificates....................................................72
Subordinate Class Percentage................................................72
System......................................................................17
Systemwide Debt Securities..................................................17
TEFRA.......................................................................19
TIN.........................................................................62
Transfer and Servicing Agreements...........................................35
Treasury Bonds..............................................................10
Treasury Strips.............................................................10
Trust........................................................................5
Trust Accounts..............................................................37
Trust Agreement..............................................................5
Trust Stripped Bond.........................................................72
Trust Stripped Coupon.......................................................72
TVA.........................................................................13
TVA Act.....................................................................16
UCC.........................................................................30
Underlying Issuer............................................................9
Underlying Servicer..........................................................9
Underlying Trust Agreement...................................................9
Underlying Trustee...........................................................9
Underwriter's PTE...........................................................80
Underwriting Agreements.....................................................84
United States Person........................................................60
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in some limited circumstances, the globally offered securities
(the "Global securities") will be available only in book-entry form. Unless
otherwise specified in the related prospectus supplement, investors in the
Global securities may hold Global securities through any of The Depository Trust
company ("DTC"), Clearstream, Luxembourg or Euroclear. Unless otherwise
specified in the related prospectus supplement, Global securities will be
tradeable as home market instruments in both the European and U.S. domestic
markets. Unless otherwise specified in the related prospectus supplement,
Initial settlement and all secondary trades will settle in same-day funds.
Secondary market trading between investors holding Global securities
through Clearstream, Luxembourg and Euroclear will be conducted in the ordinary
way in accordance with their normal rules and operating procedures and in
accordance with conventional eurobond practice (i.e., seven calendar day
settlement).
Secondary market trading between investors holding Global securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations.
Secondary cross-market trading between Clearstream, Luxembourg or
Euroclear and DTC Participants holding securities will be effected on a
delivery-against-payment basis through the respective Depositaries of
Clearstream, Luxembourg and Euroclear, in this capacity, and as DTC
Participants.
Non-U.S. holders of Global securities will be subject to U.S.
withholding taxes unless the holders meet particular requirements and deliver
appropriate U.S. tax documents to the securities clearing organizations or their
participants.
INITIAL SETTLEMENT
All Global securities will be held in book-entry form by The
Depository Trust Company ("DTC") in the name of Cede & Co. ("Cede") as nominee
of DTC. Securityholders' interests in the Global securities will be represented
through financial institutions acting on their behalf as direct and indirect
Participants in DTC. As a result, Clearstream, Luxembourg and Euroclear will
hold positions on behalf of their participants through their respective
Depositaries, which in turn will hold these positions in accounts as DTC
Participants.
Securityholders electing to hold their Global securities through DTC
will follow the settlement practices applicable to U.S. corporate debt
obligations. Securityholder securities custody accounts will be credited with
their holdings against payment in same-day funds on the settlement date.
Securityholders electing to hold their Global securities through
Clearstream, Luxembourg or Euroclear accounts will follow the settlement
procedures applicable to conventional eurobonds, except that there will be no
temporary global security and no "lock-up" or restricted period. Global
securities will be credited to the securities custody accounts on the settlement
date against payment in same-day funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
TRADING BETWEEN DTC PARTICIPANTS. Secondary market trading between DTC
Participants will be settled using the procedures applicable to U.S. corporate
debt obligations in same-day funds.
TRADING BETWEEN CLEARSTREAM, LUXEMBOURG AND/OR EUROCLEAR PARTICIPANTS.
Secondary market trading between Clearstream, Luxembourg Participants or
Euroclear Participants will be settled using the procedures applicable to
conventional eurobonds in same-day funds.
TRADING BETWEEN DTC SELLER AND CLEARSTREAM, LUXEMBOURG OR EUROCLEAR
PURCHASER. When Global securities are to be transferred from the account of a
DTC Participant to the account of a Clearstream, Luxembourg Clearstream,
Luxembourg Participant or a Euroclear Participant, the purchaser will send
instructions to Clearstream, Luxembourg or Euroclear through a Clearstream,
Luxembourg Participant or Euroclear Participant at least one business day prior
to settlement. Clearstream, Luxembourg or Euroclear will instruct the respective
Depositary, as the case may be, to receive the Global securities against
payment. Payment will include interest accrued on the Global securities from and
including the last coupon payment date to and excluding the settlement date.
Payment will then be made by the respective Depositary to the DTC Participant's
account against delivery of the Global securities. After settlement has been
completed, the Global securities will be credited to the respective clearing
system and by the clearing system, in accordance with its usual procedures, to
the Clearstream, Luxembourg Participant's or Euroclear Participant's account.
The Global securities credit will appear the next day (European time) and the
cash debit will be back-valued to, and the interest on the Global securities
will accrue from, the value date, which would be the preceding day when
settlement occurred in New York. If settlement is not completed on the intended
value date (i.e., the trade fails), the Clearstream, Luxembourg or Euroclear
cash debit will be valued instead as of the actual settlement date.
Clearstream, Luxembourg Participants and Euroclear Participants will
need to make available to the respective clearing systems the funds necessary to
process same-day funds settlement. The most direct means of doing so is to
pre-position funds for settlement, either from cash on hand or existing lines of
credit, as they would for any settlement occurring within Clearstream,
Luxembourg or Euroclear. Under this approach, they may take on credit exposure
to Clearstream, Luxembourg or Euroclear until the Global securities are credited
to their accounts one day later.
As an alternative, if Clearstream, Luxembourg or Euroclear has
extended a line of credit to them, Clearstream, Luxembourg Participants or
Euroclear Participants can elect not to pre-position funds and allow that credit
line to be drawn upon the finance settlement. Under this procedure, Clearstream,
Luxembourg Participants or Euroclear Participants purchasing Global securities
would incur overdraft charges for one day, assuming they cleared the overdraft
when the Global securities were credited to their accounts. However, interest on
the Global securities would accrue from the value date. Therefore, in many cases
the investment income on the Global securities earned during that one-day period
may substantially reduce or offset the amount of the overdraft charges, although
this result will depend on each Clearstream, Luxembourg Participant's or
Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours,
DTC Participants can employ their usual procedures for sending Global securities
to the respective Depositary for the benefit of Clearstream, Luxembourg
Participants or Euroclear Participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC Participant a
cross-market transaction will settle no differently than a trade between two DTC
Participants.
TRADING BETWEEN CLEARSTREAM, LUXEMBOURG OR EUROCLEAR SELLER AND DTC
PURCHASER. Due to time zone differences in their favor, Clearstream, Luxembourg
Participants and Euroclear Participants may employ their customary procedures
for transactions in which Global securities are to be transferred by the
respective clearing system, through the respective Depositary, to a DTC
Participant. The seller will send instructions to Clearstream, Luxembourg or
Euroclear through a Clearstream, Luxembourg Participant or Euroclear Participant
at least one business day prior to settlement. In these cases, Clearstream,
Luxembourg or Euroclear will instruct the respective Depositary, as appropriate,
to deliver the bonds to the DTC Participant's account against payment. Payment
will include interest accrued on the Global securities from and including the
last coupon payment date to and excluding the settlement date. The payment will
then be reflected in the account of the Clearstream, Luxembourg Participant or
Euroclear Participant the following day, and receipt of the cash proceeds in the
Clearstream, Luxembourg Participant's or Euroclear Participant's account would
be back-valued to the value date, which would be the preceding day, when
settlement occurred in New York. Should the Clearstream, Luxembourg Participant
or Euroclear Participant have a line of credit with its respective clearing
system and elect to be in debit in anticipation of receipt of the sale proceeds
in its account, the back-valuation will extinguish any overdraft charges
incurred over that one-day period. If settlement is not completed on the
intended value date (i.e., the trade fails), receipt of the cash proceeds in the
Clearstream, Luxembourg Participant's or Euroclear Participant's account would
instead be valued as of the actual settlement date. Finally, day traders that
use Clearstream, Luxembourg or Euroclear and that purchase Global securities
from DTC Participants for delivery to Clearstream, Luxembourg Participants or
Euroclear Participants should note that these trades would automatically fail on
the sale side unless affirmative action were taken. At least three techniques
should be readily available to eliminate this potential problem:
(a) borrowing through Clearstream, Luxembourg or Euroclear for one
day, until the purchase side of the day trade is reflected in
their Clearstream, Luxembourg or Euroclear accounts, in
accordance with the clearing system's customary procedures;
(b) borrowing the Global securities in the U.S. from a DTC
Participant no later than one day prior to settlement, which
would give the Global securities sufficient time to be reflected
in their Clearstream, Luxembourg or Euroclear account in order to
settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the
trade so that the value date for the purchase from the DTC
Participant is at least one day prior to the value date for the
sale to the Clearstream, Luxembourg Participant or Euroclear
Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global securities holding securities through
Clearstream, Luxembourg or Euroclear, or through DTC will be subject to the 30%
U.S. withholding tax that generally applies to payments of interest, including
original issue discount, on registered debt issued by U.S. Persons or to 31%
backup withholding, unless (1) each clearing system, bank or other financial
institution that holds customers' securities in the ordinary course of its trade
or business in the chain of intermediaries between the beneficial owner and the
U.S. entity required to withhold tax complies with applicable certification
requirements and (2) the beneficial owner takes one of the following steps to
obtain an exemption or reduced tax rate:
EXEMPTION FOR NON-U.S. PERSONS (FORM W-8BEN). Beneficial owners of
securities that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8BEN (Certificate of Foreign Status)
of Benficial Owner for United States Tax Withholding. If the information shown
on Form W-8 changes, a new Form W-8BEN must be filed within 30 days of the
change.
EXEMPTION FOR NON-U.S. PERSONS WITH EFFECTIVELY CONNECTED INCOME (FORM
W-8ECI). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form W-8ECI (Certificate of Foreing Person's Claim for
Exemption from Withholding on Income Effectively Connected with the Conduct of a
Trade or Business in the United States).
EXEMPTION OR REDUCED RATE FOR NON-U.S. PERSONS RESIDENT IN TREATY
COUNTRIES (FORM W-8BEN). Non-U.S. Persons that are beneficial owners of
securities residing in a country that has a tax treaty with the United States
can obtain an exemption or reduced tax rate, depending on the treaty terms, by
filing Form W-8BEN (including Part II thereof). If the treaty provides only for
a reduced rate, the beneficial owner may still be entitled to complete exemption
from withholding under item (1) above.
EXEMPTION FOR U.S. PERSONS (FORM W-9). U.S. Persons can obtain
complete exemption from the withholding tax by filing Form W-9 (Payer's Request
for Taxpayer Identification Number and Certification).
U.S. FEDERAL INCOME TAX REPORTING PROCEDURE. The beneficial owner of a
Global Security, files by submitting the appropriate form to the person through
whom it holds, the clearing agency, in the case of persons holding directly on
the books of the clearing agency. Form W-8BEN and Form W-8ECI are generally
effective for three calendar years from the close of the calendar year in which
it is collected.
The term "U.S. Person" means;
(1) a citizen or resident of the United States,
(2) a corporation or partnership (or other entity properly classified
as a corporation or partnership for U.S. Federal income tax
purposes) organized in or under the laws of the United States or
any state or the District of Columbia,
(3) an estate the income of which is includible in gross income for
United States tax purposes, regardless of its source, or
(4) a trust if a court within the United States is able to exercise
primary supervision over the administration of the trust and one
or more United States persons have authority to control all
substantial decisions of the trust. Notwithstanding the preceding
sentence, to the extent provided in regulations, trusts in
existence on August 20, 1996 and treated as United States persons
prior to that date that elect to continue to be treated also will
be considered U.S. Persons. Treasury regulations provide certain
presumptions regarding the entity classification and foreign or
U.S. status of a holder that a payor generally must apply in the
absence of appropriate documentation from the holder, and provide
detailed documentation and procedures for holders claiming
withholding tax exemptions through intermediaries. Prospective
investors are urged to consult their tax advisors regarding the
effect of these regulations on their ability to claim and the
means for claiming exemptions from or reduced relates of U.S.
withholding taxes.
This summary does not deal with all aspects of U.S. Federal income tax
withholding that may be relevant to foreign holders of the Global securities.
Investors are advised to consult their own tax advisers for specific tax
advice concerning their holding and disposing of the Global securities.
The information in this prospectus supplement is not complete and may be
changed. We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This prospectus
supplement is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
SUBJECT TO COMPLETION, [ ]
PROSPECTUS SUPPLEMENT (to prospectus dated [ ])
$[ ] (APPROXIMATE)
ACE SECURITIES CORP.
[ ] TRUST [ ]
ASSET BACKED NOTES
[ ]
SERVICER
-------------------
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-[ ] OF THIS
PROSPECTUS SUPPLEMENT AND ON PAGE [ ] OF THE PROSPECTUS.
For a list of capitalized terms used in this prospectus supplement and the
prospectus, see the index of defined terms beginning on page S-[ ] of this
prospectus supplement and on page [ ] of the prospectus.
The notes will represent interests in the trust fund only and will not
represent interests in or obligations of any other entity.
This prospectus supplement may be used to offer and sell the notes only if
accompanied by the prospectus.
The trust will issue the following notes:
ORIGINAL CLASS INTEREST PRICE UNDERWRITING PROCEEDS
CLASS PRINCIPAL AMOUNT(1) RATE(2) TO PUBLIC DISCOUNT TO DEPOSITOR
- --------- ------------------- ------- --------- -------- ------------
[ ] $[ ] [ ]% $[ ] [ ]% $[ ]
______________
(1) This amount is approximate, as described in this prospectus supplement.
(2) The interest rate is subject to increase as described in this prospectus
supplement.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS SUPPLEMENT OR THE ATTACHED PROSPECTUS IS ACCURATE OR COMPLETE. MAKING
ANY CONTRARY REPRESENTATION IS A CRIMINAL OFFENSE.
[Describe underwriting arrangements.]
On or about [ ], delivery of the notes offered by this prospectus
supplement will be made through the book-entry facilities of The Depository
Trust Company.
UNDERWRITER:
DEUTSCHE BANC ALEX. BROWN
The date of this prospectus supplement is [ ]
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS:
We provide information to you about the notes offered by this
prospectus supplement in two separate documents that progressively provide more
detail: (1) the accompanying prospectus, which provides general information,
some of which may not apply to your notes, and (2) this prospectus supplement,
which describes the specific terms of your notes.
IF INFORMATION VARIES BETWEEN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS, YOU SHOULD RELY ON THE INFORMATION IN THIS PROSPECTUS
SUPPLEMENT.
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We have
not authorized anyone to provide you with different information.
We are not offering the notes in any state where the offer is not
permitted. We do not claim that the information in this prospectus supplement
and prospectus is accurate as of any date other than the dates stated on their
respective covers.
-------------------
Dealers will deliver a prospectus supplement and prospectus when
acting as underwriters of the notes and with respect to their unsold allotments
or subscriptions. In addition, all dealers selling the notes will be required to
deliver a prospectus supplement and prospectus for ninety days following the
date of this prospectus supplement.
-------------------
We include cross-references in this prospectus supplement and the
accompanying prospectus to captions in these materials where you can find
further related discussions. The following tables of contents and the table of
contents included in the accompanying prospectus provide the pages on which
these captions are located.
TABLES OF CONTENTS
PROSPECTUS SUPPLEMENT
PAGE
Summary of Terms....................................4
Risk Factors........................................8
Description of the Trust...........................12
Description of the Notes...........................12
[The Insurance Policy..............................17
Description of the Mortgage Pool...................18
Additional Information.............................25
The Originator.....................................25
The Servicer.......................................25
Description of the Transfer and Servicing
Agreements.........................................26
Yield Considerations...............................32
Material Federal Income Tax Considerations.........39
State and Local Income Tax Considerations..........39
ERISA Considerations...............................39
Legal Investment Considerations....................40
Use of Proceeds....................................40
Underwriting.......................................40
Experts............................................41
Legal Matters......................................41
Ratings............................................41
Glossary of Defined Terms..........................43
Annex I............................................44
PROSPECTUS
PAGE
Description of the Trust Funds.......................
Use of Proceeds......................................
Yield Considerations.................................
The Depositor........................................
Description of the Securities........................
Description of the Agreements........................
Description of Credit Support........................
Certain Legal Aspects of Mortgage Loans..............
Certain Legal Aspects of the Contracts...............
Material Federal Income Tax Considerations...........
State and Other Tax Considerations...................
Legal Investment.....................................
Methods of Distribution..............................
Additional Information...............................
Incorporation of Certain Documents by Reference......
Legal Matters........................................
Financial Information................................
Rating...............................................
Index of Defined Terms...............................
SUMMARY OF TERMS
o THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROSPECTUS
SUPPLEMENT AND DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU NEED TO
CONSIDER IN MAKING YOUR INVESTMENT DECISION. TO UNDERSTAND ALL OF THE TERMS
OF THE OFFERING OF THE NOTES, IT IS NECESSARY THAT YOU READ CAREFULLY THIS
ENTIRE PROSPECTUS SUPPLEMENT AND ACCOMPANYING PROSPECTUS.
o WHILE THIS SUMMARY CONTAINS AN OVERVIEW OF CERTAIN CALCULATIONS, CASH FLOW
PRIORITIES, AND OTHER INFORMATION TO AID YOUR UNDERSTANDING, YOU SHOULD
READ CAREFULLY THE FULL DESCRIPTION OF THESE CALCULATIONS, CASH FLOW
PRIORITIES AND OTHER INFORMATION IN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS BEFORE MAKING ANY INVESTMENT DECISION.
o WHENEVER WE REFER TO A PERCENTAGE OF SOME OR ALL OF THE MORTGAGE LOANS IN
THE TRUST, THAT PERCENTAGE HAS BEEN CALCULATED ON THE BASIS OF THE TOTAL
PRINCIPAL BALANCE OF THOSE MORTGAGE LOANS AS OF [ ], UNLESS WE SPECIFY
OTHERWISE. WE EXPLAIN IN THIS PROSPECTUS SUPPLEMENT UNDER "DESCRIPTION OF
THE NOTES -- RELATED DEFINITIONS" HOW THE PRINCIPAL BALANCE OF A MORTGAGE
LOAN IS DETERMINED. WHENEVER WE REFER IN THIS SUMMARY OF TERMS OR IN THE
RISK FACTORS SECTION OF THIS PROSPECTUS SUPPLEMENT TO THE TOTAL PRINCIPAL
BALANCE OF ANY MORTGAGE LOANS, WE MEAN THE TOTAL OF THEIR PRINCIPAL
BALANCES DETERMINED BY THAT METHOD, UNLESS WE SPECIFY OTHERWISE.
THE OFFERED NOTES
ACE Securities Corp. [ ] Trust [ ] is offering the Class [ ] Asset Backed
Notes as part of Series [ ]. The notes will be issued in book-entry form.
SEE "DESCRIPTION OF THE NOTES -- GENERAL" IN THIS PROSPECTUS SUPPLEMENT FOR
A DISCUSSION OF THE MINIMUM DENOMINATIONS AND THE INCREMENTAL DENOMINATIONS OF
THE NOTES.
The notes will represent obligations of the trust and will be secured by
the assets of the trust, which consist primarily of [describe assets of the
trust.]
The notes will have an approximate total initial principal amount of $[ ].
Any difference between the total principal amount of the notes on the date they
are issued and the approximate total principal amount of the notes on the date
of this prospectus supplement will not exceed 5%.
PAYMENTS ON THE NOTES
Principal and interest on the notes will be payable on the [25]th day of
each month, beginning in [ ]. However, if the [25]th day is not a business day,
payments will be made on the next business day after the [25]th day of the
month.
INTEREST PAYMENTS
Interest will accrue on the notes at the annual rate described in this
prospectus supplement.
SEE "DESCRIPTION OF THE NOTES -- PAYMENTS -- PAYMENTS OF INTEREST" IN THIS
PROSPECTUS SUPPLEMENT.
PRINCIPAL PAYMENTS
The amount of principal payable on the notes will be determined by (1)
funds actually received on the mortgage loans that are available to make
payments on the notes, (2) the amount of interest received on the mortgage loans
that is used to pay principal on the notes, calculated as described in this
prospectus supplement, (3) [the amount of principal received on the mortgage
loans that is released to the residual certificate, calculated as described in
this prospectus supplement,] and (4) [ ]. Funds actually received on the
mortgage loans may consist of expected, scheduled payments, and unexpected
payments resulting from prepayments or defaults by borrowers, liquidation of
defaulted mortgage loans, or repurchases of mortgage loans under the
circumstances described in this prospectus supplement.
WE EXPLAIN HOW PRINCIPAL IS PAID ON THE NOTES UNDER "DESCRIPTION OF THE
NOTES -- PAYMENTS -- PAYMENTS OF PRINCIPAL" IN THIS PROSPECTUS SUPPLEMENT.
The last possible day on which the principal of the notes could become
payable in full is [ ] and is referred to as the maturity date. The notes could
be paid in full before the maturity date.
LIMITED RECOURSE
The only source of cash available to make interest and principal payments
on the notes will be the assets of the trust. The trust will have no other
source of cash and no entity other than the trust will be required or expected
to make any payments on the notes.
ENHANCEMENT OF LIKELIHOOD OF PAYMENT ON THE NOTES
[DESCRIBE ANY APPLICABLE FINANCIAL GUARANTY INSURANCE POLICY OR GUARANTEE.]
[SUBORDINATION OF PAYMENTS
No amounts will be paid to the holder of the residual certificate on any
distribution date until all amounts due to the notes on that date have been paid
and overcollateralization has reached the required level.]
[OVERCOLLATERALIZATION
On the closing date, the total principal balance of the mortgage loans is
expected to exceed the total principal amount of the notes by approximately [
]%. This condition is referred to as "overcollateralization." Any interest
received on the mortgage loans in excess of the amount needed to pay interest on
the notes and some expenses and fees of the trust will be used to reduce the
total principal amount of the notes to a level set by [ ], until the mortgage
loans have a total principal balance that exceeds the total outstanding
principal amount of the notes by the amount required by [ ]. We cannot assure
you that sufficient interest will be generated by the mortgage loans to increase
overcollateralization to the level required by [ ], or to maintain it at that
level.
SEE "DESCRIPTION OF THE NOTES -- OVERCOLLATERALIZATION" IN THIS PROSPECTUS
SUPPLEMENT.]
THE MORTGAGE LOANS
On the closing date, which is expected to be on or about [ ], the assets of
the trust will consist primarily of [describe mortgage loans.]
[Description of pre-funding account and additional mortgage loans as
applicable.]
SEE "DESCRIPTION OF THE MORTGAGE POOL" IN THIS PROSPECTUS SUPPLEMENT FOR A
GENERAL DESCRIPTION OF THE MORTGAGE LOANS AND "THE ORIGINATOR" IN THIS
PROSPECTUS SUPPLEMENT FOR A DESCRIPTION OF THE UNDERWRITING GUIDELINES APPLIED
IN ORIGINATING THE MORTGAGE LOANS.
[THE PRE-FUNDING ACCOUNT
On the closing date, approximately $[ ] will be deposited by [ ] in a
pre-funding account maintained by [ ]. It is intended that additional mortgage
loans will be sold to the trust by the depositor from time to time, from [ ]
until [ ], paid for with the funds on deposit in the pre-funding account.
[Description of pre-funding account and additional mortgage loans as
applicable.]
SEE "DESCRIPTION OF THE NOTES -- PRE-FUNDING ACCOUNT" IN THIS PROSPECTUS
SUPPLEMENT.]
SERVICING OF THE MORTGAGE LOANS
The mortgage loans will be serviced by [ ].
SEE "THE SERVICER" AND "DESCRIPTION OF THE TRANSFER AND SERVICING
AGREEMENTS" IN THIS PROSPECTUS SUPPLEMENT.
OPTIONAL PURCHASE OF MORTGAGE LOANS
[ ] will have the option to purchase all of the mortgage loans and the
other assets of the trust, after the total principal balance of the mortgage
loans declines to less than [ ]% of their initial total principal balance; if [
] does not exercise that option, [ ] may purchase the mortgage loans and other
assets of the trust.
If the mortgage loans and other assets are purchased, the noteholders will
be paid accrued interest, and principal equal to the outstanding principal
amount of the notes.
SEE "DESCRIPTION OF THE NOTES -- OPTIONAL REDEMPTION" IN THIS PROSPECTUS
SUPPLEMENT FOR A DESCRIPTION OF THE PURCHASE PRICE TO BE PAID FOR THE MORTGAGE
LOANS.
TAX STATUS
Stroock & Stroock & Lavan LLP, special federal tax counsel, will deliver an
opinion of counsel that for federal income tax purposes, the notes will be
treated as indebtedness and the trust will not be an association, or publicly
traded partnership, taxable as a corporaiton or a taxable mortgage pool.
SEE "MATERIAL FEDERAL INCOME TAX CONSIDERATIONS" IN THIS PROSPECTUS
SUPPLEMENT AND IN THE ACCOMPANYING PROSPECTUS FOR ADDITIONAL INFORMATION
CONCERNING THE APPLICATION OF FEDERAL INCOME TAX LAWS TO THE NOTES.
ERISA CONSIDERATIONS
The Notes may be acquired by employee benefit plans and other
retirement arrangements subject to certain conditions.
SEE "ERISA CONSIDERATIONS" IN THIS PROSPECTUS SUPPLEMENT AND IN THE PROSPECTUS
FOR A MORE COMPLETE DISCUSSION OF THESE ISSUES.
LEGAL INVESTMENT CONSIDERATIONS
[The notes will not constitute "mortgage related securities" for purposes
of the Secondary Mortgage Market Enhancement Act of 1984.]
There are other restrictions on the ability of some types of investors to
purchase the notes that prospective investors should consider.
SEE "LEGAL INVESTMENT CONSIDERATIONS" IN THIS PROSPECTUS SUPPLEMENT AND IN
THE PROSPECTUS.
RATINGS OF THE NOTES
The notes will initially be rated "[ ]" by [Rating Agency], and "[ ]" by
[Rating Agency].
These ratings are not recommendations to buy, sell or hold these notes. A
rating may be changed or withdrawn at any time by the assigning rating agency.
o The ratings do not address the possibility that, as a result of
principal prepayments, the yield on your notes may be lower than
anticipated.
SEE "RATINGS" IN THIS PROSPECTUS SUPPLEMENT FOR A MORE COMPLETE DISCUSSION
OF THE NOTE RATINGS.
RISK FACTORS
THE FOLLOWING INFORMATION, WHICH YOU SHOULD CAREFULLY CONSIDER,
IDENTIFIES CERTAIN SIGNIFICANT SOURCES OF RISK ASSOCIATED WITH AN INVESTMENT IN
THE NOTES. YOU SHOULD ALSO CAREFULLY CONSIDER THE INFORMATION SET FORTH UNDER
"RISK FACTORS" IN THE PROSPECTUS.
UNPREDICTABILITY
AND EFFECT OF PREPAYMENTS Borrowers may prepay their mortgage loans in
whole or in part at any time; however,
approximately [ ] of the mortgage loans
require the payment of a prepayment penalty
in connection with any voluntary prepayment
during [ ]. The prepayment penalties may be
waived by the servicer. A prepayment of a
mortgage loan will usually result in a
prepayment on the notes.
o If you purchase your notes at a
discount and principal is repaid
slower than you anticipate, then
your yield may be lower than you
anticipate.
o If you purchase your notes at a
premium and principal is repaid
faster than you anticipate, then
your yield may be lower than you
anticipate.
The rate at which defaults and
losses occur on the mortgage loans will
affect the rate of payment of principal on
the notes. We encourage you to review the
information in this prospectus supplement
about the underwriting guidelines applied in
originating the mortgage loans, the credit
quality of the mortgage loans and the
collateral for the mortgage loans.
SEE "YIELD CONSIDERATIONS" IN
THIS PROSPECTUS SUPPLEMENT FOR A DESCRIPTION
OF FACTORS THAT MAY INFLUENCE THE RATE AND
TIMING OF PREPAYMENTS ON THE MORTGAGE LOANS.
[The prepayment experience of
the mortgage loans may differ significantly
from that of first lien residential mortgage
loans, or junior lien mortgage loans with a
principal balance lower than the value of
the related property.]
[EFFECT OF CREATION AND
MAINTENANCE OF
OVERCOLLATERALIZATION ON
PAYMENTS OF PRINCIPAL ON THE NOTES We describe in this prospectus
supplement the underwriting guidelines used
in originating the mortgage loans, the
collateral for the mortgage loans and the
servicing of the mortgage loans. These and
other factors will affect the rate of
defaults and losses on the mortgage loans,
which in turn will affect the rate at which
overcollateralization is created or
maintained. When overcollateralization is
less than the level required by [ ], a
portion of interest collections on the
mortgage loans will be used to make
principal payments on the notes. This will
accelerate the rate at which you receive
payments of principal. When
overcollateralization is greater than the
level required by [ ], a portion of
principal collections on the mortgage loans
will be released to the residual
certificate. This will slow the rate at
which you receive payments of principal.]
GEOGRAPHIC CONCENTRATION OF
MORTGAGE LOANS Approximately [ ]% of the
mortgage loans expected to be in the trust
on the closing date are secured by
properties in [California]. The rate of
delinquencies and defaults, and therefore
the rate of prepayments, on the mortgage
loans may be higher than if fewer of the
mortgage loans were concentrated in one
state because the following conditions in
[California] will have a disproportionate
impact on the mortgage loans in general:
o Weak economic conditions in
[California] (which may or may
not affect real property values)
may affect the ability of
borrowers to repay their
mortgage loans on time;
o Declines in the [California]
residential real estate market
may reduce the values of
properties located in
[California], which would result
in an increase in the combined
loan-to-value ratios;
o Properties in [California] may
be more susceptible than homes
located in other parts of the
country to some types of
uninsurable hazards, such as
earthquakes, as well as floods,
mudslides and other natural
disasters; and
o Any increase in the market value
of properties located in
[California] would reduce the
combined loan-to-value ratios of
the mortgage loans and could,
therefore, make alternative
sources of financing available
to the borrowers at lower
interest rates, which could
result in an increased rate of
prepayment of the mortgage
loans.
Natural disasters affect regions
of the United States from time to time, and
may result in increased losses on mortgage
loans in those regions, or in insurance
payments that will constitute prepayments of
those mortgage loans.
FOR ADDITIONAL INFORMATION
REGARDING THE GEOGRAPHIC DISTRIBUTION OF THE
MORTGAGE LOANS IN THE TRUST, SEE THE
APPLICABLE TABLE UNDER "DESCRIPTION OF THE
MORTGAGE POOL" IN THIS PROSPECTUS
SUPPLEMENT.
[SOME OF THE LOANS
IN THE MORTGAGE POOL ARE
MORE LIKELY TO DEFAULT THAN
OTHERS, AND
HIGHER THAN EXPECTED
DEFAULTS ON THESE LOANS
COULD REDUCE THE YIELD ON
YOUR NOTES The payment schedules for most
of the mortgage loans in the pool require
the borrower to pay off the principal
balance of the loan gradually over the life
of the loan. Some of the mortgage loans in
the pool, however, have payment schedules
under which the borrowers makes relatively
small payments of principal over the life of
the loan, and then must make a large final
payment at maturity that pays off the entire
principal balance outstanding. This final
payment is usually much larger than the
previous monthly payments. Because the
borrower's ability to make this final
payment usually depends on the ability to
refinance the loan or sell the underlying
property, the risk of default is greater
than on other types of loans. High rates of
default on these types of loans in the pool
will result in greater losses on your notes.
The ability of a borrower to
refinance the type of loan described above
or sell the mortgaged property will depend
upon a number of factors, including:
o the level of mortgage interest
rates;
o the borrower's equity in the
mortgage property;
o general economic conditions; and
o the availability of credit.
We cannot predict how these
factors will affect the default rate of
these mortgage loans in the pool. You should
refer to "Description of the Mortgage Pool"
for information on the percentage of loans
in the mortgage pool that consists of these
loans.]
[EFFECT OF LACK OF PRIMARY MORTGAGE
INSURANCE ON THE NOTES
Approximately [ ]% of the
mortgage loans have loan-to-value ratios
greater than [ ]%. None of the mortgage
loans are covered by a primary mortgage
insurance policy. If borrowers default on
their mortgage loans, there is a greater
likelihood of losses than if the loans were
insured. We cannot assure you that the
applicable credit enhancement will be
adequate to cover those losses.
SEE "DESCRIPTION OF THE NOTES"
IN THIS PROSPECTUS SUPPLEMENT.]
REAL ESTATE MARKET MAY AFFECT
PERFORMANCE OF MORTGAGE LOANS A decline in the real estate
values or in economic conditions generally
could increase the rates of delinquencies,
foreclosures and losses on the mortgage
loans to a level that is significantly
higher than those experienced currently; and
no assurance can be given that values of the
properties securing the mortgage loans will
not decline since the date of origination of
the mortgage loan. If the credit enhancement
described in this prospectus supplement is
not enough to protect your notes from these
losses, the yield on your notes may be
reduced.
[EARLY PRINCIPAL PAYMENT FROM
CASH REMAINING IN PRE-FUNDING
ACCOUNT If the cash in the
pre-fundingaccount on the closing date is
not used to acquire additional mortgage
loans by [ ], then that cash will be [paid
to you on a proportionate basis with the
other noteholders in reduction of the
principal balance of your notes.] If the
amount of that cash is substantial, you will
receive a significant unexpected early
payment of principal in (or before) [ ]. We
cannot assure you that you will be able to
reinvest that money in another investment
with a comparable yield.]
YOU WILL NOT RECEIVE PHYSICAL NOTES,
WHICH CAN CAUSE DELAYS IN
DISTRIBUTIONS AND HAMPER
YOUR ABILITY TO PLEDGE OR
RESELL YOUR NOTES Your ownership of the notes will
be registered electronically with DTC. The
lack of physical notes could:
o result in payment delays on the
notes because the indenture
trustee will be sending
distributions on the notes to
DTC instead of directly to you;
o make it difficult for you to
pledge your notes if physical
notes are required by the party
demanding the pledge; and
o could hinder your ability to
resell the notes because some
investors may be unwilling to
buy notes that are not in
physical form.
SEE "DESCRIPTION OF THE NOTES --
BOOK-ENTRY REGISTRATION" IN THIS PROSPECTUS
SUPPLEMENT.
LIMITED ABILITY TO RESELL NOTES The underwriter is not required
to assist in resales of the notes, although
it may do so. A secondary market for the
notes may not develop. If a secondary market
does develop, it might not continue or it
might not be sufficiently liquid to allow
you to resell any of your notes. The
certificates will not be listed on any
securities exchange.
[Additional risk factors to be provided as applicable.]
DESCRIPTION OF THE TRUST
GENERAL
ACE Securities Corp. [ ] Trust [ ] (the "Trust" or the "Issuer") will
be a [statutory business trust] [common law trust] formed under the laws of [ ]
pursuant to an amended and restated Trust Agreement (the "Trust Agreement")
dated as of [ ] (the "Cut-off Date") between ACE Securities Corp. as depositor
(the "Depositor") and [ ] as owner trustee (the "Owner Trustee"), for the
transactions described in this prospectus supplement. The Trust will not engage
in any activity other than acquiring, holding and managing the Mortgage Loans
(as defined in this prospectus supplement) and the other assets of the Trust and
proceeds from the Mortgage Loans and other assets, issuing the Securities (as
defined in this prospectus supplement), making payments on the Securities, and
engaging in related activities.
On or about [ ] (the "Closing Date"), the Trust will purchase the
Mortgage Loans from the Depositor pursuant to a Sale and Servicing Agreement (as
amended and supplemented from time to time, the "Sale and Servicing Agreement")
dated as of the Cut-off Date, among the Trust, the Depositor, the Servicer and [
], as indenture trustee (the "Indenture Trustee").
The Trust's principal offices are located in [ ].
THE OWNER TRUSTEE
[ ] will act not in its individual capacity but solely as the Owner
Trustee under the Trust Agreement. [ ] is a [ ] banking corporation and its
principal offices are located at [ ]. The compensation of the Owner Trustee will
be paid by [ ].
THE RESIDUAL CERTIFICATE
The equity interest in the Trust will be represented by a residual
interest certificate (the "Residual Certificate").
The holder of the Residual Certificate (the "Residual
Certificateholder," and together with the Noteholders (as defined in this
prospectus supplement), the "Securityholders") will be entitled to receive [to
be described as applicable].
DESCRIPTION OF THE NOTES
GENERAL
The Trust will issue the Class [ ] Notes (the "Notes") pursuant to an
Indenture dated as of the Cut-off Date (the "Indenture") between the Issuer and
the Indenture Trustee. The Trust will also issue the Residual Certificate
pursuant to the Trust Agreement. The Notes and the Residual Certificate are
referred to in this prospectus supplement as the "Securities." Only the Notes
are offered by this prospectus supplement. The Notes will be secured by the
Trust Estate (as defined below) pursuant to the Indenture.
The "Trust Estate" will consist primarily of [describe as applicable].
The Notes will be issued in the approximate initial total principal
amount specified on the cover page of this prospectus supplement (the "Original
Class Principal Amount"). The total principal amount of the Notes outstanding at
any time is referred to in this prospectus supplement as the "Class Principal
Amount." The Residual Certificate will be issued without a principal amount or
interest rate, and will be entitled only to the amounts that are described in
this prospectus supplement. The Original Class Principal Amount of the Notes may
be increased or decreased by up to 5% to the extent that the Cut-off Date
Balance (as defined in this prospectus supplement) of the Mortgage Loans is
increased or decreased as described under "Description of the Mortgage Pool" in
this prospectus supplement.
Payments on the Notes will be made on the [25th] day of each month or,
if the [25th] day is not a Business Day, on the next succeeding Business Day,
commencing in [ ] (each, a "Distribution Date"), to holders of Notes
("Noteholders") of record on the applicable Record Date. The "Record Date" for
each Distribution Date will be the close of business on the last Business Day of
the calendar month immediately before the month in which that Distribution Date
occurs.
o A "Business Day" is generally any day other than a Saturday
or Sunday or a day on which banks in [New York] are closed.
Payments on the Notes will be made to each registered holder entitled
to these payments, either (1) by check mailed to the Noteholder's address as it
appears on the books of the Indenture Trustee, or (2) at the request, submitted
to the Indenture Trustee in writing not later than the related Record Date, of
any Noteholder (at the Noteholder's expense) in immediately available funds;
provided, that the final payment for any Note will be made only upon
presentation and surrender of the Note at the Corporate Trust Office (as defined
in this prospectus supplement) of the Indenture Trustee or the office of the
Note Registrar (as defined in this prospectus supplement). See "-- The Indenture
Trustee" in this prospectus supplement.
[PRE-FUNDING ACCOUNT
On the Closing Date approximately $[ ] (the "Pre-Funded Amount") will
be deposited in an account (the "Pre-Funding Account") maintained by [ ]. During
the period (the "Pre-Funding Period") from [ ] until [ ], the Pre-Funding Amount
will be maintained in the Pre-Funding Account. The Pre-Funded Amount will be
reduced during the Pre-Funding Period by the amount of Subsequent Mortgage Loans
(as defined in this prospectus supplement) purchased by the Trust in accordance
with the [Sale and Servicing Agreement]. During the Pre-Funding Period, the
Pre-Funded Amount will be used only to purchase Subsequent Mortgage Loans.
Immediately following the Pre-Funding Period, any Pre-Funded Amount remaining
will be distributed to [to be provided as applicable].
Amounts on deposit in the Pre-Funding Account will be invested in [to
be provided as applicable] and all investment earnings on amounts on deposit in
the Pre-Funding Account will be distributed to [to be provided as applicable]
following the Pre-Funding Period.]
BOOK-ENTRY REGISTRATION
GENERAL. The Notes (the "Book-Entry Notes") will be issued, maintained
and transferred on the book-entry records of The Depository Trust Company
("DTC") in the United States [, or through Clearstream Banking, societe anonyme
("Clearstream Luxembourg") or the Euroclear System ("Euroclear") in Europe] and
through [its/their] participating organizations (each, a "Participant"). The
Book-Entry Notes will be issued in minimum denominations in principal amount of
$25,000 and integral multiples of $1 in excess of $25,000.
Each Class of Book-Entry Notes will be represented by one or more
certificates registered in the name of the nominee of DTC. ACE Securities Corp.
(the "Depositor") has been informed by DTC that DTC's nominee will be Cede & Co.
[Clearstream Luxembourg and Euroclear will hold omnibus positions on behalf of
their Participants through customers' securities accounts in Clearstream
Luxembourg's and Euroclear's names on the books of their respective
depositaries, which in turn will hold positions in customers' securities
accounts in the depositaries' names on the books of DTC.] No person acquiring an
interest in a Book-Entry Note (each, a "Beneficial Owner") will be entitled to
receive a certificate representing an interest (a "Definitive Note"), except as
set forth below under "-- Definitive Notes" and in the prospectus under
"Description of the Securities -- Book-Entry Registration and Definitive
Securities -- Definitive Securities."
Unless and until Definitive Notes are issued, it is anticipated that:
o the only "Noteholder" of the Notes will be Cede & Co., as
nominee of DTC, and Beneficial Owners will not be
Noteholders as that term is used in the Indenture.
o Beneficial Owners will receive all distributions of
principal of, and interest on, the Offered Notes from the
Indenture Trustee through DTC [, Clearstream Luxembourg or
Euroclear, as applicable,] and [its/their] Participants.
o while the Notes are outstanding, under the rules,
regulations and procedures creating and affecting DTC
[Clearstream Luxembourg and Euroclear] and [its/their]
operations, DTC [Clearstream Luxembourg and Euroclear]
[is/are] required to make book-entry transfers among
Participants on whose behalf it acts with respect to the
Notes and is required to receive and transmit distributions
of principal of, and interest on, the Notes. Participants
and indirect participants with whom Beneficial Owners have
accounts with respect to Notes are similarly required to
make book-entry transfers and receive and transmit
distributions on behalf of their respective Beneficial
Owners. Accordingly, although Beneficial Owners will not
possess certificates, DTC [Clearstream Luxembourg and
Euroclear] [has/have] in place a mechanism by which
Beneficial Owners will receive distributions and will be
able to transfer their interest.
None of the Depositor, [ ] ("[ ]'), the Servicer , the Owner Trustee
or the Indenture Trustee [or additional parties] (as those terms are defined in
this prospectus supplement) will have any responsibility for any aspect of the
records relating to or payments made on account of beneficial ownership
interests of the Book-Entry Notes held by Cede & Co., as nominee for DTC, or for
maintaining, supervising or reviewing any records relating to those beneficial
ownership interests.
For a more complete description of book-entry registration and
clearance and the rules and regulations governing DTC [,Clearstream Luxembourg
and Euroclear], see "Description of the Securities -- Book-Entry Registration
and Definitive Securities" in the prospectus".
DEFINITIVE NOTES. Definitive Notes will be issued to Beneficial Owners
or their nominees, respectively, rather than to DTC or its nominee, only under
the limited conditions set forth in the prospectus under " Description of the
Securities -- Book-Entry Registration and Definitive Securities -- Definitive
Securities." Upon the occurrence of an event described in that section, the
Trustee is required to direct DTC to notify Participants who have ownership of
Book-Entry Notes as indicated on the records of DTC of the availability of
Definitive Notes for their Book-Entry Notes. Upon surrender by DTC of the
Definitive Notes representing the Book-Entry Notes and upon receipt of
instructions from DTC for re-registration, the Trustee will re-issue the
Book-Entry Notes as Definitive Notes in the respective principal amounts owned
by individual Beneficial Owners, and thereafter the Trustee will recognize the
holders of the Definitive Notes as Noteholders under the Indenture and the Sale
and Servicing Agreement.
PAYMENTS
Payments on the Notes on each Distribution Date will be made from the
Available Collection Amount. The Available Collection Amount will be determined
as [to be provided as applicable.]
o With respect to each Distribution Date, the "Due Period" is
the calendar month immediately before that Distribution
Date.
PAYMENTS OF INTEREST. Interest on the Class Principal Amount of the
Notes will accrue during each Accrual Period (as defined in this prospectus
supplement) at the interest rate specified on the front cover of this prospectus
supplement (the "Interest Rate") and will be payable to Noteholders on each
Distribution Date, starting in [ ]. [If the Residual Certificateholder does not
exercise its option to purchase the Mortgage Loans and the other assets of the
Trust when it is first entitled to do so, as described under "--Optional
Redemption" in this prospectus supplement, then with respect to each succeeding
Distribution Date the Interest Rate will be increased [to be provided as
applicable.]] See "-- Optional Redemption" in this prospectus supplement.
Interest on the Notes will be calculated on the basis of a 360-day year of
twelve 30-day months.
o The "Accrual Period" for the Notes will be the calendar
month immediately preceding the month in which the related
Distribution Date occurs.
Payments of interest on the Notes will be made from [to be provided as
applicable].
PAYMENTS OF PRINCIPAL. Principal payments will be made to Noteholders
on each Distribution Date in an amount generally equal to [to be provided as
applicable].
o The "Principal Distribution Amount" for any Distribution
Date will be equal to the sum of [to be provided as
applicable].
PAYMENT PRIORITIES
On each Distribution Date, the Available Funds will be applied in the
following order of priority:
[to be provided as applicable.]
OVERCOLLATERALIZATION
On the Closing Date the Cut-off Date Balance is expected to exceed the
Original Class Principal Amount of the Notes by approximately $[ ]. The weighted
average Net Mortgage Loan Rate (as defined below) of the Mortgage Loans is
generally expected to be higher than the Interest Rate of the Notes, thus
generating excess interest collections. To the extent described in this
prospectus supplement, Excess Spread will be applied on any Distribution Date as
[to be provided as applicable].
o The "Net Mortgage Loan Rate" for any Mortgage Loan equals
[to be provided as applicable].
MATURITY DATE
The Class Principal Amount of the Notes and all interest accrued and
unpaid on the Notes will be payable in full on [ ] (the "Maturity Date"). See
"--Rights of Noteholders Upon Occurrence of an Event of Default" below. The
actual final Distribution Date for the Notes could be substantially earlier than
the Maturity Date.
REPORTS TO NOTEHOLDERS
On each Distribution Date the Indenture Trustee will make available to
each Noteholder a statement containing the following information:
o the amount of principal distributed on that date to
Noteholders;
o the amount of interest distributed on that date to
Noteholders;
o the amount of any outstanding Noteholders' Interest
Carryforward Amount for the Notes after distributions on
that date;
o the Class Principal Amount of the Notes after distributions
on that date;
o the amount of the Servicing Fees paid with respect to that
date;
o the Total Loan Balance as of the related Distribution Date;
o the number and total Principal Balance of Mortgage Loans (1)
remaining outstanding, (2) delinquent by one, two, three or
four or more monthly payments, (3) in foreclosure, and (4)
with respect to REO Property;
o any amount distributed to the holder of the Residual
Certificate; and
o other information to the extent provided in the Sale and
Servicing Agreement.
OPTIONAL REDEMPTION
On any Distribution Date after the date on which the Total Loan
Balance is less than [ ]% of the Cut-off Date Balance, [ ] will (subject to the
terms of the Sale and Servicing Agreement) have the option to purchase the
Mortgage Loans, any REO Property and any other assets of the Trust for the
Termination Price. If [ ] does not exercise that option, [ ] will then have the
same purchase option. If either purchase option is exercised, the Notes will be
redeemed and the Residual Certificate and the Trust will be terminated (this
event, an "Optional Redemption").
If the Residual Certificateholder does not exercise its option as
described above when it is first entitled to do so, the Interest Rate of the
Notes will be increased as described under "-- Payments of Interest" in this
prospectus supplement.
RIGHTS OF NOTEHOLDERS UPON OCCURRENCE OF EVENT OF DEFAULT
Under the Indenture, a failure to pay the full amount of the
Noteholders' Interest Distribution Amount within five days of the Distribution
Date on which that payment is due (without regard to the amount of Available
Funds) or failure to pay the entire outstanding principal amount of the Notes on
the Maturity Date, will constitute an event of default (an "Event of Default").
Upon the occurrence of an Event of Default, the holders of Notes
evidencing more than [ ]% of the Class Principal Amount of the Notes then
outstanding may exercise their remedies under the Indenture. These remedies
include [to be provided as applicable]. See "Description of the Agreements --
Material Terms of the Indenture" in the prospectus.
THE INDENTURE TRUSTEE
[ ], a [ ], will be the Indenture Trustee under the Indenture. The
Indenture Trustee will be entitled to [describe applicable fees of the indenture
trustee]. The Indenture Trustee's "Corporate Trust Office" is located at [ ], or
any address as the Indenture Trustee may designate from time to time by notice
to the Noteholders, the Depositor and the Servicer.
[THE INSURANCE POLICY
The following information has been provided by [ ] (the "Insurer") for
inclusion in this prospectus supplement. Neither the Depositor nor the
Underwriter makes any representation as to the accuracy or completeness of this
information.
The Insurer does not accept any responsibility for the accuracy or
completeness of this prospectus supplement or any information or disclosure
contained in this prospectus supplement, or omitted from this prospectus
supplement, other than with respect to the accuracy of the information regarding
the Note Guaranty Insurance Policy (the "Insurance Policy") and the Insurer set
forth below under this heading "The Insurance Policy." Additionally, the Insurer
makes no representation regarding the Notes or the advisability of investing in
the Notes.
THE INSURER
[To be provided as applicable.]
INSURER FINANCIAL INFORMATION
[To be provided as applicable.]
WHERE YOU CAN OBTAIN ADDITIONAL INFORMATION ABOUT THE INSURER
[To be provided as applicable.]
FINANCIAL STRENGTH RATINGS OF THE INSURER
[To be provided as applicable.]
THE INSURANCE POLICY
[To be provided as applicable.]]
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
The Mortgage Pool will consist of approximately [ ] Mortgage Loans
with original terms to maturity of not more than [thirty] years, having a total
Principal Balance as of the Cut-off Date of approximately $[ ] (the "Cut-off
Date Balance"). The Mortgage Loans are secured by [to be provided as applicable]
("Mortgages"). All of the Mortgage Loans will be [description of Mortgage
Loans.]
Generally, the Mortgage Loans were originated or acquired by the
Originator (as defined in this prospectus supplement) in one of the following
ways:
o [to be provided as applicable].
For a description of the underwriting criteria applicable to the
Mortgage Loans, see "The Originator -- Underwriting Criteria" in this prospectus
supplement.
The Servicer will be required to service the Mortgage Loans pursuant
to the Sale and Servicing Agreement and will be compensated for these services
as described under "Description of the Transfer and Servicing Agreements --
Servicing" in this prospectus supplement.
PAYMENTS ON THE MORTGAGE LOANS
[To be provided as applicable.]
CHARACTERISTICS OF THE MORTGAGE LOANS
The Mortgage Loans are expected to have the following approximate
total characteristics as of the Cut-off Date. Prior to the issuance of the
Notes, Mortgage Loans may be removed from the Mortgage Pool as a result of
incomplete documentation or otherwise, if the Depositor deems removal necessary
or appropriate. In addition, a limited number of other home loans may be
included in the Mortgage Pool prior to the issuance of the Notes.
Wherever reference is made in this prospectus supplement to a
percentage of some or all of the Mortgage Loans, the percentage is determined
(unless otherwise specified) on the basis of the total principal balance of the
related Mortgage Loans as of the Cut-off Date.
Approximately [ ] of the Mortgage Loans provide for payment by the
borrower of a prepayment premium in connection with full or partial prepayments
of principal within [three to five years] of the date of origination of the
loan, generally equal to [to be provided as applicable].
The Mortgage Loan Rates of the Mortgage Loans range from approximately
[ ]% annually to [ ]% annually. The weighted average Mortgage Loan Rate of the
Mortgage Loans is approximately [ ]% annually.
The Principal Balances of the Mortgage Loans range from approximately
$[ ] to $[ ]. The Mortgage Loans have an average Principal Balance of
approximately $[ ].
The weighted average Combined Loan-to-Value Ratio at origination of
the Mortgage Loans is approximately [ ]%.
No more than approximately [ ]% of the Mortgage Loans are secured by
Mortgaged Properties located in any one zip code area.
The following tables set forth as of the Cut-off Date the number,
total Principal Balance and percentage of the Mortgage Loans having the stated
characteristics shown in the tables in each range. (The sum of the amounts of
the total Principal Balances and the percentages in the following tables may not
equal the totals due to rounding.)
CUT-OFF DATE PRINCIPAL BALANCES
RANGE OF NUMBER OF TOTAL PERCENTAGE OF
PRINCIPAL BALANCES ($) MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
BY TOTAL
PRINCIPAL BALANCE
$ %
---- ------------------ --------
Total....................... $ 100.00%
The average Cut-off Date Principal Balance is approximately $[ ].
LOAN-TO-VALUE RATIOS
RANGE OF NUMBER OF TOTAL PERCENTAGE OF
LOAN-TO-VALUE RATIOS(%) MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
BY TOTAL
PRINCIPAL BALANCE
$ %
---- ------------------ --------
Total....................... $ 100.00%
The weighted average original Loan-to-Value Ratio is approximately [ ]%
MORTGAGE RATES
RANGE OF NUMBER OF TOTAL PERCENTAGE OF
MORTGAGE RATES(%) MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
BY TOTAL
PRINCIPAL BALANCE
$ %
---- ------------------ ---------
Total....................... $ 100.00%
- --------------
* Reflects current Mortgage Rates of Adjustable Rate Mortgage Loans.
The weighted average Mortgage Rate is approximately [ ]% per annum.
LOAN TYPES
LOAN TYPE NUMBER OF TOTAL PERCENTAGE OF
MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
BY TOTAL
PRINCIPAL BALANCE
$ %
---- ------------------ --------
Total....................... $ 100.00%
ORIGINAL TERMS TO MATURITY
RANGE OF MATURITIES (MONTHS) NUMBER OF TOTAL PERCENTAGE OF
MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
BY TOTAL
PRINCIPAL BALANCE
$ %
---- ------------------ --------
Total....................... $ 100.00%
The weighted average original term to maturity is approximately [ ] months.
REMAINING TERMS TO MATURITY
REMAINING TERM TO NUMBER OF TOTAL PERCENTAGE OF
MATURITY (MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
BY TOTAL
PRINCIPAL BALANCE
$ %
---- ------------------ --------
Total....................... $ 100.00%
The weighted average remaining term to maturity of the fully amortizing Mortgage
Loans is approximately [ ] months.
GEOGRAPHIC DISTRIBUTION
STATE NUMBER OF TOTAL PERCENTAGE OF
MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
BY TOTAL
PRINCIPAL BALANCE
$ %
---- ------------------ --------
Total....................... $ 100.00%
PROPERTY TYPES
PROPERTY TYPE NUMBER OF TOTAL PERCENTAGE OF
MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
BY TOTAL
PRINCIPAL BALANCE
$ %
---- ------------------ --------
Total....................... $ 100.00%
LOAN PURPOSES
LOAN PURPOSE NUMBER OF TOTAL PERCENTAGE OF
MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
BY TOTAL
PRINCIPAL BALANCE
$ %
---- ------------------ --------
Total....................... $ 100.00%
OCCUPANCY STATUS
OCCUPANCY STATUS NUMBER OF TOTAL PERCENTAGE OF
MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
BY TOTAL
PRINCIPAL BALANCE
$ %
---- ------------------ --------
Total....................... $ 100.00%
DOCUMENTATION TYPES
DOCUMENTATION TYPES NUMBER OF TOTAL PERCENTAGE OF
MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
BY TOTAL
PRINCIPAL BALANCE
$ %
---- ------------------ --------
Total....................... $ 100.00%
CREDIT GRADES
CREDIT GRADE NUMBER OF TOTAL PERCENTAGE OF
MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
BY TOTAL
PRINCIPAL BALANCE
$ %
---- ------------------ --------
Total....................... $ 100.00%
PREPAYMENT PENALTIES
PREPAYMENT PENALTY NUMBER OF TOTAL PERCENTAGE OF
MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
BY TOTAL
PRINCIPAL BALANCE
$ %
---- ------------------ --------
Total....................... $ 100.00%
[SUBSEQUENT MORTGAGE LOANS
The obligation of the Trust to purchase additional Mortgage Loans (the
"Subsequent Mortgage Loans") on [any] date, as specified in the [Sale and
Servicing Agreement] (each, a "Subsequent Transfer Date") will be subject to the
Subsequent Mortgage Loans meeting the following criteria: [to be provided as
applicable]. These criteria will be based on the characteristics of the
Subsequent Mortgage Loans on the related Subsequent Transfer Date.
The characteristics of Subsequent Mortgage Loans may vary
significantly from time to time, subject to the requirements described above,
and may bear no particular relationship to the characteristics of the initial
Mortgage Loans at any time. It is expected that a substantial portion of the
Subsequent Mortgage Loans will be [to be provided as applicable.]]
ADDITIONAL INFORMATION
The description in this prospectus supplement of the Mortgage Pool and
the Mortgaged Properties is based upon the Mortgage Pool as constituted at the
close of business on the Cut-off Date. A Current Report on Form 8-K will be
available to purchasers of the Notes and will be filed, together with the Sale
and Servicing Agreement, the Indenture and the Trust Agreement, with the
Securities and Exchange Commission (the "SEC") within fifteen days after the
initial issuance of the Notes. In the event that Mortgage Loans are removed from
or added to the Mortgage Pool as described in this prospectus supplement under
"Description of the Mortgage Pool," the removal or addition, to the extent
material, will be noted in the Current Report on Form 8-K.
THE ORIGINATOR
GENERAL
[Describe the Originator.]
UNDERWRITING CRITERIA
The information contained in this prospectus supplement regarding the
Originator's underwriting requirements and practices was obtained from publicly
available information regarding asset-backed notes secured by loans made by the
Originator that are similar to the Mortgage Loans and not from the Originator
directly. As a result, there can be no assurance that the Mortgage Loans were
originated, in whole or in part, in accordance with these underwriting
requirements and practices, or that these underwriting requirements and
practices were in effect when the Mortgage Loans were originated.
[Describe Originator's underwriting guidelines.]
THE SERVICER
The following information has been provided by the Servicer. Neither
the Depositor nor the Underwriter makes any representation as to the accuracy or
completeness of this information.
GENERAL
[ ] (the "Servicer") will service the Mortgage Loans pursuant to the
terms of the Sale and Servicing Agreement.
[Description of the servicer.]
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
The following summary describes terms of the Sale and Servicing
Agreement, the Indenture, the Trust Agreement, and the Administration Agreement
(collectively, 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. The
following summary supplements, and to the extent inconsistent, replaces, the
description of the general terms and provisions of the Transfer and Servicing
Agreements under the headings "Description of the Agreements" in the prospectus.
SALE AND ASSIGNMENT OF THE MORTGAGE LOANS
On the Closing Date, [ ] will sell the Mortgage Loans (other than the
right to receive some of the charges payable by borrowers) to the Depositor, and
the Depositor will sell the Mortgage Loans (other than those amounts) to the
Trust. The Trust will, concurrently, deliver or cause to be delivered the
Securities to the Depositor. The Trust will pledge and assign the Mortgage Loans
to the Indenture Trustee in exchange for the Notes. Each Mortgage Loan will be
identified in a schedule appearing as an exhibit to the Sale and Servicing
Agreement (the "Mortgage Loan Schedule").
[In addition, the Depositor will, as to each Mortgage Loan, deliver to
a custodian appointed by the Indenture Trustee (the "Custodian") the following
documents (together, with respect to each Mortgage Loan, a "Mortgage Loan
File"):
o the related Note endorsed to the order of the Indenture
Trustee, or in blank, without recourse,
o any assumption and modification agreements and the Mortgage
with evidence of recording indicated on the Mortgage (except
for any Mortgage not returned from the public recording
office),
o an assignment of the Mortgage in the name of the Indenture
Trustee, or in blank, in recordable form, and
o any intervening assignments of the Mortgage.]
Assignments of the Mortgages to the Indenture Trustee will be recorded
following the Closing Date in the real property records of the states in which
the related Mortgaged Properties are located to protect the Indenture Trustee's
interest in the Mortgage Loans against the claims of creditors of [ ] or
subsequent purchasers. In the event that, with respect to any Mortgage Loan, the
Depositor cannot deliver the assignment with evidence of recording on the
Mortgage Loan concurrently with the conveyance of the Mortgage Loan under the
Sale and Servicing Agreement because they have not yet been returned by the
public recording office, the Depositor will deliver or cause to be delivered to
the Custodian a certified true photocopy of the assignment. The Depositor will
deliver or cause to be delivered to the Custodian any assignment with evidence
of recording indicated on the assignment upon receipt of the assignment from the
public recording office. The Custodian will review (or cause to be reviewed)
each Mortgage Loan File within ninety days after the conveyance of the related
Mortgage Loan to the Trust to ascertain that all required documents have been
executed and received.
Under the terms of the agreement (the "Mortgage Loan Sale Agreement")
pursuant to which the Depositor will purchase the Mortgage Loans from [ ], and
of the Sale and Servicing Agreement, the Custodian will conduct an initial
review of the Mortgage Loan documents and will notify the Depositor and [ ] as
to each Mortgage Loan document that either has not yet been delivered to the
Depositor as required or appears to be not properly executed, not in conformity
with the description of the Mortgage Loan on the Mortgage Loan schedule or
otherwise defective. If any Mortgage Loan document is not delivered or any
material defect in a document is not cured within the time period specified in
the Mortgage Loan Sale Agreement, [ ] will be required to repurchase the
affected Mortgage Loan for a price equal to the unpaid principal balance of the
Mortgage Loan plus accrued interest on the Mortgage Loan (the "Repurchase
Price") or, in some circumstances, to substitute another Mortgage Loan that
satisfies the requirements specified in the Sale and Servicing Agreement.
[ ] will make to the Depositor under the Mortgage Loan Sale Agreement
representations and warranties that include representations and warranties
similar to those summarized in the prospectus under the heading "Description of
the Agreements -- Material Terms of the Pooling and Servicing Agreements and
Underlying Servicing Agreements -- Representations and Warranties; Repurchases."
The Depositor's rights under these representations and warranties will be
assigned to the Indenture Trustee for the benefit of the Noteholders. In the
event of a breach of any of these representations or warranties that materially
and adversely affects the value of any Mortgage Loan or the interests of the
Noteholders, [ ] will be obligated, within 60 days following its discovery of a
breach or receipt of notice of a breach, to cure the breach or purchase the
affected Mortgage Loan from the Trust for the Repurchase Price or, in some
circumstances, to substitute another Mortgage Loan.
No assurance can be given that, at any particular time, [ ] will be
capable, financially or otherwise, of repurchasing defective Mortgage Loans or
substituting additional Mortgage Loans for defective Mortgage Loans.
TRUST FEES AND EXPENSES
The Servicer is entitled to the Servicing Fee and reimbursement for
specific expenses as described under "-- Servicing Compensation and Payment of
Expenses" below. The fees and expenses of the Indenture Trustee, the Owner
Trustee and the Custodian will be paid by [ ].
VOTING RIGHTS
Voting rights of Securityholders under the Transfer and Servicing
Agreements will be allocated among the Notes and the Residual Certificate as
provided in the Transfer and Servicing Agreements.
GENERAL SERVICING PROVISIONS
The Mortgage Loans will be serviced by the Servicer in accordance with
the provisions of the Sale and Servicing Agreement.
[Describe servicing provisions as applicable.]
NO DELINQUENCY ADVANCES
In the event of a delinquency or default with respect to a Mortgage
Loan, neither the Servicer nor any Subservicer (as defined below) will have any
obligation to advance scheduled monthly payments of principal or interest with
respect to the Mortgage Loan.
SERVICING ADVANCES
The Servicer or any Subservicer will make reasonable and customary
expense advances with respect to the Mortgage Loans (each, a "Servicing
Advance") and will be entitled to reimbursement for Servicing Advances as
described in this prospectus supplement. Servicing Advances may include costs
and expenses advanced for the preservation, restoration and protection of any
Mortgaged Property, including advances to pay delinquent real estate taxes and
assessments. Any Servicing Advances by the Servicer or any Subservicer will be
reimbursable from late collections on the related Mortgage Loan, or with respect
to any Liquidated Mortgage Loan from the related Liquidation Proceeds. Servicing
Advances remaining outstanding will be reimbursed, to the extent of Available
Funds, as described under "Description of the Notes -- Payment Priorities."
INSURANCE COVERAGE
The Servicer is required to obtain and thereafter maintain in effect a
bond or similar form of insurance coverage (which may provide blanket coverage)
insuring against loss occasioned by the errors and omissions of its officers and
employees.
EVIDENCE AS TO COMPLIANCE
The Sale and Servicing Agreement will provide that each year a firm of
independent accountants will furnish a statement to the Indenture Trustee to the
effect that the firm has examined the necessary documents and records relating
to the servicing of home loans by the Servicer and that, on the basis of that
examination, the firm is of the opinion that the servicing has been conducted in
accordance with applicable accounting standards, except for those exceptions
that the firm believes to be immaterial and those exceptions set forth in the
statement.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Servicer will be paid a monthly fee (the "Servicing Fee") with
respect to each Mortgage Loan calculated at [ ]% annually (the "Servicing Fee
Rate") on the outstanding principal balance of each Mortgage Loan. No Servicing
Fee will be payable on a Liquidated Mortgage Loan unless the Servicer determines
that additional collection efforts are warranted with respect to that Mortgage
Loan. The Servicer will be entitled to reimbursement from collections on the
Mortgage Loans for some of its expenses before any amounts are paid to
Noteholders.
SUBSERVICING
The Servicer will be prohibited from assigning the responsibility for
servicing the Mortgage Loans, except as permitted by the Sale and Servicing
Agreement, but it may employ one or more subservicers ("Subservicers") as
provided under the Sale and Servicing Agreement. If the Servicer chooses to
employ Subservicers, the Servicer will remain liable for fulfillment of its
obligations under the Sale and Servicing Agreement, and will be considered to
have itself received any payment received by a Subservicer whether or not the
Subservicer actually remits that payment.
RESIGNATION OR REMOVAL OF THE SERVICER
The Servicer will agree in the Sale and Servicing Agreement not to
resign except with the consent of [ ], unless the Servicer delivers to [ ] an
opinion of legal counsel to the effect that the Servicer is no longer permitted
under applicable law to perform the duties of the Servicer under the Sale and
Servicing Agreement.
If the Servicer is in default under the Sale and Servicing Agreement,
the Indenture Trustee or Noteholders having a majority of voting rights may
remove the Servicer. [Events of default include:
o failure by the Servicer to remit any required payment to the
Indenture Trustee for one Business Day after receipt of
written notice that the payment has not been made;
o failure by the Servicer to deposit collections or other
recoveries on the Mortgage Loans in the Collection Account
on a daily basis in accordance with the Sale and Servicing
Agreement;
o failure by the Servicer to fulfill any other material
requirement under the Sale and Servicing Agreement within
the applicable time period;
o failure by the Servicer to be qualified to service home
loans for either Fannie Mae or Freddie Mac;
o failure by the Servicer to maintain any applicable licenses
in each jurisdiction where Mortgaged Properties are located;
o failure by the Servicer to maintain a minimum net worth of
$25,000,000;
o insolvency of the Servicer; and
o other events specified in the Sale and Servicing Agreement.]
[If the Servicer is removed, the Indenture Trustee will immediately
assume the role of Servicer under the Sale and Servicing Agreement unless
another Servicer is appointed pursuant to the Sale and Servicing Agreement. The
Indenture Trustee may continue to service the Mortgage Loans if it is legally
qualified to do so or may appoint a successor Servicer as provided in the Sale
and Servicing Agreement].
COLLECTION ACCOUNT, NOTE DISTRIBUTION ACCOUNT AND CERTIFICATE DISTRIBUTION
ACCOUNT
The Servicer is required to deposit in a segregated account (the
"Collection Account") within [ ] Business Days of receipt all payments received
on or after the Cut-off Date on account of principal and interest on the
Mortgage Loans, all Net Liquidation Proceeds, Insurance Proceeds, Released
Mortgaged Property Proceeds, any amounts payable in connection with the
repurchase or substitution of any Mortgage Loan and any amount required to be
deposited in the Collection Account in connection with the redemption of the
Notes. Withdrawals will be made from the Collection Account only for the
purposes specified in the Sale and Servicing Agreement. The Collection Account
may be maintained at any depository institution that satisfies the requirements
specified in the Sale and Servicing Agreement.
Amounts on deposit in the Collection Account will be invested as
provided in the Sale and Servicing Agreement. All interest and any other
investment earnings on amounts on deposit in the Collection Account will be paid
to [ ]. Any net losses on these investments will be paid by [ ].
The Servicer will establish and maintain with the Paying Agent an
account on behalf of the Noteholders, into which amounts released from the
Collection Account for payment to the Noteholders will be deposited and from
which all payments to the Noteholders will be made (the "Note Distribution
Account"). The Servicer will also establish and maintain with the Paying Agent
an account in the name of the Owner Trustee on behalf of the Residual
Certificateholder, into which amounts released from the Collection Account for
distribution to the Residual Certificateholder will be deposited and from which
all distributions to the Residual Certificateholder will be made (the
"Certificate Distribution Account").
On the [ ] day of each month, or if the [ ] day is not a Business Day,
the preceding Business Day, the Servicer will remit the Available Funds to the
Paying Agent for deposit into the Note Distribution Account and Certificate
Distribution Account by making appropriate withdrawals from the Collection
Account. On each Distribution Date, the Indenture Trustee will make withdrawals
from the Note Distribution Account and Certificate Distribution Account for
application as described under "Description of the Notes -- Payment Priorities"
in this prospectus supplement. Amounts on deposit in the Note Distribution
Account and Certificate Distribution Account will be invested as provided in the
Sale and Servicing Agreement. All interest and any other investment earnings on
amounts on deposit in the Note Distribution Account and Certificate Distribution
Account will be retained by the Indenture Trustee as its compensation. Any net
losses on these investments will be paid by the Indenture Trustee.
THE OWNER TRUSTEE AND INDENTURE TRUSTEE
The Owner Trustee, the Indenture Trustee and any of their respective
affiliates may hold Securities in their own names or as pledgees. For the
purpose of meeting the legal requirements of some jurisdictions, the Servicer,
the Owner Trustee and the Indenture Trustee acting jointly (or in some
instances, the Owner Trustee or the Indenture Trustee acting alone) will have
the power to appoint co-trustees or separate trustees of all or any part of the
Trust. In the event of an appointment of another trustee all rights, powers,
duties and obligations conferred or imposed upon the Owner Trustee by the Sale
and Servicing Agreement and the Trust Agreement and upon the Indenture Trustee
by the Indenture will be conferred or imposed upon the Owner Trustee and the
Indenture Trustee, respectively, and in each case the separate trustee or
co-trustee, jointly, or, in any jurisdiction in which the Owner Trustee or
Indenture Trustee will be incompetent or unqualified to perform particular acts,
singly upon the separate trustee or co-trustee, which will exercise and perform
these rights, powers, duties and obligations solely at the direction of the
Owner Trustee or the Indenture Trustee, as applicable.
The Owner Trustee and the Indenture Trustee may resign at any time, in
which event the Servicer will be obligated to appoint a successor to the Owner
Trustee or the Indenture Trustee, as the case may be. The Servicer may also
remove the Owner Trustee or the Indenture Trustee if either ceases to be
eligible to continue as Owner Trustee or Indenture Trustee under the Trust
Agreement or the Indenture, as the case may be, becomes legally unable to act or
becomes insolvent. In these circumstances, the Servicer will be obligated to
appoint a successor Owner Trustee or a successor Indenture Trustee, as
applicable. Any resignation or removal of the Owner Trustee or Indenture Trustee
and appointment of a successor Owner Trustee or Indenture Trustee will not
become effective until acceptance of the appointment by the successor.
The Trust Agreement and Indenture will provide that the Owner Trustee
and Indenture Trustee will be entitled to indemnification by [ ] and the
Depositor for, and will be held harmless against, any loss, liability or expense
incurred by the Owner Trustee or Indenture Trustee not resulting from its own
willful misfeasance, bad faith or negligence (other than by reason of a breach
of any of its representations or warranties to be set forth in the Trust
Agreement or Indenture, as the case may be).
DUTIES OF THE OWNER TRUSTEE AND INDENTURE TRUSTEE
The Owner Trustee will make no representations as to the validity or
sufficiency of the Trust Agreement, the Residual Certificate (other than the
execution and authentication of the Residual Certificate), the Notes or any
Mortgage Loans or related documents, and will not be accountable for the use or
application by the Depositor or the Servicer of any funds paid to the Depositor
or the Servicer in respect of the Securities or the Mortgage Loans, or the
investment of any monies by the Servicer before these monies are deposited into
the Collection Account, the Note Distribution Account or the Certificate
Distribution Account. So long as no Event of Default has occurred and is
continuing, the Owner Trustee will be required to perform only those duties
specifically required of it under the Trust Agreement. Generally, those duties
will be limited to the receipt of the various certificates, reports or other
instruments required to be furnished to the Owner Trustee under the Trust
Agreement, in which case it will only be required to examine them to determine
whether they conform to the requirements of the Trust Agreement. The Owner
Trustee will not be charged with knowledge of a failure by the Servicer to
perform its duties under the Sale and Servicing Agreement, which failure
constitutes an Event of Default, unless the Owner Trustee has actual knowledge
of any failure.
The Owner Trustee will be under no obligation to exercise any of the
rights or powers vested in it by the Trust Agreement or to make any
investigation of matters arising under the Trust Agreement or to institute,
conduct or defend any litigation under the Trust Agreement or in relation to the
Trust Agreement at the request, order or direction of the holder of the Residual
Certificate, unless the Residual Certificateholder has offered to the Owner
Trustee reasonable security or indemnity against the costs, expenses and
liabilities that may be incurred in or by the exercise of its rights or powers,
an investigation by it of matters arising or the institution or defense of any
litigation. Subject to the rights or consent of the Noteholders and Indenture
Trustee, the Residual Certificateholder will not have any right under the Trust
Agreement to institute any proceeding with respect to the Trust Agreement,
unless the Residual Certificateholder previously has given to the Owner Trustee
written notice of the occurrence of an Event of Default and (1) the Event of
Default arises from the Servicer's failure to remit payments when due or (2) the
holder of the Residual Certificate has made written request upon the Owner
Trustee to institute a proceeding in its own name as the Owner Trustee under the
Trust Agreement and have offered to the Owner Trustee reasonable indemnity, and
the Owner Trustee for 30 days has neglected or refused to institute any
proceedings.
The Indenture Trustee will make no representations as to the validity
or sufficiency of the Indenture, the Residual Certificate, the Notes (other than
the execution and authentication of the Notes) or any Mortgage Loans or related
documents, and will not be accountable for the use or application by the
Depositor, the Servicer or the Owner Trustee of any funds paid to the Depositor,
the Servicer or the Owner Trustee in respect of the Securities or the Mortgage
Loans, or the investment of any monies by the Servicer before those monies are
deposited into the Collection Account or the Note Distribution Account. So long
as no Event of Default under the Indenture or the Sale and Servicing Agreement
has occurred or is continuing, the Indenture Trustee will be required to perform
only those duties specifically required of it under the Transfer and Servicing
Agreements. Generally, those duties will be limited to the receipt of the
various certificates, reports or other instruments required to be furnished to
the Indenture Trustee under the Indenture, in which case it will only be
required to examine them to determine whether they conform to the requirements
of the Indenture. The Indenture Trustee will not be charged with knowledge of a
failure by the Servicer to perform its duties under the Sale and Servicing
Agreement, which failure constitutes an Event of Default under the Indenture or
the Sale and Servicing Agreement, unless the Indenture Trustee obtains actual
knowledge of any failure.
The Indenture Trustee will be under no obligation to exercise any of
the rights or powers vested in it by the Indenture or to make any investigation
of matters arising under the Indenture or to institute, conduct or defend any
litigation under the Indenture or in relation to the Indenture at the request,
order or direction of any of the Noteholders, unless those Noteholders have
offered to the Indenture Trustee reasonable security or indemnity against the
costs, expenses and liabilities that may be incurred in or by an exercise of any
of its rights or powers, an investigation of matters arising or the institution
or defense of any litigation. No Noteholder will have any right under the
Indenture to institute any proceeding with respect to the Indenture, unless the
holder previously has given to the Indenture Trustee written notice of the
occurrence of an Event of Default and (1) the Event of Default arises from the
Servicer's failure to remit payments when due or (2) Noteholders evidencing not
less than [ ]% of the Class Principal Amount of the Notes, acting together as a
single class, have made written request upon the Indenture Trustee to institute
a proceeding in its own name as the Indenture Trustee under the Indenture and
have offered to the Indenture Trustee reasonable indemnity, and the Indenture
Trustee for 30 days has neglected or refused to institute any proceedings. See
"Description of the Notes -- Rights of Noteholders Upon Occurrence of Event of
Default" in this prospectus supplement.
YIELD CONSIDERATIONS
GENERAL
The yields to maturity (or to early termination) on the Notes will be
affected by the rate of principal payments on the Mortgage Loans (including
prepayments, which may include amounts received by virtue of purchase,
condemnation, insurance or foreclosure) on the Mortgage Loans. Yields will also
be affected by the extent to which Mortgage Loans bearing higher Mortgage Loan
Rates prepay at a more rapid rate than Mortgage Loans with lower Mortgage Loan
Rates, the amount and timing of borrower delinquencies and defaults resulting in
Realized Losses, the application of Monthly Excess Cashflow, the purchase price
paid for the Notes and other factors.
Principal prepayments may be influenced by a variety of economic,
geographic, demographic, social, tax, legal and other factors. These factors may
include changes in borrowers' housing needs, job transfers, unemployment,
borrowers' net equity, if any, in the mortgaged properties, servicing decisions,
homeowner mobility, the existence and enforceability of "due-on-sale" clauses,
seasoning of loans, market interest rates for similar types of loans and the
availability of funds for the loans. Nearly all of the Mortgage Loans contain
due-on-sale provisions and the Servicer will generally enforce these provisions
unless (1) the Servicer, in a manner consistent with its servicing practices,
permits the purchaser of the related Mortgaged Property to assume the Mortgage
Loan, or (2) enforcement is not permitted by applicable law. In some cases, the
Servicer may, in a manner consistent with its servicing practices, permit a
borrower who is selling his principal residence and purchasing a new one to
substitute the new Mortgaged Property as collateral for the related Mortgage
Loan, or may simply release its lien on the existing collateral, leaving the
related Mortgage Loan unsecured. In that event, the Servicer will generally
require the borrower to make a partial prepayment in reduction of the principal
balance of the Mortgage Loan to the extent that the borrower has received
proceeds from the sale of the prior residence that will not be applied to the
purchase of the new residence.
Approximately [ ] of the Mortgage Loans are subject to prepayment
penalties during the first [three to five years] after origination. Prepayment
penalties may have the effect of reducing the amount or the likelihood of
prepayments on the Mortgage Loans. A prepayment premium may be waived by the
Servicer under some circumstances. The remaining Mortgage Loans may be prepaid
in full or in part at any time without penalty.
In general, if prevailing interest rates fall below the interest rates
on the Mortgage Loans, the Mortgage Loans are likely to be subject to higher
prepayments than if prevailing rates remain at or above the interest rates on
the Mortgage Loans. Conversely, if prevailing interest rates rise above the
interest rates on the Mortgage Loans, the rate of prepayment would be expected
to decrease.
The rate of principal payments on the Mortgage Loans will also be
affected by the amortization schedules of the Mortgage Loans, the rate and
timing of prepayments by the borrowers, liquidations of defaulted Mortgage Loans
and repurchases of Mortgage Loans due to breaches of representations and
warranties or defective documentation as described in this prospectus
supplement. The timing of changes in the rate of prepayments, liquidations and
purchases of the related Mortgage Loans may significantly affect the yield to an
investor, even if the average rate of principal payments experienced over time
is consistent with an investor's expectation. Because the rate and timing of
principal payments on the Mortgage Loans will depend on future events and on a
variety of factors (as described more fully in this prospectus supplement and in
the prospectus under "Yield Considerations") no assurance can be given as to the
rate or the timing of principal payments on the Notes. In general, the earlier a
prepayment of principal of the related Mortgage Loans, the greater the effect on
an investor's yield. The effect on an investor's yield of principal payments
occurring at a rate higher (or lower) than the rate anticipated by the investor
during the period immediately following the issuance of the Notes may not be
offset by a subsequent like decrease (or increase) in the rate of principal
payments.
From time to time, areas of the United States may be affected by
flooding, severe storms, landslides, wildfires or other natural disasters. Any
resulting Realized Losses could affect the rate of payment of principal no the
Notes. To the extent that the insurance proceeds received with respect to any
damaged Mortgage Properties are not applied to the restoration of those Mortgage
Properties, the proceeds will be used to prepay the related Mortgage Loans in
whole or in part. Any repurchases or repayments of the Mortgage Loans may reduce
the weighted average lives of the Notes and will reduce the yields on the Notes
to the extent they are purchased at a premium.
In addition, any future limitations on the rights of borrowers to
deduct interest payments on mortgage loans for federal income tax purposes may
result in a higher rate of prepayment on the Mortgage Loans.
The Depositor and [ ]make no representations as to the particular
factors that will affect the prepayment of the Mortgage Loans, as to the
relative importance of these factors, or as to the percentage of the principal
balance of the Mortgage Loans that will be paid as of any date.
Payments of principal at a faster rate than anticipated will decrease
the yield on Notes purchased at a premium; payments of principal at a slower
rate than anticipated will decrease the yield on Notes purchased at a discount.
The effect on an investor's yield due to payments of principal occurring at a
rate that is faster (or slower) than the rate anticipated by the investor during
any period following the issuance of the Notes will not be entirely offset by a
subsequent like reduction (or increase) in the rate of payments of principal
during any subsequent period.
The rate of delinquencies and defaults on the Mortgage Loans and of
recoveries, if any, on defaulted Mortgage Loans and foreclosed properties will
affect the rate and timing of principal payments on the Mortgage Loans, and,
accordingly, the weighted average life of the Notes. Some factors may influence
delinquencies and defaults, including origination and underwriting standards,
loan-to-value ratios and delinquency history. In general, defaults on Mortgage
Loans are expected to occur with greater frequency in their early years,
although little data is available with respect to the rate of default on similar
types of home loans. The rate of default on Mortgage Loans with high
loan-to-value ratios, or on Mortgage Loans secured by junior liens, may be
higher than that of home loans with lower loan-to-value ratios or secured by
first liens on comparable properties. In addition, the rate and timing of
prepayments, defaults and liquidations on the Mortgage Loans will be affected by
the general economic condition of the area in which the related Mortgaged
Properties are located or the related borrower is residing. See "Description of
the Mortgage Pool" in this prospectus supplement. The risk of delinquencies and
losses is greater and voluntary principal prepayments are less likely in regions
where a weak or deteriorating economy exists, as may be evidenced by, among
other factors, increasing unemployment or falling property values.
Investors in the Notes will bear the risk of reinvestment of amounts
received in respect of principal on the Notes at yields that may be lower than
the yield on the Notes.
The yields to investors in the Notes may be affected by the exercise
by [ ] of its right to purchase the Mortgage Loans, as described under
"Description of the Notes -- Optional Redemption" in this prospectus supplement,
or the failure of [ ] to exercise that right.
If the purchaser of a Note offered at a discount from its initial
principal amount calculates its anticipated yield to maturity (or early
termination) based on an assumed rate of payment of principal that is faster
than that actually experienced on the related Mortgage Loans, the actual yield
may be lower than that so calculated. Conversely, if the purchaser of a Note
offered at a premium calculates its anticipated yield based on an assumed rate
of payment of principal that is slower than that actually experienced on the
related Mortgage Loans, the actual yield may be lower than that so calculated.
The effective yield to holders of the Notes will be lower than the
yield otherwise produced by the Interest Rate and the purchase price because
monthly payments will not be payable until the [ ] day (or later) of the month
following the Accrual Period.
OVERCOLLATERALIZATION
[Describe as applicable.]
MATURITY DATE
The Maturity Date of the Notes is as set forth under "Description of
the Notes -- Maturity Date" in this prospectus supplement. The Maturity Date of
the Notes was determined by [to be provided as applicable]. The actual maturity
of the Notes may be significantly earlier than the Maturity Date.
WEIGHTED AVERAGE LIFE
The following information illustrates the effect of prepayments of the
Mortgage Loans on the weighted average life of the Notes under stated
assumptions and is not a prediction of the prepayment rate that might actually
be experienced on the Mortgage Loans. Weighted average life refers to the
average amount of time that will elapse from the date of issuance of a security
to the date of distribution to the investor of each dollar distributed in net
reduction of principal of the security (assuming no losses). The weighted
average life of the Notes will be influenced by, among other things, the rate at
which principal of the Mortgage Loans is paid, which may be in the form of
scheduled amortization or prepayments (for this purpose, the term "prepayment"
includes unscheduled reductions of principal, including without limitation those
resulting from full or partial prepayments, refinancings, liquidations and
write-offs due to defaults, casualties or other dispositions, substitutions and
repurchases by or on behalf of [ ] or the Depositor) and [to be provided as
applicable].
Prepayments on loans such as the Mortgage Loans are commonly measured
relative to a prepayment standard or model. The model used in this prospectus
supplement for the Mortgage Loans represents [to be provided as applicable]. [ ]
does not purport to be either a historical description of the prepayment
experience or any pool of loans or a prediction of the anticipated rate of
prepayment of any pool of loans, including the Mortgage Loans. Neither the
Depositor nor the Underwriter makes any representation about the appropriateness
of the [ ] model.
[The following table was prepared based on the following assumptions,
among other things (collectively, the "Modeling Assumptions"):
o the initial Class Principal Amount and the Interest Rate are
as set forth on the cover of this prospectus supplement;
o each scheduled payment of principal and interest on a
Mortgage Loan is timely received on the last day of each
month starting in [ ];
o principal prepayments are received in full on the last day
of each month starting in [ ], and each prepayment includes
30 days of interest on the Mortgage Loan;
o prepayments are received on the Mortgage Loans at the
applicable constant rates indicated;
o there are no defaults or delinquencies on the Mortgage
Loans;
o Distribution Dates occur on the [ ] day of each month,
starting in [ ];
o there are no re-purchases or substitutions of the Mortgage
Loans;
o the Notes are issued on [ ]; and
o the Mortgage Loans were aggregated into assumed Mortgage
Loans having the following characteristics:]
HOME PRINCIPAL HOME NET HOME REMAINING
LOAN BALANCE LOAN LOAN TERM TO
NUMBER INTEREST INTEREST MATURITY
RATE RATE (IN MONTHS)
The actual characteristics of the Mortgage Loans may, and the
performance of the Mortgage Loans will, differ from the assumptions used in
constructing the table below, which is hypothetical in nature and is provided
only to give a general sense of how the principal cash flows might behave under
varying prepayment scenarios. For example, it is not expected that the Mortgage
Loans will prepay at a constant rate until maturity, that all of the Mortgage
Loans will prepay at the same rate or that there will be no defaults or
delinquencies on the Mortgage Loans. Moreover, the diverse remaining terms to
maturity of the Mortgage Loans could produce slower or faster principal payments
than indicated in the table in the [assumed prepayment rate] specified, even if
the weighted average remaining term to maturity of the Mortgage Loans is as
assumed. Any difference between those assumptions and the actual characteristics
and performance of the Mortgage Loans or actual prepayment or loss experience
will cause the percentages of Original Principal Amounts outstanding over time
and the weighted average lives of the Notes to differ (which difference could be
material) from the corresponding information in the table for each indicated
[assumed prepayment rate].
Subject to the foregoing discussion and assumptions, the following
tables indicate the weighted average lives of the Notes and set forth the
percentages of the Original Principal Amount of the Notes that would be
outstanding after each of the Distribution Dates shown at the indicated [assumed
prepayment rate].
The weighted average life of the Notes is determined by (1)
multiplying the net reduction, if any, of the Class Principal Amount by the
number of years from the date of issuance of the Note to the related
Distribution Date, (2) adding the results and (3) dividing the sum by the total
of the net reductions of Class Principal Amount referred to in clause (1) and
rounding to one decimal place.
PERCENTAGE OF ORIGINAL PRINCIPAL AMOUNT OF THE NOTES
OUTSTANDING AT THE FOLLOWING [PREPAYMENT RATES]
Class [ ]
-----------------------------------------------------------------------------
DISTRIBUTION DATE [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
- -----------------
Initial Percentage........................... 100 100 100 100 100 100 100
Weighted Average
- ---------------------------------------------
Life in Years
With Optional Redemption.................
Without Optional Redemption..............
- ---------
* Based upon the assumption that [ ] does not exercise its option to
repurchase the Mortgage Loans as described under "Description of the
Notes -- Optional Redemption" in this prospectus supplement.
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
Upon the issuance of the notes, Stroock & Stroock & Lavan LLP, special
federal tax counsel, will deliver an opinion of counsel that for federal income
tax purposes, the Notes will be treated as indebtedness and the Trust will not
be an association, or publicly traded partnership, taxable as a corporation or a
taxable mortgage pool.
[The Trust does not anticipate treating the Notes as having been issued
with original issue discount.] [It is anticipated that the Notes will be treated
as issued with original issue discount. The prepayment assumption that will be
used in determining the rate of accrual of original issue discount with respect
to the Notes is [ ]. However, this rate does not represent the rate at which
prepayments have actually occurred and no representation is made as to the rate
at which prepayments actually will occur in the future.
All prospective purchasers of the Notes should see "Material Federal
Income Tax Consideration--Partnership Trust Funds and Disregarded Trust
Funds--Taxation of Debt Securityholders" in the accompanying prospectus for a
summary of the anticipated federal income tax consequences of the purchase,
ownership and disposition of the Notes.
STATE AND LOCAL INCOME TAX CONSIDERATIONS
In addition to the federal income tax matters described under
"Material Federal Income Tax Considerations" above, prospective investors should
consider the state and local income tax consequences of the acquisition,
ownership and disposition of the Notes. State income tax law may differ
substantially from the corresponding federal tax law, and this discussion does
not purport to describe any aspect of the income tax laws of any state and
localilty. Therefore, prospective investors should consult their own tax
advisors with respect to the various tax consequences of investments in the
Notes.
ERISA CONSIDERATIONS
The Notes may be purchased by an employee benefit plan or an
individual retirement account (a "Plan") subject to the Employee Retirement
Income Security Act of 1974, as amended ("ERISA") or Section 4975 of the
Internal Revenue Code of 1986, as amended (the "Code"). A fiduciary of a Plan
must determine that the purchase of a [Note] is consistent with its fiduciary
duties under ERISA and does not result in a nonexempt prohibited transaction as
defined in Section 406 of ERISA or Section 4975 of the Code. For additional
information regarding treatment of the Notes under ERISA, See "ERISA
Considerations" in the prospectus.
LEGAL INVESTMENT CONSIDERATIONS
[The Notes will [not] constitute "mortgage related securities" under
the Secondary Mortgage Market Enhancement Act of 1984. Accordingly, many
institutions with legal authority to invest in "mortgage related securities" may
[not] be legally authorized to invest in the Notes.]
There may be restrictions on the ability of some investors, including
depository institutions, either to purchase the Notes or to purchase Notes
representing more than a specified percentage of the investor's assets.
Investors should consult their own legal, tax and accounting advisors in
determining whether and to what extent the Notes constitute legal investments
for the investors and the applicable tax, regulatory and accounting treatment of
the Notes.
See "Legal Investment Considerations" in the prospectus.
USE OF PROCEEDS
The net proceeds from the sale of the Notes will be applied by the
Depositor, or an affiliate of the Depositor, toward the purchase of the Mortgage
Loans. The Mortgage Loans will be acquired by the Depositor from [ ]in a
privately negotiated transaction.
UNDERWRITING
[Subject to the terms and conditions provided in the underwriting
agreement and in a terms agreement (collectively, the "Underwriting Agreement")
among the Depositor, [ ] and the Underwriter, the Depositor has agreed to sell
to the Underwriter, and the Underwriter has agreed to purchase from the
Depositor, all of the Notes.
The Underwriter has advised the Depositor that the Underwriter intends
to initially offer the Notes to the public at the price specified on the front
cover of this prospectus supplement. After the initial public offering of the
Notes, the public offering price may be changed. The Underwriting Agreement
provides that the Depositor will indemnify the Underwriter against some civil
liabilities, including liabilities under the Securities Act of 1933, as amended.
Until the distribution of the Notes is completed, the rules of the SEC
may limit the ability of the Underwriter and some selling group members to bid
for and purchase the Notes. As an exception to these rules, the Underwriter is
permitted to engage in transactions that stabilize the price of the Notes. These
transactions consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of the Notes.
If the Underwriter creates a short position in the Notes in connection
with the offering, that is, if they sell more Notes than the amount specified on
the cover page of this prospectus supplement, the Underwriter may reduce that
short position by purchasing Notes in the open market.
In general, purchases of a security for the purpose 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 those purchases.
Neither the Depositor nor the Underwriter makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Notes. In addition, neither the
Depositor nor the Underwriter makes any representation that the Underwriter will
engage in these transactions or that these transactions, once begun, will not be
discontinued without notice.]
Expenses incurred by the Depositor in connection with this offering
are expected to be approximately $[ ].
The Underwriter expects to make a secondary market in the Notes, but
has no obligation to do so. There can be no assurance that any secondary market
will develop, or, if it does develop, that it will continue.
[ ] has entered into an agreement with the Depositor to purchase the
Residual Certificate simultaneously with the purchase of the Notes.
The Underwriter is an affiliate of [ ] and performs management
services for the Depositor. The Underwriter has engaged in other transactions
with, arranged other transactions for or performed other services for the
Depositor and [ ] in the ordinary course of business.
EXPERTS
[To be provided as applicable].
LEGAL MATTERS
Certain legal matters with respect to the Notes will be passed upon
for the Depositor and for the Underwriter by Stroock & Stroock & Lavan LLP, New
York, New York.
RATINGS
It is a condition to the issuance of the Notes that they be rated "[
]" by [Rating Agency] and "[ ]" by [Rating Agency]. [Rating Agency] and [Rating
Agency] are referred to in this prospectus supplement as the "Rating Agencies."
A securities rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. A securities rating addresses the likelihood of
the receipt by holders of Notes of distributions in the amount of scheduled
payments on the Mortgage Loans. The rating takes into consideration the
characteristics of the Mortgage Loans and the structural, legal and tax aspects
associated with the Notes. The ratings on the Notes do not represent any
assessment of the likelihood or rate of principal prepayments. The ratings do
not address the possibility that holders of Notes might suffer a lower than
anticipated yield due to prepayments.
The security ratings assigned to the Notes should be evaluated
independently from similar ratings on other types of securities. A security
rating is not a recommendation to buy, sell or hold securities and may be
subject to revision or withdrawal at any time by either Rating Agency.
The Depositor has not requested a rating of the Notes by any rating
agency other than the Rating Agencies; there can be no assurance, however, as to
whether any other rating agency will rate the Notes or, if it does, what rating
would be assigned by the other rating agency. The rating assigned by the other
rating agency to the Notes could be lower than the ratings assigned by the
Rating Agencies.
GLOSSARY OF DEFINED TERMS
[To be provided.]
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in some limited circumstances, the globally offered ACE
Securities Corp. [ ] Asset Backed Notes (the "Global Securities") will be
available only in book-entry form. Investors in the Global Securities may hold
the Global Securities through any of DTC, Clearstream Luxembourg or Euroclear.
The Global Securities will be tradable as home market instruments in both the
European and U.S. domestic markets. Initial settlement and all secondary trades
will settle in same-day funds.
Secondary market trading between investors holding Global Securities
through Clearstream Luxembourg and Euroclear will be conducted in the ordinary
way in accordance with their normal rules and operating procedures and in
accordance with conventional eurobond practice (i.e., seven calendar day
settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations and prior mortgage loan asset backed
certificates issues.
Secondary cross-market trading between Clearstream Luxembourg or
Euroclear and DTC Participants holding Certificates will be effected on a
delivery-against-payment basis through the respective Depositaries of
Clearstream Luxembourg and Euroclear and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless those holders meet specific
requirements and deliver appropriate U.S. tax documents to the securities
clearing organizations or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the
name of Cede & Co. as nominee of DTC. Investors' interests in the Global
Securities will be represented through financial institutions acting on their
behalf as direct and indirect Participants in DTC. As a result, Clearstream
Luxembourg and Euroclear will hold positions on behalf of their participants
through their respective Depositaries, which in turn will hold the positions in
accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow the settlement practices applicable to prior mortgage loan asset backed
certificates issues. Investor securities custody accounts will be credited with
their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Clearstream
Luxembourg or Euroclear accounts will follow the settlement procedures
applicable to conventional eurobonds, except that there will be no temporary
global security and no "lock-up" or restricted period. Global Securities will be
credited to the securities custody accounts on the settlement date against
payment in same-day funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
TRADING BETWEEN DTC PARTICIPANTS. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior mortgage
loan asset backed certificates issues in same-day funds.
TRADING BETWEEN CLEARSTREAM LUXEMBOURG AND/OR EUROCLEAR PARTICIPANTS.
Secondary market trading between Clearstream Luxembourg Participants or
Euroclear Participants will be settled using the procedures applicable to
conventional eurobonds in same-day funds.
TRADING BETWEEN DTC SELLER AND CLEARSTREAM LUXEMBOURG OR EUROCLEAR
PURCHASER. When Global Securities are to be transferred from the account of a
DTC Participant to the account of a Clearstream Luxembourg Participant or a
Euroclear Participant, the purchaser will send instructions to Clearstream
Luxembourg or Euroclear through a Clearstream Luxembourg Participant or
Euroclear Participant at least one business day prior to settlement. Clearstream
Luxembourg or Euroclear will instruct the respective Depositary, as the case may
be, to receive the Global Securities against payment. Payment will include
interest accrued on the Global Securities from and including the last interest
payment date to and excluding the settlement date, on the basis of either the
actual number of days in the accrual period and a year assumed to consist of 360
days or a 360-day year of twelve 30-day months as applicable to the related
class of Global Securities. For transactions settling on the 31st of the month,
payment will include interest accrued to and excluding the first day of the
following month. Payment will then be made by the respective Depositary of the
DTC Participant's account against delivery of the Global Securities. After
settlement has been completed, the Global Securities will be credited to the
respective clearing system and by the clearing system, in accordance with its
usual procedures, to the Clearstream Luxembourg Participant's or Euroclear
Participant's account. The securities credit will appear the next day (European
time) and the cash debt will be back-valued to, and the interest on the Global
Securities will accrue from, the value date (that would be the preceding day
when settlement occurred in New York). If settlement is not completed on the
intended value date (i.e., the trade fails), the Clearstream Luxembourg or
Euroclear cash debt will be valued instead as of the actual settlement date.
Clearstream Luxembourg Participants and Euroclear Participants will
need to make available to the respective clearing systems the funds necessary to
process same-day funds settlement. The most direct means of doing so is to
preposition funds for settlement, either from cash on hand or existing lines of
credit, as they would for any settlement occurring within Clearstream Luxembourg
or Euroclear. Under this approach, they may take on credit exposure to
Clearstream Luxembourg or Euroclear until the Global Securities are credited to
their accounts one day later.
As an alternative, if Clearstream Luxembourg or Euroclear has extended
a line of credit to them, Clearstream Luxembourg Participants or Euroclear
Participants can elect not to preposition funds and allow that credit line to be
drawn upon the finance settlement. Under this procedure, Clearstream Luxembourg
Participants or Euroclear Participants purchasing Global Securities would incur
overdraft charges for one day, assuming they cleared the overdraft when the
Global Securities were credited to their accounts. However, interest on the
Global Securities would accrue from the value date. Therefore, in many cases the
investment income on the Global Securities earned during that one-day period may
substantially reduce or offset the amount of overdraft charges, although this
result will depend on each Clearstream Luxembourg Participant's or Euroclear
Participant's particular cost of funds.
Since the settlement is taking place during New York business hours,
DTC Participants can employ their usual procedures for sending Global Securities
to the respective European Depositary for the benefit of Clearstream Luxembourg
Participants or Euroclear Participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC Participants a
cross-market transaction will settle no differently than a trade between two DTC
Participants.
TRADING BETWEEN CLEARSTREAM LUXEMBOURG OR EUROCLEAR SELLER AND DTC
PURCHASER. Due to time zone differences in their favor, Clearstream Luxembourg
Participants and Euroclear Participants may employ their customary procedures
for transactions in which Global Securities are to be transferred by the
respective clearing system, through the respective Depositary, to a DTC
Participant. The seller will send instructions to Clearstream Luxembourg or
Euroclear through a Clearstream Luxembourg Participant or Euroclear Participant
at least one business day prior to settlement. In these cases Clearstream
Luxembourg or Euroclear will instruct the respective Depositary, as appropriate,
to deliver the Global Securities to the DTC Participant's account against
payment. Payment will include interest accrued on the Global Securities from and
including the last interest payment to and excluding the settlement date on the
basis of either the actual number of days in the accrual period and a year
assumed to consist of 360 days or a 360-day year of twelve 30-day months as
applicable to the related class of Global Securities. For transactions settling
on the 31st of the month, payment will include interest accrued to and excluding
the first day of the following month. The payment will then be reflected in the
account of the Clearstream Luxembourg Participant or Euroclear Participant the
following day, and receipt of the cash proceeds in the Clearstream Luxembourg
Participant's or Euroclear Participant's account would be back-valued to the
value date (which would be the preceding day, when settlement occurred in New
York). Should the Clearstream Luxembourg Participant or Euroclear Participant
have a line of credit with its respective clearing system and elect to be in
debt in anticipation of receipt of the sale proceeds in its account, the
back-valuation will extinguish any overdraft incurred over that one day period.
If settlement is not completed on the intended value date (that is, the trade
fails), receipt of the cash proceeds in the Clearstream Luxembourg Participant's
or Euroclear Participant's account would instead be valued as of the actual
settlement date.
Finally, day traders that use Clearstream Luxembourg or Euroclear and
that purchase Global Securities from DTC Participants for delivery to
Clearstream Luxembourg Participants or Euroclear Participants should note that
these trades would automatically fail on the sale side unless affirmative action
were taken. At least three techniques should be readily available to eliminate
this potential problem:
o borrowing through Clearstream Luxembourg or Euroclear for one day
(until the purchase side of the day trade is reflected in their
Clearstream Luxembourg or Euroclear accounts) in accordance with
the clearing system's customary procedures;
o borrowing the Global Securities in the U.S. from a DTC
Participant no later than one day prior to the settlement, which
would give the Global Securities sufficient time to be reflected
in their Clearstream Luxembourg or Euroclear account in order to
settle the sale side of the trade; or
o staggering the value dates for the buy and sell sides of the
trade so that the value date for the purchase from the DTC
Participant is at least one day prior to the value date for the
sale to the Clearstream Luxembourg or Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global securities holding securities through
Clearstream Luxembourg or Euroclear (or through DTC if the holder has an address
outside the U.S.) will be subject to the 30% U.S. withholding tax that generally
applies to payments of interest (including original issue discount) on
registered debt issued by U.S. Persons or to 31% backup withholding, unless (1)
each clearing system, bank or other financial institution that holds customers'
securities in the ordinary course of its trade or business in the chain of
intermediaries between the beneficial owner and the U.S. entity required to
withhold tax complies with applicable certification requirements and (2) the
beneficial owner takes one of the following steps to obtain an exemption or
reduced tax rate:
EXEMPTION FOR NON-U.S. PERSONS (FORM W-8BEN). Beneficial owners of
securities that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8BEN (Certificate of Foreign Status of
Beneficial Owner for United States Tax Withholding. If the information shown on
Form W-8 BEN changes, a new Form W-8 must be filed within 30 days of the change.
EXEMPTION FOR NON-U.S. PERSONS WITH EFFECTIVELY CONNECTED INCOME (FORM
W-8ECI). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form W-8ECI (Certificate of Foreign Person's Claim for
Exemption from Withholding on Income Effectively Connected with the Conduct of a
Trade or Business in the United States).
EXEMPTION OR REDUCED RATE FOR NON-U.S. PERSONS RESIDENT IN TREATY
COUNTRIES (FORM W-8BEN). Non-U.S. Persons that are beneficial owners of
securities residing in a country that has a tax treaty with the United States
can obtain an exemption or reduced tax rate, depending on the treaty terms, by
filing Form W-8BEN (including Part II thereof). If the treaty provides only for
a reduced rate, the beneficial owner may still be entitled to complete exemption
from withholding under item (1) above.
EXEMPTION FOR U.S. PERSONS (FORM W-9). U.S. Persons can obtain
complete exemption from the withholding tax by filing Form W-9 (Request for
Taxpayer Identification Number and Certification).
U.S. FEDERAL INCOME TAX REPORTING PROCEDURE. The beneficial owner of a
Global Security files by submitting the appropriate form to the person through
whom it holds, the clearing agency, in the case of persons holding directly on
the books of the clearing agency. Form W-8BEN and Form W-8ECI are generally
effective for three calendar years from the close of the calendar year in which
it is collected.
The term "U.S. Person" means (1) a citizen or resident of the United
States, (2) a corporation or partnership (or other entity properly classified as
a corporation or partnership for U.S. Federal income tax purposes) organized in
or under the laws of the United States or any state or the District of Columbia,
(3) an estate the income of which is includible in gross income for United
States tax purposes, regardless of its source, or (4) a trust if a court within
the United States is able to exercise primary supervision over the
administration of the trust and one or more United States persons have authority
to control all substantial decisions of the trust. Notwithstanding the preceding
sentence, to the extent provided in regulations, trusts in existence on August
20, 1996 and treated as United States persons prior to that date that elect to
continue to be so treated also will be considered U.S. Persons. Treasury
regulations provide certain presumptions regarding the entity classification and
foreign or U.S. status of a holder that a payor generally must apply in the
absence of appropriate documentation from the holder, and provide detailed
documentation and procedures for holders claiming withholding tax exemptions
through intermediaries. Prospective investors are urged to consult their tax
advisors regarding the effect of these regulations on their ability to claim and
the means for claiming exemptions from or reduced rates of U.S. withholding
taxes.
This summary does not deal with all aspects of U.S. Federal income tax
withholding that may be relevant to foreign holders of the Global securities.
Investors are advised to consult their own tax advisers for specific tax advice
concerning their holding and disposing of the Global securities.
$[ ]
(APPROXIMATE)
ACE SECURITIES CORP.
[ ] TRUST [ ]
ASSET BACKED NOTES
[ ]
SERVICER
-------------------------
PROSPECTUS SUPPLEMENT
-------------------------
DEUTSCHE BANC ALEX. BROWN
The information in this prospectus supplement is not complete and may be
changed. We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This prospectus
supplement is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
SUBJECT TO COMPLETION, [ ]
PROSPECTUS SUPPLEMENT (to prospectus dated [ ])
$[ ] (APPROXIMATE)
ACE SECURITIES CORP.
[ ] TRUST
[ ] PASS-THROUGH CERTIFICATES
[ ]
ORIGINATOR AND SERVICER
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-[ ] OF THIS
PROSPECTUS SUPPLEMENT AND ON PAGE [ ] OF THE PROSPECTUS.
For a list of capitalized terms used in this prospectus supplement and
the prospectus, see the index of defined terms beginning on page S-[ ] of this
prospectus supplement and on page [ ] of the prospectus.
The certificates will represent interests in the trust fund only and
will not represent interests in or obligations of any other entity.
This prospectus supplement may be used to offer and sell the
certificates only if accompanied by the prospectus.
The trust fund will issue certificates including the following:
CLASS INTEREST
CLASS PRINCIPAL AMOUNT(1) RATE
----- ------------------- ------
[ ]................ $[ ] [ ]
[ ]................ [ ] [ ]
[ ]................ [ ] [ ]
-------------------
(1) These amounts are approximate, as described in this prospectus supplement.
(2) Interest will accrue on the Class [ ] and [ ] Certificates at [described as
applicable].
This prospectus supplement and the accompanying prospectus relate only
to the offering of the certificates listed in the table above and not to the
other classes of certificates that will be issued by the trust fund as described
in this prospectus supplement.
[Describe assets of trust fund.]
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THE CERTIFICATES OR DETERMINED
THAT THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS IS ACCURATE OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
[Describe underwriting arrangements.]
On or about [ ], delivery of the certificates offered by this
prospectus supplement will be made through the book-entry facilities of [ ].
UNDERWRITER:
DEUTSCHE BANC ALEX. BROWN
The date of this prospectus supplement is [ ]
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS:
We provide information to you about the certificates offered by this
prospectus supplement in two separate documents that progressively provide more
detail: (1) the accompanying prospectus, which provides general information,
some of which may not apply to your certificates, and (2) this prospectus
supplement, which describes the specific terms of your certificates.
IF INFORMATION VARIES BETWEEN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS, YOU SHOULD RELY ON THE INFORMATION IN THIS PROSPECTUS
SUPPLEMENT.
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We have
not authorized anyone to provide you with different information.
We are not offering the certificates in any state where the offer is
not permitted. We do not claim that the information in this prospectus
supplement and prospectus is accurate as of any date other than the dates stated
on their respective covers.
Dealers will deliver a prospectus supplement and prospectus when
acting as underwriters of the certificates and with respect to their unsold
allotments or subscriptions. In addition, all dealers selling the certificates
will be required to deliver a prospectus supplement and prospectus for ninety
days following the date of this prospectus supplement.
We include cross-references in this prospectus supplement and the
accompanying prospectus to captions in these materials where you can find
further related discussions. The following table of contents and the table of
contents included in the accompanying prospectus provide the pages on which
these captions are located.
TABLES OF CONTENTS
PROSPECTUS SUPPLEMENT
PAGE
-----
Summary of Terms....................................4
Risk Factors........................................8
Description of the Certificates....................14
[The Insurance Policy..............................22
Description of the Mortgage Pool...................23
Additional Information.............................32
[Originator/Servicer...............................33
The Pooling and Servicing Agreement................35
Yield Considerations...............................40
Material Federal Income Tax Considerations.........45
State and Local Income Tax Considerations..........45
Legal Investment Considerations....................45
Use of Proceeds....................................46
Underwriting.......................................46
ERISA Considerations...............................46
Experts............................................46
Legal Matters......................................47
Ratings............................................47
Glossary of Defined Terms..........................48
Annex I............................................49
PROSPECTUS
PAGE
-----
Description of the Trust Funds.......................
Use of Proceeds......................................
Yield Considerations.................................
The Depositor........................................
Description of the Securities........................
Description of the Agreements........................
Description of Credit Support........................
Certain Legal Aspects of Mortgage Loans..............
Certain Legal Aspects of the Contracts...............
Material Federal Income Tax
Considerations....................................
State and Other Tax Considerations...................
Legal Investment.....................................
Methods of Distribution..............................
Additional Information...............................
Incorporation of Certain Documents by Reference......
Legal Matters........................................
Financial Information................................
Rating...............................................
Index of Defined Terms...............................
SUMMARY OF TERMS
o THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROSPECTUS
SUPPLEMENT AND DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU NEED TO
CONSIDER IN MAKING YOUR INVESTMENT DECISION. TO UNDERSTAND ALL OF THE TERMS
OF THE OFFERING OF THE CERTIFICATES, IT IS NECESSARY THAT YOU READ
CAREFULLY THIS ENTIRE PROSPECTUS SUPPLEMENT AND ACCOMPANYING PROSPECTUS.
o WHILE THIS SUMMARY CONTAINS AN OVERVIEW OF CERTAIN CALCULATIONS, CASH FLOW
PRIORITIES, AND OTHER INFORMATION TO AID YOUR UNDERSTANDING, YOU SHOULD
READ CAREFULLY THE FULL DESCRIPTION OF THESE CALCULATIONS, CASH FLOW
PRIORITIES AND OTHER INFORMATION IN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS BEFORE MAKING ANY INVESTMENT DECISION.
o [WHENEVER WE REFER TO A PERCENTAGE OF SOME OR ALL OF THE MORTGAGE LOANS IN
THE TRUST FUND OR IN ANY POOL, THAT PERCENTAGE HAS BEEN CALCULATED ON THE
BASIS OF THE TOTAL PRINCIPAL BALANCE OF THOSE MORTGAGE LOANS AS OF [ ],
UNLESS WE SPECIFY OTHERWISE. WE EXPLAIN IN THIS PROSPECTUS SUPPLEMENT UNDER
"DESCRIPTION OF THE CERTIFICATES -- DISTRIBUTIONS OF PRINCIPAL" HOW THE
PRINCIPAL BALANCE OF A MORTGAGE LOAN IS DETERMINED. WHENEVER WE REFER IN
THIS SUMMARY OF TERMS OR IN THE RISK FACTORS SECTION OF THIS PROSPECTUS
SUPPLEMENT TO THE TOTAL PRINCIPAL BALANCE OF ANY MORTGAGE LOANS, WE MEAN
THE TOTAL OF THEIR PRINCIPAL BALANCES, UNLESS WE SPECIFY OTHERWISE.]
THE OFFERED CERTIFICATES
ACE Securities Corp.'s [ ] Pass-Through Certificates consist of the
following classes: [ ]. Only the [ ] Certificates are being offered by this
prospectus supplement. These certificates will be issued in book-entry form.
SEE "DESCRIPTION OF THE CERTIFICATES -- GENERAL" IN THIS PROSPECTUS
SUPPLEMENT FOR A DISCUSSION OF THE MINIMUM DENOMINATIONS AND THE INCREMENTAL
DENOMINATIONS OF EACH CLASS OF CERTIFICATES.
The certificates represent ownership interests in a trust fund, the assets
of which consist primarily of [describe assets of trust fund.]
The certificates will have an approximate total initial principal amount of
$[ ]. Any difference between the total principal amount of the certificates on
the date they are issued and the approximate total principal amount of the
certificates on the date of this prospectus supplement will not exceed 5%.
PAYMENTS ON THE CERTIFICATES
Principal and interest on the certificates will be payable on the [25th]
day of each month, beginning in [ ]. However, if the [25th] day is not a
business day, distributions will be made on the next business day after the
[25th] day of the month.
INTEREST PAYMENTS
Interest will accrue on each class of certificates, [other than the Class [
] Certificate], at the applicable annual rates described in this prospectus
supplement.
SEE "DESCRIPTION OF THE CERTIFICATES -- DISTRIBUTIONS OF INTEREST" IN THIS
PROSPECTUS SUPPLEMENT.
PRINCIPAL PAYMENTS
The amount of principal payable on the certificates, [other than the Class
[ ] Certificate], will be determined by (1) funds actually received on the
mortgage loans in [each] pool that are available to make payments on the
certificates, (2) the amount of interest received or advanced on the mortgage
loans that is used to pay principal on the certificates, calculated as described
in this prospectus supplement, (3) [formulas that allocate a portion of
principal payments received on the mortgage loans to each class of certificates,
as described in this prospectus supplement,] and (4) [ ]. Funds actually
received on the mortgage loans may consist of expected, scheduled payments, and
unexpected payments resulting from prepayments or defaults by borrowers,
liquidation of defaulted mortgage loans, or repurchases of mortgage loans under
the circumstances described in this prospectus supplement.
WE EXPLAIN HOW PRINCIPAL IS PAID ON THE CERTIFICATES UNDER "DESCRIPTION OF
THE CERTIFICATES -- DISTRIBUTIONS OF PRINCIPAL" IN THIS PROSPECTUS SUPPLEMENT.
[PREPAYMENT PENALTIES ON THE MORTGAGE LOANS
The holder of the Class [ ] Certificate will be entitled to receive any
prepayment penalties received on the mortgage loans. These amounts will not be
available to make payments on other classes of certificates.
SEE "DESCRIPTION OF THE CERTIFICATES" AND "DESCRIPTION OF THE MORTGAGE POOL
- -- GENERAL" IN THIS PROSPECTUS SUPPLEMENT.]
LIMITED RECOURSE
The only source of cash available to make interest and principal payments
on the certificates will be the assets of the trust fund. The trust fund will
have no other source of cash and no entity other than the trust fund will be
required or expected to make any payments on the certificates.
ENHANCEMENT OF LIKELIHOOD OF PAYMENT ON THE CERTIFICATES
[DESCRIBE ANY APPLICABLE FINANCIAL GUARANTY INSURANCE POLICY OR GUARANTEE.]
[SUBORDINATION OF PAYMENTS
The [ ] certificates will have a payment priority as a group over the Class
[ ] Certificates both for payments of interest and payments of principal. No
amounts will be paid to the Holder of the Class [ ] Certificate on any
distribution date until all amounts due to the senior certificates and the Class
[ ] Certificates on that date have been paid and overcollateralization has
reached the required level.]
[OVERCOLLATERALIZATION
On the closing date, the total principal balance of the mortgage loans is
expected to [approximately equal the total principal amount of the
certificates]. Any interest received on the mortgage loans in excess of the
amount needed to pay interest on the certificates and some of the expenses and
fees of the trust fund will be used to reduce the total principal amount of the
certificates to a level set by the rating agencies until the mortgage loans have
a total principal balance that exceeds the total outstanding principal amount of
the certificates by the amount required by the rating agencies. This condition
is referred to as "overcollateralization." We cannot assure you that sufficient
interest will be generated by the mortgage loans to create
overcollateralization, to increase overcollateralization to the level required
by the rating agencies, or to maintain it at that level.
SEE "RISK FACTORS -- POTENTIAL INADEQUACY OF CREDIT ENHANCEMENT FOR THE
CLASS [ ] CERTIFICATES" AND "DESCRIPTION OF THE CERTIFICATES -- CREDIT
ENHANCEMENT -- SUBORDINATION" AND "-- OVERCOLLATERALIZATION" IN THIS PROSPECTUS
SUPPLEMENT.]
[ALLOCATION OF LOSSES
As described in this prospectus supplement, amounts representing losses on
the mortgage loans in excess of overcollateralization will be applied to reduce
the principal amount of the Class [ ] Certificates until their principal amount
has been reduced to zero.
o If a loss has been allocated to reduce the principal amount of your
Class [ ] Certificate, you will receive no payment in respect of that
reduction at that time.
o After overcollateralization has been created and has been increased to
the required level, you will receive the amount of that loss if there
are sufficient funds to pay you, as described in this prospectus
supplement, but you will not receive any interest on that amount.
After the principal amount of the Class [ ] Certificates has been reduced
to zero, amounts representing losses on the mortgage loans will be paid to
holders of the senior certificates by [ ], to the extent funds available are
insufficient to cover these losses.
SEE "DESCRIPTION OF THE CERTIFICATES -- CREDIT ENHANCEMENT -- ALLOCATION OF
LOSSES" AND "THE INSURANCE POLICY" IN THIS PROSPECTUS SUPPLEMENT.]
THE MORTGAGE LOANS
On the closing date, which is expected to be on or about [ ], the assets of
the trust fund will consist of [two] pools of mortgage loans with a total
principal balance of approximately $[ ]. The mortgage loans will be secured by
mortgages, deeds of trust, or other security instruments, all of which are
referred to in this prospectus supplement as mortgages.
[Description of mortgage loans.]
[Description of pre-funding account and additional mortgage loans as
applicable.]
[The mortgage loans in the trust fund will not be insured or guaranteed by
any government agency.]
SEE "DESCRIPTION OF THE MORTGAGE POOL" IN THIS PROSPECTUS SUPPLEMENT FOR A
GENERAL DESCRIPTION OF THE MORTGAGE LOANS AND "[ORIGINATOR/SERVICER]" IN THIS
PROSPECTUS SUPPLEMENT FOR A DESCRIPTION OF THE UNDERWRITING GUIDELINES APPLIED
IN ORIGINATING THE MORTGAGE LOANS.
[THE PRE-FUNDING ACCOUNT
On the closing date, approximately $[ ] will be deposited by [ ] in a
pre-funding account maintained by [ ]. It is intended that additional mortgage
loans will be sold to the trust fund by the depositor from time to time, from [
] until [ ], paid for with the funds on deposit in the pre-funding account.
[Description of pre-funding account and additional mortgage loans as
applicable.]
SEE "DESCRIPTION OF THE CERTIFICATES --PRE-FUNDING ACCOUNT" IN THIS
PROSPECTUS SUPPLEMENT.]
SERVICING OF THE MORTGAGE LOANS
The mortgage loans will be serviced by [ ].
SEE "[ORIGINATOR/SERVICER]" AND "THE POOLING AND SERVICING AGREEMENT" IN
THIS PROSPECTUS SUPPLEMENT.
OPTIONAL PURCHASE OF MORTGAGE LOANS
[ ] will have the option to purchase all of the mortgage loans and the
other property of the trust fund, [other than the insurance policy], after the
total principal balance of the mortgage loans declines to less than [ ]% of
their initial total principal balance; if [ ] does not exercise that option, [ ]
may purchase the Mortgage Loans and other property of the trust fund.
If the mortgage loans and other assets are purchased, the
certificateholders will be paid accrued interest and principal equal to the
outstanding principal amount of the certificates.
SEE "DESCRIPTION OF THE CERTIFICATES -- OPTIONAL PURCHASE OF MORTGAGE
LOANS; TERMINATION OF THE TRUST FUND" IN THIS PROSPECTUS SUPPLEMENT FOR A
DESCRIPTION OF THE PURCHASE PRICE TO BE PAID FOR THE MORTGAGE LOANS.
TAX STATUS
[The Trust Fund will make one or more elections to treat certain assets of
the trust as a real estate mortgage investment conduit (each, a "REMIC") for
federal income tax purposes. The Class [ ] Certificates will represent regular
interests in a REMIC and generally will be treated as debt instruments for
federal income tax purposes. The Class [R] Certificates will represent the
residual interest in each REMIC.]
[Alternatively, grantor trust, partnership or FASIT status to be described
as applicable.]
SEE "MATERIAL FEDERAL INCOME TAX CONSIDERATIONS" IN THIS PROSPECTUS
SUPPLEMENT AND IN THE ACCOMPANYING PROSPECTUS FOR ADDITIONAL INFORMATION
CONCERNING THE APPLICATION OF FEDERAL INCOME TAX LAWS TO THE CERTIFICATES.
ERISA CONSIDERATIONS
The Offered Certificates may be acquired by employee benefit plans and
other retirement arrangements, subject to certain conditions.
SEE "ERISA CONSIDERATIONS" IN THIS PROSPECTUS SUPPLEMENT AND IN THE
PROSPECTUS FOR A MORE COMPLETE DISCUSSION OF THESE ISSUES.
LEGAL INVESTMENT CONSIDERATIONS
[Only the Class [ ] Certificates] will constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984.
There are other restrictions on the ability of some types of investors to
purchase the certificates that prospective investors should consider.
SEE "LEGAL INVESTMENT CONSIDERATIONS" IN THIS PROSPECTUS SUPPLEMENT AND IN
THE PROSPECTUS.
RATINGS OF THE CERTIFICATES
The certificates will initially have the following ratings from [ ]:
[Rating [Rating
CLASS AGENCY] AGENCY]
----- ------ ------
[ ] [ ] [ ]
[ ] [ ] [ ]
[ ] [ ] [ ]
These ratings are not recommendations to buy, sell or hold these certificates. A
rating may be changed or withdrawn at any time by the assigning rating agency.
o The ratings do not address the possibility that, as a result of
principal prepayments, the yield on your certificates may be lower
than anticipated.
SEE "RATINGS" IN THIS PROSPECTUS SUPPLEMENT FOR A MORE COMPLETE DISCUSSION
OF THE CERTIFICATE RATINGS.
RISK FACTORS
THE FOLLOWING INFORMATION, WHICH YOU SHOULD CAREFULLY CONSIDER,
IDENTIFIES CERTAIN SIGNIFICANT SOURCES OF RISK ASSOCIATED WITH AN INVESTMENT IN
THE CERTIFICATES. YOU SHOULD ALSO CAREFULLY CONSIDER THE INFORMATION SET FORTH
UNDER "RISK FACTORS" IN THE PROSPECTUS.
[SOME OF THE LOANS IN THE The payment schedules for most of
MORTGAGE POOL ARE MORE LIKELY the mortgage loans in the pool
TO DEFAULT THAN OTHERS, AND require the borrower to pay off the
HIGHER THAN EXPECTED DEFAULTS principal balance of the loan
ON THESE LOANS COULD REDUCE THE gradually over the life of the
YIELD ON YOUR CERTIFICATES loan. Some of the mortgage loans in
the pool, however, have payment
schedules under which the borrowers
makes relatively small payments of
principal over the life of the
loan, and then must make a large
final payment at maturity that pays
off the entire principal balance
outstanding. This final payment is
usually much larger than the
previous monthly payments. Because
the borrower's ability to make this
final payment usually depends on
the ability to refinance the loan
or sell the underlying property,
the risk of default is greater than
on other types of loans. High rates
of default on these types of loans
in the pool will result in greater
losses on your certificates.
The ability of a borrower to refinance
the type of loan described above or sell
the mortgaged property will depend upon a
number of factors, including:
o the level of mortgage interest rates;
o the borrower's equity in the mortgage
property;
o general economic conditions; and
o the availability of credit.
We cannot predict how these factors will
affect the default rate of these mortgage
loans in the pool. You should refer to
"Description of the Mortgage Pool" for
information on the percentage of loans in
the mortgage loan pool that consists of
these loans.]
[MORTGAGE LOAN INTEREST RATES [LIBOR may increase or decrease at
MAY LIMIT INTEREST RATES ON THE different times and in different amounts
CERTIFICATES than the index applicable to the
adjustable rate mortgage loans.]
[The trust fund will include a reserve
fund whose primary asset will be
[describe as applicable]].
SEE "DESCRIPTION OF THE CERTIFICATES --
THE RESERVE FUND" IN THIS PROSPECTUS
SUPPLEMENT. FOR DETAILED INFORMATION ON
THE INTEREST RATES OF THE MORTGAGE LOANS,
SEE "DESCRIPTION OF THE MORTGAGE POOL" IN
THIS PROSPECTUS SUPPLEMENT.]
[POTENTIAL INADEQUACY OF CREDIT The Class [ ] Certificates are not
ENHANCEMENT FOR THE CLASS [ ] insured by any financial guaranty
CERTIFICATES insurance policy. The
overcollateralization feature described
in this prospectus supplement is intende
to enhance the likelihood that holders o
Class [ ] Certificates will receive
regular payments of interest and
principal, but is limited in nature and
may be insufficient to cover all losses d
on the mortgage loans or shortfalls in f
interest payments on the mortgage loans.
In order to create, increase and maintain
overcollateralization, it will be
necessary that the mortgage loans
generate more interest than is needed to
pay interest on the certificates as well
as fees and expenses of the trust fund
and other amounts that are described in
this prospectus supplement. We expect
that the mortgage loans will generate
more interest than is needed to pay those
amounts, at least during some periods,
because the weighted average of the
interest rates on the mortgage loans will
be higher, at the time the certificates
are issued, than the weighted average of
the interest rates on the certificates.
We cannot assure you, however, that
enough excess interest will be generated
to reach the overcollateralization levels
required by the rating agencies. The
following factors will affect the amount
of excess interest that the mortgage
loans will generate:
o PREPAYMENTS. Every time a mortgage
loan with an interest rate higher
than the weighted average of the
interest rates on the certificates is
prepaid, total excess interest after
the date of prepayment will be
reduced because that mortgage loan
will no longer be outstanding and
generating interest. The effect on
your certificates of this reduction
will be influenced by the amount of
prepaid loans and the characteristics
of the prepaid loans. Prepayment of a
disproportionately high number of
high interest rate mortgage loans
would have a greater negative effect
on future excess interest.
o DEFAULTS. The rate of defaults on the
mortgage loans may turn out to be
higher than expected. Defaulted
mortgage loans may be liquidated, and
liquidated mortgage loans will no
longer be outstanding and generating
interest.
o LEVEL OF LIBOR. If LIBOR increases,
more money will be needed to pay
interest to certificateholders, so
less money will be available as
excess interest.]
[SPECIAL RISKS FOR THE CLASS [ ] The rights of holders of Class [ ]
CERTIFICATES Certificates to receive payments of
interest are subordinate to the rights of
holders of senior certificates to receive
payments of interest, and the rights of
holders of Class [ ] Certificates to
receive payments of principal are
subordinate to the rights of holders of
senior certificates to receive payments
of principal.
In addition, you should consider the
following:
o If you buy a Class [ ] Certificate
and losses on the mortgage loans
exceed excess interest and any
overcollateralization that has been
created, the principal amount of your
certificate will be reduced
proportionately with the principal
amounts of the other Class [ ]
Certificates by the amount of that
excess;
o If, after overcollateralization is
created in the required amount, the
mortgage loans generate interest in
excess of the amount needed to pay
interest and principal on the
certificates and fees and expenses of
the trust fund, the excess interest
will be used to pay you and other
holders of Class [ ] Certificates the
amount of any reduction in the
principal balances of the Class [ ]
Certificates caused by application of
losses.
o We cannot assure you, however, that
any excess interest will be generated
and, in any event, no interest will
be paid to you on the amount by which
your principal balance was reduced
because of the application of losses.
SEE "DESCRIPTION OF THE CERTIFICATES --
CREDIT ENHANCEMENT -- SUBORDINATION" AND
"-- ALLOCATION OF LOSSES" IN THIS
PROSPECTUS SUPPLEMENT.]
[EFFECT OF LACK OF PRIMARY Approximately [ ]% of the mortgage loans
MORTGAGE INSURANCE ON THE have loan-to-value ratios greater than
CLASS [ ] CERTIFICATES 80%. None of the mortgage loans are
covered by a primary mortgage insurance
policy. If borrowers default on their
mortgage loans, there is a greater
likelihood of losses than if the loans
were insured. We cannot assure you that
the applicable credit enhancement will be
adequate to cover those losses.
SEE "DESCRIPTION OF THE CERTIFICATES --
CREDIT ENHANCEMENT -- SUBORDINATION" AND
"-- ALLOCATION OF LOSSES" IN THIS
PROSPECTUS SUPPLEMENT.]
UNPREDICTABILITY AND EFFECT OF Borrowers may prepay their mortgage loans
PREPAYMENT in whole or in part at any time; [however,
approximately [ ]% of the mortgage loans
require the payment of a prepayment
penalty in connection with some voluntary
prepayments, which may discourage these
borrowers from prepaying their mortgage
loans]. Prepayments of principal may also
be caused by liquidations of or insurance
payments on the mortgage loans. A
prepayment of a mortgage loan will usually
result in a prepayment on the
certificates.
The prepayment experience on the mortgage
loans may affect the average life of the
certificates. The rate of principal
payments on the mortgage loans is from
time to time influenced by a variety of
economic, demographic, geographic, social,
tax, legal and other factors. There can be
no assurance as to the rate of prepayment
on the mortgage loans or that the rate of
payments will conform to the model
described in this prospectus supplement.
If prevailing interest rates fall
significantly below the interest rates on
the mortgage loans, principal prepayments
are likely to be higher than if prevailing
rates remain at or above the interest
rates on the mortgage loans. As a result,
the actual maturity of the certificates
could occur significantly earlier than
expected. Conversely, if prevailing
interest rates rise significantly above
the interest rates on the mortgage loans,
principal prepayments are likely to be
lower than if prevailing rates remain at
or below the interest rates on the
mortgage loans and the maturity of the
certificates could occur significantly
later than expected. In addition, some
prepayments may result in the collection
of less interest than would otherwise be
the case in the month of prepayment.
o If you purchase your certificates at a
discount and principal is repaid more
slowly than you anticipate, then your
yield may be lower than you
anticipate.
o If you purchase your certificates at a
premium and principal is repaid faster
than you anticipate, then your yield
may be lower than you anticipate.
SEE "YIELD CONSIDERATIONS" IN THIS
PROSPECTUS SUPPLEMENT FOR A DESCRIPTION OF
FACTORS THAT MAY INFLUENCE THE RATE AND
TIMING OF PREPAYMENTS ON THE MORTGAGE
LOANS.
GEOGRAPHIC CONCENTRATION OF
MORTGAGE LOANS Approximately [ ]% of the
mortgage loans expected to be in the pool
on the closing date are secured by
properties in [California]. Delinquencies,
defaults and losses on the mortgage loans
may be higher than if fewer of the
mortgage loans were concentrated in one
state because the following conditions in
[California] will have a disproportionate
impact on the mortgage loans in general:
o Declines in the [California]
residential real estate market may
reduce the values of properties
located in that state, which would
result in an increase in the
loan-to-value ratios.
o Properties in [California] may be
more susceptible than homes located
in other parts of the country to some
types of uninsured hazards, such as
earthquakes, as well as floods,
wildfires, mudslides and other
natural disasters.
Natural disasters affect regions of the
United States from time to time, and may
result in increased losses on mortgage
loans in those regions, or in insurance
payments that will constitute prepayments
of those mortgage loans.
FOR ADDITIONAL INFORMATION REGARDING THE
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGE
LOANS IN EACH POOL, SEE THE APPLICABLE
TABLE UNDER "DESCRIPTION OF THE MORTGAGE
POOL" IN THIS PROSPECTUS SUPPLEMENT.
REAL ESTATE MARKET MAY AFFECT A decline in the real estate values or in
PERFORMANCE OF A MORTGAGE LOANS economic conditions generally could
increase the rates of delinquencies,
foreclosures and losses on the mortgage
loans to a level that is significantly
higher than those experienced currently;
and no assurance can be given that values
of the properties securing the mortgage
loans will not decline since the date of
origination of the mortgage loan. If the
credit enhancement described in this
prospectus supplement is not enough to
protect your certificates from these
losses, the yield on your certificates may
be reduced.
[EARLY PRINCIPAL PAYMENT FROM If the cash in the pre-funding account on
CASH REMAINING IN PRE-FUNDING the closing date is not used to acquire
ACCOUNT additional mortgage loans by [ ], then
that cash will be [paid to you on a
proportionate basis with the other
certificateholders in reduction of the
principal balance of your certificates.]
If the amount of that cash is substantial,
you will receive a significant unexpected
early payment of principal in (or before)
[ ]. We cannot assure you that you will be
able to reinvest that money in another
investment with a comparable yield.]
YOU WILL NOT RECEIVE PHYSICAL Unless you are the purchaser of the
CERTIFICATES, WHICH CAN CAUSE residual certificates, your ownership of
DELAYS IN DISTRIBUTIONS AND the certificates will be registered
HAMPER YOURABILITY TO PLEDG electronically with DTC. The lack of
OR RESELL YOUR CERTIFICATES physical certificates could:
o result in payment delays on the
certificates because the trustee will
be sending distributions on the
certificates to DTC instead of
directly to you;
o make it difficult for you to pledge
your certificates if physical
certificates are required by the party
demanding the pledge; and
o could hinder your ability to resell
the certificates because some
investors may be unwilling to buy
certificates that are not in physical
form.
SEE "DESCRIPTION OF THE CERTIFICATES --
BOOK-ENTRY REGISTRATION" IN THIS
PROSPECTUS SUPPLEMENT.
LIMITED ABILITY TO RESELL The underwriter is not required to assist
CERTIFICATES in resales of the certificates, although
it may do so. A secondary market for any
class of certificates may not develop. If
a secondary market does develop, it might
not continue or it might not be
sufficiently liquid to allow you to resell
any of your certificates. The certificates
will not be listed on any securities
exchange.
[Additional risk factors to be provided as applicable.]
DESCRIPTION OF THE CERTIFICATES
GENERAL
The [ ] Pass-Through Certificates will consist of the following Classes: [
] (together, the "Certificates").
The [ ] Certificates are referred to in this prospectus supplement as the
"Senior Certificates." Only the Class [ ] Certificates (the "Offered
Certificates") are offered by this prospectus supplement. The Class [ ]
Certificates are referred to in this prospectus supplement as the "LIBOR
Certificates." The Class [ ] Certificates are referred to in this prospectus
supplement as the "Subordinate Certificates." The Class R Certificate is also
referred to as the "Residual Certificate."
The Class [ ] Certificate will be issued as a single Certificate in fully
registered, certificated form.
The Certificates represent beneficial ownership interests in a trust fund
(the "Trust Fund"), the assets of which consist primarily of (1) [describe
mortgage loans] mortgage loans (the "Mortgage Loans"), (2) the assets that from
time to time are identified as deposited in respect of the Mortgage Loans in the
Collection Account and the Certificate Account (each as defined in this
prospectus supplement), (3) property acquired by foreclosure of Mortgage Loans
or deed in lieu of foreclosure, (4) any applicable insurance policies and all
proceeds of these insurance policies, and (5) [describe other assets, as
applicable].
Each Class of Offered Certificates will be issued in the respective
approximate initial total principal amount set forth or described on the cover
page of this prospectus supplement. The total principal amount of each Class of
Offered Certificates is referred to in this prospectus supplement as the "Class
Principal Amount" for that Class. The Class [ ] Certificate will be issued
without a principal amount or interest rate, and will be entitled only to the
amounts that are described in this prospectus supplement. The total Certificate
Principal Amount (as defined in this prospectus supplement) of the Certificates
and the initial Class Principal Amount of each Class of Offered Certificates may
be increased or decreased by up to 5% to the extent that the Cut-off Date
Balance (as defined in this prospectus supplement) of the Mortgage Loans is
increased or decreased as described under "Description of the Mortgage Pools" in
this prospectus supplement.
Distributions on the Certificates will be made on the [25th] day of each
month or, if the [25th] day is not a Business Day, on the next succeeding
Business Day, commencing in [ ] (each, a "Distribution Date"), to
Certificateholders of record on the applicable Record Date. The "Record Date"
for each Distribution Date will be the close of business on the last Business
Day of the calendar month immediately preceding the month in which that
Distribution Date occurs.
o A "Business Day" is generally any day other than a Saturday or Sunday
or a day on which banks in New York or [California] are closed.
Distributions on the Offered Certificates will be made to each registered
holder entitled to the distributions, either (1) by check mailed to the
Certificateholder's address as it appears on the books of the Trustee (as
defined in this prospectus supplement), or (2) at the request, submitted to the
Trustee in writing at least five Business Days prior to the related Record Date,
of any holder of an Offered Certificate (at the holder's expense) in immediately
available funds; provided, that the final distribution in respect of any
Certificate will be made only upon presentation and surrender of the Certificate
at the Corporate Trust Office (as defined in this prospectus supplement) of the
Trustee. See "-- The Trustee" in this prospectus supplement.
[PRE-FUNDING ACCOUNT
On the Closing Date approximately $[ ] (the "Pre-Funded Amount") will be
deposited in an account (the "Pre-Funding Account") maintained by [ ], which
account shall be part of the trust fund. During the period (the "Pre-Funding
Period") from [ ] until [ ], the Pre-Funding Amount will be maintained in the
Pre-Funding Account. The Pre-Funded Amount will be reduced during the
Pre-Funding Period by the amount of Subsequent Mortgage Loans (as defined in
this prospectus supplement) deposited in the trust fund in accordance with the
Pooling and Servicing Agreement. During the Pre-Funding Period, the Pre-Funded
Amount will be used only to purchase Subsequent Mortgage Loans. Immediately
following the Pre-Funding Period, any Pre-Funded Amount remaining will be
distributed to [to be provided as applicable].
Amounts on deposit in the Pre-Funding Account will be invested in [to be
provided as applicable] and all investment earnings on amounts on deposit in the
Pre-Funding Account will be distributed to [to be provided as applicable]
following the Pre-Funding Period.]
BOOK-ENTRY REGISTRATION
GENERAL. The Offered Certificates (the "Book-Entry Certificates") will be
issued, maintained and transferred on the book-entry records of The Depository
Trust Company ("DTC") in the United States [, or through Clearstream Luxembourg,
societe anonyme ("Clearstream Luxembourg") or the Euroclear System ("Euroclear")
in Europe] and through [its/their] participating organizations (each, a
"Participant"). The Book-Entry Certificates will be issued in minimum
denominations in principal amount of $25,000 and integral multiples of $1 in
excess of $25,000.
Each Class of Book-Entry Certificates will be represented by one or more
certificates registered in the name of the nominee of DTC. ACE Securities Corp.
(the "Depositor") has been informed by DTC that DTC's nominee will be Cede & Co.
[Clearstream Luxembourg and Euroclear will hold omnibus positions on behalf of
their Participants through customers' securities accounts in Clearstream
Luxembourg's and Euroclear's names on the books of their respective
depositaries, which in turn will hold positions in customers' securities
accounts in the depositaries' names on the books of DTC.] No person acquiring an
interest in a Book-Entry Certificate (each, a "Beneficial Owner") will be
entitled to receive a certificate representing an interest (a "Definitive
Certificate"), except as set forth below under "-- Definitive Certificates" and
in the Prospectus under "Description of the Certificates -- Book-Entry
Registration and Definitive Securities -- Definitive Securities."
Unless and until Definitive Certificates are issued, it is anticipated
that:
o the only "Certificateholder" of the Offered Certificates will be Cede
& Co., as nominee of DTC, and Beneficial Owners will not be
Certificateholders as that term is used in the Pooling and Servicing
Agreement (as defined in this prospectus supplement).
o Beneficial Owners will receive all distributions of principal of, and
interest on, the Offered Certificates from the Trustee through DTC [,
Clearstream Luxembourg or Euroclear, as applicable,] and [its/their]
Participants.
o while the Offered Certificates are outstanding, under the rules,
regulations and procedures creating and affecting DTC [Clearstream
Luxembourg and Euroclear] and [its/their] operations, DTC [Clearstream
Luxembourg and Euroclear] [is/are] required to make book-entry
transfers among Participants on whose behalf it acts with respect to
the Offered Certificates and is required to receive and transmit
distributions of principal of, and interest on, the Offered
Certificates. Participants and indirect participants with whom
Beneficial Owners have accounts with respect to Offered Certificates
are similarly required to make book-entry transfers and receive and
transmit distributions on behalf of their respective Beneficial
Owners. Accordingly, although Beneficial Owners will not possess
certificates, DTC [Clearstream Luxembourg and Euroclear] [has/have] in
place a mechanism by which Beneficial Owners will receive
distributions and will be able to transfer their interest.
None of the Depositor, [ ], the Servicer or the Trustee [or additional
parties] (as those terms are defined in this prospectus supplement) will have
any responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the Book-Entry Certificates held by
Cede & Co., as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to those beneficial ownership interests.
For a more complete description of book-entry registration and clearance
and the rules and regulations governing DTC [,Clearstream Luxembourg and
Euroclear], see "Description of the Securities -- Book-Entry Registration and
Definitive Securities" in the Prospectus" [and "Global Clearance, Settlement and
Tax Documentation Procedures" in Annex I to this Prospectus Supplement].
DEFINITIVE CERTIFICATES. Definitive Certificates will be issued to
Beneficial Owners or their nominees, respectively, rather than to DTC or its
nominee, only under the limited conditions set forth in the Prospectus under "
Description of the Securities -- Book-Entry Registration and Definitive
Securities -- Definitive Securities." Upon the occurrence of an event described
in that section, the Trustee is required to direct DTC to notify Participants
who have ownership of Book-Entry Certificates as indicated on the records of DTC
of the availability of Definitive Certificates for their Book-Entry
Certificates. Upon surrender by DTC of the Definitive Certificates representing
the Book-Entry Certificates and upon receipt of instructions from DTC for
re-registration, the Trustee will re-issue the Book-Entry Certificates as
Definitive Certificates in the respective principal amounts owned by individual
Beneficial Owners, and thereafter the Trustee will recognize the holders of the
Definitive Certificates as Certificateholders under the Pooling and Servicing
Agreement.
DISTRIBUTIONS OF INTEREST
The amount of interest distributable on each Distribution Date in respect
of each Class of Certificates (other than the Class [ ] Certificate) will equal
the sum of [to be provided as applicable]. Interest will accrue on the Offered
Certificates on the basis of a 360-day year and the actual number of days in
each Accrual Period.
o The "Interest Rate" for each Class of Certificates will be the
applicable annual rate described below.
[If [ ] does not exercise its option to purchase the Mortgage Loans when it
is first entitled to do so, as described under "-- Optional Purchase of Mortgage
Loans; Termination of the Trust Fund" in this prospectus supplement, then with
respect to each succeeding Distribution Date, the [ ] will be increased to %].
Subject to the preceding proviso, the Interest Rates for the Class [ ]
Certificates will be the applicable annual rate determined as follows:
o [To be provided as applicable].
o The "Net Mortgage Rate" for any Mortgage Loan equals the Mortgage Rate
of the Mortgage Loan MINUS the Total Expense Rate (as defined in this
prospectus supplement).
o The "Total Expense Rate" for each Distribution Date is the sum of [the
Servicing Fee Rate and the Trustee Fee Rate (each as defined in this
prospectus supplement)].
The "Certificate Principal Amount" of any Offered Certificate for any date
of determination will equal that Certificate Principal Amount on [ ] (the
"Closing Date") as reduced by all amounts previously distributed on that
Certificate in respect of principal and, in the case of a Class [ ] Certificate,
any Applied Loss Amount (as defined in this prospectus supplement) previously
allocated to that Certificate.
For each Distribution Date, the "Accrual Period" applicable to each Class
of Offered Certificates will be the period beginning on the immediately
preceding Distribution Date (or on the Closing Date, in the case of the first
Accrual Period) and ending on the day immediately preceding the related
Distribution Date.
o The "Interest Remittance Amount" for any Distribution Date will equal
the sum of [to be provided as applicable].
On each Distribution Date, the Interest Remittance Amount will be
distributed in the following order of priority:
[To be provided as applicable.]
When a principal prepayment in full is made on a Mortgage Loan, the
borrower is charged interest only to the date of the prepayment, instead of for
a full month, with a resulting reduction in interest payable for the month
during which the prepayment is made. Prepayments in part will be applied as of
the date of receipt. Full or partial prepayments (or proceeds of other
liquidations) received in any Prepayment Period will be distributed to holders
of Offered Certificates on the Distribution Date following that Prepayment
Period. To the extent that, as a result of a full or partial prepayment, a
borrower is not required to pay a full month's interest on the amount prepaid, a
shortfall (a "Prepayment Interest Shortfall") in the amount available to make
distributions of interest on the Certificates could result. A Prepayment
Interest Shortfall will result from a prepayment in full only if that prepayment
is received on or after the [16th] day of a calendar month. If a prepayment in
full is received on or prior to the [15th] day of a calendar month, there will
be an excess of interest over one month's interest for that Mortgage Loan
("Prepayment Interest Excess") available for distribution to Certificateholders
on the related Distribution Date. The Servicer is obligated to fund Prepayment
Interest Shortfalls that exceed Prepayment Interest Excess, but only in an
amount up to the total of the Servicing Fees for the applicable Distribution
Date. See "The Pooling and Servicing Agreement -- Prepayment Interest
Shortfalls" in this prospectus supplement. Any of these payments by the Servicer
is referred to in this prospectus supplement as "Compensating Interest." Any
Prepayment Interest Shortfalls not funded by the Servicer ("Net Prepayment
Interest Shortfalls") will reduce the Interest Remittance Amount available for
distribution on the related Distribution Date.
[DETERMINATION OF INDEX
On the second Business Day preceding the beginning of each Accrual Period
(each date, an "Index Determination Date"), the Trustee will determine the Index
for that Accrual Period.
On each Index Determination Date, the Index for the next succeeding Accrual
Period will be established by the Trustee as follows:
[To be provided as applicable.]]
DISTRIBUTIONS OF PRINCIPAL
Distributions of principal on the Class [ ] Certificates will be made
primarily from [to be provided as applicable.]
o The "Principal Distribution Amount" for [each Mortgage Pool for] any
Distribution Date will be equal to the sum of [to be provided as
applicable].
o The "Principal Remittance Amount" for [each Mortgage Pool for] any
Distribution Date will be equal to the sum of [to be provided as
applicable.]
o The "Due Period" for any Distribution Date is the one-month period
beginning on [the second day of the calendar month immediately
preceding the month in which that Distribution Date occurs and ending
on the first day of the month in which that Distribution Date occurs.]
o The "Prepayment Period" for each Distribution Date is the one-month
period beginning on the Cut-off Date, in the case of [the first
Distribution Date, and on the day immediately following the close of
the immediately preceding Prepayment Period, in the case of each
subsequent Distribution Date, and ending on the [ ]th day (or if that
day is not a Business Day, the immediately preceding Business Day) of
the month in which that Distribution Date occurs].
On each Distribution Date, the Principal Distribution Amount will be
distributed in the following order of priority:
[To be provided as applicable].
CREDIT ENHANCEMENT
Credit enhancement for the Offered Certificates consists of [the Insurance
Policy, the subordination of the Subordinate Certificates, the priority of
application of Realized Losses (as defined in this prospectus supplement) and
overcollateralization], in each case as described in this prospectus supplement.
[The Insurance Policy is described under "The Insurance Policy" below.]
[SUBORDINATION. The rights of holders of the Class [ ] Certificates to
receive distributions with respect to the Mortgage Loans will be subordinated,
to the extent described in this prospectus supplement, to the rights of holders
of the Senior Certificates, as described under "-- Distributions of Interest"
and "-- Distributions of Principal." This subordination is intended to enhance
the likelihood of regular receipt by holders of Senior Certificates of the full
amount of interest and principal distributable on the Senior Certificates, and
to afford holders of Senior Certificates limited protection against Realized
Losses incurred on the Mortgage Loans.
No amounts will be distributed to the holder of the Class [ ] Certificate
until all amounts due to the holders of the Class [ ] Certificates have been
distributed.
The limited protection afforded to holders of Class [ ] Certificates by
means of the subordination of Subordinate Certificates having a lower priority
of distribution will be accomplished by the preferential right of holders of
Offered Certificates to receive, prior to any distribution in respect of
interest or principal, respectively, being made on any Distribution Date in
respect of Certificates having a lower priority of distribution, the amounts of
interest due them and principal available for distribution, respectively, on
that Distribution Date.]
[ALLOCATION OF LOSSES. If a Mortgage Loan becomes a Liquidated Mortgage
Loan during any Prepayment Period, the related Net Liquidation Proceeds, to the
extent allocable to principal, may be less than the outstanding principal
balance of the Mortgage Loan. The amount of that insufficiency is a "Realized
Loss." Realized Losses on Mortgage Loans will have the effect of reducing
amounts distributable in respect of, first, the Class [ ] Certificate (both
through the application of Monthly Excess Interest to fund the deficiency and
through a reduction in the Overcollateralization Amount for the related
Distribution Date), and second, the Class [ ] Certificates, before reducing
amounts distributable in respect of the Senior Certificates.
o A "Liquidated Mortgage Loan" is, in general, a defaulted Mortgage Loan
as to which the Servicer has determined that all amounts that it
expects to recover in respect of that Mortgage Loan have been
recovered (exclusive of any possibility of a deficiency judgment).
To the extent that Realized Losses occur, those Realized Losses will reduce
the Total Loan Balance, and thus may reduce the Overcollateralization Amount. As
described in this prospectus supplement, the Overcollateralization Amount is
created, increased and maintained by application of Monthly Excess Cashflow to
make distributions of principal on the Offered Certificates.
If on any Distribution Date after giving effect to all Realized Losses
incurred during the related Due Period and distributions of principal on that
Distribution Date, the total Certificate Principal Amount of the Certificates
exceeds the Total Loan Balance for that Distribution Date (this excess, an
"Applied Loss Amount"), the Class Principal Amount of the Class [ ] Certificates
will be reduced by that amount, until the Class Principal Amount of the Class [
] Certificates has been reduced to zero. The Class Principal Amounts of the
Senior Certificates will not be reduced by allocation of Applied Loss Amounts.
Holders of Class [ ] Certificates will not receive any distributions in
respect of Applied Loss Amounts, except to the extent of available Monthly
Excess Cashflow as described below.]
[OVERCOLLATERALIZATION. The weighted average Net Mortgage Rate of the
Mortgage Loans is generally expected to be higher than the weighted average of
the interest rates of the Certificates, thus generating excess interest
collections. To the extent described in this prospectus supplement, Monthly
Excess Interest will be applied on any Distribution Date in reduction of the
Certificate Principal Amounts of the Offered Certificates. This application of
interest collections as distributions of principal will cause the total
Certificate Principal Amount of the Certificates to amortize more rapidly than
the Total Loan Balance, creating, increasing and maintaining
overcollateralization. However, Realized Losses will reduce
overcollateralization, and could result in an Overcollateralization Deficiency.
For each Distribution Date, the Monthly Excess Interest and any Excess
Principal will be the "Monthly Excess Cashflow," which will be in the following
order of priority:
[To be provided as applicable.]]
[THE RESERVE FUND
The Reserve Fund will be an asset of the Trust Fund but not of the REMIC.
The holder of the Residual Certificate will be the owner of the Reserve Fund,
and amounts on deposit in the Reserve Fund will be invested at the direction of
the holder of the Residual Certificate as provided in the Pooling and Servicing
Agreement. The Reserve Fund will consist of [to be provided as applicable].
Withdrawals will be made from the Reserve Fund for the benefit of the
Offered Certificates as described under "-- Overcollateralization" above.
The only asset of the Reserve Fund on the Closing Date will be [to be
provided as applicable.]
If on any Distribution Date the sum of the amount on deposit in the Reserve
Fund and the Overcollateralization Amount exceeds the Targeted
Overcollateralization Amount, the excess will be released to the Residual
Certificateholder, provided that the amount remaining in the Reserve Fund equals
or exceeds the reserve fund requirement specified in the Pooling and Servicing
Agreement.]
FINAL SCHEDULED DISTRIBUTION DATE
It is expected that scheduled distributions on the Mortgage Loans, assuming
no defaults or losses that are not covered by the limited credit support
described in this prospectus supplement, will be sufficient to make timely
distributions of interest on the Offered Certificates and to reduce the Class
Principal Amount of each Class of the Senior Certificates to zero not later than
[ ] and of the Class [ ] Certificates not later than [ ]. As to each Class, the
actual final Distribution Date may be earlier or later, and could be
substantially earlier, than the applicable Final Scheduled Distribution Date.
REPORTS TO CERTIFICATEHOLDERS
On each Distribution Date the Trustee will make available to each
Certificateholder a statement containing the following information:
o the amount of principal distributed on that date to holders of each
Class of Offered Certificates;
o the amount of interest distributed on that date to holders of each
Class of Offered Certificates;
o the Interest Rate applicable to each Class of Offered Certificates;
o the Class Principal Amount of each Class of Offered Certificates after
distributions on that date;
o the amount of the Servicing Fees and Trustee Fee paid with respect to
that date;
o the Total Loan Balance as of the related Distribution Date;
o the amount of any Realized Losses on the Mortgage Loans during the
immediately preceding calendar month and total Realized Losses since
the Cut-off Date;
o the number and aggregate Principal Balance of Mortgage Loans (1)
remaining outstanding, (2) delinquent by one, two, three or four or
more monthly payments, (3) in foreclosure, and (4) with respect to REO
Property;
o any amount distributed to the holder of the Residual Certificate; and
o other information to the extent provided in the Pooling and Servicing
Agreement.
OPTIONAL PURCHASE OF MORTGAGE LOANS; TERMINATION OF THE TRUST FUND
On any Distribution Date after the date on which the Total Loan Balance is
less than [ ]% of the Cut-off Date Balance, the holder of the [ ] will (subject
to the terms of the Pooling and Servicing Agreement) have the option to purchase
the Mortgage Loans, any REO Property and any other related property for a price
equal to the sum of (1) 100% of the total outstanding principal balance of the
Mortgage Loans plus accrued interest on the Mortgage Loans at the applicable
Mortgage Rate, (2) the fair market value of all other property being purchased,
(3) any unpaid Servicing Fees and other amounts payable to the Servicer and the
Trustee and (4) [ ]; provided, that the purchase price will not be less than the
total Certificate Principal Amount of the Offered Certificates, plus accrued
interest on the Offered Certificates. If the holder of the [ ] does not exercise
that option, the [ ] will then have the same purchase option. If either purchase
option is exercised, the Trust Fund will be terminated (this event, an "Optional
Termination").
If the [ ] does not exercise its option as described above when it is first
entitled to do so, [to be provided as applicable].
THE TRUSTEE
[ ], a [ ] banking corporation, will be the Trustee under the Pooling and
Servicing Agreement (the "Trustee"). The Trustee will be paid a monthly fee (the
"Trustee Fee") calculated as a fixed percentage equal to [ ]% annually (the
"Trustee Fee Rate") on the Total Loan Balance. As additional compensation, the
Trustee will be entitled to [to be provided as applicable]. The Trustee's
"Corporate Trust Office" for purposes of presentment and surrender of the
Offered Certificates for the final distribution on the Offered Certificates and
for all other purposes is located at [ ], or any address as the Trustee may
designate from time to time by notice to the Certificateholders, the Depositor
and the Servicer.
[THE INSURANCE POLICY
The following information has been supplied by [ ] (the "Insurer") for
inclusion in this Prospectus Supplement. Accordingly, the Depositor, the
Servicer and the Underwriter do not make any representation as to the accuracy
and completeness of this information.
The Insurer does not accept any responsibility for the accuracy or
completeness of this Prospectus Supplement or any information or disclosure
contained in this prospectus supplement, or omitted from this prospectus
supplement, other than with respect to the accuracy of the information regarding
the Certificate Guaranty Insurance Policy (the "Insurance Policy") and the
Insurer set forth below under this heading "The Insurance Policy." Additionally,
the Insurer makes no representation regarding the Certificates or the
advisability of investing in the Certificates.
THE INSURER
[To be provided as applicable.]
INSURER FINANCIAL INFORMATION
[To be provided as applicable.]
WHERE YOU CAN OBTAIN ADDITIONAL INFORMATION ABOUT THE INSURER
[To be provided as applicable.]
FINANCIAL STRENGTH RATINGS OF THE INSURER
[To be provided as applicable.]
THE INSURANCE POLICY
[To be provided as applicable.]]
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
The Mortgage Pool will consist of approximately [ ] [description of
Mortgage Loans] Mortgage Loans with original terms to maturity from the first
due date of the scheduled monthly payment (a "Monthly Payment") of not more than
[30] years, having a total Principal Balance as of the Cut-off Date (after
giving effect to Monthly Payments due on that date) of approximately $[ ] (the
"Cut-off Date Balance"). The Mortgage Loans were originated or acquired by the
originators described in this prospectus supplement generally in accordance with
the underwriting guidelines described in this prospectus supplement.
Wherever reference is made in this prospectus supplement to a percentage of
some or all of the Mortgage Loans, the percentage is determined (unless
otherwise specified) on the basis of the total Principal Balance of the related
Mortgage Loans as of the Cut-off Date.
All of the Mortgage Loans are secured by mortgages or deeds of trust or
other similar security instruments creating [to be provided as applicable.] The
Mortgage Loans to be included in the Mortgage Pool will be acquired by the
Depositor from [ ] ("[ ]"), which acquired the Mortgage Loans from [ ]. See
"[Originator/Servicer]" and "The Pooling and Servicing Agreement -- Assignment
of Mortgage Loans" in this prospectus supplement.
Pursuant to its terms, each Mortgage Loan, other than a loan secured by a
condominium unit, is required to be covered by a standard hazard insurance
policy in an amount generally equal to the lower of the unpaid principal amount
of the Mortgage Loan or the replacement value of the improvements on the
Mortgaged Property. Generally, a condominium association is responsible for
maintaining hazard insurance covering the entire building. See "Description of
Mortgage and Other Insurance Hazard -- Insurance on the Loans -- Standard Hazard
Insurance Policies" in the Prospectus.
[Approximately [ ]% of the Mortgage Loans have Loan-to-Value Ratios in
excess of 80%. None of those Mortgage Loans or any other Mortgage Loans are
covered by primary mortgage insurance policies. The "Loan-to-Value Ratio" of a
Mortgage Loan at any time is the ratio of the principal balance of the Mortgage
Loan at the date of determination to (a) in the case of a purchase, the lesser
of the sale price of the Mortgaged Property and its appraised value at the time
of sale, or (b) in the case of a refinance or modification, the appraised value
of the Mortgaged Property at the time of refinance or modification.]
[Approximately [ ]% of the Mortgage Loans are fully amortizing.
Approximately [ ]% of the Mortgage Loans will have original terms to maturity
that are shorter than their amortization schedules, leaving final payments
("Balloon Payments") due on their maturity dates that are significantly larger
than other monthly payments (these loans, "Balloon Loans"). The Balloon Loans
are generally expected to have original terms to maturity of [15] years. The
ability of the borrower to repay a Balloon Loan at maturity frequently will
depend on the borrower's ability to refinance the loan. Any loss on a Balloon
Loan as a result of the borrower's inability to refinance the loan will be borne
by Certificateholders, to the extent not covered by the applicable credit
enhancement. Neither the Servicer nor the Trustee will make any Advances with
respect to delinquent Balloon Payments.]
ADJUSTABLE RATE MORTGAGE LOANS
[Describe adjustment of adjustable rate Mortgage Loans, as applicable.]
[THE INDEX
The Index applicable to the determination of the Mortgage Rates for the
Adjustable Rate Mortgage Loans will be [described as applicable].]
THE MORTGAGE LOANS
The Mortgage Loans are expected to have the following approximate total
characteristics as of the Cut-off Date. Prior to the issuance of the
Certificates, the Mortgage Loans may be removed from the Trust Fund as a result
of incomplete documentation or otherwise, if the Depositor deems removal
necessary or appropriate. In addition, a limited number of other mortgage loans
may be included in the Trust Fund prior to the issuance of the Offered
Certificates.
Number of Mortgage Loans...................
Initial Pool Balance.......................$
Mortgage Rates: %
Weighted Average......................
Range................................. % to %
Weighted Average Remaining Term to
Maturity (in months).......................
The Principal Balances of the Mortgage Loans range from approximately $[ ]
to approximately $[ ]. The Mortgage Loans have an average Principal Balance of
approximately $[ ].
The weighted average Loan-to-Value Ratio at origination of the Mortgage
Loans is approximately [ ]%.
No more than approximately [ ]% of the Mortgage Loans are secured by
Mortgaged Properties located in any one zip code area.
The following tables set forth as of the Cut-off Date the number, total
Principal Balance and percentage of the Mortgage Loans having the stated
characteristics shown in the tables in each range. (The sum of the amounts of
the percentages in the following tables may not equal the totals due to
rounding.)
CUT-OFF DATE PRINCIPAL BALANCES
PERCENTAGE OF
MORTGAGE LOANS
RANGE OF NUMBER OF TOTAL BY TOTAL
PRINCIPAL BALANCES($) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------- -------------- ----------------- -----------------
$ %
---------- ------------- ---------
Total $ 100.00%
The average Cut-off Date Principal Balance is approximately $[ ].
LOAN-TO-VALUE RATIIOS
PERCENTAGE OF
MORTGAGE LOANS
RANGE OF ORIGINAL NUMBER OF TOTAL BY TOTAL
PRINCIPAL BALANCES(%) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------- -------------- ----------------- -----------------
$ %
---------- ------------- ---------
Total $ 100.00%
The weighted average original Loan-to-Value Ratio is approximately [ ]%.
MORTGAGE RATES
PERCENTAGE OF
MORTGAGE LOANS
RANGE OF NUMBER OF TOTAL BY TOTAL
MORTAGE RATES(%) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------- -------------- ----------------- -----------------
$ %
---------- ------------- ---------
Total $ 100.00%
- ---------
* Reflects current Mortgage Rates of Adjustable Rate Mortgage Loans.
The weighted average Mortgage Rate is approximately [ ]% per annum.
LOAN TYPES
PERCENTAGE OF
MORTGAGE LOANS
NUMBER OF TOTAL BY TOTAL
LOAN TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------- -------------- ----------------- -----------------
$ %
---------- ------------- ---------
Total $ 100.00%
ORIGINAL TERMS TO MATURITY
PERCENTAGE OF
MORTGAGE LOANS
RANGE OF NUMBER OF TOTAL BY TOTAL
MATURITIES (MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------ -------------- ----------------- -----------------
$ %
---------- ------------- ---------
Total $ 100.00%
The weighted average original term to maturity is approximately [ ] months.
REMAINING TERMS TO MATURITY
PERCENTAGE OF
MORTGAGE LOANS
REMAINING TERM TO NUMBER OF TOTAL BY TOTAL
MATURITY (MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------- -------------- ----------------- -----------------
$ %
---------- ------------- ---------
Total $ 100.00%
The weighted average remaining term to maturity of the fully amortizing
Mortgage Loans is approximately [ ] months.
GEOGRAPHIC DISTRIBUTION
PERCENTAGE OF
MORTGAGE LOANS
NUMBER OF TOTAL BY TOTAL
STATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------- -------------- ----------------- -----------------
$ %
---------- ------------- ---------
Total $ 100.00%
PROPERTY TYPES
PERCENTAGE OF
MORTGAGE LOANS
NUMBER OF TOTAL BY TOTAL
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------- -------------- ----------------- -----------------
$ %
---------- ------------- ---------
Total $ 100.00%
LOAN PURPOSES
PERCENTAGE OF
MORTGAGE LOANS
NUMBER OF TOTAL BY TOTAL
LOAN PURPOSE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------- -------------- ----------------- -----------------
$ %
---------- ------------- ---------
Total $ 100.00%
OCCUPANCY STATUS
PERCENTAGE OF
MORTGAGE LOANS
NUMBER OF TOTAL BY TOTAL
OCCUPANCY STATUS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------- -------------- ----------------- -----------------
$ %
---------- ------------- ---------
Total $ 100.00%
DOCUMENTATION TYPES
PERCENTAGE OF
MORTGAGE LOANS
NUMBER OF TOTAL BY TOTAL
DOCUMENTATION TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------ -------------- ----------------- -----------------
$ %
---------- ------------- ---------
Total $ 100.00%
CREDIT GRADES
PERCENTAGE OF
MORTGAGE LOANS
NUMBER OF TOTAL BY TOTAL
CREDIT GRADE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------- -------------- ----------------- -----------------
$ %
---------- ------------- ---------
Total $ 100.00%
PREPAYMENT PENALTIES
PERCENTAGE OF
MORTGAGE LOANS
PREPAYMENT NUMBER OF TOTAL BY TOTAL
PENALTY MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------ -------------- ----------------- -----------------
$ %
---------- ------------- ---------
Total $ 100.00%
MAXIMUM RATES OF THE ADJUSTABLE RATE MORTGAGE LOANS
PERCENTAGE OF
MORTGAGE LOANS
RANGE OF NUMBER OF TOTAL BY TOTAL
MAXIMUM RATES(%) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------- -------------- ----------------- -----------------
$ %
---------- ------------- ---------
Total $ 100.00%
The weighted average Maximum Rate of the Adjustable Rate Mortgage Loans is
approximately [ ]% per annum.
MINIMUM RATES OF THE ADJUSTABLE RATE MORTGAGE LOANS
PERCENTAGE OF
MORTGAGE LOANS
RANGE OF NUMBER OF TOTAL BY TOTAL
MINIMUM RATES(%) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------- -------------- ----------------- -----------------
$ %
---------- ------------- ---------
Total $ 100.00%
The weighted average Minimum Rate of the Adjustable Rate Mortgage Loans
is approximately [ ]% per annum.
GROSS MARGINS OF THE ADJUSTABLE RATE MORTGAGE LOANS
PERCENTAGE OF
MORTGAGE LOANS
RANGE OF GROSS NUMBER OF TOTAL BY TOTAL
MARGINS(%) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------- -------------- ----------------- -----------------
$ %
---------- ------------- ---------
Total $ 100.00%
The weighted average Gross Margin of the Adjustable Rate Mortgage Loans
is approximately % per annum.
NEXT ADJUSTMENT DATE OF THE ADJUSTABLE RATE MORTGAGE LOANS
PERCENTAGE OF
MORTGAGE LOANS
NEXT NUMBER OF TOTAL BY TOTAL
ADJUSTMENT DATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------- -------------- ----------------- -----------------
$ %
---------- ------------- ---------
Total $ 100.00%
INITIAL FIXED TERM/SUBSEQUENT ADJUSTABLE RATE TERM
OF THE ADJUSTABLE RATE MORTGAGE LOANS
INITIAL FIXED MORTGAGE LOANS
TERM/SUBSEQUENT NUMBER OF TOTAL BY TOTAL
ADJUSTMENT RATE TERM MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------- -------------- ----------------- -----------------
$ %
---------- ------------- ---------
Total $ 100.00%
PERIODIC CAPS OF THE ADJUSTABLE RATE MORTGAGE LOANS
PERCENTAGE OF
MORTGAGE LOANS
NUMBER OF TOTAL BY TOTAL
PERIODIC CAP(%) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------- -------------- ----------------- -----------------
$100.00%
Total....................... $100.00%
INITIAL CAPS OF THE ADJUSTABLE RATE MORTGAGE LOANS
PERCENTAGE OF
MORTGAGE LOANS
NUMBER OF TOTAL BY TOTAL
INITIAL CAP($%) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------- -------------- ----------------- -----------------
Total....................... $100.00%
[SUBSEQUENT MORTGAGE LOANS
The obligation of the Trust Fund to purchase additional Mortgage Loans (the
"Subsequent Mortgage Loans") on [any] date, as specified in the Pooling and
Servicing Agreement (each, a "Subsequent Transfer Date") will be subject to the
Subsequent Mortgage Loans meeting the following criteria: [to be provided as
applicable]. These criteria will be based on the characteristics of the
Subsequent Mortgage Loans on the related Subsequent Transfer Date.
The characteristics of Subsequent Mortgage Loans may vary significantly
from time to time subject to the requirements described above, and may bear no
particular relationship to the characteristics of the initial Mortgage Loans at
any time. It is expected that a substantial portion of the Subsequent Mortgage
Loans will be [to be provided as applicable.]]
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Mortgage Pool and the
Mortgaged Properties is based upon the Mortgage Pool as constituted at the close
of business on the Cut-off Date, as adjusted for Monthly Payments due on or
before that date. A Current Report on Form 8-K will be available to purchasers
of the Offered Certificates and will be filed, together with the Pooling and
Servicing Agreement, with the Securities and Exchange Commission within fifteen
days after the initial issuance of the Offered Certificates. In the event that
Mortgage Loans are removed from or added to the Mortgage Pool as set forth in
this prospectus supplement under "Description of the Mortgage Pool," the removal
or addition, to the extent material, will be noted in the Current Report on Form
8-K.
[ORIGINATOR/SERVICER
The information in this section has been provided by [servicer]. None of
the Depositor, [ ], the Trustee, the Insurer, the Underwriter or any of their
respective affiliates has made or will make any representation as to the
accuracy or completeness of this information.
GENERAL
[Description of the Originator/Servicer.]
LENDING ACTIVITIES AND LOAN SALES
[ ] originates real estate loans through its network of offices and loan
origination centers. [ ] also participates in secondary market activities by
originating and selling mortgage loans while continuing to service the majority
of the loans sold. In other cases [ ]'s whole loan sale agreements provide for
the transfer of servicing rights.
[ ]'s primary lending activity is funding loans to enable borrowers to
purchase or refinance residential real property, which loans are secured by
first or second liens on the related real property. [ ]'s single-family real
estate loans are predominantly "conventional" mortgage loans, meaning that they
are not insured by the Federal Housing Administration or partially guaranteed by
the U.S. Department of Veterans Affairs.
The following table summarizes [ ]'s one- to four-family residential
mortgage loan origination and sales activity for the periods shown below. Sales
activity may include sales of mortgage loans purchased by [ ] from other loan
originators.
Year Ended December 31, Three Months Ended March 31,
----------------------- ----------------------------
(Dollar in thousands) (Dollars in thousands)
------------------------------ ---------------------
Originated and $ $ $ $ $ $ $
purchased......
Sales.......... $ $ $ $ $ $ $
LOAN SERVICING
The Servicer services all of the mortgage loans it originates that are
retained in its portfolio and continues to service at least a majority of the
loans that have been sold to investors. Servicing includes collecting and
remitting loan payments, accounting for principal and interest, contacting
delinquent borrowers, and supervising foreclosure in the event of unremedied
defaults. The Servicer's servicing activities are audited periodically by
applicable regulatory authorities. Some financial records of the Servicer
relating to its loan servicing activities are reviewed annually as part of the
audit of the Servicer's financial statements conducted by its independent
accountants.
UNDERWRITING GUIDELINES
The Mortgage Loans were originated generally in accordance with guidelines
(the "Underwriting Guidelines") established by [ ]. The Underwriting Guidelines
are primarily intended to evaluate the value and adequacy of the mortgaged
property as collateral and are also intended to consider the borrower's credit
standing and repayment ability. On a case-by-case basis and only with the
approval of two or more senior lending officers, [ ] may determine that, based
upon compensating factors, a prospective borrower not strictly qualifying under
the underwriting risk category guidelines described below warrants an
underwriting exception. Compensating factors may include, but are not limited
to, low loan-to-value ratio, low debt-to-income ratio, good credit history,
stable employment and time in residence at the applicant's current address. It
is expected that a substantial number of the Mortgage Loans will have been
originated under underwriting exceptions.
[Describe originator's underwriting guidelines.]
SERVICING PRACTICES AND EXPERIENCE
In general, when a borrower fails to make a required payment on a
residential mortgage loan, [ ] attempts to cause the deficiency to be cured by
corresponding with the borrower. In most cases deficiencies are cured promptly.
Pursuant to [ ]'s customary procedures for residential mortgage loans serviced
by it for its own account, [ ] generally mails a notice of intent to foreclose
to the borrower after the loan has become 31 days past due (two payments due but
not received) and, within one month thereafter, if the loan remains delinquent,
typically institutes appropriate legal action to foreclose on the property
securing the loan. If foreclosed, the property is sold at public or private sale
and may be purchased by [ ]. In California, real estate lenders are generally
unable as a practical matter to obtain a deficiency judgment against the
borrower on a loan secured by single-family real estate.
The following table sets forth the delinquency and loss experience at the
dates indicated for residential (one- to four-family and multifamily) first lien
mortgage loans serviced by the Servicer that were originated or purchased by the
Servicer:
[To be provided as applicable.]
There can be no assurance that the delinquency and loss experience of the
Mortgage Loans will correspond to the loss experience of the Servicer's mortgage
portfolio set forth in the table above. The statistics shown above represent the
delinquency and loss experience for the Servicer's total servicing portfolio
only for the periods presented, whereas the total delinquency and loss
experience on the Mortgage Loans will depend on the results over the life of the
Trust Fund. The Servicer's portfolio includes mortgage loans with payment and
other characteristics that are not representative of the payment and other
characteristics of the Mortgage Loans. A substantial number of the Mortgage
Loans may also have been originated based on Underwriting Guidelines that are
less stringent than those generally applicable to the servicing portfolio
reflected in the table. If the residential real estate market experiences an
overall decline in property values, the actual rates of delinquencies,
foreclosures and losses could be higher than those previously experienced by the
Servicer. In addition, adverse economic conditions (which may or may not affect
real property values) may affect the timely payment by borrowers of scheduled
payments of principal and interest on the Mortgage Loans and, accordingly, the
actual rates of delinquencies, foreclosures and losses on to the Mortgage
Loans.]
THE POOLING AND SERVICING AGREEMENT
GENERAL
The Certificates will be issued pursuant to a Pooling and Servicing
Agreement (the "Pooling and Servicing Agreement") dated as of [ ] among the
Depositor, the Servicer and the Trustee. Reference is made to the Prospectus for
important information in addition to that set forth in this Prospectus
Supplement regarding the terms and conditions of the Pooling and Servicing
Agreement and the Offered Certificates. Offered Certificates in certificated
form will be transferable and exchangeable at the Corporate Trust Office of the
Trustee. [ ] serve as Certificate Registrar and Paying Agent.
ASSIGNMENT OF MORTGAGE LOANS
The Depositor will assign the Mortgage Loans to the Trustee, together with
all principal and interest received with respect to the Mortgage Loans on and
after the Cut-off Date, other than Monthly Payments due on or before that date.
Each Mortgage Loan will be identified in a schedule appearing as an exhibit to
the Pooling and Servicing Agreement that will specify with respect to each
Mortgage Loan, among other things, the original principal balance and the
Principal Balance as of the close of business on the Cut-off Date, the Mortgage
Rate, the Monthly Payment and the maturity date.
The Trustee will, concurrently with the assignment to it of the property
constituting the Trust Fund, authenticate and deliver the Certificates.
[As to each Mortgage Loan, the following documents are generally required
to be delivered to the Trustee or its custodian (the "Custodian") in accordance
with the Pooling and Servicing Agreement:
o the related original Mortgage Note endorsed without recourse to the
Trustee or in blank;
o the original Mortgage with evidence of recording indicated on the
original Mortgage (or, if the original recorded Mortgage has not yet
been returned by the recording office, a copy certified to be a true
and complete copy of the Mortgage sent for recording), the original
security agreement and related documents;
o an original assignment of the Mortgage to the Trustee or in blank in
recordable form and originals of all intervening assignments, if any,
showing a complete chain of title from origination to the Trustee;
o the policies of title insurance issued with respect to each Mortgage
Loan; and
o the originals of any assumption, modification, extension or guaranty
agreements.
Where necessary to protect the interest of the Trustee in the Mortgage Loans,
the assignments of each Mortgage to the Trustee are required to be submitted for
recording promptly after the Closing Date.]
Under the terms of the agreements (the "Mortgage Loan Purchase Agreements")
pursuant to which [ ] purchased the Mortgage Loans from [the Originator] and the
Depositor purchased the Mortgage Loans from [ ], the Custodian [has conducted an
initial review of the mortgage loan documents and has notified] the Depositor, [
] and [the Originator] as to each mortgage loan document that either has not yet
been delivered to the Depositor as required or appears to be not properly
executed, not in conformity with the description of the Mortgage Loan on the
Mortgage Loan schedule or otherwise defective. If any Mortgage Loan document is
not delivered or any material defect in a document is not cured within the time
period specified in the Mortgage Loan Purchase Agreements, [the Originator] will
be required to repurchase the affected Mortgage Loan for a price equal to the
unpaid principal balance of the Mortgage Loan plus accrued interest on the
Mortgage Loan (the "Repurchase Price") or, in some circumstances, to substitute
another mortgage loan.
[[The Originator] has made to [ ] and the Depositor under the Mortgage Loan
Purchase Agreements representations and warranties that include representations
and warranties similar to those summarized in the Prospectus under the heading
"Description of the Agreements -- Material Terms of the Pooling and Servicing
Agreements and Underlying Servicing Agreements -- Representations and
Warranties; Repurchases." [ ]'s and the Depositor's rights under these
representations and warranties will be assigned to the Trustee for the benefit
of Certificateholders. In the event of a breach of any of these representations
or warranties that materially and adversely affects the value of any Mortgage
Loan or the interests of Certificateholders or the Insurer, [the Originator]
will be obligated, within 60 days following its discovery of a breach or receipt
of notice of a breach to cure the breach or purchase the affected Mortgage Loan
from the Trust Fund for the Repurchase Price or, in some circumstances, to
substitute another mortgage loan.]
To the extent that any Mortgage Loan as to which a representation or
warranty has been breached is not repurchased by [the Originator] and a Realized
Loss occurs on the Mortgage Loan, holders of Offered Certificates, in particular
the Class [ ]Certificates, may incur a loss if the applicable credit enhancement
is not sufficient to cover that loss.
VOTING RIGHTS
Voting rights of Certificateholders under the Pooling and Servicing
Agreement will be allocated among the Classes of Certificates and among the
Certificates of each Class as provided in the Pooling and Servicing Agreement.
GENERAL SERVICING PROVISIONS
The Mortgage Loans will be serviced by the Servicer in accordance with the
provisions of the Pooling and Servicing Agreement.
[The Servicer will be required to use reasonable efforts to collect all
amounts due under each Mortgage Loan and to administer the Mortgage Loans in
accordance with generally accepted servicing practices. See
"[Originator/Servicer] -- Servicing Practices and Experience." The Servicer will
be required to deposit all amounts collected and recovered with respect to the
Mortgage Loans within three Business Days of receipt of those amounts in a
separate account in the name of the Trustee (the "Collection Account"); on the [
] day of each month, or if that date is not a Business Day, on the immediately
following Business Day, the Servicer will be required to transfer the Interest
Remittance Amount and the Principal Remittance Amount to a separate account
maintained by the Trustee for the benefit of the Certificateholders (the
"Certificate Account").
The Servicer will be prohibited under the Pooling and Servicing Agreement
from making any material modification to the terms of a Mortgage Loan, including
a change in the Mortgage Rate other than as provided in the Mortgage Note,
deferral or forgiveness of a Monthly Payment or extension of the maturity date,
unless the Mortgage Loan is in default or default is, in the judgment of the
Servicer, reasonably foreseeable.
The Servicer will also be prohibited from waiving any prepayment premium
except in the case of a default or imminent default, and then may waive the
prepayment premium only if the waiver would maximize amounts collected under the
Mortgage Loan.]
PREPAYMENT INTEREST SHORTFALLS
When a borrower prepays a Mortgage Loan in full or in part between Monthly
Payment dates, the borrower pays interest on the amount prepaid only from the
last Monthly Payment date to the date of prepayment, with a resulting reduction
in interest payable for the month during which the prepayment is made. [Any
Prepayment Interest Shortfall resulting from a prepayment in full or in part is
required to be paid by the Servicer, but only to the extent that the shortfall
does not exceed the total of the Servicing Fees for the applicable Distribution
Date.]
ADVANCES
[The Servicer will be obligated to make advances ("Advances") with respect
to delinquent payments of principal of and interest on the Mortgage Loans (other
than Balloon Payments), adjusted to the related Mortgage Rate less the Servicing
Fee Rate, to the extent that those Advances, in its judgment, are recoverable
from future payments and collections, insurance payments or proceeds of
liquidation of a Mortgage Loan. The Trustee will be obligated to make any
required Advance if the Servicer fails in its obligation to do so, to the extent
provided in the Pooling and Servicing Agreement. The Servicer or the Trustee, as
applicable, will be entitled to recover any Advances made by it with respect to
a Mortgage Loan out of late payments on the Mortgage Loan or out of related
liquidation proceeds and insurance proceeds or, if the Servicer determines that
those Advances are not recoverable from those sources, then from collections on
other Mortgage Loans. These reimbursements may result in Realized Losses.
The purpose of making Advances is to maintain a regular cash flow to
Certificateholders, rather than to guarantee or insure against losses. No party
will be required to make any Advances with respect to reductions in the amount
of the Monthly Payments on Mortgage Loans due to reductions made by a bankruptcy
court in the amount of a Monthly Payment owed by a borrower or a reduction of
the applicable Mortgage Rate by application of the Relief Act.]
SERVICING ADVANCES
The Servicer will be required to advance its own funds for particular
purposes, including preserving and restoring Mortgaged Properties, payment of
delinquent taxes and insurance premiums, managing and disposing of REO
Properties, and legal proceedings. Advances for these and similar purposes are
referred to as "Servicing Advances." The Servicer will be reimbursed for
Servicing Advances made with respect to a Mortgage Loan out of late payments on
the Mortgage Loan, to the extent provided in the Pooling and Servicing
Agreement, or out of related liquidation proceeds and insurance proceeds, if the
Servicer determines that Servicing Advances are not recoverable from those
sources, then from collections and other recoveries on other Mortgage Loans. The
Pooling and Servicing Agreement will require that the Servicer not make a
Servicing Advance that is not expected to be recoverable from proceeds of the
related Mortgage Loan unless, in the Servicer's judgment, making that Servicing
Advance is in the best interests of the Certificateholders.
COLLECTION OF TAXES AND INSURANCE PREMIUMS
The Servicer will, to the extent required by the related loan documents,
maintain escrow accounts for the collection of hazard insurance premiums as well
as real estate taxes and similar items with respect to the Mortgage Loans, and
will make Servicing Advances with respect to delinquencies in required escrow
payments by the related borrowers.
INSURANCE COVERAGE
The Servicer is required to obtain and thereafter maintain in effect a bond
or similar form of insurance coverage (which may provide blanket coverage)
insuring against loss occasioned by the errors and omissions of their respective
officers and employees.
PURCHASES OF DEFAULTED MORTGAGE LOANS
The Servicer may, but will not be obligated to, purchase any Mortgage Loan
that becomes three months or more delinquent in payment or as to which the
Servicer has started foreclosure proceedings, for a price equal to the unpaid
principal balance plus interest accrued and unpaid.
EVIDENCE AS TO COMPLIANCE
The Pooling and Servicing Agreement will provide that each year a firm of
independent accountants will furnish a statement to the Trustee to the effect
that the firm has examined the necessary documents and records relating to the
servicing of mortgage loans by the Servicer and that, on the basis of that
examination, the firm is of the opinion that the servicing has been conducted in
accordance with applicable accounting standards, except for those exceptions as
the firm believes to be immaterial and those exceptions set forth in the
statement.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Servicer will be paid a monthly fee (the "Servicing Fee") with respect
to each Mortgage Loan calculated as [ ]% annually (the "Servicing Fee Rate") on
the outstanding principal balance of each Mortgage Loan. The Servicer will also
be entitled to receive, to the extent provided in the Pooling and Servicing
Agreement, additional compensation, in the form of any interest or other income
earned on funds it has deposited in the Collection Account pending remittance to
the Trustee, as well as customary fees and charges paid by borrowers (other than
prepayment premiums).
[The Servicing Fee is subject to reduction as described above under "--
Prepayment Interest Shortfalls."]
SUBSERVICING
The Servicer will be prohibited from assigning the responsibility for
servicing the Mortgage Loans, except as permitted by the Pooling and Servicing
Agreement, but it may employ one or more subservicers. If the Servicer chooses
to employ subservicers, the Servicer will remain liable for fulfillment of its
obligations under the Pooling and Servicing Agreement, and will be considered to
have itself received any payment received by a subservicer whether or not the
subservicer actually remits that payment.
RESIGNATION OR REMOVAL OF THE SERVICER
The Servicer will agree in the Pooling and Servicing Agreement not to
resign except with the consent of the Trustee, unless the Servicer delivers to
the Trustee an opinion of legal counsel to the effect that the Servicer is no
longer permitted under applicable law to perform the duties of the Servicer
under the Pooling and Servicing Agreement.
If the Servicer is in default under the Pooling and Servicing Agreement, or
the Trustee or Certificateholders having a majority of Voting Rights may remove
the Servicer. [Events of default include:
o failure by the Servicer to remit any required payment, including any
Advance, to the Trustee for one Business Day after receipt of written
notice that the payment has not been made;
o failure by the Servicer to make a required Servicing Advance for 60
days after receipt of written notice that the Servicing Advance has
not been made;
o failure by the Servicer to fulfill any other material requirement
under the Pooling and Servicing Agreement within the applicable time
period;
o failure by the Servicer to be qualified to service mortgage loans for
either Fannie Mae or Freddie Mac;
o insolvency of the Servicer; and
o other events specified in the Pooling and Servicing Agreement.]
[If the Servicer is removed, the Trustee will immediately assume the role
of Servicer under the Pooling and Servicing Agreement unless another Servicer is
appointed pursuant to the Pooling and Servicing Agreement. The Trustee will
solicit bids from prospective successor Servicers as provided in the Pooling and
Servicing Agreement. If a qualifying bid is not received, the Trustee will
continue to service the Mortgage Loans if it is legally qualified to do so until
the Trustee appoints a successor Servicer as provided in the Pooling and
Servicing Agreement. If the servicing rights are sold, any proceeds of the sale
after deduction of expenses will be paid to the predecessor Servicer.]
YIELD CONSIDERATIONS
GENERAL
The yields to maturity (or to early termination) on the Offered
Certificates will be affected by the rate of principal payments on the Mortgage
Loans (including prepayments, which may include amounts received by virtue of
purchase, condemnation, insurance or foreclosure) on the Mortgage Loans. Yields
will also be affected by the extent to which Mortgage Loans bearing higher
Mortgage Rates prepay at a more rapid rate than Mortgage Loans with lower
Mortgage Rates, the amount and timing of borrower delinquencies and defaults
resulting in Realized Losses, the application of Monthly Excess Cashflow, the
purchase price paid for the Offered Certificates and other factors.
Principal prepayments may be influenced by a variety of economic,
geographic, demographic, social, tax, legal and other factors. In general, if
prevailing interest rates fall below the interest rates on the Mortgage Loans,
the Mortgage Loans are likely to be subject to higher prepayments than if
prevailing rates remain at or above the interest rates on the Mortgage Loans.
Conversely, if prevailing interest rates rise above the interest rates on the
Mortgage Loans, the rate of prepayment would be expected to decrease. Other
factors affecting prepayment of the Mortgage Loans include factors such as
changes in borrowers' housing needs, job transfers, unemployment, borrowers' net
equity in the mortgaged properties, changes in the value of the mortgaged
properties, mortgage market interest rates and servicing decisions. The Mortgage
Loans generally have due-on-sale clauses.
[Approximately [ ]% of the Mortgage Loans are subject to prepayment
premiums during intervals ranging from one to five years following origination,
as described under "Description of the Mortgage Pools" in this prospectus
supplement. The prepayment premiums may have the effect of reducing the amount
or the likelihood of prepayment of these Mortgage Loans during intervals when a
prepayment premium would be payable.]
The rate of principal payments on the Mortgage Loans will also be affected
by the amortization schedules of the Mortgage Loans, the rate and timing of
prepayments by the borrowers, liquidations of defaulted Mortgage Loans,
repurchases of Mortgage Loans due to breaches of representations and warranties
or defective documentation and exercise by the holder of the Residual
Certificate of its right to purchase all of the Mortgage Loans as described in
this prospectus supplement. The timing of changes in the rate of prepayments,
liquidations and purchases of the related Mortgage Loans may significantly
affect the yield to an investor, even if the average rate of principal payments
experienced over time is consistent with an investor's expectation. Because the
rate and timing of principal payments on the Mortgage Loans will depend on
future events and on a variety of factors (as described more fully in this
prospectus supplement and in the Prospectus under "Yield Considerations") no
assurance can be given as to the rate or the timing of principal payments on the
Offered Certificates. In general, the earlier a prepayment of principal of the
related Mortgage Loans, the greater the effect on an investor's yield. The
effect on an investor's yield of principal payments occurring at a rate higher
(or lower) than the rate anticipated by the investor during the period
immediately following the issuance of the Certificates may not be offset by a
subsequent like decrease (or increase) in the rate of principal payments.
From time to time, areas of the United States may be affected by flooding,
severe storms, landslides, wildfires or other natural disasters. [The
Originator] will represent and warrant that as of the Closing Date each
Mortgaged Property was free of material damage. In the event of an uncured
breach of this representation and warranty that materially and adversely affects
the value of a Mortgage Loan, [the Originator] will be required to repurchase
the affected Mortgage Loan or, under some circumstances, substitute another
mortgage loan. If any damage caused by earthquakes, flooding, storms, wildfires,
or landslides (or other cause) occurs after the Closing Date, [the Originator]
will not have any repurchase obligation. In addition, the standard hazard
policies covering the Mortgaged Properties generally do not cover damage caused
by earthquakes, flooding and landslides, and earthquake, flood or landslide
insurance may not have been obtained with respect to the affected Mortgaged
Properties. As a consequence, Realized Losses could result. To the extent that
the insurance proceeds received with respect to any damaged Mortgage Properties
are not applied to the restoration of those Mortgage Properties, the proceeds
will be used to prepay the related Mortgage Loans in whole or in part. Any
repurchases or repayments of the Mortgage Loans may reduce the weighted average
lives of the Offered Certificates and will reduce the yields on the Offered
Certificates to the extent they are purchased at a premium.
Prepayments, liquidations and purchases of the Mortgage Loans will result
in distributions to holders of the related Certificates of principal amounts
that would otherwise be distributed over the remaining terms of those Mortgage
Loans. The rate of defaults on the Mortgage Loans will also affect the rate and
timing of principal payments on the Mortgage Loans. In general, defaults on
mortgage loans are expected to occur with greater frequency in their early
years.
The yields on the Class [ ] Certificates may be adversely affected by
Net Prepayment Interest Shortfalls on the Mortgage Loans.
The yields to investors in the Offered Certificates may be affected by the
purchase of defaulted Mortgage Loans by the Servicer and by the exercise by [ ]
of its right to purchase the Mortgage Loans, as described under "Description of
the Certificates -- Optional Purchase of Mortgage Loans; Termination of the
Trust Fund" in this prospectus supplement, or the failure of [ ] to exercise
that right.
If the purchaser of an Offered Certificate offered at a discount from its
initial principal amount calculates its anticipated yield to maturity (or early
termination) based on an assumed rate of payment of principal that is faster
than that actually experienced on the related Mortgage Loans, the actual yield
may be lower than that so calculated. Conversely, if the purchaser of a
Certificate offered at a premium calculates its anticipated yield based on an
assumed rate of payment of principal that is slower than that actually
experienced on the related Mortgage Loans, the actual yield may be lower than
that so calculated.
[The Interest Rates applicable to the Offered Certificates will be affected
by the level of [ ] from time to time, and by the Mortgage Rates of the Mortgage
Loans from time to time as described under "Risk Factors -- Mortgage Loan
Interest Rates May Limit Interest Rates on the Certificates."]
OVERCOLLATERALIZATION
[Describe as applicable.]
[SUBORDINATION OF THE CLASS [ ] CERTIFICATES
As described in this prospectus supplement, the Senior Certificates are
senior to the Class [ ]Certificates, and the Senior Certificates will have a
preferential right to receive amounts in respect of interest to the extent of
the Interest Remittance Amount and amounts in respect of principal to the extent
of the Principal Distribution Amount for the related Mortgage Pool. As a result,
the yield on the Class [ ]Certificates will be particularly sensitive to
delinquencies and losses on the Mortgage Loans.]
WEIGHTED AVERAGE LIFE
Weighted average life refers to the average amount of time that will elapse
from the date of issuance of a security to the date of distribution to the
investor of each dollar distributed in net reduction of principal of the
security (assuming no losses). The weighted average lives of the Offered
Certificates will be influenced by, among other things, the rate at which
principal of the related Mortgage Loans is paid, which may be in the form of
scheduled amortization, prepayments or liquidations.
Prepayments on mortgage loans are commonly measured relative to a [ ]
prepayment standard or model. The model used in this Prospectus Supplement
represents [ ]. [ ] does not purport to be either a historical description of
the prepayment experience of any pool of mortgage loans or a prediction of the
anticipated rate of prepayment of any mortgage loans, including the Mortgage
Loans to be included in the Trust Fund.
[The following tables were prepared based on the following assumptions,
among other things (collectively, the "Modeling Assumptions"):
o the initial Class Principal Amounts are as set forth on the cover of
this Prospectus Supplement, and the Interest Rates are as described in
this prospectus supplement;
o each Monthly Payment of principal and interest is timely received on
the first day of each month starting in [ ];
o principal prepayments are received in full on the first day of each
month starting in [ ] and there are no Net Prepayment Interest
Shortfalls;
o prepayments are received on the Mortgage Loans at the [ ] rate;
o there are no defaults or delinquencies on the Mortgage Loans;
o Distribution Dates occur on the [ ]th day of each month, starting in [
];
o there are no re-purchases or substitutions of the Mortgage Loans;
o [the Mortgage Rates of the Adjustable Rate Mortgage Loans adjust
semi-annually;]
o [the value of the Index is [ ]%;]
o [the value of LIBOR is %;]
o the Certificates are issued on [ ];
o the sum of the Trustee Fee Rate and the Servicing Fee Rate is [ ]%;
and
o the Mortgage Loans were aggregated into assumed mortgage loans having
the following characteristics:]
ASSUMED MORTGAGE LOAN CHARACTERISTICS
ORIGINAL REMAINING
GROSS TERM TO TERM TO
PRINICPAL COUPON MATURITY MATURITY LOAN AGE GROSS
LOAN TYPE BALANCE($) RATE(%) (MONTHS) MONTHS (MONTHS) MARGINS(%)
- --------------------------------------------------------------------------------
The actual characteristics of the Mortgage Loans may, and the performance
of the Mortgage Loans will, differ from the assumptions used in constructing the
tables set forth below, which are hypothetical in nature and are provided only
to give a general sense of how the principal cash flows might behave under
varying prepayment scenarios. For example, it is not expected that the Mortgage
Loans will prepay at a constant rate until maturity, that all of the Mortgage
Loans will prepay at the same rate or that there will be no defaults or
delinquencies on the Mortgage Loans. Moreover, the diverse remaining terms to
maturity of the Mortgage Loans could produce slower or faster principal
distributions than indicated, even if the weighted average remaining term to
maturity of the Mortgage Loans is as assumed. Any difference between those
assumptions and the actual characteristics and performance of the Mortgage Loans
or actual prepayment or loss experience will cause the percentages of initial
Class Principal Amounts outstanding over time and the weighted average lives of
the Offered Certificates to differ (which difference could be material) from the
corresponding [assumed prepayment rates].
Subject to the foregoing discussion and assumptions, the following tables
indicate the weighted average lives of the Offered Certificates and set forth
the percentages of the initial Class Principal Amounts of the Offered
Certificates that would be outstanding after each of the Distribution Dates
shown at the indicated [assumed prepayment rates].
The weighted average life of an Offered Certificate is determined by (1)
multiplying the net reduction, if any, of the applicable Class Principal Amount
by the number of years from the date of issuance of the Offered Certificate to
the related Distribution Date, (2) adding the results and (3) dividing the sum
by the total of the net reductions of Class Principal Amount described in (1)
above.
PERCENTAGE OF INITIAL CLASS PRINCIPAL AMOUNT OF THE
CLASS [ ] CERTIFICATES OUTSTANDING UNDER THE FOLLOWING [PREPAYMENT RATES]
DISTRIBUTION DATE [ ] [ ] [ ] [ ] [ ] [ ]
- ----------------- --- --- --- --- --- ---
Initial Percentage 100 100 100 100 100 100
Weighted Average
Life in Years
With Optional Termination
Without Optional Termination
- ---------
* Based upon the assumption that [ ] exercises its option to repurchase the
Mortgage Loans as described under "Description of the Certificates --
Optional Purchase of Mortgage Loans; Termination of the Trust Fund" in this
prospectus supplement, except in the case of the "Weighted Average Life
With Optional Termination."
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
For federal income tax purposes, one or more elections will be made to
treat certain assets of the Trust Fund as a REMIC. Upon the issuance of the
Offered Certificates, Stroock & Stroock & Lavan LLP ("Tax Counsel") will deliver
its opinion to the effect that, assuming compliance with the Pooling and
Servicing Agreement, for federal income tax purposes, each segregate pool of
assets for which a REMIC election is made will qualify as a REMIC within the
meaning of Section 860D of the Internal Revenue Code of 1986, as amended (the
"Code"), and that the Offered Certificates will represent the ownership of
regular interests in the REMIC. The Class [R] Certificates will represent the
residual interest in each REMIC. All prospectus purchasers of Offered
Certificates should see "Material Federal Income Tax Considerations--REMICs" in
the accompanying prospectus.
Because the Offered Certificates are considered REMIC regular interests,
they generally are taxable as debt obligations under the Code, and interest paid
or accrued on such certificates, including original issue discount with respect
to any such certificate issued with original issue discount, will be taxable to
holders of Offered Certificates in accordance with the accrual method of
accounting. See "Material Federal Income Tax Considerations--REMICs--Taxation of
Owners of Regular Securities" in the accompanying prospectus.
The prepayment assumption that is used in determining the rate of accrual
of original issue discount with respect to the Offered Certificates is [100%
Prepayment Assumption], as defined below. However, this rate does not represent
the rate at which prepayments have actually occurred and no representation is
made as to the rate at which prepayments actually will occur in the future.
The ["100% Prepayment Assumption] assumes a constant prepayment rate of
...]
[Alternatively, grantor trust, partnership or FASIT status to be described
as applicable.]
STATE AND LOCAL INCOME TAX CONSIDERATIONS
In addition to the federal income tax matters described under "Material
Federal Income Tax Considerations" above, prospective investors should consider
the state and local income tax consequences of the acquisition, ownership and
disposition of the Offered Certificates. State income tax law may differ
substantially from the corresponding federal tax law, and this discussion does
not purport to describe any aspect of the income tax laws of any state and
locality. Therefore, prospective investors should consult their own tax advisors
with respect to the various tax consequences of investments in the Offered
Certificates.
LEGAL INVESTMENT CONSIDERATIONS
[The [Senior Certificates] will constitute "mortgage related securities"
for purposes of the Secondary Mortgage Market Enhancement Act of 1984, as
amended ("SMMEA"), for so long as they are rated in one of the two highest
rating categories by one or more nationally recognized rating agencies, and, as
such, are legal investments for some entities to the extent provided in SMMEA.]
These investments, however, will be subject to general regulatory considerations
governing investment practices under state and federal laws.
Institutions whose investment activities are subject to review by
regulatory authorities may be or may become subject to restrictions, which may
be retroactively imposed by the regulatory authorities, on the investment by
those institutions in some mortgage related securities. In addition, several
states have adopted or may adopt regulations that prohibit some state-chartered
institutions from purchasing or holding similar types of securities.
Accordingly, investors should consult their own legal advisors to determine
whether and to what extent the Offered Certificates may be purchased by them.
See "Legal Investment Considerations" in the Prospectus.
USE OF PROCEEDS
The net proceeds from the sale of the Certificates will be applied by the
Depositor, or an affiliate of the Depositor, toward the purchase of the Mortgage
Loans. The Mortgage Loans will be acquired by the Depositor from [ ] in a
privately negotiated transaction.
UNDERWRITING
[Subject to the terms and conditions provided in the underwriting agreement
and in a terms agreement (collectively, the "Underwriting Agreement") among the
Depositor, [ ] and the Underwriter, the Depositor and [ ] have agreed to sell to
the Underwriter, and the Underwriter has agreed to purchase from the Depositor,
all of the Offered Certificates.
The distribution of the Offered Certificates by the Underwriter will be
effected in each case from time to time in one or more negotiated transactions,
or otherwise, at varying prices to be determined, in each case, at the time of
sale. The Underwriter may effect these transactions by selling the Certificates
to or through dealers, and dealers may receive from the Underwriter, for whom
they act as agent, compensation in the form of underwriting discounts,
concessions or commissions. The Underwriter and any dealers that participate
with the Underwriter in the distribution of the Certificates may be deemed to be
an underwriter, and any discounts, commissions or concessions received by them,
and any profit on the resale of the Certificates purchased by them, may be
deemed to be underwriting discounts and commissions under the Securities Act of
1933, as amended (the "Act"). The Underwriting Agreement provides that the
Depositor will indemnify the Underwriter against some civil liabilities,
including liabilities under the Act.]
Expenses incurred by the Depositor in connection with this offering are
expected to be approximately $[ ].
The Underwriter is an affiliate of the Depositor and [ ].
ERISA CONSIDERATIONS
Employee benefit plans and other retirement arrangements that are subject
to the Employee Retirement Income Security Act of 1974, as amended ("ERISA") or
Section 4975 of the Code ("Plans") and any person utilizing the assets of a
Plan, may be eligible to purchase the Offered Certificates, pursuant to a
prohibited transaction exemption which has been issued to the Underwriter by the
Department of Labor as described in "ERISA Considerations" in the Prospectus,
except that if the rating of the Offered Certificates is lower than "BBB-" at
the time of its acquisition by a Plan in the secondary market it may only be
acquired by an insurance company general account if the exemptive relief granted
by the Department of Labor for transactions involving insurance company general
accounts in Prohibited Transaction Exemption 95-60, is available with respect to
the investment. The Pooling and Servicing Agreement will include restrictions on
the transfer of the Offered Certificates. A fiduciary of a Plan must determine
that the purchase of a [Note] is consistent with its fiduciary duties under
ERISA and does not result in a nonexempt prohibited transaction as defined in
Section 406 of ERISA or Section 4975 of the Code.
See "ERISA Considerations" in the accompanying Prospectus.
EXPERTS
[Describe as applicable.]
LEGAL MATTERS
Certain legal matters with respect to the Certificates will be passed
upon for the Depositor and for the Underwriter by Strock & Stroock & Lavan LLP.
RATINGS
It is a condition to the issuance of the [ ] Certificates that they be
rated "[ ]" by [Rating Agency] and "[ ]" by [Rating Agency] (the "Rating
Agencies "). It is a condition to the issuance of the Class [ ] Certificates
that they be rated "[ ]" by [Rating Agency] and "[ ]" by [Rating Agency].
A securities rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. A securities rating addresses the likelihood of the receipt by
holders of Offered Certificates of distributions in the amount of scheduled
payments on the Mortgage Loans. The rating takes into consideration the
characteristics of the Mortgage Loans and the structural, legal and tax aspects
associated with the Offered Certificates. The ratings on the Offered
Certificates do not represent any assessment of the likelihood or rate of
principal prepayments. The ratings do not address the possibility that holders
of Offered Certificates might suffer a lower than anticipated yield due to
prepayments.
The security ratings assigned to the Offered Certificates should be
evaluated independently from similar ratings on other types of securities. A
security rating is not a recommendation to buy, sell or hold securities and may
be subject to revision or withdrawal at any time by either Rating Agency.
The Depositor has not requested a rating of the Offered Certificates by any
rating agency other than the Rating Agencies; there can be no assurance,
however, as to whether any other rating agency will rate the Offered
Certificates or, if it does, what rating would be assigned by the other rating
agency. The rating assigned by the other rating agency to the Offered
Certificates could be lower than the ratings assigned by the Rating Agencies.
GLOSSARY OF DEFINED TERMS
[To be provided.]
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in some limited circumstances, the globally offered ACE Securities
Corp. [ ] Pass-Through Certificates (the "Global Securities") will be available
only in book-entry form. Investors in the Global Securities may hold the Global
Securities through any of DTC, Clearstream Luxembourg or Euroclear. The Global
Securities will be tradable as home market instruments in both the European and
U.S. domestic markets. Initial settlement and all secondary trades will settle
in same-day funds.
Secondary market trading between investors holding Global Securities
through Clearstream Luxembourg and Euroclear will be conducted in the ordinary
way in accordance with their normal rules and operating procedures and in
accordance with conventional eurobond practice (i.e., seven calendar day
settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations and prior mortgage loan asset backed
certificates issues.
Secondary cross-market trading between Clearstream Luxembourg or Euroclear
and DTC Participants holding Certificates will be effected on a
delivery-against-payment basis through the respective Depositaries of
Clearstream Luxembourg and Euroclear and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless those holders meet specific requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the Global Securities will
be represented through financial institutions acting on their behalf as direct
and indirect Participants in DTC. As a result, Clearstream Luxembourg and
Euroclear will hold positions on behalf of their participants through their
respective Depositaries, which in turn will hold the positions in accounts as
DTC Participants.
Investors electing to hold their Global Securities through DTC will follow
the settlement practices applicable to prior mortgage loan asset backed
certificates issues. Investor securities custody accounts will be credited with
their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Clearstream
Luxembourg or Euroclear accounts will follow the settlement procedures
applicable to conventional eurobonds, except that there will be no temporary
global security and no "lock-up" or restricted period. Global Securities will be
credited to the securities custody accounts on the settlement date against
payment in same-day funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
TRADING BETWEEN DTC PARTICIPANTS. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior mortgage
loan asset backed certificates issues in same-day funds.
TRADING BETWEEN CLEARSTREAM LUXEMBOURG AND/OR EUROCLEAR PARTICIPANTS.
Secondary market trading between Clearstream Luxembourg Participants or
Euroclear Participants will be settled using the procedures applicable to
conventional eurobonds in same-day funds.
TRADING BETWEEN DTC SELLER AND CLEARSTREAM LUXEMBOURG OR EUROCLEAR
PURCHASER. When Global Securities are to be transferred from the account of a
DTC Participant to the account of a Clearstream Luxembourg Participant or a
Euroclear Participant, the purchaser will send instructions to Clearstream
Luxembourg or Euroclear through a Clearstream Luxembourg Participant or
Euroclear Participant at least one business day prior to settlement. Clearstream
Luxembourg or Euroclear will instruct the respective Depositary, as the case may
be, to receive the Global Securities against payment. Payment will include
interest accrued on the Global Securities from and including the last interest
payment date to and excluding the settlement date, on the basis of either the
actual number of days in the accrual period and a year assumed to consist of 360
days or a 360-day year of twelve 30-day months as applicable to the related
class of Global Securities. For transactions settling on the 31st of the month,
payment will include interest accrued to and excluding the first day of the
following month. Payment will then be made by the respective Depositary of the
DTC Participant's account against delivery of the Global Securities. After
settlement has been completed, the Global Securities will be credited to the
respective clearing system and by the clearing system, in accordance with its
usual procedures, to the Clearstream Luxembourg Participant's or Euroclear
Participant's account. The securities credit will appear the next day (European
time) and the cash debt will be back-valued to, and the interest on the Global
Securities will accrue from, the value date (that would be the preceding day
when settlement occurred in New York). If settlement is not completed on the
intended value date (i.e., the trade fails), the Clearstream Luxembourg or
Euroclear cash debt will be valued instead as of the actual settlement date.
Clearstream Luxembourg Participants and Euroclear Participants will need to
make available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Clearstream Luxembourg or
Euroclear. Under this approach, they may take on credit exposure to Clearstream
Luxembourg or Euroclear until the Global Securities are credited to their
accounts one day later.
As an alternative, if Clearstream Luxembourg or Euroclear has extended a
line of credit to them, Clearstream Luxembourg Participants or Euroclear
Participants can elect not to preposition funds and allow that credit line to be
drawn upon the finance settlement. Under this procedure, Clearstream Luxembourg
Participants or Euroclear Participants purchasing Global Securities would incur
overdraft charges for one day, assuming they cleared the overdraft when the
Global Securities were credited to their accounts. However, interest on the
Global Securities would accrue from the value date. Therefore, in many cases the
investment income on the Global Securities earned during that one-day period may
substantially reduce or offset the amount of overdraft charges, although this
result will depend on each Clearstream Luxembourg Participant's or Euroclear
Participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Securities to
the respective European Depositary for the benefit of Clearstream Luxembourg
Participants or Euroclear Participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC Participants a
cross-market transaction will settle no differently than a trade between two DTC
Participants.
TRADING BETWEEN CLEARSTREAM LUXEMBOURG OR EUROCLEAR SELLER AND DTC
PURCHASER. Due to time zone differences in their favor, Clearstream Luxembourg
Participants and Euroclear Participants may employ their customary procedures
for transactions in which Global Securities are to be transferred by the
respective clearing system, through the respective Depositary, to a DTC
Participant. The seller will send instructions to Clearstream Luxembourg or
Euroclear through a Clearstream Luxembourg Participant or Euroclear Participant
at least one business day prior to settlement. In these cases Clearstream
Luxembourg or Euroclear will instruct the respective Depositary, as appropriate,
to deliver the Global Securities to the DTC Participant's account against
payment. Payment will include interest accrued on the Global Securities from and
including the last interest payment to and excluding the settlement date on the
basis of either the actual number of days in the accrual period and a year
assumed to consist of 360 days or a 360-day year of twelve 30-day months as
applicable to the related class of Global Securities. For transactions settling
on the 31st of the month, payment will include interest accrued to and excluding
the first day of the following month. The payment will then be reflected in the
account of the Clearstream Luxembourg Participant or Euroclear Participant the
following day, and receipt of the cash proceeds in the Clearstream Luxembourg
Participant's or Euroclear Participant's account would be back-valued to the
value date (which would be the preceding day, when settlement occurred in New
York). Should the Clearstream Luxembourg Participant or Euroclear Participant
have a line of credit with its respective clearing system and elect to be in
debt in anticipation of receipt of the sale proceeds in its account, the
back-valuation will extinguish any overdraft incurred over that one day period.
If settlement is not completed on the intended value date (that is, the trade
fails), receipt of the cash proceeds in the Clearstream Luxembourg Participant's
or Euroclear Participant's account would instead be valued as of the actual
settlement date.
Finally, day traders that use Clearstream Luxembourg or Euroclear and that
purchase Global Securities from DTC Participants for delivery to Clearstream
Luxembourg Participants or Euroclear Participants should note that these trades
would automatically fail on the sale side unless affirmative action were taken.
At least three techniques should be readily available to eliminate this
potential problem:
o borrowing through Clearstream Luxembourg or Euroclear for one day
(until the purchase side of the day trade is reflected in their
Clearstream Luxembourg or Euroclear accounts) in accordance with the
clearing system's customary procedures;
o borrowing the Global Securities in the U.S. from a DTC Participant no
later than one day prior to the settlement, which would give the
Global Securities sufficient time to be reflected in their Clearstream
Luxembourg or Euroclear account in order to settle the sale side of
the trade; or
o staggering the value dates for the buy and sell sides of the trade so
that the value date for the purchase from the DTC Participant is at
least one day prior to the value date for the sale to the Clearstream
Luxembourg or Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global securities holding securities through
Clearstream, Luxembourg or Euroclear, or through DTC will be subject to the 30%
U.S. withholding tax that generally applies to payments of interest, including
original issue discount, on registered debt issued by U.S. Persons or to 31%
backup withholding, unless (1) each clearing system, bank or other financial
institution that holds customers' securities in the ordinary course of its trade
or business in the chain of intermediaries between the beneficial owner and the
U.S. entity required to withhold tax complies with applicable certification
requirements and (2) the beneficial owner takes one of the following steps to
obtain an exemption or reduced tax rate:
EXEMPTION FOR NON-U.S. PERSONS (FORM W-8BEN). Beneficial owners of
securities that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8BEN (Certificate of Foreign Status of
Beneficial Owner for United States Tax Withholding. If the information shown on
Form W-8 BEN changes, a new Form W-8 must be filed within 30 days of the change.
EXEMPTION FOR NON-U.S. PERSONS WITH EFFECTIVELY CONNECTED INCOME (FORM
W-8ECI). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form W-8ECI (Certificate of Foreign Person's Claim for
Exemption from Withholding on Income Effectively Connected with the Conduct of a
Trade or Business in the United States).
EXEMPTION OR REDUCED RATE FOR NON-U.S. PERSONS RESIDENT IN TREATY COUNTRIES
(FORM W-8BEN). Non-U.S. Persons that are beneficial owners of securities
residing in a country that has a tax treaty with the United States can obtain an
exemption or reduced tax rate, depending on the treaty terms, by filing Form
W-8BEN (including Part II thereof). If the treaty provides only for a reduced
rate, the beneficial owner may still be entitled to complete exemption from
withholding under item (1) above.
EXEMPTION FOR U.S. PERSONS (FORM W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. FEDERAL INCOME TAX REPORTING PROCEDURE. The beneficial owner of a
Global Security files by submitting the appropriate form to the person through
whom it holds, the clearing agency, in the case of persons holding directly on
the books of the clearing agency. Form W-8BEN and Form W-8ECI are generally
effective for three calendar years from the close of the calendar year in which
it is collected.
The term "U.S. Person" means (1) a citizen or resident of the United
States, (2) a corporation or partnership (or other entity properly classified as
a corporation or partnership for U.S. Federal income tax purposes) organized in
or under the laws of the United States or any state or the District of Columbia,
(3) an estate the income of which is includible in gross income for United
States tax purposes, regardless of its source, or (4) a trust if a court within
the United States is able to exercise primary supervision over the
administration of the trust and one or more United States persons have authority
to control all substantial decisions of the trust. Notwithstanding the preceding
sentence, to the extent provided in regulations, trusts in existence on August
20, 1996 and treated as United States persons prior to that date that elect to
continue to be so treated also will be considered U.S. Persons. Treasury
regulations provide certain presumptions regarding the entity classification and
foreign or U.S. status of a holder that a payor generally must apply in the
absence of appropriate documentation from the holder, and provide detailed
documentation and procedures for holders claiming withholding tax exemptions
through intermediaries. Prospective investors are urged to consult their tax
advisors regarding the effect of these regulations on their ability to claim and
the means for claiming exemptions from or reduced rates of U.S. withholding
taxes.
This summary does not deal with all aspects of U.S. Federal income tax
withholding that may be relevant to foreign holders of the Global securities.
Investors are advised to consult their own tax advisers for specific tax advice
concerning their holding and disposing of the Global securities.
$[ ]
(APPROXIMATE)
ACE SECURITIES CORP.
[ ] TRUST
[ ] PASS-THROUGH CERTIFICATES,
[ ,]
ORIGINATOR AND SERVICER
- ------------------------------------------------------------------------------
PROSPECTUS SUPPLEMENT
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DEUTSCHE BANC ALEX. BROWN
The information in this prospectus supplement is not complete and may be
changed. We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This prospectus
supplement is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
SUBJECT TO COMPLETION, [ ]
PROSPECTUS
ASSET BACKED CERTIFICATES
ASSET BACKED NOTES
(ISSUABLE IN SERIES)
ACE SECURITIES CORP.,
DEPOSITOR
THE TRUST FUNDS:
Each trust fund will be established to hold assets transferred to it by ACE
Securities Corp. The assets in each trust fund will generally consist of one or
more of the following:
o mortgage loans secured by one- to four-family residential properties;
o mortgage loans secured by multi-family residential properties;
o unsecured home improvement loans;
o manufactured housing installment sale contracts;
o mortgage pass-through securities issued or guaranteed by Ginnie Mae,
Fannie Mae, or Freddie Mac; or
o previously issued asset-backed or mortgage-backed securities backed by
mortgage loans secured by residential properties or participations in
those types of loans.
The assets in your trust fund are specified in the prospectus supplement
for that particular trust fund, while the types of assets that may be included
in a trust fund, whether or not in your trust fund, are described in greater
detail in this prospectus.
THE SECURITIES:
ACE Securities Corp. will sell the securities pursuant to a prospectus
supplement. The securities will be grouped into one or more series, each having
is own distinct designation. Each series will be issued in one or more classes
and will evidence beneficial ownership of, or be secured by, the assets in the
trust fund that the series relates to. A prospectus supplement for a series will
specify all of the terms of the series and of each of the classes in the series.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is [ ].
Table of Contents
Description of the Trust Funds.........................................3
Use of Proceeds.......................................................19
Yield Considerations..................................................19
The Depositor.........................................................26
Description of the Securities.........................................27
Description of the Agreements.........................................44
Description of Credit Support.........................................70
Certain Legal Aspects of Mortgage Loans...............................74
Certain Legal Aspects of the Contracts................................89
Material Federal Income Tax Considerations............................94
State and Other Tax Considerations...................................143
Legal Investment.....................................................149
Methods of Distribution..............................................151
Additional Information...............................................152
Incorporation of Certain Documents by Reference......................153
Legal Matters........................................................154
Financial Information................................................154
Rating...............................................................154
Index of Defined Terms...............................................155
DESCRIPTION OF THE TRUST FUNDS
ASSETS
The primary assets of each trust fund (the "Assets") will include some or
all of the following types of assets:
o single family and/or multifamily mortgage loans, which may include
Home Equity Loans, home improvement contracts and Land Sale Contracts
(each as defined in this prospectus);
o home improvement installment sales contracts or installment loans that
are unsecured called unsecured home improvement Loans;
o manufactured housing installment sale contracts or installment loan
agreements referred to as contracts;
o any combination of "fully modified pass-through" mortgage-backed
certificates guaranteed by the Government National Mortgage
Association ("Ginnie Mae"), guaranteed mortgage pass-through
securities issued by Fannie Mae ("Fannie Mae") and mortgage
participation certificates issued by the Federal Home Loan Mortgage
Corporation ("Freddie Mac") (collectively, "Agency Securities");
o previously issued asset-backed certificates, collateralized mortgage
obligations or participation certificates (each, and collectively,
"Mortgage Securities") evidencing interests in, or collateralized by,
mortgage loans or Agency Securities; or
o a combination of mortgage loans, unsecured home improvement loans,
contracts, Agency Securities and/or Mortgage Securities.
The mortgage loans will not be guaranteed or insured by ACE Securities
Corp. or any of its affiliates. The mortgage loans will be guaranteed or insured
by a governmental agency or instrumentality or other person only if and to the
extent expressly provided in the prospectus supplement. The depositor will
select each Asset to include in a trust fund from among those it has purchased,
either directly or indirectly, from a prior holder (an "Asset Seller"), which
may be an affiliate of the depositor and which prior holder may or may not be
the originator of that mortgage loan.
The Assets included in the trust fund for your series may be subject to
various types of payment provisions:
o "Level Payment Assets," which may provide for the payment of interest,
and full repayment of principal, in level monthly payments with a
fixed rate of interest computed on their declining principal balances;
o "Adjustable Rate Assets," which may provide for periodic adjustments
to their rates of interest to equal the sum of a fixed margin and an
index;
o "Buy Down Assets," which are Assets for which funds have been provided
by someone other than the related borrowers to reduce the borrowers'
monthly payments during the early period after origination of those
Assets;
o "Increasing Payment Assets," as described below;
o "Interest Reduction Assets," which provide for the one-time reduction
of the interest rate payable on these Assets;
o "GEM Assets," which provide for (1) monthly payments during the first
year after origination that are at least sufficient to pay interest
due on these Assets, and (2) an increase in those monthly payments in
later years at a predetermined rate resulting in full repayment over a
shorter term than the initial amortization terms of those Assets;
o "GPM Assets," which allow for payments during a portion of their terms
which are or may be less than the amount of interest due on their
unpaid principal balances, and this unpaid interest will be added to
the principal balances of those Assets and will be paid, together with
interest on the unpaid interest, in later years;
o "Step-up Rate Assets" which provide for interest rates that increase
over time;
o "Balloon Payment Assets;"
o "Convertible Assets" which are Adjustable Rate Assets subject to
provisions pursuant to which, subject to limitations, the related
borrowers may exercise an option to convert the adjustable interest
rate to a fixed interest rate; and
o "Bi-weekly Assets," which provide for payments to be made by borrowers
on a bi-weekly basis.
An "Increasing Payment Asset" is an Asset that provides for monthly
payments that are fixed for an initial period to be specified in the prospectus
supplement and which increase thereafter (at a predetermined rate expressed as a
percentage of the monthly payment during the preceding payment period, subject
to any caps on the amount of any single monthly payment increase) for a period
to be specified in the prospectus supplement from the date of origination, after
which the monthly payment is fixed at a level-payment amount so as to fully
amortize the Asset over its remaining term to maturity. The scheduled monthly
payment for an Increasing Payment Asset is the total amount required to be paid
each month in accordance with its terms and equals the sum of (1) the borrower's
monthly payments referred to in the preceding sentence and (2) payments made by
the respective servicers pursuant to buy-down or subsidy agreements. The
borrower's initial monthly payments for each Increasing Payment Asset are set at
the level-payment amount that would apply to an otherwise identical Level
Payment Asset having an interest rate some number of percentage points below the
Asset Rate of that Increasing Payment Asset. The borrower's monthly payments on
each Increasing Payment Asset, together with any payments made on the Increasing
Payment Asset by the related servicers pursuant to buy-down or subsidy
agreements, will in all cases be sufficient to allow payment of accrued interest
on the Increasing Payment Asset at the related interest rate, without negative
amortization. A borrower's monthly payments on an Increasing Payment Asset may,
however, not be sufficient to result in any reduction of the principal balance
of that Asset until after the period when those payments may be increased.
The Notes or Certificates, as applicable, will be entitled to payment only
from the assets of the related trust fund and will not be entitled to payments
from the assets of any other trust fund established by the depositor. The assets
of a trust fund may consist of certificates representing beneficial ownership
interests in, or indebtedness of, another trust fund that contains the Assets,
if specified in the prospectus supplement.
MORTGAGE LOANS
GENERAL
Each mortgage loan will generally be secured by a lien on (1) a one- to
four-family residential property (including a manufactured home) or a security
interest in shares issued by a cooperative housing corporation (a "Single Family
Property") or (2) a primarily residential property that consists of five or more
residential dwelling units, referred to as a multifamily property, which may
include limited retail, office or other commercial space. Single Family
Properties are sometimes referred to in this prospectus as "Mortgaged
Properties." The mortgage loans will be secured by first and/or junior mortgages
or deeds of trust or other similar security instruments creating a first or
junior lien on Mortgaged Property.
The Mortgaged Properties may also include:
o Apartments owned by cooperative housing corporations ("Cooperatives");
and
o Leasehold interests in properties, the title to which is held by third
party lessors. The term of these leaseholds will exceed the term of
the related mortgage note by at least five years or some other time
period specified in the prospectus supplement.
The mortgage loans may include:
o Closed-end and/or revolving home equity loans or balances of these
home equity loans ("Home Equity Loans");
o Secured home improvement installment sales contracts and secured
installment loan agreements, known as home improvement contracts; and
o Mortgage loans evidenced by contracts ("Land Sale Contracts") for the
sale of properties pursuant to which the borrower promises to pay the
amount due on the mortgage loans to the holder of the Land Sale
Contract with fee title to the related property held by that holder
until the borrower has made all of the payments required pursuant to
that Land Sale Contract, at which time fee title is conveyed to the
borrower.
The originator of each mortgage loan will have been a person other than the
depositor. The prospectus supplement will indicate if any originator is an
affiliate of the depositor. The mortgage loans will be evidenced by mortgage
notes secured by mortgages, deeds of trust or other security instruments (the
"Mortgages") creating a lien on the Mortgaged Properties. The Mortgaged
Properties will be located in any one of the fifty states, the District of
Columbia, Guam, Puerto Rico or any other territory of the United States. If
provided in the prospectus supplement, the mortgage loans may include loans
insured by the Federal Housing Administration (the "FHA") or partially
guaranteed by the Veteran's Administration (the "VA"). See "--FHA Loans and VA
Loans" below.
LOAN-TO-VALUE RATIO
The "Loan-to-Value Ratio" of a mortgage loan at any particular time is the
ratio (expressed as a percentage) of the then outstanding principal balance of
the mortgage loan to the Value of the related Mortgaged Property. The "Value" of
a Mortgaged Property, other than for Refinance Loans, is generally the lesser of
(a) the appraised value determined in an appraisal obtained by the originator at
origination of that loan and (b) the sales price for that property. "Refinance
Loans" are loans made to refinance existing loans. Unless otherwise specified in
the prospectus supplement, the Value of the Mortgaged Property securing a
Refinance Loan is the appraised value of the Mortgaged Property determined in an
appraisal obtained at the time of origination of the Refinance Loan. The value
of a Mortgaged Property as of the date of initial issuance of the related series
may be less than the Value at origination and will fluctuate from time to time
based upon changes in economic conditions and the real estate market.
MORTGAGE LOAN INFORMATION IN THE PROSPECTUS SUPPLEMENTS
Your prospectus supplement will contain information, as of the dates
specified in that prospectus supplement and to the extent then applicable and
specifically known to the depositor, with respect to the mortgage loans,
including:
o the total outstanding principal balance and the largest, smallest and
average outstanding principal balance of the mortgage loans as of,
unless otherwise specified in that prospectus supplement, the close of
business on the first day of the month of formation of the related
trust fund (the "Cut-off Date");
o the type of property securing the mortgage loans;
o the weighted average (by principal balance) of the original and
remaining terms to maturity of the mortgage loans;
o the range of maturity dates of the mortgage loans;
o the range of the Loan-to-Value Ratios at origination of the mortgage
loans;
o the mortgage rates or range of mortgage rates and the weighted average
mortgage rate borne by the mortgage loans;
o the state or states in which most of the Mortgaged Properties are
located;
o information regarding the prepayment provisions, if any, of the
mortgage loans;
o for mortgage loans with adjustable mortgage rates ("ARM Loans"), the
index, the frequency of the adjustment dates, the range of margins
added to the index, and the maximum mortgage rate or monthly payment
variation at the time of any adjustment of and over the life of the
ARM Loan;
o information regarding the payment characteristics of the mortgage
loans, including balloon payment and other amortization provisions;
o the number of mortgage loans that are delinquent and the number of
days or ranges of the number of days those mortgage loans are
delinquent; and
o the material underwriting standards used for the mortgage loans.
If specific information respecting the mortgage loans is unknown to the
depositor at the time the Notes or Certificates, as applicable, are initially
offered, more general information of the nature described above will be provided
in the prospectus supplement, and specific information will be set forth in a
report that will be available to purchasers of the related Notes or
Certificates, as applicable, at or before the initial issuance of that Security
and will be filed as part of a Current Report on Form 8-K with the Securities
and Exchange Commission (the "Commission") within fifteen days after that
initial issuance. The characteristics of the mortgage loans included in a trust
fund will not vary by more than five percent (by total principal balance as of
the Cut-off Date) from the characteristics of the mortgage loans that are
described in the prospectus supplement.
The prospectus supplement will specify whether the mortgage loans include
(1) Home Equity Loans, which may be secured by Mortgages that are junior to
other liens on the related Mortgaged Property and/or (2) home improvement
contracts originated by a home improvement contractor and secured by a mortgage
on the related mortgaged property that is junior to other liens on the mortgaged
property. The home improvements purchased with the home improvement contracts
typically include replacement windows, house siding, roofs, swimming pools,
satellite dishes, kitchen and bathroom remodeling goods, solar heating panels,
patios, decks, room additions and garages. The prospectus supplement will
specify whether the home improvement contracts are FHA loans and, if so, the
limitations on any FHA insurance. In addition, the prospectus supplement will
specify whether the mortgage loans contain some mortgage loans evidenced by Land
Sale Contracts.
PAYMENT PROVISIONS OF THE MORTGAGE LOANS
All of the mortgage loans will provide for payments of principal, interest
or both, on due dates that occur monthly, quarterly or semi-annually or at some
other interval as is specified in the prospectus supplement or for payments in
another manner described in the prospectus supplement. Each mortgage loan may
provide for no accrual of interest or for accrual of interest on the mortgage
loan at a mortgage rate that is fixed over its term or that adjusts from time to
time, or that may be converted from an adjustable to a fixed mortgage rate or a
different adjustable mortgage rate, or from a fixed to an adjustable mortgage
rate, from time to time pursuant to an election or as otherwise specified in the
related mortgage note, in each case as described in the prospectus supplement.
Each mortgage loan may provide for scheduled payments to maturity or payments
that adjust from time to time to accommodate changes in the mortgage rate or to
reflect the occurrence of particular events or that adjust on the basis of other
methodologies, and may provide for negative amortization or accelerated
amortization, in each case as described in the prospectus supplement. Each
mortgage loan may be fully amortizing or require a balloon payment due on its
stated maturity date, in each case as described in the prospectus supplement.
Each mortgage loan may contain prohibitions on prepayment (a "Lock-out Period"
and, the date of expiration thereof, a "Lock-out Date") or require payment of a
premium or a yield maintenance penalty (a "Prepayment Premium") in connection
with a prepayment, in each case as described in the prospectus supplement. If
the holders of any class or classes of Offered Notes or Offered Certificates, as
applicable, are entitled to all or a portion of any Prepayment Premiums
collected from the mortgage loans, the prospectus supplement will specify the
method or methods by which any of these amounts will be allocated. See
"--Assets" above.
REVOLVING CREDIT LINE LOANS
As more fully described in the prospectus supplement, the mortgage loans
may consist, in whole or in part, of revolving Home Equity Loans or balances of
these Home Equity Loans ("Revolving Credit Line Loans"). Interest on each
Revolving Credit Line Loan, excluding introductory rates offered from time to
time during promotional periods, may be computed and payable monthly on the
average daily outstanding principal balance of that loan. From time to time
before the expiration of the related draw period specified in a Revolving Credit
Line Loan, principal amounts on that Revolving Credit Line Loan may be drawn
down (up to a maximum amount as set forth in the prospectus supplement) or
repaid. If specified in the prospectus supplement, new draws by borrowers under
the Revolving Credit Line Loans will automatically become part of the trust fund
described in the prospectus supplement. As a result, the total balance of the
Revolving Credit Line Loans will fluctuate from day to day as new draws by
borrowers are added to the trust fund and principal payments are applied to
those balances and those amounts will usually differ each day, as more
specifically described in the prospectus supplement. Under some circumstances,
under a Revolving Credit Line Loan, a borrower may, during the related draw
period, choose an interest only payment option, during which the borrower is
obligated to pay only the amount of interest that accrues on the loan during the
billing cycle, and may also elect to pay all or a portion of the principal. An
interest only payment option may terminate at the end of the related draw
period, after which the borrower must begin paying at least a minimum monthly
portion of the average outstanding principal balance of the loan.
UNSECURED HOME IMPROVEMENT LOANS
The unsecured home improvement loans may consist of conventional unsecured
home improvement loans, unsecured installment loans and unsecured home
improvement loans that are FHA loans. Except as otherwise described in the
prospectus supplement, the unsecured home improvement loans will be fully
amortizing and will bear interest at a fixed or variable annual percentage rate.
UNSECURED HOME IMPROVEMENT LOAN INFORMATION IN PROSPECTUS SUPPLEMENTS
Each prospectus supplement will contain information, as of the dates
specified in the prospectus supplement and to the extent then applicable and
specifically known to the depositor, with respect to any unsecured home
improvement loans, including:
o the total outstanding principal balance and the largest, smallest and
average outstanding principal balance of the unsecured home
improvement loans as of the applicable cut-off date;
o the weighted average, by principal balance, of the original and
remaining terms to maturity of the unsecured home improvement loans;
o the earliest and latest origination date and maturity date of the
unsecured home improvements loans;
o the interest rates or range of interest rates and the weighted average
interest rates borne by the unsecured home improvement loans;
o the state or states in which most of the unsecured home improvement
loans were originated.
o information regarding the prepayment provisions, if any, of the
unsecured home improvement loans;
o with respect to the unsecured home improvement loans with adjustable
interest rates, called ARM unsecured home improvement loans, the
index, the frequency of the adjustment dates, the rage of margins
added to the index, and the maximum interest rate or monthly payment
variation at the time of any adjustment thereof and over the life of
the ARM unsecured home improvement loan;
o information regarding the payment characteristics of the unsecured
home improvement loans;
o the number of unsecured home improvement loans that are delinquent and
the number of days or ranges of the number of days that unsecured home
improvement loans are delinquent; and
o the material underwriting standards used for the unsecured home
improvement loans.
If specific information respecting the unsecured home improvement loans is
unknown to the depositor at the time Notes or Certificates, as applicable, are
initially offered, more general information of the nature described above will
be provided in the prospectus supplement, and specific information will be set
forth in a report that will be available to purchasers of the related Notes or
Certificates, as applicable, at or before the initial issuance thereof and will
be filed as part of a Current Report on Form 8-K with the Commission within
fifteen days after the related initial issuance. The characteristics of the
unsecured home improvement loans included in a trust fund will not vary by more
than five percent, by total principal balance as of the cut-off date, from the
characteristics thereof that are described in the prospectus supplement.
CONTRACTS
GENERAL
To the extent provided in the prospectus supplement, each contract will be
secured by a security interest in a new or used manufactured home, called a
Manufactured Home. The contracts may include contracts that are FHA loans. The
method of computing the Loan-to-Value Ratio of a contract will be described in
the prospectus supplement.
CONTRACT INFORMATION IN PROSPECTUS SUPPLEMENTS
Each prospectus supplement relating to a trust fund whose assets include a
substantial proportion of contracts will contain certain information, as of the
dates specified in that prospectus supplement and to the extent then applicable
and specifically known to the depositor, with respect to any contracts,
including:
o the total outstanding principal balance and the largest, smallest and
average outstanding principal balance of the contracts as of the
applicable cut-off date;
o whether the manufactured homes were new or used as of the origination
of the related contracts;
o the weighted average, by principal balance, of the original and
remaining terms to maturity of the contracts;
o the range of maturity dates of the contracts;
o the range of the Loan-to-Value Ratios at origination of the contracts;
o the annual percentage rate on each contract, called a contract rate,
or range of contract rates and the weighted average contract rate
borne by the contracts;
o the state or states in which most of the manufactured homes are
located at origination;
o information regarding the prepayment provisions, if any, of the
contracts;
o for contracts with adjustable contract rates, referred to as ARM
contracts, the index, the frequency of the adjustment dates, and the
maximum contract rate or monthly payment variation at the time of any
adjustment thereof and over the life of the ARM contract;
o the number of contracts that are delinquent and the number of days or
ranges of the number of days those contracts are delinquent;
o information regarding the payment characteristics of the contracts;
and
o the material underwriting standards used for the contracts.
If specific information respecting the contracts is unknown to the
depositor at the time the Notes or Certificates, as applicable, are initially
offered, more general information of the nature described above will be provided
i the prospectus supplement, and specific information will be set forth in a
report that will be available to purchasers of the related Notes or
Certificates, as applicable, at or before the initial issuance thereof and will
be filed as part of a Current Report on Form 8-K with the Commission within
fifteen days after the related initial issuance. The characteristics of the
contracts included in a trust fund will not vary by more than five percent (by
total principal balance as of the cut-off date) from the characteristics thereof
that are described in the prospectus supplement.
The information described above regarding the contrac6ts in a trust fund
may be presented in the prospectus supplement in combination with similar
information regarding the mortgage loans in the trust fund.
PAYMENT PROVISIONS OF THE CONTRACTS
All of the contracts will provide for payments of principal, interest or
both, on due dates that occur monthly or at some other interval as is specified
in the prospectus supplement or form payments in another manner described in the
prospectus supplement. Each contract may provide for no accrual of interest or
for accrual of interest thereon at a contract rate that is fixed over its term
or that adjusts from time to time, or as otherwise specified in the prospectus
supplement. Each contract may provide for scheduled payments to maturity or
payments that adjust from time to time to accommodate changes in the contract
rate as otherwise described in the prospectus supplement.
AGENCY SECURITIES
The Agency Securities will consist of any combination of Ginnie Mae
certificates, Fannie Mae certificates and Freddie Mac certificates, which may
include Stripped Agency Securities, as described below.
GINNIE MAE
Ginnie Mae is a wholly-owned corporate instrumentality of the United States
within the Department of Housing and Urban Development. Section 306(g) of Title
III of the Housing Act authorizes Ginnie Mae to guarantee the timely payment of
the principal of and interest on certificates that are based on and backed by a
pool of FHA loans, VA loans or by pools of other eligible residential loans.
Section 306(g) of the Housing Act provides that "the full faith and credit
of the United States is pledged to the payment of all amounts that may be
required to be paid under any guaranty under this subsection." To meet its
obligations under that guaranty, Ginnie Mae is authorized, under Section 306(d)
of the National Housing Act of 1934 (the "Housing Act"), to borrow from the
United States Treasury with no limitations as to amount, to perform its
obligations under its guarantee.
GINNIE MAE CERTIFICATES
Each Ginnie Mae certificate will be a "fully modified pass-through"
mortgage-backed certificate issued and serviced by an issuer approved by Ginnie
Mae or Fannie Mae as a seller-servicer of FHA loans or VA loans, except as
described below regarding Stripped Agency Securities (as defined below). The
loans underlying Ginnie Mae certificates may consist of FHA loans, VA loans and
other loans eligible for inclusion in loan pools underlying Ginnie Mae
certificates. Ginnie Mae certificates may be issued under either or both of the
Ginnie Mae I program and the Ginnie Mae II program, as described in the
prospectus supplement. If the trust fund includes Ginnie Mae certificates, your
prospectus supplement will include any material additional information regarding
the Ginnie Mae guaranty program, the characteristics of the pool underlying
those Ginnie Mae certificates, the servicing of the related pool, the payment of
principal and interest on Ginnie Mae certificates and other relevant matters
regarding the Ginnie Mae certificates.
Except as otherwise specified in the prospectus supplement or as described
below with respect to Stripped Agency Securities, each Ginnie Mae certificate
will provide for the payment, by or on behalf of the issuer, to the registered
holder of that Ginnie Mae certificate of monthly payments of principal and
interest equal to the holder's proportionate interest in the total amount of the
monthly principal and interest payments on each related FHA loan or VA loan,
minus servicing and guaranty fees totaling the excess of the interest on that
FHA loan or VA loan over the Ginnie Mae certificates' interest rate. In
addition, each payment to a holder of a Ginnie Mae certificate will include
proportionate pass-through payments to that holder of any prepayments of
principal of the FHA loans or VA loans underlying the Ginnie Mae certificate and
the holder's proportionate interest in the remaining principal balance in the
event of a foreclosure or other disposition of any related FHA loan or VA loan.
The Ginnie Mae certificates do not constitute a liability of, or evidence
any recourse against, the issuer of the Ginnie Mae certificates, the depositor
or any affiliates of the depositor, and the only recourse of a registered holder
(for example, the trustee) is to enforce the guaranty of Ginnie Mae.
Ginnie Mae will have approved the issuance of each of the Ginnie Mae
certificates included in a trust fund in accordance with a guaranty agreement or
contract between Ginnie Mae and the issuer of the Ginnie Mae certificates.
Pursuant to that agreement, that issuer, in its capacity as servicer, is
required to perform customary functions of a servicer of FHA loans and VA loans,
including collecting payments from borrowers and remitting those collections to
the registered holder, maintaining escrow and impoundment accounts of borrowers
for payments of taxes, insurance and other items required to be paid by the
borrower, maintaining primary hazard insurance, and advancing from its own funds
to make timely payments of all amounts due on the Ginnie Mae certificate, even
if the payments received by that issuer on the loans backing the Ginnie Mae
certificate are less than the amounts due. If the issuer is unable to make
payments on a Ginnie Mae certificate as they become due, it must promptly notify
Ginnie Mae and request Ginnie Mae to make that payment. Upon that notification
and request, Ginnie Mae will make those payments directly to the registered
holder of the Ginnie Mae certificate. In the event no payment is made by the
issuer and the issuer fails to notify and request Ginnie Mae to make that
payment, the registered holder of the Ginnie Mae certificate has recourse
against only Ginnie Mae to obtain that payment. The trustee or its nominee, as
registered holder of the Ginnie Mae certificates included in a trust fund, is
entitled to proceed directly against Ginnie Mae under the terms of the guaranty
agreement or contract relating to the Ginnie Mae certificates for any amounts
that are unpaid when due under each Ginnie Mae certificate.
The Ginnie Mae certificates included in a trust fund may have other
characteristics and terms, different from those described above so long as the
Ginnie Mae certificates and underlying residential loans meet the criteria of
the rating agency or agencies. The Ginnie Mae certificates and underlying
residential loans will be described in the prospectus supplement.
FANNIE MAE
Fannie Mae is a federally chartered and stockholder-owned corporation
organized and existing under the Federal National Mortgage Association Charter
Act, as amended (the "Charter Act"). Fannie Mae was originally established in
1938 as a United States government agency to provide supplemental liquidity to
the mortgage market and was transformed into a stockholder-owned and privately
managed corporation by legislation enacted in 1968.
Fannie Mae provides funds to the mortgage market by purchasing mortgage
loans from lenders. Fannie Mae acquires funds to purchase loans from many
capital market investors, thus expanding the total amount of funds available for
housing. Operating nationwide, Fannie Mae helps to redistribute mortgage funds
from capital-surplus to capital-short areas. In addition, Fannie Mae issues
mortgage-backed securities primarily in exchange for pools of mortgage loans
from lenders. Fannie Mae receives fees for its guaranty of timely payment of
principal and interest on its mortgage-backed securities.
FANNIE MAE CERTIFICATES
Fannie Mae certificates are Guaranteed Mortgage Pass-Through Certificates
typically issued pursuant to a prospectus that is periodically revised by Fannie
Mae. Fannie Mae certificates represent fractional undivided interests in a pool
of mortgage loans formed by Fannie Mae. Each mortgage loan must meet the
applicable standards of the Fannie Mae purchase program. Mortgage loans
comprising a pool are either provided by Fannie Mae from its own portfolio or
purchased pursuant to the criteria of the Fannie Mae purchase program. Mortgage
loans underlying Fannie Mae certificates included in a trust fund will consist
of conventional mortgage loans, FHA loans or VA loans. If the trust fund
includes Fannie Mae certificates, your prospectus supplement will include any
material additional information regarding the Fannie Mae program, the
characteristics of the pool underlying the Fannie Mae certificates, the
servicing of the related pool, payment of principal and interest on the Fannie
Mae certificates and other relevant matters about the Fannie Mae certificates.
Except as described below with respect to Stripped Agency Securities,
Fannie Mae guarantees to each registered holder of a Fannie Mae certificate that
it will distribute amounts representing that holder's proportionate share of
scheduled principal and interest at the applicable interest rate provided for by
that Fannie Mae certificate on the underlying mortgage loans, whether or not
received, and that holder's proportionate share of the full principal amount of
any prepayment or foreclosed or other finally liquidated mortgage loan, whether
or not the related principal amount is actually recovered.
The obligations of Fannie Mae under its guarantees are obligations solely
of Fannie Mae and are not backed by, nor entitled to, the full faith and credit
of the United States. If Fannie Mae were unable to satisfy those obligations,
distributions to the holders of Fannie Mae certificates would consist solely of
payments and other recoveries on the underlying loans and, accordingly, monthly
distributions to the holders of Fannie Mae certificates would be affected by
delinquent payments and defaults on those loans.
Fannie Mae certificates evidencing interests in pools of mortgage loans
formed on or after May 1, 1985 (other than Fannie Mae certificates backed by
pools containing graduated payment mortgage loans or multifamily loans) are
available in book-entry form only. For a Fannie Mae certificate issued in
book-entry form, distributions on the Fannie Mae certificate will be made by
wire, and for a fully registered Fannie Mae certificate, distributions will be
made by check.
The Fannie Mae certificates included in a trust fund may have other
characteristics and terms, different from those described above, as long as the
Fannie Mae certificates and underlying mortgage loans meet the criteria of the
rating agency or agencies rating the Certificates. The Fannie Mae certificates
and underlying mortgage loans will be described in the prospectus supplement.
FREDDIE MAC
Freddie Mac is a corporate instrumentality of the United States created
pursuant to Title III of the Emergency Home Finance Act of 1970, as amended (the
"Freddie Mac Act"). Freddie Mac was established primarily for the purpose of
increasing the availability of mortgage credit for the financing of needed
housing. It seeks to provide an enhanced degree of liquidity for residential
mortgage investments primarily by assisting in the development of secondary
markets for conventional mortgages. The principal activity of Freddie Mac
currently consists of the purchase of first lien, conventional residential
mortgage loans or participation interests in those mortgage loans and the resale
of the mortgage loans so purchased in the form of mortgage securities, primarily
Freddie Mac certificates. Freddie Mac is confined to purchasing, so far as
practicable, mortgage loans and participation interests in mortgage loans which
it deems to be of the quality, type and class as to meet generally the purchase
standards imposed by private institutional mortgage investors.
FREDDIE MAC CERTIFICATES
Each Freddie Mac certificate represents an undivided interest in a pool of
residential loans that may consist of first lien conventional residential loans,
FHA loans or VA loans (the "Freddie Mac Certificate Group"). Each of these
mortgage loans must meet the applicable standards set forth in the Freddie Mac
Act. A Freddie Mac Certificate Group may include whole loans, participation
interests in whole loans and undivided interests in whole loans and/or
participations comprising another Freddie Mac Certificate Group. If the trust
fund includes Freddie Mac certificates, your prospectus supplement will include
any material additional information regarding the Freddie Mac guaranty program,
the characteristics of the pool underlying that Freddie Mac certificate, the
servicing of the related pool, payment of principal and interest on the Freddie
Mac certificate and any other relevant matters about the Freddie Mac
certificates.
Except as described below with respect to Stripped Agency Securities,
Freddie Mac guarantees to each registered holder of a Freddie Mac certificate
the timely payment of interest on the underlying mortgage loans to the extent of
the applicable interest rate on the registered holder's pro rata share of the
unpaid principal balance outstanding on the underlying mortgage loans in the
Freddie Mac Certificate Group represented by that Freddie Mac certificate,
whether or not received. Freddie Mac also guarantees to each registered holder
of a Freddie Mac certificate collection by that holder of all principal on the
underlying mortgage loans, without any offset or deduction, to the extent of
that holder's pro rata share of the principal, but does not, except if and to
the extent specified in the prospectus supplement, guarantee the timely payment
of scheduled principal. Pursuant to its guarantees, Freddie Mac also guarantees
ultimate collection of scheduled principal payments, prepayments of principal
and the remaining principal balance in the event of a foreclosure or other
disposition of a mortgage loan. Freddie Mac may remit the amount due on account
of its guarantee of collection of principal at any time after default on an
underlying mortgage loan, but not later than 30 days following the latest of
(1) foreclosure sale;
(2) payment of the claim by any mortgage insurer; and
(3) the expiration of any right of redemption, but in any event no
later than one year after demand has been made upon the borrower
for accelerated payment of principal.
In taking actions regarding the collection of principal after default on
the mortgage loans underlying Freddie Mac certificates, including the timing of
demand for acceleration, Freddie Mac reserves the right to exercise its
servicing judgment for the mortgage loans in the same manner as for mortgage
loans that it has purchased but not sold. The length of time necessary for
Freddie Mac to determine that a mortgage loan should be accelerated varies with
the particular circumstances of each borrower, and Freddie Mac has not adopted
servicing standards that require that the demand be made within any specified
period.
Freddie Mac certificates are not guaranteed by the United States or by any
Federal Home Loan Bank and do not constitute debts or obligations of the United
States or any Federal Home Loan Bank. The obligations of Freddie Mac under its
guarantee are obligations solely of Freddie Mac and are not backed by, nor
entitled to, the full faith and credit of the United States. If Freddie Mac were
unable to satisfy those obligations, distributions to holders of Freddie Mac
certificates would consist solely of payments and other recoveries on the
underlying mortgage loans and, accordingly, monthly distributions to holders of
Freddie Mac certificates would be affected by delinquent payments and defaults
on those mortgage loans.
The Freddie Mac certificates included in a trust fund may have other
characteristics and terms, different from those described above, so long as the
Freddie Mac certificates and underlying mortgage loans meet the criteria of the
rating agency or agencies rating the Notes or Certificates, as applicable. The
Freddie Mac certificates and underlying mortgage loans will be described in the
prospectus supplement.
STRIPPED AGENCY SECURITIES
The Ginnie Mae certificates, Fannie Mae certificates or Freddie Mac
certificates may be issued in the form of certificates ("Stripped Agency
Securities") that represent an undivided interest in all or part of either the
principal distributions (but not the interest distributions) or the interest
distributions (but not the principal distributions), or in some specified
portion of the principal or interest distributions (but not all of those
distributions), on an underlying pool of mortgage loans or other Ginnie Mae
certificates, Fannie Mae certificates or Freddie Mac certificates. Ginnie Mae,
Fannie Mae or Freddie Mac, as applicable, will guarantee each Stripped Agency
Security to the same extent as that entity guarantees the underlying securities
backing the Stripped Agency Securities or to the extent described above for a
Stripped Agency Security backed by a pool of mortgage loans, unless otherwise
specified in the prospectus supplement. If the trust fund includes Stripped
Agency Securities, your prospectus supplement will include any material
additional information regarding the characteristics of the assets underlying
the Stripped Agency Securities, the payments of principal and interest on the
Stripped Agency Securities and other relevant matters about the Stripped Agency
Securities.
MORTGAGE SECURITIES
The Mortgage Securities will represent beneficial interests in loans of the
type that would otherwise be eligible to be mortgage loans, unsecured home
improvement loans, contract or Agency Securities, or collateralized obligations
secured by mortgage loans, unsecured home improvement loans, contract or Agency
Securities. The Mortgage Securities will have been
(1) issued by an entity other than the depositor or its
affiliates;
(2) acquired in bona fide secondary market transactions from
persons other than the issuer of the Mortgage Securities or its
affiliates; and
(3) (a) offered and distributed to the public pursuant to an
effective registration statement or (b) purchased in a transaction not
involving any public offering from a person who is not an affiliate of
the issuer of those securities at the time of sale (nor an affiliate
of the issuer at any time during the preceding three months); provided
a period of two years elapsed since the later of the date the
securities were acquired from the issuer.
Although individual Underlying Loans may be insured or guaranteed by the
United States or an agency or instrumentality of the United States, they need
not be, and Mortgage Securities themselves will not be so insured or guaranteed.
Except as otherwise set forth in the prospectus supplement, Mortgage Securities
will generally be similar to Notes or Certificates, as applicable, offered under
this prospectus.
The prospectus supplement for the Notes or Certificates, as applicable, of
each series evidencing interests in a trust fund including Mortgage Securities
will include a description of the Mortgage Securities and any related credit
enhancement, and the related mortgage loans, unsecured home improvement loans,
contracts, or Agency Securities will be described together with any other
mortgage loans or Agency Securities included in the trust fund of that series.
As used in this prospectus, the terms "mortgage loans," unsecured home
improvement loans, contracts, include the mortgage loans, unsecured home
improvement loans, contracts, as applicable, underlying the Mortgage Securities
in your trust fund. References in this prospectus to advances to be made and
other actions to be taken by the master servicer in connection with the Assets
may include any advances made and other actions taken pursuant to the terms of
the applicable Mortgage Securities.
FHA LOANS AND VA LOANS
FHA loans will be insured by the FHA as authorized under the Housing Act,
and the United States Housing Act of 1937, as amended. One- to four-family FHA
loans will be insured under various FHA programs including the standard FHA
203-b programs to finance the acquisition of one- to four-family housing units
and the FHA 245 graduated payment mortgage program. The FHA loans generally
require a minimum down payment of approximately 5% of the original principal
amount of the FHA loan. No FHA loan may have an interest rate or original
principal balance exceeding the applicable FHA limits at the time of origination
of that FHA loan.
Mortgage loans, unsecured home improvement loans, contracts, that are FHA
loans are insured by the FHA (as described in the prospectus supplement, up to
an amount equal to 90% of the sum of the unpaid principal of the FHA loan, a
portion of the unpaid interest and other liquidation costs) pursuant to Title I
of the Housing Act.
There are two primary FHA insurance programs that are available for
multifamily loans. Sections 221(d)(3) and (d)(4) of the Housing Act allow HUD to
insure multifamily loans that are secured by newly constructed and substantially
rehabilitated multifamily rental projects. Section 244 of the Housing Act
provides for co-insurance of those loans made under Sections 221(d)(3) and
(d)(4) by HUD/FHA and a HUD-approved co-insurer. Generally the term of this type
of multifamily loan may be up to 40 years and the ratio of the loan amount to
property replacement cost can be up to 90%.
Section 223(f) of the Housing Act allows HUD to insure multifamily loans
made for the purchase or refinancing of existing apartment projects that are at
least three years old. Section 244 also provides for co-insurance of mortgage
loans made under Section 223(f). Under Section 223(f), the loan proceeds cannot
be used for substantial rehabilitation work, but repairs may be made for up to,
in general, the greater of 15% of the value of the project and a dollar amount
per apartment unit established from time to time by HUD. In general the loan
term may not exceed 35 years and a loan-to-value ratio refinancing of a project.
VA loans will be partially guaranteed by the VA under the Servicemen's
Readjustment Act of 1944, as amended (the "Servicemen's Readjustment Act"). The
Servicemen's Readjustment Act permits a veteran (or in some instances the spouse
of a veteran) to obtain a mortgage loan guarantee by the VA covering mortgage
financing of the purchase of a one- to four-family dwelling unit at interest
rates permitted by the VA. The program has no mortgage loan limits, requires no
down payment from the purchasers and permits the guarantee of mortgage loans of
up to 30 years' duration. However, no VA loan will have an original principal
amount greater than five times the partial VA guarantee for that VA loan. The
maximum guarantee that may be issued by the VA under this program will be set
forth in the prospectus supplement.
PRE-FUNDING ACCOUNTS
To the extent provided in a prospectus supplement, a portion of the
proceeds of the issuance of Notes or Certificates, as applicable, may be
deposited into an account maintained with the trustee (a "Pre-Funding Account").
In that case, the depositor will be obligated to sell at a predetermined price -
and the trust fund for the related series of Notes or Certificates, as
applicable, will be obligated to purchase - additional Assets (the "Subsequent
Assets") from time to time, and as frequently as daily, within the period (not
to exceed three months) specified in the prospectus supplement (the "Pre-Funding
Period") after the issuance of the Notes or Certificates, as applicable, having
a total principal balance approximately equal to the amount on deposit in the
Pre-Funding Account (the "Pre-Funded Amount") for that series on the date of its
issuance. The Pre-Funded Amount for a series will be specified in the prospectus
supplement, and will not in any case exceed 50% of the total initial Security
Balance of the related Notes or Certificates, as applicable. Any Subsequent
Assets will be required to satisfy specific eligibility criteria more fully set
forth in the prospectus supplement, which criteria will be consistent with the
eligibility criteria of the Assets initially included in the trust fund, subject
to those exceptions that are expressly stated in the prospectus supplement. In
addition, specific conditions must be satisfied before the Subsequent Assets are
transferred into the trust fund, for example, the delivery to the rating
agencies and to the trustee of any required opinions of counsel. See "ERISA
Considerations--Pre-Funding Accounts" for additional information regarding
Pre-Funding Accounts.
Except as set forth in the following sentence, the Pre-Funded Amount will
be used only to purchase Subsequent Assets. Any portion of the Pre-Funded Amount
remaining in the Pre-Funding Account at the end of the Pre-Funding Period will
be used to prepay one or more classes of Notes or Certificates, as applicable,
in the amounts and in the manner specified in the prospectus supplement. In
addition, if specified in the prospectus supplement, the depositor may be
required to deposit cash into an account maintained by the trustee (the
"Capitalized Interest Account") for the purpose of assuring the availability of
funds to pay interest on the Notes or Certificates, as applicable, during the
Pre-Funding Period. Any amount remaining in the Capitalized Interest Account at
the end of the Pre-Funding Period will be remitted as specified in the
prospectus supplement.
Amounts deposited in the Pre-Funding and Capitalized Interest Accounts will
be permitted to be invested, pending application, only in eligible investments
authorized by each applicable rating agency.
ACCOUNTS
Each trust fund will include one or more accounts, established and
maintained on behalf of the securityholders into which the person or persons
designated in the prospectus supplement will, to the extent described in this
prospectus and in the prospectus supplement deposit all payments and collections
received or advanced with respect to the Assets and other assets in the trust
fund. This type of account may be maintained as an interest bearing or a
non-interest bearing account, and funds held in that account may be held as cash
or invested in some short-term, investment grade obligations, in each case as
described in the prospectus supplement. See "Description of the
Agreements--Material Terms of the Pooling and Servicing Agreements and
Underlying Servicing Agreements--Collection Account and Related Accounts."
CREDIT SUPPORT
If so provided in the prospectus supplement, partial or full protection
against some defaults and losses on the Assets in the related trust fund may be
provided to one or more classes of Notes or Certificates, as applicable, in the
related series in the form of subordination of one or more other classes of
Notes or Certificates, as applicable, in that series or by one or more other
types of credit support, for example, a letter of credit, insurance policy,
guarantee, reserve fund or another type of credit support, or a combination of
these (any of these types of coverage for the Notes or Certificates, as
applicable, of any series, is referred to generally as "credit support"). The
amount and types of coverage, the identification of the entity providing the
coverage (if applicable) and related information for each type of credit
support, if any, will be described in the prospectus supplement for a series of
Notes or Certificates, as applicable. See "Description of Credit Support."
CASH FLOW AGREEMENTS
If so provided in the prospectus supplement, the trust fund may include
guaranteed investment contracts pursuant to which moneys held in the funds and
accounts established for the related series will be invested at a specified
rate. The trust fund may also include other agreements, for example, interest
rate swap agreements, interest rate cap or floor agreements, currency swap
agreements or similar agreements provided to reduce the effects of interest rate
or currency exchange rate fluctuations on the Assets or on one or more classes
of Notes or Certificates, as applicable. (Currency swap agreements might be
included in the trust fund if some or all of the Assets were denominated in a
non-United States currency.) The principal terms of any related guaranteed
investment contract or other agreement (any of these types of agreement, a "Cash
Flow Agreement"), including provisions relating to the timing, manner and amount
of payments under these documents and provisions relating to the termination of
these documents, will be described in the prospectus supplement for the related
series. In addition, the prospectus supplement will provide information with
respect to the borrower under any Cash Flow Agreement.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Notes or Certificates,
as applicable, will be applied by the depositor to the purchase of Assets, or
the repayment of the financing incurred in that purchase, and to pay for some of
the expenses incurred in connection with that purchase of Assets and sale of
Notes or Certificates, as applicable. The depositor expects to sell the Notes or
Certificates, as applicable, from time to time, but the timing and amount of
offerings of Notes or Certificates, as applicable, will depend on a number of
factors, including the volume of Assets acquired by the depositor, prevailing
interest rates, availability of funds and general market conditions.
YIELD CONSIDERATIONS
GENERAL
The yield on any Offered Security will depend on the price paid by the
securityholder, the Interest Rate of the Security, the receipt and timing of
receipt of distributions on the Security and the weighted average life of the
Assets in the related trust fund (which may be affected by prepayments,
defaults, liquidations or repurchases).
INTEREST RATE
Notes or Certificates, as applicable, of any class within a series may have
fixed, variable or adjustable Interest Rates, which may or may not be based upon
the interest rates borne by the Assets in the related trust fund. The prospectus
supplement for any series will specify the Interest Rate for each class of Notes
or Certificates, as applicable, or, in the case of a variable or adjustable
Interest Rate, the method of determining the Interest Rate; the effect, if any,
of the prepayment of any Asset on the Interest Rate of one or more classes of
Notes or Certificates, as applicable,; and whether the distributions of interest
on the Notes or Certificates, as applicable, of any class will be dependent, in
whole or in part, on the performance of any borrower under a Cash Flow
Agreement.
If specified in the prospectus supplement, the effective yield to maturity
to each holder of Notes or Certificates, as applicable, entitled to payments of
interest will be below that otherwise produced by the applicable Interest Rate
and purchase price of that Security because, while interest may accrue on each
Asset during a period (each, an "Accrual Period"), the distribution of that
interest will be made on a day that may be several days, weeks or months
following the period of accrual.
TIMING OF PAYMENT OF INTEREST
Each payment of interest on the Notes or Certificates, as applicable,
entitled to distributions of interest (or addition to the Security Balance of a
class of Accrual Securities) will be made by or on behalf of the trustee each
month on the date specified in the related prospectus supplement (each date, a
"Distribution Date"), and will include interest accrued during the Accrual
Period for that Distribution Date. As indicated above under "--Interest Rate,"
if the Accrual Period ends on a date other than the day before a Distribution
Date for the related series, the yield realized by the holders of those Notes or
Certificates, as applicable, may be lower than the yield that would result if
the Accrual Period ended on the day before the Distribution Date.
PAYMENTS OF PRINCIPAL; PREPAYMENTS
The yield to maturity on the Notes or Certificates, as applicable, will be
affected by the rate of principal payments on the Assets (or, in the case of
Mortgage Securities and Agency Securities, the underlying assets related to the
Mortgage Securities and Agency Securities), including principal prepayments
resulting from both voluntary prepayments by the borrowers and involuntary
liquidations. The rate at which principal prepayments occur will be affected by
a variety of factors, including the terms of the Assets (or, in the case of
Mortgage Securities and Agency Securities, the underlying assets related to the
Mortgage Securities and Agency Securities), the level of prevailing interest
rates, the availability of mortgage credit and economic, demographic,
geographic, tax, legal and other factors.
In general, however, if prevailing interest rates fall significantly below
the interest rates on the Assets in a particular trust fund (or, in the case of
Mortgage Securities and Agency Securities, the underlying assets related to the
Mortgage Securities and Agency Securities), those assets are likely to be the
subject of higher principal prepayments than if prevailing rates remain at or
above the rates borne by those assets. However, you should note that some Assets
(or, in the case of Mortgage Securities and Agency Securities, the underlying
assets related to the Mortgage Securities and Agency Securities) may consist of
loans with different interest rates. The rate of principal payment on Mortgage
Securities will also be affected by the allocation of principal payments on the
underlying assets among the Mortgage Securities or Agency Securities and other
Mortgage Securities or Agency Securities of the same series. The rate of
principal payments on the Assets in the related trust fund (or, in the case of
Mortgage Securities and Agency Securities, the underlying assets related to the
Mortgage Securities and Agency Securities) is likely to be affected by the
existence of any Lock-out Periods and Prepayment Premium provisions of the
mortgage loans underlying or comprising those Assets, and by the extent to which
the servicer of any of these mortgage loans is able to enforce these provisions.
Mortgage loans with a Lock-out Period or a Prepayment Premium provision, to the
extent enforceable, generally would be expected to experience a lower rate of
principal prepayments than otherwise identical mortgage loans without those
provisions, with shorter Lock-out Periods or with lower Prepayment Premiums.
Because of the depreciating nature of manufactured housing, which limits
the possibilities for refinancing, and because the terms and principal amounts
of manufactured housing contracts are generally shorter and smaller than the
terms and principal amounts of mortgage loans secured by site-built homes,
changes in interest rates have a correspondingly small effect on the amount of
the monthly payments on mortgage loans secured by site-built homes.
Consequently, changes in interest rates may play a smaller role in prepayment
behavior of manufactured housing contracts than they do in the prepayment
behavior of loans secured by mortgage on site-built homes. Conversely, local
economic conditions and some of the other factors mentioned above may play a
larger role in the prepayment behavior of manufactured housing contracts than
they do in the prepayment behavior of loans secured by mortgages on site-built
homes.
If the purchaser of a Security offered at a discount calculates its
anticipated yield to maturity based on an assumed rate of distributions of
principal that is faster than that actually experienced on the Assets (or, in
the case of Mortgage Securities and Agency Securities, the underlying assets
related to the Mortgage Securities and Agency Securities), the actual yield to
maturity will be lower than that so calculated. Conversely, if the purchaser of
a Security offered at a premium calculates its anticipated yield to maturity
based on an assumed rate of distributions of principal that is slower than that
actually experienced on the Assets (or, in the case of Mortgage Securities and
Agency Securities, the underlying assets related to the Mortgage Securities and
Agency Securities), the actual yield to maturity will be lower than that so
calculated. In either case, if so provided in the prospectus supplement for a
series of Notes or Certificates, as applicable, the effect on yield on one or
more classes of the Notes or Certificates, as applicable, of that series of
prepayments of the Assets in the related trust fund may be mitigated or
exacerbated by any provisions for sequential or selective distribution of
principal to those classes.
When a full prepayment is made on a mortgage loan or a contract, the
borrower is charged interest on the principal amount of the mortgage loan or a
contract so prepaid for the number of days in the month actually elapsed up to
the date of the prepayment or some other period specified in the prospectus
supplement. Generally, the effect of prepayments in full will be to reduce the
amount of interest paid in the following month to holders of Notes or
Certificates, as applicable, entitled to payments of interest because interest
on the principal amount of any mortgage loan or a contract so prepaid will be
paid only to the date of prepayment rather than for a full month. A partial
prepayment of principal is applied so as to reduce the outstanding principal
balance of the related mortgage loan or a contract as of its due date in the
month in which the partial prepayment is received or some other date as is
specified in the prospectus supplement.
The timing of changes in the rate of principal payments on the Assets (or,
in the case of Mortgage Securities and Agency Securities, the underlying assets
related to the Mortgage Securities and Agency Securities) may significantly
affect an investor's actual yield to maturity, even if the average rate of
distributions of principal is consistent with an investor's expectation. In
general, the earlier a principal payment is received on the mortgage loans and
distributed on a Security, the greater the effect on that investor's yield to
maturity. The effect on an investor's yield of principal payments occurring at a
rate higher (or lower) than the rate anticipated by the investor during a
particular period may not be offset by a similar decrease (or increase) in the
rate of principal payments at a later time.
The securityholder will bear the risk of not being able to reinvest
principal received from a Security at a yield at least equal to the yield on
that Security.
PREPAYMENTS--MATURITY AND WEIGHTED AVERAGE LIFE
The rates at which principal payments are received on the Assets included
in or comprising a trust fund and the rate at which payments are made from any
credit support or Cash Flow Agreement for the related series of Notes or
Certificates, as applicable, may affect the ultimate maturity and the weighted
average life of each class of that series. Prepayments on the mortgage loans or
contracts comprising or underlying the Assets in a particular trust fund will
generally accelerate the rate at which principal is paid on some or all of the
classes of the Notes or Certificates, as applicable, of the related series.
If so provided in the prospectus supplement for a series of Notes or
Certificates, as applicable, one or more classes of Notes or Certificates, as
applicable, may have a final scheduled Distribution Date, which is the date on
or before which the Security Balance of the class of Notes or Certificates, as
applicable, is scheduled to be reduced to zero, calculated on the basis of the
assumptions applicable to that series. Weighted average life refers to the
average amount of time that will elapse from the date of issue of a security
until each dollar of principal of that security will be repaid to the investor.
The weighted average life of a class of Notes or Certificates, as applicable, of
a series will be influenced by the rate at which principal on the Assets is paid
to that class, which may be in the form of scheduled amortization or prepayments
(for this purpose, the term "prepayment" includes prepayments, in whole or in
part, and liquidations due to default).
In addition, the weighted average life of the Notes or Certificates, as
applicable, may be affected by the varying maturities of the Assets in a trust
fund. If any Assets in a particular trust fund have actual terms to maturity
less than those assumed in calculating final scheduled Distribution Dates for
the classes of Notes or Certificates, as applicable, of the related series, one
or more classes of these Notes or Certificates, as applicable, may be fully paid
before their respective final scheduled Distribution Dates, even in the absence
of prepayments. Accordingly, the prepayment experience of the Assets will, to
some extent, be a function of the mix of mortgage rates or contract rates and
maturities of the mortgage loans or contracts comprising or underlying those
Assets. See "Description of the Trust Funds."
Prepayments on loans are also commonly measured relative to a prepayment
standard or model, such as the Constant Prepayment Rate ("CPR") prepayment model
or the Standard Prepayment Assumption ("SPA") prepayment model. CPR represents a
constant assumed rate of prepayment each month relative to the then outstanding
principal balance of a pool of loans for the life of those loans. SPA represents
an assumed rate of prepayment each month relative to the then outstanding
principal balance of a pool of loans. A prepayment assumption of 100% of SPA
assumes prepayment rates of 0.2% per annum of the then outstanding principal
balance of those loans in the first month of the life of the loans and an
additional 0.2% per annum in each month thereafter until the thirtieth month.
Starting in the thirtieth month and in each month thereafter during the life of
the loans, 100% of SPA assumes a constant prepayment rate of 6% per annum each
month.
Neither CPR nor SPA nor any other prepayment model or assumption purports
to be a historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of loans, including the mortgage
loans or contracts underlying or comprising the Assets.
The prospectus supplement for each series of Notes or Certificates, as
applicable, may contain tables, if applicable, setting forth the projected
weighted average life of each class of Offered Notes or Offered Certificates, as
applicable, of that series and the percentage of the initial Security Balance of
each class that would be outstanding on specified Distribution Dates based on
the assumptions stated in the prospectus supplement, including assumptions that
prepayments on the mortgage loans comprising or underlying the related Assets
are made at rates corresponding to various percentages of CPR, SPA or some other
standard specified in the prospectus supplement. These tables and assumptions
are intended to illustrate the sensitivity of the weighted average life of the
Notes or Certificates, as applicable, to various prepayment rates and will not
be intended to predict or to provide information that will enable investors to
predict the actual weighted average life of the Notes or Certificates, as
applicable. It is unlikely that prepayment of any mortgage loans or contracts
comprising or underlying the Assets for any series will conform to any
particular level of CPR, SPA or any other rate specified in the prospectus
supplement.
OTHER FACTORS AFFECTING WEIGHTED AVERAGE LIFE
TYPE OF ASSET
If specified in the prospectus supplement, a number of mortgage loans may
have balloon payments due at maturity (which, based on the amortization schedule
of those mortgage loans, may be a substantial amount), and because the ability
of a borrower to make a balloon payment typically will depend on its ability
either to refinance the loan or to sell the related Mortgaged Property, there is
a risk that a number of Balloon Payment Assets may default at maturity. The
ability to obtain refinancing will depend on a number of factors prevailing at
the time refinancing or sale is required, including real estate values, the
borrower's financial situation, prevailing mortgage loan interest rates, the
borrower's equity in the related Mortgaged Property, tax laws and prevailing
general economic conditions. Neither the depositor, the servicer, the master
servicer, nor any of their affiliates will be obligated to refinance or
repurchase any mortgage loan or to sell the Mortgaged Property except to the
extent provided in the prospectus supplement. In the case of defaults, recovery
of proceeds may be delayed by, among other things, bankruptcy of the borrower or
adverse conditions in the market where the property is located. To minimize
losses on defaulted mortgage loans, the servicer may modify mortgage loans that
are in default or as to which a payment default is reasonably foreseeable. Any
defaulted balloon payment or modification that extends the maturity of a
mortgage loan will tend to extend the weighted average life of the Notes or
Certificates, as applicable, and may thus lengthen the period of time elapsed
from the date of issuance of a Security until it is retired.
For some mortgage loans, including ARM Loans, the mortgage rate at
origination may be below the rate that would result if the index and margin
relating to the mortgage loan were applied at origination. For some contracts,
the contract rate may be stepped up during its terms or may otherwise vary or be
adjusted. Under the applicable underwriting standards, the borrower under each
mortgage loan or contract generally will be qualified on the basis of the
mortgage rate or contract rate or contract rate in effect at origination. The
repayment of any of these mortgage loans or contracts may therefore be dependent
on the ability of the borrower to make larger level monthly payments following
the adjustment of the mortgage rate or contract rate. In addition, some mortgage
loans may be subject to temporary buydown plans ("Buydown Mortgage Loans")
pursuant to which the monthly payments made by the borrower during the early
years of the mortgage loan will be less than the scheduled monthly payments on
the mortgage loan (the "Buydown Period"). The periodic increase in the amount
paid by the borrower of a Buydown Mortgage Loan during or at the end of the
applicable Buydown Period may create a greater financial burden for the
borrower, who might not have otherwise qualified for a mortgage, and may
accordingly increase the risk of default for the related mortgage loan.
The mortgage rates on some ARM Loans subject to negative amortization
generally adjust monthly and their amortization schedules adjust less
frequently. During a period of rising interest rates as well as immediately
after origination (initial mortgage rates are generally lower than the sum of
the applicable index at origination and the related margin over that index at
which interest accrues), the amount of interest accruing on the principal
balance of those mortgage loans may exceed the amount of the minimum scheduled
monthly payment on the mortgage loans. As a result, a portion of the accrued
interest on negatively amortizing mortgage loans may be added to the principal
balance of those mortgage loans and will bear interest at the applicable
mortgage rate. The addition of any deferred interest to the principal balance of
any related class or classes of Notes or Certificates, as applicable, will
lengthen the weighted average life of those Notes or Certificates, as
applicable, and may adversely affect yield to holders of those Notes or
Certificates, as applicable, depending on the price at which those Notes or
Certificates, as applicable, were purchased. In addition, for some ARM Loans
subject to negative amortization, during a period of declining interest rates,
it might be expected that each minimum scheduled monthly payment on this type of
mortgage loan would exceed the amount of scheduled principal and accrued
interest on the principal balance of that mortgage loan, and since that excess
will be applied to reduce the principal balance of the related class or classes
of Notes or Certificates, as applicable, the weighted average life of those
Notes or Certificates, as applicable, will be reduced and may adversely affect
yield to holders of those Notes or Certificates, as applicable, depending on the
price at which those Notes or Certificates, as applicable, were purchased.
As may be described in the prospectus supplement, the related Agreement may
provide that all or a portion of the principal collected on or with respect to
the related mortgage loans may be applied by the related trustee to the
acquisition of additional Revolving Credit Line Loans during a specified period
(rather than used to fund payments of principal to securityholders during that
period) with the result that the related Notes or Certificates, as applicable,
possess an interest-only period, also commonly referred to as a revolving
period, which will be followed by an amortization period. Any of these
interest-only or revolving periods may, upon the occurrence of particular events
to be described in the prospectus supplement, terminate before the end of the
specified period and result in the earlier than expected amortization of the
related Notes or Certificates, as applicable.
In addition, and as may be described in the prospectus supplement, the
related Agreement may provide that all or some of this collected principal may
be retained by the trustee (and held in specific temporary investments,
including mortgage loans) for a specified period before being used to fund
payments of principal to securityholders.
The result of the retention and temporary investment by the trustee of this
principal would be to slow the amortization rate of the related Notes or
Certificates, as applicable, relative to the amortization rate of the related
mortgage loans, or to attempt to match the amortization rate of the related
Notes or Certificates, as applicable, to an amortization schedule established at
the time the Notes or Certificates, as applicable, are issued. Any similar
feature applicable to any Notes or Certificates, as applicable, may end on the
occurrence of events to be described in the prospectus supplement, resulting in
the current funding of principal payments to the related securityholders and an
acceleration of the amortization of these Notes or Certificates, as applicable.
TERMINATION
If specified in the prospectus supplement, a series of Notes or
Certificates, as applicable, may be subject to optional early termination
through the repurchase of the Assets in the related trust fund by the party
specified in the prospectus supplement, on any date on which the total Security
Balance of the Notes or Certificates, as applicable, of that series declines to
a percentage specified in the prospectus supplement (generally not to exceed
10%) of the Initial Security Balance, under the circumstances and in the manner
set forth therein. In addition, if so provided in the prospectus supplement,
some classes of Notes or Certificates, as applicable, may be purchased or
redeemed in the manner set forth therein. See "Description of the
Securities--Termination."
DEFAULTS
The rate of defaults on the Assets will also affect the rate, timing and
amount of principal payments on the Assets and thus the yield on the Notes or
Certificates, as applicable. In general, defaults on mortgage loans or contracts
are expected to occur with greater frequency in their early years. The rate of
default on mortgage loans that are refinance or limited documentation mortgage
loans, and on mortgage loans with high Loan-to-Value Ratios, may be higher than
for other types of mortgage loans. Furthermore, the rate and timing of
prepayments, defaults and liquidations on the mortgage loans or contracts will
be affected by the general economic condition of the region of the country in
which the related Mortgage Properties or manufactured homes are located. The
risk of delinquencies and loss is greater and prepayments are less likely in
regions where a weak or deteriorating economy exists, as may be evidenced by,
among other factors, increasing unemployment or falling property values.
FORECLOSURES
The number of foreclosures or repossessions and the principal amount of the
mortgage loans or contracts comprising or underlying the Assets that are
foreclosed or repossessed in relation to the number and principal amount of
mortgage loans or contracts that are repaid in accordance with their terms will
affect the weighted average life of the mortgage loans or contracts comprising
or underlying the Assets and that of the related series of Notes or
Certificates, as applicable.
REFINANCING
At the request of a borrower, the servicer may allow the refinancing of a
mortgage loan or contract in any trust fund by accepting prepayments on the
mortgage loan and permitting a new loan secured by a mortgage on the same
property. In the event of that refinancing, the new loan would not be included
in the related trust fund and, therefore, that refinancing would have the same
effect as a prepayment in full of the related mortgage loan or contract. A
servicer may, from time to time, implement programs designed to encourage
refinancing. These programs may include modifications of existing loans, general
or targeted solicitations, the offering of pre-approved applications, reduced
origination fees or closing costs, or other financial incentives. In addition,
servicers may encourage the refinancing of mortgage loans or contracts,
including defaulted mortgage loans or contracts, that would permit creditworthy
borrowers to assume the outstanding indebtedness of those mortgage loans or
contracts.
DUE-ON-SALE CLAUSES
Acceleration of mortgage payments as a result of transfers of underlying
Mortgaged Property is another factor affecting prepayment rates that may not be
reflected in the prepayment standards or models used in the relevant prospectus
supplement. A number of the mortgage loans comprising or underlying the Assets,
other than FHA loans and VA loans, may include "due-on-sale clauses" that allow
the holder of the mortgage loans to demand payment in full of the remaining
principal balance of the mortgage loans upon sale, transfer or conveyance of the
related Mortgaged Property.
For any mortgage loans, except as set forth in the prospectus supplement,
the servicer will generally enforce any due-on-sale clause to the extent it has
knowledge of the conveyance or proposed conveyance of the underlying Mortgaged
Property and it is entitled to do so under applicable law; provided, however,
that the servicer will not take any action in relation to the enforcement of any
due-on-sale provision that would adversely affect or jeopardize coverage under
any applicable insurance policy. See "Certain Legal Aspects of Mortgage
Loans--Due-on-Sale Clauses" and "Description of the Agreements--Material Terms
of the Pooling and Servicing Agreements and Underlying Servicing
Agreements--Due-on-Sale Provisions."
The contracts, in general, prohibit the sale or transfer of the related
manufactured homes without the consent of the servicer and permit the
acceleration of the maturity of the contracts by the servicer upon any sale or
transfer that is not consented to. It is expected that the servicer will permit
most transfers of manufactured homes and not accelerate the maturity of the
related contracts. In some cases, the transfer may be made by a delinquent
borrower to avoid a repossession of the manufactured home. In the case of a
transfer of a manufactured home after which the servicer desires to accelerate
the maturity of related contract, the servicer's ability to do so will depend on
the enforceability under state law of the due-on-sale clause.
THE DEPOSITOR
ACE Securities Corp., the depositor, is a special purpose corporation
incorporated in the State of Delaware on June 3, 1998. The principal executive
offices of the depositor are located at 6525 Morrison Boulevard, Suite 318,
Charlotte, North Carolina 28211. Its telephone number is (704) 365-0569. The
depositor does not have, nor is it expected in the future to have, any
significant assets.
The limited purposes of the depositor are, in general, to acquire, own and
sell mortgage loans and financial assets; to issue, acquire, own, hold and sell
securities and notes secured by or representing ownership interests in mortgage
loans and other financial assets, collections on the mortgage loans and related
assets; and to engage in any acts that are incidental to, or necessary, suitable
or convenient to accomplish, these purposes.
All of the shares of capital stock of the depositor are held by Altamont
Holdings Corp., a Delaware corporation.
DESCRIPTION OF THE SECURITIES
GENERAL
The Asset-backed certificates (the "Certificates") of each series
(including any class of Certificates not offered by this prospectus) will
represent the entire beneficial ownership interest in the trust fund created
pursuant to the related Agreement. The Asset-backed notes (the "Notes," and
together with the Certificates, the "Securities"), will represent indebtedness
of the related trust fund and will be issued and secured pursuant to an
indenture. Each series of Notes or Certificates, as applicable, will consist of
one or more classes of Notes or Certificates, as applicable, that may:
o provide for the accrual of interest on the series of Notes or
Certificates, as applicable, based on fixed, variable or adjustable
rates;
o be senior ("Senior Notes" or "Senior Certificates," and collectively,
"Senior Securities") or subordinate ("Subordinate Notes" or
"Subordinate Certificates," and collectively, "Subordinate
Securities") to one or more other classes of Notes or Certificates, as
applicable, in respect of distributions on the Notes or Certificates,
as applicable,;
o be entitled either to (A) principal distributions, with
disproportionately low, nominal or no interest distributions or (B)
interest distributions, with disproportionately low, nominal or no
principal distributions (collectively, "Strip Securities");
o provide for distributions of accrued interest on the series of Notes
or Certificates, as applicable, which begin only following the
occurrence of specific events, that as the retirement of one or more
other classes of Notes or Certificates, as applicable, of that series
(collectively, "Accrual Securities");
o provide for payments of principal as described in the prospectus
supplement, from all or only a portion of the Assets in that trust
fund, to the extent of available funds, in each case as described in
the prospectus supplement; and/or
o provide for distributions based on a combination of two or more
components of the Notes or Certificates, as applicable, with one or
more of the characteristics described in this paragraph including a
Strip Security component.
If specified in the prospectus supplement, distributions on one or more
classes of a series of Notes or Certificates, as applicable, may be limited to
collections from a designated portion of the Assets in the related trust fund
(each portion of the Assets, an "Asset Group"). Any of these classes may include
classes of Offered Notes or Offered Certificates, as applicable.
Each class of Notes or Certificates, as applicable, offered by this
prospectus and the related prospectus supplement (the "Offered Notes" and the
"Offered Certificates," respectively, and together, the "Offered Securities")
will be issued in minimum denominations corresponding to the Security Balances
or, in the case of some classes of Strip Securities, notional amounts or
percentage interests specified in the prospectus supplement. The transfer of any
Offered Notes or Offered Certificates, as applicable, may be registered and
those Notes or Certificates, as applicable, may be exchanged without the payment
of any service charge payable in connection with that registration of transfer
or exchange, but the depositor or the trustee or any agent of the depositor or
the trustee may require payment of a sum sufficient to cover any tax or other
governmental charge. One or more classes of Notes or Certificates, as
applicable, of a series may be issued in fully registered, certificated form
("Definitive Notes" or "Definitive Certificates," and collectively, "Definitive
Securities") or in book-entry form ("Book-Entry Notes" or "Book-Entry
Certificates," and collectively, "Book-Entry Securities"), as provided in the
prospectus supplement. See "Description of the Securities--Book-Entry
Registration and Definitive Securities." Definitive Notes or Definitive
Certificates, as applicable, will be exchangeable for other Notes or
Certificates, as applicable, of the same class and series of a similar total
Security Balance, notional amount or percentage interest but of different
authorized denominations.
DISTRIBUTIONS
Distributions on the Notes or Certificates, as applicable, of each series
will be made by or on behalf of the trustee on each Distribution Date as
specified in the prospectus supplement from the Available Distribution Amount
for that series and that Distribution Date. Distributions (other than the final
distribution) will be made to the persons in whose names the Notes or
Certificates, as applicable, are registered at the close of business on, unless
a different date is specified in the prospectus supplement, the last business
day of the month preceding the month in which the Distribution Date occurs (the
"Record Date"), and the amount of each distribution will be determined as of the
close of business on the date specified in the prospectus supplement (the
"Determination Date"). All distributions for each class of Notes or
Certificates, as applicable, on each Distribution Date will be allocated pro
rata among the outstanding securityholders in that class or by random selection
or as described in the prospectus supplement. Payments will be made either by
wire transfer in immediately available funds to the account of a securityholder
at a bank or other entity having appropriate facilities for these payments, if
that securityholder has so notified the trustee or other person required to make
those payments no later than the date specified in the prospectus supplement
(and, if so provided in the prospectus supplement, holds Notes or Certificates,
as applicable, in the requisite amount specified in the prospectus supplement),
or by check mailed to the address of the person entitled to the payment as it
appears on the Security Register; provided, however, that the final distribution
in retirement of the Notes or Certificates, as applicable, will be made only
upon presentation and surrender of the Notes or Certificates, as applicable, at
the location specified in the notice to securityholders of that final
distribution.
AVAILABLE DISTRIBUTION AMOUNT
All distributions on the Notes or Certificates, as applicable, of each
series on each Distribution Date will be made from the Available Distribution
Amount described below, subject to the terms described in the prospectus
supplement. Generally, the "Available Distribution Amount" for each Distribution
Date equals the sum of the following amounts:
(1) the total amount of all cash on deposit in the related Collection
Account as of the corresponding Determination Date, exclusive, unless
otherwise specified in the prospectus supplement, of:
(a) all scheduled payments of principal and interest collected
but due on a date after the related Due Period (unless a different
period is specified in the prospectus supplement, a "Due Period " for
any Distribution Date will begin on the second day of the month in
which the immediately preceding Distribution Date occurs, or the
Cut-off Date in the case of the first Due Period, and will end on the
first day of the month of the related Distribution Date),
(b) all prepayments, together with related payments of the
interest thereon and related Prepayment Premiums, all proceeds of any
FHA insurance, VA Guaranty Policy or insurance policies to be
maintained for each Asset (to the extent that proceeds are not applied
to the restoration of the Asset or released in accordance with the
normal servicing procedures of a servicer, subject to the terms and
conditions applicable to the related Asset) (collectively, "Insurance
Proceeds"), all other amounts received and retained in connection with
the liquidation of Assets in default in the trust fund ("Liquidation
Proceeds"), and other unscheduled recoveries received after the
related Due Period, or other period specified in the prospectus
supplement,
(c) all amounts in the Collection Account that are due or
reimbursable to the depositor, the trustee, an Asset Seller, a
servicer, the master servicer or any other entity as specified in the
prospectus supplement or that are payable in respect of particular
expenses of the related trust fund, and
(d) all amounts received for a repurchase of an Asset from the
trust fund for defective documentation or a breach of representation
or warranty received after the related Due Period, or other period
specified in the prospectus supplement;
(2) if the prospectus supplement so provides, interest or investment
income on amounts on deposit in the Collection Account, including any net
amounts paid under any Cash Flow Agreements;
(3) all advances made by a servicer or the master servicer or any
other entity as specified in the prospectus supplement for that
Distribution Date;
(4) if and to the extent the prospectus supplement so provides,
amounts paid by a servicer or any other entity as specified in the
prospectus supplement with respect to interest shortfalls resulting from
prepayments during the related Prepayment Period; and
(5) to the extent not on deposit in the related Collection Account as
of the corresponding Determination Date, any amounts collected under, from
or in respect of any credit support for that Distribution Date.
As described below, unless otherwise specified in the prospectus
supplement, the entire Available Distribution Amount will be distributed among
the related Notes or Certificates, as applicable, (including any Notes or
Certificates, as applicable, not offered by this prospectus) on each
Distribution Date, and accordingly will be released from the trust fund and will
not be available for any future distributions.
The prospectus supplement for a series of Notes or Certificates, as
applicable, will describe any variation in the calculation or distribution of
the Available Distribution Amount for that series.
DISTRIBUTIONS OF INTEREST ON THE SECURITIES
Each class of Notes or Certificates, as applicable, (other than classes of
Strip Securities which have no Interest Rate) may have a different Interest
Rate, which will be a fixed, variable or adjustable rate at which interest will
accrue on that class or a component of that class (the "Interest Rate" in the
case of Certificates). The prospectus supplement will specify the Interest Rate
for each class or component or, in the case of a variable or adjustable Interest
Rate, the method for determining the Interest Rate. Interest on the Notes or
Certificates, as applicable, will be calculated on the basis of a 360-day year
consisting of twelve 30-day months unless the prospectus supplement specifies a
different basis.
Distributions of interest on the Notes or Certificates, as applicable, of
any class will be made on each Distribution Date (other than any class of
Accrual Securities, which will be entitled to distributions of accrued interest
starting only on the Distribution Date, or under the circumstances, specified in
the prospectus supplement, and any class of Strip Securities that are not
entitled to any distributions of interest) based on the Accrued Security
Interest for that class and that Distribution Date, subject to the sufficiency
of the portion of the Available Distribution Amount allocable to that class on
that Distribution Date. Before any interest is distributed on any class of
Accrual Securities, the amount of Accrued Security Interest otherwise
distributable on that class will instead be added to the Security Balance of
that class on each Distribution Date.
For each class of Notes or Certificates, as applicable, and each
Distribution Date (other than some classes of Strip Securities), "Accrued
Security Interest" will be equal to interest accrued during the related Accrual
Period on the outstanding Security Balance of the class of Notes or
Certificates, as applicable, immediately before the Distribution Date, at the
applicable Interest Rate, reduced as described below. Accrued Security Interest
on some classes of Strip Securities will be equal to interest accrued during the
related Accrual Period on the outstanding notional amount of the Strip Security
immediately before each Distribution Date, at the applicable Interest Rate,
reduced as described below, or interest accrual in the manner described in the
prospectus supplement. The method of determining the notional amount for a
particular class of Strip Securities will be described in the prospectus
supplement. Reference to notional amount is solely for convenience in some of
the calculations and does not represent the right to receive any distributions
of principal. Unless otherwise provided in the prospectus supplement, the
Accrued Security Interest on a series of Notes or Certificates, as applicable,
will be reduced in the event of prepayment interest shortfalls, which are
shortfalls in collections of interest for a full accrual period resulting from
prepayments before the due date in that accrual period on the mortgage loans or
contracts comprising or underlying the Assets in the trust fund for that series.
The particular manner in which these shortfalls are to be allocated among some
or all of the classes of Notes or Certificates, as applicable, of that series
will be specified in the prospectus supplement. The prospectus supplement will
also describe the extent to which the amount of Accrued Security Interest that
is otherwise distributable on (or, in the case of Accrual Securities, that may
otherwise be added to the Security Balance of) a class of Offered Notes or
Offered Certificates, as applicable, may be reduced as a result of any other
contingencies, including delinquencies, losses and deferred interest on the
mortgage loans or contracts comprising or underlying the Assets in the related
trust fund. Unless otherwise provided in the prospectus supplement, any
reduction in the amount of Accrued Security Interest otherwise distributable on
a class of Notes or Certificates, as applicable, by reason of the allocation to
that class of a portion of any deferred interest on the mortgage loans or
contracts comprising or underlying the Assets in the related trust fund will
result in a corresponding increase in the Security Balance of that class. See
"Yield Considerations."
DISTRIBUTIONS OF PRINCIPAL OF THE SECURITIES
The Notes or Certificates, as applicable, of each series, other than some
classes of Strip Securities, will have a "Security Balance" which, at any time,
will equal the then maximum amount that the holder will be entitled to receive
on principal out of the future cash flow on the Assets and other assets included
in the related trust fund. The outstanding Security Balance of a Security will
be reduced:
o to the extent of distributions of principal on that Security from time
to time and
o if and to the extent provided in the prospectus supplement, by the
amount of losses incurred on the related Assets.
The outstanding Security Balance of a Security:
o may be increased in respect of deferred interest on the related
mortgage loans, to the extent provided in the prospectus supplement
and
o in the case of Accrual Securities, will be increased by any related
Accrued Security Interest up until the Distribution Date on which
distributions of interest are required to begin.
If specified in the prospectus supplement, the initial total Security
Balance of all classes of Notes or Certificates, as applicable, of a series will
be greater than the outstanding total principal balance of the related Assets as
of the applicable Cut-off Date. The initial total Security Balance of a series
and each class of the series will be specified in the prospectus supplement.
Distributions of principal will be made on each Distribution Date to the class
or classes of Notes or Certificates, as applicable, in the amounts and in
accordance with the priorities specified in the prospectus supplement. Some
classes of Strip Securities with no Security Balance are not entitled to any
distributions of principal.
If specified in the related prospectus supplement, the trust fund may issue
notes or certificates, as applicable, from time to time and use proceeds of this
issuance to make principal payments with respect to a series.
REVOLVING PERIOD
The applicable prospectus supplement may provide that all or a portion of
the principal collections may be applied by the trustee to the acquisition of
subsequent Revolving Credit Line Loans during a specified period rather than
used to distribute payments of principal to securityholders during that period.
These notes or certificates, as applicable, would then possess an interest only
period, also commonly referred to as a "Revolving Period", which will be
followed by an "Amortization Period", during which principal will be paid. Any
interest only revolving period may terminate prior to the end of the specified
period and result in the earlier than expected principal repayment of the notes
or certificates, as applicable.
COMPONENTS
To the extent specified in the prospectus supplement, distribution on a
class of Notes or Certificates, as applicable, may be based on a combination of
two or more different components as described under "--General" above. To that
extent, the descriptions set forth under "--Distributions of Interest on the
Securities" and "--Distributions of Principal of the Securities" above also
relate to components of the component class of Notes or Certificates, as
applicable. References in those sections to Security Balance may refer to the
principal balance, if any, of these components and reference to the Interest
Rate may refer to the Interest Rate, if any, on these components.
DISTRIBUTIONS ON THE SECURITIES OF PREPAYMENT PREMIUMS
If so provided in the prospectus supplement, Prepayment Premiums that are
collected on the mortgage loans in the related trust fund will be distributed on
each Distribution Date to the class or classes of Notes or Certificates, as
applicable, entitled to the distribution as described in the prospectus
supplement.
ALLOCATION OF LOSSES AND SHORTFALLS
If so provided in the prospectus supplement for a series of Notes or
Certificates, as applicable, consisting of one or more classes of Subordinate
Notes or Subordinate Certificates, as applicable, on any Distribution Date in
respect of which losses or shortfalls in collections on the Assets have been
incurred, the amount of those losses or shortfalls will be borne first by a
class of Subordinate Notes or Subordinate Certificates, as applicable, in the
priority and manner and subject to the limitations specified in the prospectus
supplement. See "Description of Credit Support" for a description of the types
of protection that may be included in a trust fund against losses and shortfalls
on Assets comprising that trust fund. The prospectus supplement for a series of
Notes or Certificates, as applicable, will describe the entitlement, if any, of
a class of Notes or Certificates, as applicable, whose Security Balance has been
reduced to zero as a result of distributions or the allocation of losses on the
related Assets to recover any losses previously allocated to that class from
amounts received on the Assets. However, if the Security Balance of a class of
Notes or Certificates, as applicable, has been reduced to zero as the result of
principal distributions, the allocation of losses on the Assets, an optional
termination or an optional purchase or redemption, that class will no longer be
entitled to receive principal distributions from amounts received on the assets
of the related trust fund, including distributions in respect of principal
losses previously allocated to that class.
ADVANCES IN RESPECT OF DELINQUENCIES
If so provided in the prospectus supplement, the servicer or another entity
described in the prospectus supplement will be required as part of its servicing
responsibilities to advance on or before each Distribution Date its own funds or
funds held in the related Collection Account that are not included in the
Available Distribution Amount for that Distribution Date, in an amount equal to
the total of payments of (1) principal (other than any balloon payments) and (2)
interest (net of related servicing fees and Retained Interest) that were due on
the Assets in that trust fund during the related Due Period and were delinquent
on the related Determination Date, subject to a good faith determination that
the advances will be reimbursable from Related Proceeds (as defined below). In
the case of a series of Notes or Certificates, as applicable, that includes one
or more classes of Subordinate Notes or Subordinate Certificates, as applicable,
and if so provided in the prospectus supplement, the servicer's (or another
entity's) advance obligation may be limited only to the portion of those
delinquencies necessary to make the required distributions on one or more
classes of Senior Notes or Senior Certificates, as applicable, and/or may be
subject to a good faith determination that advances will be reimbursable not
only from Related Proceeds but also from collections on other Assets otherwise
distributable on one or more classes of those Subordinate Notes or Subordinate
Certificates, as applicable. See "Description of Credit Support."
Advances are intended to maintain a regular flow of scheduled interest and
principal payments to holders of the class or classes of Notes or Certificates,
as applicable, entitled to the payments, rather than to guarantee or insure
against losses. Advances of the servicer's (or another entity's) funds will be
reimbursable only out of related recoveries on the Assets (including amounts
received under any form of credit support) respecting which those advances were
made (as to any Assets, "Related Proceeds") and from any other amounts specified
in the prospectus supplement, including out of any amounts otherwise
distributable on one or more classes of Subordinate Notes or Subordinate
Certificates, as applicable, of that series; provided, however, that any advance
will be reimbursable from any amounts in the related Collection Account before
any distributions being made on the Notes or Certificates, as applicable, to the
extent that the servicer (or some other entity) determines in good faith that
that advance (a "Nonrecoverable Advance") is not ultimately recoverable from
Related Proceeds or, if applicable, from collections on other Assets otherwise
distributable on the Subordinate Notes or Subordinate Certificates, as
applicable. If advances have been made by the servicer from excess funds in the
related Collection Account, the servicer is required to replace these funds in
that Collection Account on any future Distribution Date to the extent that funds
in that Collection Account on that Distribution Date are less than payments
required to be made to securityholders on that date. If specified in the
prospectus supplement, the obligations of the servicer (or another entity) to
make advances may be secured by a cash advance reserve fund, a surety bond, a
letter of credit or another form of limited guaranty. If applicable, information
regarding the characteristics of and the identity of any borrower on any surety
bond will be set forth in the prospectus supplement.
If and to the extent so provided in the prospectus supplement, the servicer
(or another entity) will be entitled to receive interest at the rate specified
in the prospectus supplement on its outstanding advances and will be entitled to
pay itself this interest periodically from general collections on the Assets
before any payment to securityholders or as otherwise provided in the related
Agreement and described in the prospectus supplement.
If specified in the prospectus supplement, the master servicer or the
trustee will be required to make advances, subject to specific conditions
described in the prospectus supplement, in the event of a servicer default.
REPORTS TO SECURITYHOLDERS
With each distribution to holders of any class of Notes or Certificates, as
applicable, of a series, the servicer, the master servicer or the trustee, as
provided in the prospectus supplement, will forward or cause to be forwarded to
each holder, to the depositor and to any other parties as may be specified in
the related Agreement, a statement containing the information specified in the
prospectus supplement, or if no information is specified in the prospectus
supplement, generally setting forth, in each case to the extent applicable and
available:
(1) the amount of that distribution to holders of Notes or
Certificates, as applicable, of that class applied to reduce the Security
Balance of the Notes or Certificates, as applicable,;
(2) the amount of that distribution to holders of Notes or
Certificates, as applicable, of that class allocable to Accrued Security
Interest;
(3) the amount of that distribution allocable to Prepayment Premiums;
(4) the amount of related servicing compensation and any other
customary information as is required to enable securityholders to prepare
their tax returns;
(5) the total amount of advances included in that distribution, and
the total amount of unreimbursed advances at the close of business on that
Distribution Date;
(6) the total principal balance of the Assets at the close of business
on that Distribution Date;
(7) the number and total principal balance of mortgage loans in
respect of which
(a) one scheduled payment is delinquent,
(b) two scheduled payments are delinquent,
(c) three or more scheduled payments are delinquent and
(d) foreclosure proceedings have begun;
(8) for any mortgage loan or contract liquidated during the related
Due Period, (a) the portion of the related liquidation proceeds payable or
reimbursable to a servicer (or any other entity) in respect of that
mortgage loan and (b) the amount of any loss to securityholders;
(9) with respect to collateral acquired by the trust fund through
foreclosure or otherwise (an "REO Property") relating to a mortgage loan or
contract and included in the trust fund as of the end of the related Due
Period, the date of acquisition;
(10) for each REO Property relating to a mortgage loan or contract and
included in the trust fund as of the end of the related Due Period,
(a) the book value,
(b) the principal balance of the related mortgage loan or
contract immediately following that Distribution Date
(calculated as if that mortgage loan or contract were still
outstanding taking into account limited modifications to the
terms of the mortgage loan specified in the Agreement),
(c) the total amount of unreimbursed servicing expenses and
unreimbursed advances in respect of the REO Property and
(d) if applicable, the total amount of interest accrued and
payable on related servicing expenses and related advances;
(11) for any REO Property sold during the related Due Period
(a) the total amount of sale proceeds,
(b) the portion of those sales proceeds payable or reimbursable
to the master servicer in respect of that REO Property or
the related mortgage loan or contract and
(c) the amount of any loss to securityholders in respect of the
related mortgage loan;
(12) the total Security Balance or notional amount, as the case may
be, of each class of Notes or Certificates, as applicable, (including any
class of Notes or Certificates, as applicable, not offered by this
prospectus) at the close of business on that Distribution Date, separately
identifying any reduction in that Security Balance due to the allocation of
any loss and increase in the Security Balance of a class of Accrual
Securities if any Accrued Security Interest has been added to that balance;
(13) the total amount of principal prepayments made during the related
Due Period;
(14) the amount deposited in the reserve fund, if any, on that
Distribution Date;
(15) the amount remaining in the reserve fund, if any, as of the close
of business on that Distribution Date;
(16) the total unpaid Accrued Security Interest, if any, on each class
of Notes or Certificates, as applicable, at the close of business on that
Distribution Date;
(17) in the case of Notes or Certificates, as applicable, with a
variable Interest Rate, the Interest Rate applicable to that Distribution
Date, and, if available, the immediately succeeding Distribution Date, as
calculated in accordance with the method specified in the prospectus
supplement;
(18) in the case of Notes or Certificates, as applicable, with an
adjustable Interest Rate, for statements to be distributed in any month in
which an adjustment date occurs, the adjustable Interest Rate applicable to
that Distribution Date, if available, and the immediately succeeding
Distribution Date as calculated in accordance with the method specified in
the prospectus supplement;
(19) as to any series that includes credit support, the amount of
coverage of each instrument of credit support included as of the close of
business on that Distribution Date;
(20) during the Pre-Funding Period, the remaining Pre-Funded Amount
and the portion of the Pre-Funding Amount used to acquire Subsequent Assets
since the preceding Distribution Date;
(21) during the Pre-Funding Period, the amount remaining in the
Capitalized Interest Account; and
(22) the total amount of payments by the borrowers of
(a) default interest,
(b) late charges and
(c) assumption and modification fees collected during the
related Due Period.
Within a reasonable period of time after the end of each calendar year, the
servicer, the master servicer or the trustee, as provided in the prospectus
supplement, will furnish to each securityholder of record at any time during the
calendar year the information required by the Code and applicable regulations
under the Code to enable securityholders to prepare their tax returns. See
"Description of the Securities--Book-Entry Registration and Definitive
Securities."
TERMINATION
The obligations created by the related Agreement for each series of Notes
or Certificates, as applicable, will terminate upon the payment to
securityholders of that series of all amounts held in the Collection Accounts or
by a servicer, the master servicer, if any, or the trustee and required to be
paid to them pursuant to that Agreement following the earlier of (1) the final
payment or other liquidation of the last Asset subject to the related Agreement
or the disposition of all property acquired upon foreclosure of any mortgage
loan or contract subject to the Agreement and (2) the purchase of all of the
assets of the trust fund by the party entitled to effect that termination, under
the circumstances and in the manner set forth in the prospectus supplement. In
no event, however, will the trust fund continue beyond the date specified in the
prospectus supplement. Written notice of termination of the Agreement will be
given to each securityholder, and the final distribution will be made only upon
presentation and surrender of the Notes or Certificates, as applicable, at the
location to be specified in the notice of termination.
If specified in the prospectus supplement, a series of Notes or
Certificates, as applicable, may be subject to optional early termination
through the purchase of the Assets in the related trust fund by the party
specified in the prospectus supplement, under the circumstances and in the
manner set forth in the prospectus supplement. If so provided in the prospectus
supplement, upon the reduction of the Security Balance of a specified class or
classes of Notes or Certificates, as applicable, by a specified percentage, the
party specified in the prospectus supplement will solicit bids for the purchase
of all assets of the trust fund, or of a sufficient portion of those assets to
retire that class or classes or purchase that class or classes at a price set
forth in the prospectus supplement, in each case, under the circumstances and in
the manner set forth in the prospectus supplement. That price will at least
equal the outstanding Security Balances and any accrued and unpaid interest on
the Security Balances (including any unpaid interest shortfalls for prior
Distribution Dates). Any sale of the Assets of the trust fund will be without
recourse to the trust fund or the securityholders. Any purchase or solicitation
of bids may be made only when the total Security Balance of that class or
classes declines to a percentage of the Initial Security Balance of those Notes
or Certificates, as applicable, (not to exceed 10%) specified in the prospectus
supplement. In addition, if so provided in the prospectus supplement, some
classes of Notes or Certificates, as applicable, may be purchased or redeemed in
the manner set forth in the prospectus supplement at a price at least equal to
the outstanding Security Balance of each class so purchased or redeemed and any
accrued and unpaid interest on the Security Balance (including any unpaid
interest shortfalls for prior Distribution Dates).
OPTIONAL PURCHASES
Subject to the provisions of the applicable Agreement, the depositor, the
servicer or any other party specified in the prospectus supplement may, at that
party's option, repurchase any mortgage loan that is in default or as to which
default is reasonably foreseeable if, in the depositor's, the servicer's or any
other party's judgment, the related default is not likely to be cured by the
borrower or default is not likely to be averted, at a price equal to the unpaid
principal balance of the mortgage loan plus accrued interest on the mortgage
loan and under the conditions set forth in the prospectus supplement.
BOOK-ENTRY REGISTRATION AND DEFINITIVE SECURITIES
GENERAL
If provided for in the prospectus supplement, one or more classes of the
Offered Notes or Offered Certificates, as applicable, of any series will be
issued as Book-Entry Notes or Book-Entry Certificates, as applicable, and each
of these classes will be represented by one or more single Notes or
Certificates, as applicable, registered in the name of a nominee for the
depository, The Depository Trust Company ("DTC") and, if provided in the
prospectus supplement, additionally through Clearstream Luxembourg, societe
anonyme ("Clearstream Luxembourg") or the Euroclear System ("Euroclear"). Each
class of Book-Entry Notes or Book-Entry Certificates, as applicable, will be
issued in one or more certificates or notes, as the case may be, that equal the
initial principal amount of the related class of Offered Notes or Offered
Certificates, as applicable, and will initially be registered in the name of
Cede & Co.
No person acquiring an interest in a Book-Entry Security (each, a
"Beneficial Owner") will be entitled to receive a Definitive Security, except as
set forth below under "--Definitive Securities." Unless and until Definitive
Notes or Definitive Certificates, as applicable, are issued for the Book-Entry
Notes or Book-Entry Certificates, as applicable, under the limited circumstances
described in the applicable prospectus supplement or this prospectus, all
references to actions by securityholders with respect to the Book-Entry Notes or
Book-Entry Certificates, as applicable, will refer to actions taken by DTC,
Clearstream Luxembourg or Euroclear upon instructions from their Participants
(as defined below), and all references in this prospectus to distributions,
notices, reports and statements to securityholders with respect to the
Book-Entry Notes or Book-Entry Certificates, as applicable, will refer to
distributions, notices, reports and statements to DTC, Clearstream Luxembourg or
Euroclear, as applicable, for distribution to Beneficial Owners by DTC in
accordance with the procedures of DTC and if applicable, Clearstream Luxembourg
and Euroclear.
Beneficial Owners will hold their Book-Entry Notes or Book-Entry
Certificates, as applicable, through DTC in the United States, or, if the
Offered Notes or Offered Certificates, as applicable, are offered for sale
globally, through Clearstream Luxembourg or Euroclear in Europe if they are
participating organizations ("Participants") of those systems. Participants
include securities brokers and dealers, banks, trust companies and clearing
corporations and may include some other organizations. Indirect access to the
DTC, Clearstream Luxembourg and Euroclear systems also is available to others,
such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a Participant, either directly or
indirectly ("Indirect Participants").
DTC
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the Uniform Commercial Code ("UCC") and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). DTC was
created to hold securities for its Participants, some of which (and/or their
representatives) own DTC, and facilitate the clearance and settlement of
securities transactions between its Participants through electronic book-entry
changes in their accounts, thus eliminating the need for physical movement of
securities. In accordance with its normal procedures, DTC is expected to record
the positions held by each of its Participants in the Book-Entry Notes or
Book-Entry Certificates, as applicable, whether held for its own account or as a
nominee for another person. In general, beneficial ownership of Book-Entry Notes
or Book-Entry Certificates, as applicable, will be subject to the rules,
regulations and procedures governing DTC and its Participants as in effect from
time to time.
CLEARSTREAM LUXEMBOURG
Clearstream Banking, societe anonyme, 67 Bd Grande-Duchesse Charlotte,
L-2967 Luxembourg ("Clearstream, Luxembourg"), was incorporated in 1970 as
"Cedel S.A.", a company with limited liability under Luxembourg law (a societe
anonyme). Cedel S.A. subsequently changed its name to Cedelbank. On January 10,
2000, Cedelbank's parent company, Cedel International, societe anonyme ("CI")
merged its clearing, settlement and custody business with that of Deutsche Borse
Clearing AG ("DBC"). The merger involved the transfer by CI of substantially all
of its assets and liabilities (including its shares in CB) to a new Luxembourg
company, New Cedel International, societe anonyme ("New CI"), which is 50% owned
by CI and 50% owned by DBC's parent company Deutsche Borse AG. The shareholders
of these two entities are banks, securities dealers and financial institutions.
Cedel International currently has 92 shareholders, including U.S. financial
institutions or their subsidiaries. No single entity may own more than 5 percent
of Cedel International's stock.
Further to the merger, the Board of Directors of New Cedel International
decided to rename the companies in the group in order to give them a cohesive
brand name. The new brand name that was chosen is "Clearstream". With effect
from January 14, 2000 New CI has been renamed "Clearstream International,
societe anonyme". On January 18, 2000, Cedelbank was renamed "Clearstream
Banking, societe anonyme", and Cedel Global Services was renamed "Clearstream
Services, societe anonyme".
On January 17, 2000 DBC was renamed "Clearstream Banking AG". This means
that there are now two entities in the corporate group headed by Clearstream
International which share the name "Clearstream Banking", the entity previously
named "Cedelbank" and the entity previously named "Deutsche Brse Clearing AG".
Clearstream, Luxembourg holds securities for its customers ("Clearstream,
Luxembourg Participants") and facilitates the clearance and settlement of
securities transactions between Clearstream, Luxembourg customers through
electronic book-entry changes in accounts of Clearstream, Luxembourg customers,
thereby eliminating the need for physical movement of certificates. Transactions
may be settled by Clearstream, Luxembourg in any of 36 currencies, including
United States Dollars. Clearstream, Luxembourg provides to its customers, among
other things, services for safekeeping, administration, clearance and settlement
of internationally traded securities and securities lending and borrowing.
Clearstream, Luxembourg also deals with domestic securities markets in over 30
countries through established depository and custodial relationships.
Clearstream, Luxembourg is registered as a bank in Luxembourg, and as such is
subject to regulation by the Commission de Surveillance du Secteur Financier,
"CSSF", which supervises Luxembourg banks. Clearstream, Luxembourg's customers
are world-wide financial institutions including underwriters, securities brokers
and dealers, banks, trust companies and clearing corporations. Clearstream,
Luxembourg's U.S. customers are limited to securities brokers and dealers, and
banks. Currently, Clearstream, Luxembourg has approximately 2,000 customers
located in over 80 countries, including all major European countries, Canada,
and the United States. Indirect access to Clearstream, Luxembourg is available
to other institutions that clear through or maintain a custodial relationship
with an account holder of Clearstream, Luxembourg. Clearstream, Luxembourg has
established an electronic bridge with Morgan Guaranty Trust Company of New York
as the Operator of the Euroclear System (MGT/EOC) in Brussels to facilitate
settlement of trades between Clearstream, Luxembourg and MGT/EOC.
EUROCLEAR
Euroclear was created in 1968 to hold securities for its Participants and
to clear and settle transactions between its Participants through simultaneous
electronic book-entry delivery against payment, thus eliminating the need for
physical movement of securities and any risk from lack of simultaneous transfers
of securities and cash. Transactions may be settled in any of 32 currencies,
including United States dollars. Euroclear includes various other services,
including securities lending and borrowing, and interfaces with domestic markets
in several countries generally similar to the arrangements for cross-market
transfers with DTC described above. Euroclear is operated by the Brussels,
Belgium office of Morgan Guaranty Trust Company of New York (the "Euroclear
Operator"), under contract with Euroclear Clearance Systems S.C., a Belgian
cooperative corporation (the "Cooperative Corporation"). All operations are
conducted by the Euroclear Operator, and all Euroclear securities clearance
accounts and Euroclear cash accounts are accounts with the Euroclear Operator,
not the Cooperative Corporation. The Cooperative Corporation establishes policy
for Euroclear on behalf of its Participants. Euroclear Participants include
banks (including central banks), securities brokers and dealers and other
professional financial intermediaries. Indirect access to Euroclear is also
available to other firms that clear through or maintain a custodial relationship
with a Participant of Euroclear, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation that is a member bank of the Federal Reserve System, and is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific securities to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of its
Participants, and has no record of or relationship with persons holding through
Participants of Euroclear.
Clearstream Luxembourg and Euroclear will hold omnibus positions on behalf
of their Participants through customers' securities accounts in Clearstream
Luxembourg's and Euroclear's names on the books of their respective depositaries
which in turn will hold positions in customers' securities accounts in the
depositaries names on the books of DTC. Citibank will act as depositary for
Clearstream Luxembourg and The Chase Manhattan Bank will act as depositary for
Euroclear (individually the "Relevant Depositary" and collectively, the
"European Depositaries").
BENEFICIAL OWNERSHIP OF BOOK-ENTRY SECURITIES
Except as described below, no Beneficial Owner will be entitled to receive
a physical certificate representing a Certificate, or note representing a Note.
Unless and until Definitive Notes or Definitive Certificates, as applicable, are
issued, it is anticipated that the only "securityholder" of the Offered Notes or
Offered Certificates, as applicable, will be Cede & Co., as nominee of DTC.
Beneficial Owners will not be "Certificateholders" as that term is used in any
Agreement, nor "Noteholders" as that term is used in any indenture. Beneficial
Owners are only permitted to exercise their rights indirectly through
Participants, DTC, Clearstream Luxembourg or Euroclear, as applicable.
The Beneficial Owner's ownership of a Book-Entry Security will be recorded
on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
Beneficial Owner's account for that purpose. In turn, the Financial
Intermediary's ownership of a Book-Entry Security will be recorded on the
records of DTC (or of a Participant that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the Beneficial Owner's Financial Intermediary is not a Participant of DTC and on
the records of Clearstream Luxembourg or Euroclear, as appropriate).
Beneficial Owners will receive all distributions of principal of, and
interest on, the Offered Notes or Offered Certificates, as applicable, from the
trustee through DTC and its Participants. While the Offered Notes or Offered
Certificates, as applicable, are outstanding (except under the circumstances
described below), under the rules, regulations and procedures creating and
affecting DTC and its operations (the "Rules"), DTC is required to make
book-entry transfers among Participants on whose behalf it acts with respect to
the Offered Notes or Offered Certificates, as applicable, and is required to
receive and transmit distributions of principal of, and interest on, the Offered
Notes or Offered Certificates, as applicable. Participants and Indirect
Participants with whom Beneficial Owners have accounts with respect to Offered
Notes or Offered Certificates, as applicable, are similarly required to make
book-entry transfers and receive and transmit distributions on behalf of their
respective Beneficial Owners. Accordingly, although Beneficial Owners will not
possess certificates or notes, the Rules provide a mechanism by which Beneficial
Owners will receive distributions and will be able to transfer their interest.
Beneficial Owners will not receive or be entitled to receive certificates
or notes representing their respective interests in the Offered Notes or Offered
Certificates, as applicable, except under the limited circumstances described
below. Unless and until Definitive Notes or Definitive Certificates, as
applicable, are issued, Beneficial Owners who are not Participants may transfer
ownership of Offered Notes or Offered Certificates, as applicable, only through
Participants and Indirect Participants by instructing the Participants and
Indirect Participants to transfer Offered Notes or Offered Certificates, as
applicable, by book-entry transfer, through DTC for the account of the
purchasers of the Offered Notes or Offered Certificates, as applicable, which
account is maintained with their respective Participants. Under the Rules and in
accordance with DTC's normal procedures, transfer of ownership of Book-Entry
Notes or Book-Entry Certificates, as applicable, will be executed through DTC
and the accounts of the respective Participants at DTC will be debited and
credited. Similarly, the Participants and Indirect Participants will make debits
or credits, as the case may be, on their records on behalf of the selling and
purchasing Beneficial Owners.
Because of time zone differences, any credits of securities received in
Clearstream Luxembourg or Euroclear as a result of a transaction with a
Participant will be made during subsequent securities settlement processing and
dated the business day following the DTC settlement date. These credits or any
transactions in securities settled during this processing will be reported to
the relevant Participants of Clearstream Luxembourg or Euroclear on that
business day. Cash received in Clearstream Luxembourg or Euroclear as a result
of sales of securities by or through a Participant of Clearstream Luxembourg or
Euroclear to a Participant of DTC will be received with value on the DTC
settlement date but will be available in the relevant Clearstream Luxembourg or
Euroclear cash account only as of the business day following settlement in DTC.
For information with respect to tax documentation procedures relating to the
Notes or Certificates, as applicable, see "Material Federal Income Tax
Considerations -- Tax Treatment of Foreign Investors" in this prospectus and, if
the Book-Entry Notes or Book-Entry Certificates, as applicable, are globally
offered and the prospectus supplement so provides, see "Global Clearance,
Settlement and Tax Documentation Procedures -- Certain U.S. Federal Income Tax
Documentation Requirements" in Annex I to the prospectus supplement.
Transfers between Participants of DTC will occur in accordance with DTC
Rules. Transfers between Participants of Clearstream Luxembourg or Euroclear
will occur in accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Participants of
Clearstream Luxembourg or Euroclear, on the other, will be effected in DTC in
accordance with the DTC Rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, cross-market transactions
will require delivery of instructions to the relevant European international
clearing system by the counterparty in that system in accordance with its rules
and procedures and within its established deadlines (European time). The
relevant European international clearing system will, if the transaction meets
its settlement requirements, deliver instructions to the Relevant Depositary to
take action to effect final settlement on its behalf by delivering or receiving
securities in DTC, and making or receiving payment in accordance with normal
procedures for same day funds settlement applicable to DTC. Participants of
Clearstream Luxembourg or Euroclear may not deliver instructions directly to the
European Depositaries.
Distributions on the Book-Entry Notes or Book-Entry Certificates, as
applicable, will be made on each Distribution Date by the Trustee to DTC. DTC
will be responsible for crediting the amount of each distribution to the
accounts of the applicable Participants of DTC in accordance with DTC's normal
procedures. Each Participant of DTC will be responsible for disbursing the
distribution to the Beneficial Owners of the Book-Entry Notes or Book-Entry
Certificates, as applicable, that it represents and to each Financial
Intermediary for which it acts as agent. Each Financial Intermediary will be
responsible for disbursing funds to the Beneficial Owners of the Book-Entry
Notes or Book-Entry Certificates, as applicable, that it represents.
Under a book-entry format, Beneficial Owners of the Book-Entry Notes or
Book-Entry Certificates, as applicable, may experience some delay in their
receipt of payments, because the distributions will be forwarded by the Trustee
to Cede & Co. Any distributions on Notes or Certificates, as applicable, held
through Clearstream Luxembourg or Euroclear will be credited to the cash
accounts of Participants of Clearstream Luxembourg or Euroclear in accordance
with the relevant system's rules and procedures, to the extent received by the
Relevant Depositary. These distributions will be subject to tax reporting in
accordance with relevant United States tax laws and regulations. See "Material
Federal Income Tax Considerations -- REMICs -- Taxation of Certain Foreign
Investors" in this prospectus. Because DTC can only act on behalf of Financial
Intermediaries, the ability of a Beneficial Owner to pledge Book-Entry Notes or
Book-Entry Certificates, as applicable, to persons or entities that do not
participate in the depository system, or otherwise take actions in respect of
Book-Entry Notes or Book-Entry Certificates, as applicable, may be limited due
to the lack of physical securities for the Book-Entry Notes or Book-Entry
Certificates, as applicable. In addition, issuance of the Book-Entry Notes or
Book-Entry Certificates, as applicable, in book-entry form may reduce the
liquidity of the securities in the secondary market since potential investors
may be unwilling to purchase Notes or Certificates, as applicable, for which
they cannot obtain physical securities.
Monthly and annual reports will be provided to Cede & Co., as nominee of
DTC, and may be made available by Cede & Co. to Beneficial Owners upon request,
in accordance with the rules, regulations and procedures creating and affecting
the depository, and to the Financial Intermediaries to whose DTC accounts the
Book-Entry Notes or Book-Entry Certificates, as applicable, of Beneficial Owners
are credited.
Generally, DTC will advise the applicable trustee that unless and until
Definitive Notes or Definitive Certificates, as applicable, are issued, DTC will
take any action permitted to be taken by the holders of the Book-Entry Notes or
Book-Entry Certificates, as applicable, under the Agreement or indenture, as
applicable, only at the direction of one or more Financial Intermediaries to
whose DTC accounts the Book-Entry Notes or Book-Entry Certificates, as
applicable, are credited, to the extent that actions are taken on behalf of
Financial Intermediaries whose holdings include the Book-Entry Notes or
Book-Entry Certificates, as applicable. If the Book-Entry Notes or Book-Entry
Certificates, as applicable, are globally offered, Clearstream Luxembourg or the
Euroclear Operator, as the case may be, will take any other action permitted to
be taken by a securityholder under the Agreement or indenture, as applicable, on
behalf of a Participant of Clearstream Luxembourg or Euroclear only in
accordance with its relevant rules and procedures and subject to the ability of
the Relevant Depositary to effect those actions on its behalf through DTC. DTC
may take actions, at the direction of the related Participants, with respect to
some Offered Notes or Offered Certificates, as applicable, that conflict with
actions taken with respect to other Offered Notes or Offered Certificates, as
applicable.
Although DTC, Clearstream Luxembourg and Euroclear have agreed to the
foregoing procedures in order to facilitate transfers of Book-Entry Notes or
Book-Entry Certificates, as applicable, among Participants of DTC, Clearstream
Luxembourg and Euroclear, they are under no obligation to perform or continue to
perform these procedures and the procedures may be discontinued at any time.
None of the depositor, any master servicer, any servicer, the trustee, any
securities registrar or paying agent or any of their affiliates will have any
responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the Book-Entry Notes or Book-Entry
Certificates, as applicable, or for maintaining, supervising or reviewing any
records relating to those beneficial ownership interests.
DEFINITIVE SECURITIES
Notes or Certificates, as applicable, initially issued in book-entry form
will be issued as Definitive Notes or Definitive Certificates, as applicable, to
Beneficial Owners or their nominees, rather than to DTC or its nominee only
(1) if the depositor advises the trustee in writing that DTC is no
longer willing or able to properly discharge its responsibilities as
depository for the Notes or Certificates, as applicable, and the depositor
is unable to locate a qualified successor,
(2) if the depositor, at its option, elects to end the book-entry
system through DTC or
(3) in accordance with any other provisions described in the
prospectus supplement.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, DTC is required to notify all Participants of the
availability through DTC of Definitive Notes or Definitive Certificates, as
applicable, for the Beneficial Owners. Upon surrender by DTC of the security or
securities representing the Book-Entry Notes or Book-Entry Certificates, as
applicable, together with instructions for registration, the trustee will issue
(or cause to be issued) to the Beneficial Owners identified in those
instructions the Definitive Notes or Definitive Certificates, as applicable, to
which they are entitled, and thereafter the trustee will recognize the holders
of those Definitive Notes or Definitive Certificates, as applicable, as
securityholders under the Agreement.
DESCRIPTION OF THE AGREEMENTS
AGREEMENTS APPLICABLE TO A SERIES
REMIC SECURITIES, FASIT SECURITIES, GRANTOR TRUST SECURITIES
Notes or Certificates, as applicable, representing interests in a trust
fund, or a portion of a trust fund, that the trustee will elect to have treated
as a real estate mortgage investment conduit under Sections 860A through 860G of
the Code ("REMIC Securities"), FASIT Securities (as defined in this prospectus),
or Grantor Trust Securities (as defined in this prospectus) will be issued, and
the related trust fund will be created, pursuant to a pooling and servicing
agreement or trust agreement (in either case, generally referred to in this
prospectus as the "pooling and servicing agreement") among the depositor, the
trustee and the sole servicer or master servicer, as applicable. The Assets of
that trust fund will be transferred to the trust fund and thereafter serviced in
accordance with the terms of the pooling and servicing agreement. In the event
there are multiple servicers of the Assets of that trust fund, or in the event
the Securities consist of Notes, each servicer will perform its servicing
functions pursuant to a related underlying servicing agreement.
SECURITIES THAT ARE PARTNERSHIP INTERESTS FOR TAX PURPOSES AND NOTES
Certificates, as applicable, that are intended to be treated as partnership
interests for tax purposes will be issued, and the related trust fund will be
created, pursuant to the pooling and servicing agreement or trust agreement.
A series of Notes issued by a trust fund that is intended to be treated as
a partnership or disregarded entity for tax purposes will be issued pursuant to
an indenture between the related trust fund and an indenture trustee named in
the prospectus supplement. The trust fund will be established either as a
statutory business trust under the law of the State of Delaware or as a common
law trust under the law of the State of New York pursuant to a trust agreement
between the depositor and an owner trustee specified in the prospectus
supplement relating to that series of Notes. The Assets securing payment on the
Notes will be serviced in accordance with a sale and servicing agreement or
servicing agreement.
MATERIAL TERMS OF THE POOLING AND SERVICING AGREEMENTS AND UNDERLYING
SERVICING AGREEMENTS
GENERAL
The following summaries describe the material provisions that may appear in
each pooling and servicing agreement, sale and servicing agreement or servicing
agreement (each an "Agreement"). The prospectus supplement for a series of Notes
or Certificates, as applicable, will describe any provision of the Agreement
relating to that series that materially differs from the description of those
provisions contained in this prospectus. The summaries do not purport to be
complete and are subject to, and are qualified by reference to, all of the
provisions of the Agreement for each trust fund and the description of those
provisions in the prospectus supplement. The provisions of each Agreement will
vary depending on the nature of the Notes or Certificates, as applicable, to be
issued under the Agreement and the nature of the related trust fund. As used in
this prospectus for any series, the term "Security" refers to all of the Notes
or Certificates, as applicable, of that series, whether or not offered by this
prospectus and by the prospectus supplement, unless the context otherwise
requires. A form of a pooling and servicing agreement has been filed as an
exhibit to the Registration Statement of which this prospectus is a part. The
depositor will provide a copy of the pooling and servicing agreement (without
exhibits) relating to any series of Notes or Certificates, as applicable,
without charge upon written request of a securityholder of that series addressed
to ACE Securities Corp., 6525 Morrison Boulevard, Suite 318, Charlotte, North
Carolina 28211, Attention: Elizabeth S. Eldridge.
The servicer or master servicer and the trustee for any series of Notes or
Certificates, as applicable, will be named in the prospectus supplement. In the
event there are multiple servicers for the Assets in a trust fund, a master
servicer will perform some of the administration, calculation and reporting
functions for that trust fund and will supervise the related servicers pursuant
to a pooling and servicing agreement. For a series involving a master servicer,
references in this prospectus to the servicer will apply to the master servicer
where non-servicing obligations are described. If specified in the prospectus
supplement, a manager or administrator may be appointed pursuant to the pooling
and servicing agreement for any trust fund to administer that trust fund.
ASSIGNMENT OF ASSETS; REPURCHASES
At the time of issuance of any series of Notes or Certificates, as
applicable, the depositor will assign (or cause to be assigned) to the
designated trustee the Assets to be included in the related trust fund, together
with all principal and interest to be received on or with respect to those
Assets after the Cut-off Date, other than principal and interest due on or
before the Cut-off Date and other than any Retained Interest. The trustee will,
concurrently with that assignment, deliver the Notes or Certificates, as
applicable, to the depositor in exchange for the Assets and the other assets
comprising the trust fund for that series. Each Asset will be identified in a
schedule appearing as an exhibit to the related Agreement. That schedule will
include detailed information to the extent available and relevant
(1) in respect of each mortgage loan included in the related trust
fund, including the city and state of the related Mortgaged Property and
type of that property, the mortgage rate and, if applicable, the applicable
index, margin, adjustment date and any rate cap information, the original
and remaining term to maturity, the original and outstanding principal
balance and balloon payment, if any, the Loan-to-Value Ratio as of the date
indicated and payment and prepayment provisions, if applicable, and
(2) in respect of each Contract included in the related trust fund,
including the outstanding principal amount and the Contract Rate; and
(3) in respect of each Mortgage Security and Agency Security, the
original and outstanding principal amount, if any, and the interest rate on
the Mortgage Security or Agency Security.
For each mortgage loan, except as otherwise specified in the prospectus
supplement, the depositor will deliver or cause to be delivered to the trustee
(or to the custodian hereinafter referred to) particular loan documents, which
will generally include the original mortgage note endorsed, without recourse, in
blank or to the order of the trustee, the original Mortgage (or a certified copy
of the original Mortgage) with evidence of recording indicated on the original
Mortgage and an assignment of the Mortgage to the trustee in recordable form.
However, a trust fund may include mortgage loans where the original mortgage
note is not delivered to the trustee if the depositor delivers to the trustee or
the custodian a copy or a duplicate original of the mortgage note, together with
an affidavit certifying that the original of the mortgage note has been lost or
destroyed. For those mortgage loans, the trustee (or its nominee) may not be
able to enforce the mortgage note against the related borrower. The Asset Seller
or other entity specified in the prospectus supplement will be required to agree
to repurchase, or substitute for, each of these mortgage loans that is
subsequently in default if the enforcement thereof or of the related Mortgage is
materially adversely affected by the absence of the original mortgage note. The
related Agreement will generally require the depositor or another party
specified in the prospectus supplement to promptly cause each of these
assignments of Mortgage to be recorded in the appropriate public office for real
property records, except in the State of California or in other states where, in
the opinion of counsel acceptable to the trustee, recording is not required to
protect the trustee's interest in the related mortgage loan against the claim of
any subsequent transferee or any successor to or creditor of the depositor, the
servicer, the relevant Asset Seller or any other prior holder of the mortgage
loan.
The trustee (or a custodian) will review the mortgage loan documents within
a specified period of days after receipt of the mortgage loan documents, and the
trustee (or a custodian) will hold those documents in trust for the benefit of
the securityholders. If any of these documents are found to be missing or
defective in any material respect, the trustee (or that custodian) will
immediately notify the servicer and the depositor, and the servicer will
immediately notify the relevant Asset Seller or other entity specified in the
prospectus supplement. If the Asset Seller cannot cure the omission or defect
within a specified number of days after receipt of that notice, then the Asset
Seller or other entity specified in the prospectus supplement will be obligated,
within a specified number of days of receipt of that notice, to either (1)
repurchase the related mortgage loan from the trustee at a price equal to the
sum of the unpaid principal balance of the mortgage loan, plus unpaid accrued
interest at the interest rate for that Asset from the date as to which interest
was last paid to the due date in the Due Period in which the relevant purchase
is to occur, plus servicing expenses that are payable to the servicer, or
another price as specified in the prospectus supplement (the "Purchase Price")
or (2) substitute a new mortgage loan. There can be no assurance that an Asset
Seller or other named entity will fulfill this repurchase or substitution
obligation, and neither the servicer nor the depositor will be obligated to
repurchase or substitute for that mortgage loan if the Asset Seller or other
named entity defaults on its obligation.
This repurchase or substitution obligation constitutes the sole remedy
available to the securityholders or the trustee for omission of, or a material
defect in, a constituent document. To the extent specified in the prospectus
supplement, in lieu of curing any omission or defect in the Asset or
repurchasing or substituting for that Asset, the Asset Seller or other named
entity may agree to cover any losses suffered by the trust fund as a result of
that breach or defect.
Notwithstanding the preceding three paragraphs, the documents for Home
Equity Loans, home improvement contracts and unsecured home improvements loans
will be delivered to the trustee (or a custodian) only to the extent specified
in the prospectus supplement. Generally these documents will be retained by the
servicer, which may also be the Asset Seller. In addition, assignments of the
related Mortgages to the trustee will be recorded only to the extent specified
in the prospectus supplement.
For each contract, the servicer, which may also be the asset seller,
generally will maintain custody of the original contract and copies of documents
and instruments related to each contract and the security interest in the
manufactured home securing each contract. To give notice of the right, title and
interest of the trustee in the contracts, the depositor will cause UCC-1
financing statements to be executed by the related asset seller identifying the
depositor as secured party and by the depositor identifying the trustee as the
secured party and, in each case, identifying all contracts as collateral. The
contracts will be stamped or otherwise marked to reflect their assignment from
the depositor to the trust fund only to the extent specified in the prospectus
supplement. Therefore, if, through negligence, fraud or otherwise, a subsequent
purchaser were able to take physical possession of the contracts without notice
of that assignment, the interest of the trustee in the contracts could be
defeated.
While the contract documents will not be reviewed by the trustee or the
servicer, if the servicer finds that any document is missing or defective in any
material respect, the servicer will be required to immediately notify the
depositor and the relevant asset seller or other entity specified in the
prospectus supplement. If the asset seller or some other entity cannot cure the
omission or defect within a specified number of days after receipt of this
notice, then the asset seller or that other entity will be obligated, within a
specified number of days of receipt of this notice, to repurchase the related
contract from the trustee at the purchase price or substitute for that contract.
There can be no assurance that an asset seller or any other entity will fulfill
this repurchase or substitution obligation, and neither the servicer nor the
depositor will be obligated to repurchase or substitute for that contract if the
asset seller or any other entity defaults on its obligation. This repurchase or
substitution obligation constitutes the sole remedy available to the
securityholders or the trustee for omission of, or a material defect in, a
constituent document. To the extent specified in the prospectus supplement, in
lieu of curing any omission or defect in the asset or repurchasing or
substituting for that asset, the asset seller may agree to cover any losses
suffered by the trust fund as a result of that breach or defect.
Mortgage Securities and Agency Securities will be registered in the name of
the trustee or its nominee on the books of the issuer or guarantor or its agent
or, in the case of Mortgage Securities and Agency Securities issued only in
book-entry form, through the depository with respect to the Mortgage Securities
and Agency Securities, in accordance with the procedures established by the
issuer or guarantor for registration of those certificates, and distributions on
those securities to which the trust fund is entitled will be made directly to
the trustee.
REPRESENTATIONS AND WARRANTIES; REPURCHASES
To the extent provided in the prospectus supplement the depositor will, for
each Asset, assign representations and warranties, as of a specified date (the
person making those representations and warranties, the "Warranting Party")
covering, by way of example, the following types of matters:
o the accuracy of the information set forth for that Asset on the
schedule of Assets appearing as an exhibit to the related Agreement;
o in the case of a mortgage loan, the existence of title insurance
insuring the lien priority of the mortgage loan and, in the case of a
contract, that the contract creates a valid first security interest in
or lien on the related manufactured home;
o the authority of the Warranting Party to sell the Asset;
o the payment status of the Asset;
o in the case of a mortgage loan, the existence of customary provisions
in the related mortgage note and Mortgage to permit realization
against the Mortgaged Property of the benefit of the security of the
Mortgage; and
o the existence of hazard and extended perils insurance coverage on the
Mortgaged Property or manufactured home.
Any Warranting Party shall be an Asset Seller or an affiliate of the Asset
Seller or any other person acceptable to the depositor and will be identified in
the prospectus supplement.
Representations and warranties made in respect of an Asset may have been
made as of a date before the applicable Cut-off Date. A substantial period of
time may have elapsed between that date and the date of initial issuance of the
related series of Notes or Certificates, as applicable, evidencing an interest
in that Asset. In the event of a breach of any of these representations or
warranties, the Warranting Party will be obligated to reimburse the trust fund
for losses caused by that breach or either cure that breach or repurchase or
replace the affected Asset as described below. Since the representations and
warranties may not address events that may occur following the date as of which
they were made, the Warranting Party will have a reimbursement, cure, repurchase
or substitution obligation in connection with a breach of that representation
and warranty only if the relevant event that causes that breach occurs before
that date. That party would have no obligations if the relevant event that
causes that breach occurs after that date.
Each Agreement will provide that the servicer and/or trustee or another
entity identified in the prospectus supplement will be required to notify
promptly the relevant Warranting Party of any breach of any representation or
warranty made by it in respect of an Asset that materially and adversely affects
the value of that Asset or the interests in the prospectus supplement of the
securityholders. If the Warranting Party cannot cure that breach within a
specified period following the date on which that party was notified of that
breach, then the Warranting Party will be obligated to repurchase that Asset
from the trustee within a specified period from the date on which the Warranting
Party was notified of that breach, at the Purchase Price therefor. If so
provided in the prospectus supplement for a series, a Warranting Party, rather
than repurchase an Asset as to which a breach has occurred, will have the
option, within a specified period after initial issuance of that series of Notes
or Certificates, as applicable, to cause the removal of that Asset from the
trust fund and substitute in its place one or more other Assets, as applicable,
in accordance with the standards described in the prospectus supplement. If so
provided in the prospectus supplement for a series, a Warranting Party, rather
than repurchase or substitute an Asset as to which a breach has occurred, will
have the option to reimburse the trust fund or the securityholders for any
losses caused by that breach. This reimbursement, repurchase or substitution
obligation will constitute the sole remedy available to securityholders or the
trustee for a breach of representation by a Warranting Party.
Neither the depositor (except to the extent that it is the Warranting
Party) nor the servicer will be obligated to purchase or substitute for an Asset
if a Warranting Party defaults on its obligation to do so, and no assurance can
be given that the Warranting Parties will carry out those obligations with
respect to the Assets.
A servicer will make representations and warranties regarding its authority
to enter into, and its ability to perform its obligations under, the related
Agreement. A breach of any representation of the servicer that materially and
adversely affects the interests of the securityholders and which continues
unremedied for the number of days specified in the Agreement after the discovery
of the breach by the servicer or the receipt of written notice of that breach by
the servicer from the trustee, the depositor or the holders of Notes or
Certificates, as applicable, evidencing not less than 25% of the voting rights
or other percentage specified in the related Agreement, will constitute an Event
of Default under that Agreement. See "Events of Default" and "Rights Upon Event
of Default."
COLLECTION ACCOUNT AND RELATED ACCOUNTS
GENERAL. The servicer and/or the trustee will, as to each trust fund,
establish and maintain or cause to be established and maintained one or more
separate accounts for the collection of payments on the related Assets
(collectively, the "Collection Account"), which must be an account or accounts
that either:
o are insured by the Bank Insurance Fund or the Savings Association
Insurance Fund of the Federal Deposit Insurance Corporation ("FDIC")
(to the limits established by the FDIC) and the uninsured deposits in
which are otherwise secured so that the securityholders have a claim
with respect to the funds in the Collection Account or a perfected
first priority security interest against any collateral securing those
funds that is superior to the claims of any other depositors or
general creditors of the institution with which the Collection Account
is maintained, or
o are maintained with a bank or trust company, and in a manner
satisfactory to the rating agency or agencies rating any class of
Notes or Certificates, as applicable, of that series.
Investment of amounts in the Collection Account is limited to United States
government securities and other investment grade obligations specified in the
Agreement ("Permitted Investments"). A Collection Account may be maintained as
an interest bearing or a non-interest bearing account and the funds held in the
Collection Account may be invested pending each succeeding Distribution Date in
short-term Permitted Investments. Any interest or other income earned on funds
in the Collection Account will, unless otherwise specified in the prospectus
supplement, be paid to the servicer or its designee as additional servicing
compensation. The Collection Account may be maintained with an institution that
is an affiliate of the servicer, if applicable, provided that that institution
meets the standards imposed by the rating agency or agencies. If permitted by
the rating agency or agencies, a Collection Account may contain funds relating
to more than one series of mortgage pass-through certificates and may contain
other funds respecting payments on mortgage loans belonging to the servicer or
serviced or master serviced by it on behalf of others.
DEPOSITS. A servicer or the trustee will deposit or cause to be deposited
in the Collection Account for one or more trust funds on a daily basis, or any
other period provided in the related Agreement, the following payments and
collections received, or advances made, by the servicer or the trustee or on its
behalf after the Cut-off Date (other than payments due on or before the Cut-off
Date, and exclusive of any amounts representing a Retained Interest), except as
otherwise provided in the Agreement:
(1) all payments on account of principal, including principal
prepayments, on the Assets;
(2) all payments on account of interest on the Assets, including
any default interest collected, in each case net of any portion
retained by a servicer as its servicing compensation and net of any
Retained Interest;
(3) Liquidation Proceeds and Insurance Proceeds, together with
the net proceeds on a monthly basis with respect to any Assets
acquired for the benefit of securityholders;
(4) any amounts paid under any instrument or drawn from any fund
that constitutes credit support for the related series of Notes or
Certificates, as applicable, as described under "Description of Credit
Support;"
(5) any advances made as described under "Description of the
Securities--Advances in Respect of Delinquencies;"
(6) any amounts paid under any Cash Flow Agreement, as described
under "Description of the Trust Funds--Cash Flow Agreements;"
(7) all proceeds of any Asset or, with respect to a mortgage
loan, property acquired in respect of the mortgage loan purchased by
the depositor, any Asset Seller or any other specified person as
described above under "--Assignment of Assets; Repurchases" and
"--Representations and Warranties; Repurchases," all proceeds of any
defaulted mortgage loan purchased as described below under
"--Realization Upon Defaulted Assets," and all proceeds of any Asset
purchased as described under "Description of the
Securities--Termination;"
(8) any amounts paid by a servicer to cover interest shortfalls
arising out of the prepayment of Assets in the trust fund as described
below under "--Retained Interest; Servicing Compensation and Payment
of Expenses;"
(9) to the extent that any of these items do not constitute
additional servicing compensation to a servicer, any payments on
account of modification or assumption fees, late payment charges or
Prepayment Premiums on the Assets;
(10) all payments required to be deposited in the Collection
Account with respect to any deductible clause in any blanket insurance
policy described below under "--Hazard Insurance Policies;"
(11) any amount required to be deposited by a servicer or the
trustee in connection with losses realized on investments for the
benefit of the servicer or the trustee, as the case may be, of funds
held in the Collection Account; and
(12) any other amounts required to be deposited in the Collection
Account as provided in the related Agreement and described in the
prospectus supplement.
WITHDRAWALS. A servicer or the trustee may, from time to time as
provided in the related Agreement, make withdrawals from the Collection Account
for each trust fund for any of the following purposes, except as otherwise
provided in the Agreement:
(1) to make distributions to the securityholders on each
Distribution Date;
(2) to reimburse a servicer for unreimbursed amounts advanced as
described under "Description of the Securities--Advances in
Respect of Delinquencies," which reimbursement is to be made
out of amounts received that were identified and applied by
the servicer as late collections of interest (net of related
servicing fees and Retained Interest) on and principal of
the particular Assets for which the advances were made or
out of amounts drawn under any form of credit support with
respect to those Assets;
(3) to reimburse a servicer for unpaid servicing fees earned and
unreimbursed servicing expenses incurred with respect to
Assets and properties acquired in respect of the Assets,
which reimbursement is to be made out of amounts that
represent Liquidation Proceeds and Insurance Proceeds
collected on the particular Assets and properties, and net
income collected on the particular properties, which fees
were earned or expenses were incurred or out of amounts
drawn under any form of credit support for those Assets and
properties;
(4) to reimburse a servicer for any advances described in clause
(2) above and any servicing expenses described in clause (3)
above which, in the servicer's good faith judgment, will not
be recoverable from the amounts described in those clauses,
which reimbursement is to be made from amounts collected on
other Assets or, if and to the extent so provided by the
related Agreement and described in the prospectus
supplement, just from that portion of amounts collected on
other Assets that is otherwise distributable on one or more
classes of Subordinate Notes or Subordinate Certificates, as
applicable, if any, remain outstanding, and otherwise any
outstanding class of Notes or Certificates, as applicable,
of the related series;
(5) if and to the extent described in the prospectus supplement,
to pay a servicer interest accrued on the advances described
in clause (2) above and the servicing expenses described in
clause (3) above while those advances and servicing expenses
remain outstanding and unreimbursed;
(6) to reimburse a servicer, the depositor, or any of their
respective directors, officers, employees and agents, as the
case may be, for expenses, costs and liabilities incurred by
these parties, as and to the extent described below under
"--Certain Matters Regarding Servicers, the Master Servicer
and the Depositor;"
(7) if and to the extent described in the prospectus supplement,
to pay (or to transfer to a separate account for purposes of
escrowing for the payment of) the trustee's fees;
(8) to reimburse the trustee or any of its directors, officers,
employees and agents, as the case may be, for expenses,
costs and liabilities incurred by these parties, as and to
the extent described below under "--Certain Matters
Regarding the Trustee;"
(9) to pay a servicer, as additional servicing compensation,
interest and investment income earned in respect of amounts
held in the Collection Account;
(10) to pay the person so entitled any amounts deposited in the
Collection Account that were identified and applied by the
servicer as recoveries of Retained Interest;
(11) to pay for costs reasonably incurred in connection with the
proper management and maintenance of any Mortgaged Property
acquired for the benefit of securityholders by foreclosure
or by deed in lieu of foreclosure or otherwise, which
payments are to be made out of income received on that
property;
(12) if one or more elections have been made to treat the trust
fund or designated portions of the trust fund as a REMIC, to
pay any federal, state or local taxes imposed on the trust
fund or its assets or transactions, as and to the extent
described under "Material Federal Income Tax
Considerations--REMICs--Taxes That May Be Imposed on the
REMIC Pool" or in the prospectus supplement, respectively;
(13) to pay for the cost of an independent appraiser or other
expert in real estate matters retained to determine a fair
sale price for a defaulted mortgage loan or a property
acquired in respect of a mortgage loan in connection with
the liquidation of that mortgage loan or property;
(14) to pay for the cost of various opinions of counsel obtained
pursuant to the related Agreement for the benefit of
securityholders;
(15) to pay for the costs of recording the related Agreement if
that recordation materially and beneficially affects the
interests of securityholders, provided that the payment
shall not constitute a waiver with respect to the obligation
of the Warranting Party to remedy any breach of
representation or warranty under the Agreement;
(16) to pay the person so entitled any amounts deposited in the
Collection Account in error, including amounts received on
any Asset after its removal from the trust fund whether by
reason of purchase or substitution as contemplated above
under "--Assignment of Assets; Repurchase" and
"--Representations and Warranties; Repurchases" or
otherwise;
(17) to make any other withdrawals permitted by the related
Agreement; and
(18) to clear and terminate the Collection Account at the
termination of the trust fund.
Other Collection Accounts. If specified in the prospectus supplement,
the Agreement for any series of Notes or Certificates, as applicable, may
provide for the establishment and maintenance of a separate collection account
into which the servicer will deposit on a daily basis, or any other period as
provided in the related Agreement, the amounts described under "--Deposits"
above for one or more series of Notes or Certificates, as applicable. Any
amounts on deposit in any of these collection accounts will be withdrawn from
these collection accounts and deposited into the appropriate Collection Account
by a time specified in the prospectus supplement. To the extent specified in the
prospectus supplement, any amounts that could be withdrawn from the Collection
Account as described under "--Withdrawals" above may also be withdrawn from any
of these collection accounts. The prospectus supplement will set forth any
restrictions for any of these collection accounts, including investment
restrictions and any restrictions for financial institutions with which any of
these collection accounts may be maintained.
The servicer will establish and maintain with the indenture trustee an
account, in the name of the indenture trustee on behalf of the holders of Notes,
into which amounts released from the Collection Account for distribution to the
holders of Notes will be deposited and from which all distributions to the
holders of Notes will be made.
Collection and Other Servicing Procedures. The servicer is required to
make reasonable efforts to collect all scheduled payments under the Assets and
will follow or cause to be followed those collection procedures that it would
follow with respect to assets that are comparable to the Assets and held for its
own account, provided that those procedures are consistent with
(1) the terms of the related Agreement and any related hazard
insurance policy or instrument of credit support, if any,
included in the related trust fund described in this prospectus
or under "Description of Credit Support,"
(2) applicable law and
(3) the general servicing standard specified in the prospectus
supplement or, if no standard is so specified, its normal
servicing practices (in either case, the "Servicing Standard").
In connection, the servicer will be permitted in its discretion to waive any
late payment charge or penalty interest in respect of a late payment on an
Asset.
Each servicer will also be required to perform other customary
functions of a servicer of comparable assets, including maintaining hazard
insurance policies as described in this prospectus and in any prospectus
supplement, and filing and settling claims under these policies; maintaining, to
the extent required by the Agreement, escrow or impoundment accounts of
borrowers for payment of taxes, insurance and other items required to be paid by
any borrower pursuant to the terms of the Assets; processing assumptions or
substitutions in those cases where the servicer has determined not to enforce
any applicable due-on-sale clause; attempting to cure delinquencies; supervising
foreclosures or repossessions; inspecting and managing mortgaged properties or
manufactured homes under some circumstances; and maintaining accounting records
relating to the Assets. The servicer or any other entity specified in the
prospectus supplement will be responsible for filing and settling claims in
respect of particular Assets under any applicable instrument of credit support.
See "Description of Credit Support."
The servicer may agree to modify, waive or amend any term of any Asset
in a manner consistent with the Servicing Standard so long as the modification,
waiver or amendment will not (1) affect the amount or timing of any scheduled
payments of principal or interest on the Asset or (2) in its judgment,
materially impair the security for the Asset or reduce the likelihood of timely
payment of amounts due on the Asset. The servicer also may agree to any
modification, waiver or amendment that would so affect or impair the payments
on, or the security for, an Asset if (1) in its judgment, a material default on
the Asset has occurred or a payment default is reasonably foreseeable and (2) in
its judgment, that modification, waiver or amendment is reasonably likely to
produce a greater recovery with respect to the Asset on a present value basis
than would liquidation. In the event of any modification, waiver or amendment of
any Asset, the servicer will furnish a copy of that modification, waiver or
amendment to the trustee (or its custodian).
In the case of multifamily loans, a borrower's failure to make
required mortgage loan payments may mean that operating income is insufficient
to service the mortgage loan debt, or may reflect the diversion of that income
from the servicing of the mortgage loan debt. In addition, a borrower under a
multifamily loan that is unable to make mortgage loan payments may also be
unable to make timely payment of all required taxes and otherwise to maintain
and insure the related Mortgaged Property. In general, the servicer will be
required to monitor any multifamily loan that is in default, evaluate whether
the causes of the default can be corrected over a reasonable period without
significant impairment of the value of related Mortgaged Property, initiate
corrective action in cooperation with the borrower if cure is likely, inspect
the related Multifamily Property and take those other actions as are consistent
with the related Agreement. A significant period of time may elapse before the
servicer is able to assess the success of servicer can make the initial
determination of appropriate action, evaluate the success of corrective action,
develop additional initiatives, institute foreclosure proceedings and actually
foreclose may vary considerably depending on the particular multifamily loan,
the Multifamily Property, the borrower, the presence of an acceptable party to
assume the multifamily loan and the laws of the jurisdiction in which the
Multifamily Property is located.
REALIZATION UPON DEFAULTED ASSETS
Generally, the servicer is required to monitor any Asset that is in
default, initiate corrective action in cooperation with the borrower if cure is
likely, inspect the Asset and take any other actions as are consistent with the
Servicing Standard. A significant period of time may elapse before the servicer
is able to assess the success of that corrective action or the need for
additional initiatives.
Any Agreement relating to a trust fund that includes mortgage loans or
contracts may grant to the servicer and/or the holder or holders of some classes
of Notes or Certificates, as applicable, a right of first refusal to purchase
from the trust fund at a predetermined purchase price any mortgage loan or
contract as to which a specified number of scheduled payments under the
Agreement are delinquent. Any right of first refusal granted to the holder of an
Offered Security will be described in the prospectus supplement. The prospectus
supplement will also describe any similar right granted to any person if the
predetermined purchase price is less than the Purchase Price described above
under "--Representations and Warranties; Repurchases."
If specified in the prospectus supplement, the servicer may offer to
sell any defaulted mortgage loan or contract described in the preceding
paragraph and not otherwise purchased by any person having a right of first
refusal with respect to that defaulted mortgage loan or contract, if and when
the servicer determines, consistent with the Servicing Standard, so that a sale
would produce a greater recovery on a present value basis than would liquidation
through foreclosure, repossession or similar proceedings. The related Agreement
will provide that any offering be made in a commercially reasonable manner for a
specified period and that the servicer accept the highest cash bid received from
any person (including itself, an affiliate of the servicer or any
securityholder) that constitutes a fair price for that defaulted mortgage loan
or contract. If there is no bid that is determined to be fair, the servicer will
proceed with respect to that defaulted mortgage loan or contract as described
below. Any bid in an amount at least equal to the Purchase Price described above
under "--Representations and Warranties; Repurchases" will in all cases be
deemed fair.
The servicer, on behalf of the trustee, may at any time institute
foreclosure proceedings, exercise any power of sale contained in any mortgage,
obtain a deed in lieu of foreclosure, or otherwise acquire title to a Mortgaged
Property securing a mortgage loan by operation of law or otherwise and may at
any time repossess and realize upon any manufactured home, if that action is
consistent with the Servicing Standard and a default on that mortgage loan or
contract has occurred or, in the servicer's judgment, is imminent.
If title to any Mortgaged Property is acquired by a trust fund as to which
a REMIC election has been made, the servicer, on behalf of the trust fund, will
be required to sell the Mortgaged Property within three years from the close of
the calendar year of acquisition, unless (1) the Internal Revenue Service grants
an extension of time to sell that property or (2) the trustee receives an
opinion of independent counsel to the effect that the holding of the property by
the trust fund longer than three years after the close of the calendar year of
its acquisition will not result in the imposition of a tax on the trust fund or
cause the trust fund to fail to qualify as a REMIC under the Code at any time
that any Notes or Certificates, as applicable, are outstanding. Subject to the
foregoing, the servicer will be required to (A) solicit bids for any Mortgaged
Property so acquired in that manner as will be reasonably likely to realize a
fair price for that property and (B) accept the first (and, if multiple bids are
contemporaneously received, the highest) cash bid received from any person that
constitutes a fair price.
The limitations imposed by the related Agreement and the REMIC
provisions of the Code (if a REMIC election has been made for the related trust
fund) on the ownership and management of any Mortgaged Property acquired on
behalf of the trust fund may result in the recovery of an amount less than the
amount that would otherwise be recovered. See "Certain Legal Aspects of Mortgage
Loans--Foreclosure."
If recovery on a defaulted Asset under any related instrument of
credit support is not available, the servicer nevertheless will be obligated to
follow or cause to be followed those normal practices and procedures as it deems
necessary or advisable to realize upon the defaulted Asset. If the proceeds of
any liquidation of the property securing the defaulted Asset are less than the
outstanding principal balance of the defaulted Asset plus interest accrued on
the defaulted Asset at the applicable interest rate, plus the total amount of
expenses incurred by the servicer in connection with those proceedings and which
are reimbursable under the Agreement, the trust fund will realize a loss in the
amount of that difference. The servicer will be entitled to withdraw or cause to
be withdrawn from the Collection Account out of the Liquidation Proceeds
recovered on any defaulted Asset, before the distribution of those Liquidation
Proceeds to securityholders, amounts representing its normal servicing
compensation on the Security, unreimbursed servicing expenses incurred with
respect to the Asset and any unreimbursed advances of delinquent payments made
with respect to the Asset.
If any property securing a defaulted Asset is damaged the servicer is
not required to expend its own funds to restore the damaged property unless it
determines (1) that restoration will increase the proceeds to securityholders on
liquidation of the Asset after reimbursement of the servicer for its expenses
and (2) that its expenses will be recoverable by it from related Insurance
Proceeds or Liquidation Proceeds.
The pooling and servicing agreement will require the trustee, if it
has not received a distribution for any Mortgage Security or Agency Security by
the fifth business day after the date on which that distribution was due and
payable pursuant to the terms of that Agency Security, to request the issuer or
guarantor, if any, of that Mortgage Security or Agency Security to make that
payment as promptly as possible and legally permitted to take legal action
against that issuer or guarantor as the trustee deems appropriate under the
circumstances, including the prosecution of any claims in connection therewith.
The reasonable legal fees and expenses incurred by the trustee in connection
with the prosecution of this legal action will be reimbursable to the trustee
out of the proceeds of that action and will be retained by the trustee before
the deposit of any remaining proceeds in the Collection Account pending
distribution of the Collection Account to securityholders of the related series.
If the proceeds of any legal action are insufficient to reimburse the trustee
for its legal fees and expenses, the trustee will be entitled to withdraw from
the Collection Account an amount equal to its expenses, and the trust fund may
realize a loss in that amount.
As servicer of the Assets, a servicer, on behalf of itself, the
trustee and the securityholders, will present claims to the borrower under each
instrument of credit support, and will take those reasonable steps as are
necessary to receive payment or to permit recovery under these instruments for
defaulted Assets.
If a servicer or its designee recovers payments under any instrument
of credit support for any defaulted Assets, the servicer will be entitled to
withdraw or cause to be withdrawn from the Collection Account out of those
proceeds, before distribution of the Collection Account to securityholders,
amounts representing its normal servicing compensation on that Asset,
unreimbursed servicing expenses incurred for the Asset and any unreimbursed
advances of delinquent payments made with respect to the Asset. See "Hazard
Insurance Policies" and "Description of Credit Support."
HAZARD INSURANCE POLICIES
Mortgage Loans. Generally, each Agreement for a trust fund composed of
mortgage loans will require the servicer to cause the borrower on each mortgage
loan to maintain a hazard insurance policy (including flood insurance coverage,
if obtainable, to the extent the property is located in a federally designated
flood area, in an amount as is required under applicable guidelines) providing
for the level of coverage that is required under the related Mortgage or, if any
Mortgage permits its holder to dictate to the borrower the insurance coverage to
be maintained on the related Mortgaged Property, then the level of coverage that
is consistent with the Servicing Standard. That coverage will be in general in
an amount equal to the lesser of the principal balance owing on that mortgage
loan (but not less than the amount necessary to avoid the application of any
co-insurance clause contained in the hazard insurance policy) and the amount
necessary to fully compensate for any damage or loss to the improvements on the
Mortgaged Property on a replacement cost basis or any other amount specified in
the prospectus supplement. The ability of the servicer to assure that hazard
insurance proceeds are appropriately applied may be dependent upon its being
named as an additional insured under any hazard insurance policy and under any
other insurance policy referred to below, or upon the extent to which
information in this regard is furnished by borrowers. All amounts collected by
the servicer under any of these policies (except for amounts to be applied to
the restoration or repair of the Mortgaged Property or released to the borrower
in accordance with the servicer's normal servicing procedures, subject to the
terms and conditions of the related Mortgage and mortgage note) will be
deposited in the Collection Account in accordance with the related Agreement.
The Agreement may provide that the servicer may satisfy its obligation
to cause each borrower to maintain a hazard insurance policy by the servicer's
maintaining a blanket policy insuring against hazard losses on the mortgage
loans. If the blanket policy contains a deductible clause, the servicer will be
required to deposit in the Collection Account from its own funds all sums that
would have been deposited in the Collection Account but for that clause.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements of the property by
fire, lightning, explosion, smoke, windstorm and hail, and riot, strike and
civil commotion, subject to the conditions and exclusions specified in each
policy. Although the policies relating to the mortgage loans will be
underwritten by different insurers under different state laws in accordance with
different applicable state forms, and therefore will not contain identical terms
and conditions, the basic terms of the policies are dictated by respective state
laws, and most of these policies typically do not cover any physical damage
resulting from war, revolution, governmental actions, floods and other
water-related causes, earth movement (including earthquakes, landslides and
mudflows), wet or dry rot, vermin, domestic animals and other kinds of uninsured
risks.
The hazard insurance policies covering the Mortgaged Properties
securing the mortgage loans will typically contain a coinsurance clause that in
effect requires the insured at all times to carry insurance of a specified
percentage (generally 80% to 90%) of the full replacement value of the
improvements on the property to recover the full amount of any partial loss. If
the insured's coverage falls below this specified percentage, the coinsurance
clause generally provides that the insurer's liability in the event of partial
loss does not exceed the lesser of (1) the replacement cost of the improvements
less physical depreciation and (2) that proportion of the loss as the amount of
insurance carried bears to the specified percentage of the full replacement cost
of those improvements.
Each Agreement for a trust fund composed of mortgage loans will
require the servicer to cause the borrower on each mortgage loan to maintain all
other insurance coverage for the related Mortgaged Property as is consistent
with the terms of the related Mortgage and the Servicing Standard, which
insurance may typically include flood insurance (if the related Mortgaged
Property was located at the time of origination in a federally designated flood
area).
Any cost incurred by the servicer in maintaining any insurance policy
will be added to the amount owing under the mortgage loan where the terms of the
mortgage loan so permit; provided, however, that the addition of that cost will
not be taken into account for purposes of calculating the distribution to be
made to securityholders. Those costs may be recovered by the servicer from the
Collection Account, with interest, as provided by the Agreement.
Under the terms of the mortgage loans, borrowers will generally be
required to present claims to insurers under hazard insurance policies
maintained on the related Mortgaged Properties. The servicer, on behalf of the
trustee and securityholders, is obligated to present or cause to be presented
claims under any blanket insurance policy insuring against hazard losses on
Mortgaged Properties securing the mortgage loans. However, the ability of the
servicer to present or cause to be presented those claims is dependent upon the
extent to which information in this regard is furnished to the servicer by
borrowers.
Contracts. Generally, the terms of the agreement for a trust fund
composed of contracts will require the servicer to maintain for each contract
one or more hazard insurance policies that provide, at a minimum, the same
coverage as a standard form fire and extended coverage insurance policy that is
customary for manufactured housing, issued by a company authorized to issue
those policies in the state in which the manufactured home is located, and in an
amount that is not less than the maximum insurable value of that manufactured
home or the principal balance due from the borrower on the related contract,
whichever is less; provided, however, that the amount of coverage provided by
each hazard insurance policy must be sufficient to avoid the application of any
co-insurance clause contained therein. When a manufactured home's location was,
at the time of origination of the related contract, within a federally
designated special flood hazard area, the servicer must cause flood insurance to
be maintained, which coverage must be at least equal to the minimum amount
specified in the preceding sentence or any lesser amount as may be available
under the federal flood insurance program. Each hazard insurance policy caused
to be maintained by the servicer must contain a standard loss payee clause in
favor of the servicer and its successors and assigns. If any borrower is in
default in the payment of premiums on its hazard insurance policy or policies,
the servicer must pay those premiums out of its own funds, and may add
separately the premiums to the borrower's obligation as provided by the
contract, but may not add the premiums to the remaining principal balance of the
contract.
The servicer may maintain, in lieu of causing individual hazard
insurance policies to be maintained for each manufactured home, and must
maintain, to the extent that the related contract does not require the borrower
to maintain a hazard insurance policy for the related manufactured home, one or
more blanket insurance policies covering losses on the borrower's interest in
the contracts resulting from the absence or insufficiency of individual hazard
insurance policies. The servicer must pay the premium for that blanket policy on
the basis described therein and must pay any deductible amount for claims under
that policy relating to the contracts.
FHA INSURANCE AND VA GUARANTEES
FHA loans will be insured by the FHA as authorized under the Housing
Act. Some FHA loans will be insured under various FHA programs including the
standard FHA 203(b) program to finance the acquisition of one- to four-family
housing units, the FHA 245 graduated payment mortgage program and the FHA Title
I Program. These programs generally limit the principal amount and interest
rates of the mortgage loans insured. The prospectus supplement for Notes or
Certificates, as applicable, of each series evidencing interests in a trust fund
including FHA loans will set forth additional information regarding the
regulations governing the applicable FHA insurance programs. Except as otherwise
specified in the prospectus supplement, the following describes FHA insurance
programs and regulations as generally in effect for FHA loans.
The insurance premiums for FHA loans are collected by lenders approved
by the Department of Housing and Urban Development ("HUD") or by the servicer
and are paid to the FHA. The regulations governing FHA single-family mortgage
insurance programs provide that insurance benefits are payable either upon
foreclosure (or other acquisition of possession) and conveyance of the mortgaged
premises to the United States of America or upon assignment of the defaulted
loan to the United States of America. For a defaulted FHA loan, the servicer is
limited in its ability to initiate foreclosure proceedings. When it is
determined, either by the servicer or HUD, that default was caused by
circumstances beyond the borrower's control, the servicer is expected to make an
effort to avoid foreclosure by entering, if feasible, into one of a number of
available forms of forbearance plans with the borrower. Those plans may involve
the reduction or suspension of regular mortgage payments for a specified period,
with those payments to be made on or before the maturity date of the mortgage,
or the recasting of payments due under the mortgage up to or, other than FHA
loans originated under the FHA Title I Program, beyond the maturity date. In
addition, when a default caused by those circumstances is accompanied by other
criteria, HUD may provide relief by making payments to the servicer in partial
or full satisfaction of amounts due under the FHA loan (which payments are to be
repaid by the borrower to HUD) or by accepting assignment of the loan from the
servicer. With some exceptions, at least three full monthly installments must be
due and unpaid under the FHA loan, and HUD must have rejected any request for
relief from the borrower before the servicer may initiate foreclosure
proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or
in debentures issued by HUD. Currently, claims are being paid in cash, and
claims have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debentures interest rate. To the extent specified in the prospectus supplement,
the servicer of each single family FHA loan will be obligated to purchase any
debenture issued in satisfaction of that FHA loan upon default for an amount
equal to the principal amount of that debenture.
Other than in relation to the FHA Title I Program, the amount of
insurance benefits generally paid by the FHA is equal to the entire unpaid
principal amount of the defaulted FHA loan adjusted to reimburse the servicer
for some of its costs and expenses and to deduct amounts received or retained by
the servicer after default. When entitlement to insurance benefits results from
foreclosure (or other acquisition of possession) and conveyance to HUD, the
servicer is compensated for no more than two-thirds of its foreclosure costs,
and is compensated for interest accrued and unpaid before that date but in
general only to the extent it was allowed pursuant to a forbearance plan
approved by HUD. When entitlement to insurance benefits results from assignment
of the FHA loan to HUD, the insurance payment includes full compensation for
interest accrued and unpaid to the assignment date. The insurance payment
itself, upon foreclosure of an FHA loan, bears interest from a date 30 days
after the borrower's first uncorrected failure to perform any obligation to make
any payment due under the mortgage and, upon assignment, from the date of
assignment to the date of payment of the claim, in each case at the same
interest rate as the applicable HUD debenture interest rate as described above.
VA loans will be partially guaranteed by the VA under the Serviceman's
Readjustment Act (a "VA Guaranty Policy"). For a defaulted VA loan, the servicer
is, absent exceptional circumstances, authorized to announce its intention to
foreclose only when the default has continued for three months. Generally, a
claim for the guarantee is submitted after liquidation of the Mortgaged
Property.
The amount payable under the guarantee will be the percentage of the
VA loan originally guaranteed applied to indebtedness outstanding as of the
applicable date of computation specified in the VA regulations. Payments under
the guarantee will be equal to the unpaid principal amount of that VA loan,
interest accrued on the unpaid balance of that VA loan to the appropriate date
of computation and limited expenses of the mortgagee, but in each case only to
the extent that those amounts have not been recovered through liquidation of the
Mortgaged Property. The amount payable under the guarantee may in no event
exceed the amount of the original guarantee.
FIDELITY BONDS AND ERRORS AND OMISSIONS INSURANCE
Each Agreement will require that the servicer obtain and maintain in
effect a fidelity bond or similar form of insurance coverage (which may provide
blanket coverage) or any combination of these insuring against loss occasioned
by fraud, theft or other intentional misconduct of the officers, employees and
agents of the servicer. The related Agreement will allow the servicer to
self-insure against loss occasioned by the errors and omissions of the officers,
employees and agents of the servicer so long as the criteria set forth in the
Agreement are met.
DUE-ON-SALE CLAUSES
The mortgage loans may contain clauses requiring the consent of the
mortgagee to any sale or other transfer of the related Mortgaged Property, or
due-on-sale clauses entitling the mortgagee to accelerate payment of the
mortgage loan upon any sale, transfer or conveyance of the related Mortgaged
Property. The servicer will generally enforce any due-on-sale clause to the
extent it has knowledge of the conveyance or proposed conveyance of the
underlying Mortgaged Property and it is entitled to do so under applicable law;
provided, however, that the servicer will not take any action in relation to the
enforcement of any due-on-sale clause that would:
o adversely affect or jeopardize coverage under any applicable
insurance policy or
o materially increase the risk of default or delinquency on, or
materially impair the security for, that mortgage loan.
Any fee collected by or on behalf of the servicer for entering into an
assumption agreement will be retained by or on behalf of the servicer as
additional servicing compensation. See "Certain Legal Aspects of Mortgage
Loans--Due-on-Sale Clauses."
The contracts may also contain clauses requiring the consent of the
mortgagee to any sale or other transfer of the related mortgaged property, or
due-on-sale clauses. The servicer will generally permit that transfer so long as
the transferee satisfies the servicer's then applicable underwriting standards.
The purpose of those transfers is often to avoid a default by the transferring
borrower.
RETAINED INTEREST; SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The prospectus supplement for a series of Notes or Certificates, as
applicable, will specify whether there will be any Retained Interest in the
Assets, and, if so, the initial owner of this Retained Interest. If so, the
Retained Interest will be established on a loan-by-loan basis and will be
specified on an exhibit to the related Agreement. A "Retained Interest" in an
Asset represents a specified portion of the interest payable on the Asset. The
Retained Interest will be deducted from borrower payments as received and will
not be part of the related trust fund.
The servicer's primary servicing compensation for a series of Notes or
Certificates, as applicable, will come from the periodic payment to it of a
portion of the interest payment on each Asset or any other amount specified in
the prospectus supplement. Since any Retained Interest and a servicer's primary
compensation are percentages of the principal balance of each Asset, those
amounts will decrease in accordance with the amortization of the Assets. The
prospectus supplement for a series of Notes or Certificates, as applicable,
evidencing interests in a trust fund that includes mortgage loans or contracts
may provide that, as additional compensation, the servicer may retain all or a
portion of assumption fees, modification fees, late payment charges or
Prepayment Premiums collected from borrowers and any interest or other income
that may be earned on funds held in the Collection Account or any account
established by a servicer pursuant to the Agreement.
The servicer may, to the extent provided in the prospectus supplement,
pay from its servicing compensation expenses incurred in connection with its
servicing and managing of the Assets, including payment of the fees and
disbursements of the trustee and independent accountants, payment of expenses
incurred in connection with distributions and reports to securityholders, and
payment of any other expenses described in the prospectus supplement. Some other
expenses, including expenses relating to defaults and liquidations on the Assets
and, to the extent so provided in the prospectus supplement, interest on these
expenses at the rate specified in the prospectus supplement may be borne by the
trust fund.
If and to the extent provided in the prospectus supplement, the
servicer may be required to apply a portion of the servicing compensation
otherwise payable to it in respect of any Due Period to interest shortfalls
resulting from the voluntary prepayment of any Assets in the related trust fund
during that period before their due dates.
EVIDENCE AS TO COMPLIANCE
Each Agreement relating to Assets that include mortgage loans or
contracts, unless otherwise provided in the prospectus supplement, will provide
that on or before a specified date in each year, beginning with the first of
these dates at least six months after the related Cut-off Date, a firm of
independent public accountants will furnish a statement to the trustee to the
effect that, on the basis of the examination by that firm conducted
substantially in compliance with either the Uniform Single Attestation Program
for Mortgage Bankers, the Audit Program for Mortgages serviced for Freddie Mac
or any other program used by the servicer, the servicing by or on behalf of the
servicer of mortgage loans under agreements substantially similar to each other
(including the related Agreement) was conducted in compliance with the terms of
those agreements or that program except for any significant exceptions or errors
in records that, in the opinion of the firm, either the Audit Program for
Mortgages serviced for Freddie Mac, or paragraph 4 of the Uniform Single
Attestation Program for Mortgage Bankers, or any other program, requires it to
report.
Each Agreement will also provide for delivery to the trustee, on or
before a specified date in each year, of an officer's certificate of the
servicer to the effect that the servicer has fulfilled its obligations under the
Agreement throughout the preceding calendar year or other specified twelve-month
period.
CERTAIN MATTERS REGARDING SERVICERS, THE MASTER SERVICER AND THE
DEPOSITOR
The servicer or master servicer under each Agreement will be named in
the prospectus supplement. The entities serving as servicer or master servicer
may be affiliates of the depositor and may have other normal business
relationships with the depositor or the depositor's affiliates. If applicable,
reference in this prospectus to the servicer will also be deemed to be to the
master servicer. Each Agreement will provide, in general, that:
o The servicer may resign from its obligations and duties under the
Agreement only upon a determination that its duties under the
Agreement are no longer permissible under applicable law or are
in material conflict by reason of applicable law with any other
activities carried on by it, the other activities of the servicer
so causing that conflict being of a type and nature carried on by
the servicer at the date of the Agreement. No resignation will
become effective until the trustee or a successor servicer has
assumed the servicer's obligations and duties under the
Agreement.
o Neither any servicer, the depositor nor any director, officer,
employee, or agent of a servicer or the depositor will be under
any liability to the related trust fund or securityholders for
any action taken, or for refraining from the taking of any
action, in good faith pursuant to the Agreement; provided,
however, that neither a servicer, the depositor nor any other
person will be protected against any breach of a representation,
warranty or covenant made in the related Agreement, or against
any liability specifically imposed by the Agreement, or against
any liability that would otherwise be imposed by reason of
willful misfeasance, bad faith or gross negligence in the
performance of obligations or duties under the Agreement or by
reason of reckless disregard of obligations and duties under the
Agreement.
o Any servicer, the depositor and any director, officer, employee
or agent of a servicer or the depositor will be entitled to
indemnification by the related trust fund and will be held
harmless against any loss, liability or expense incurred in
connection with any legal action relating to the Agreement or the
Notes or Certificates, as applicable; provided, however, that
that indemnification will not extend to any loss, liability or
expense
(1) specifically imposed by that Agreement or otherwise
incidental to the performance of obligations and duties
under the Agreement, including, in the case of a
servicer, the prosecution of an enforcement action in
respect of any specific mortgage loan or mortgage loans
or contract or contracts (except as any loss, liability
or expense will be otherwise reimbursable pursuant to
that Agreement);
(2) incurred in connection with any breach of a
representation, warranty or covenant made in that
Agreement;
(3) incurred by reason of misfeasance, bad faith or gross
negligence in the performance of obligations or duties
under the Agreement, or by reason of reckless disregard
of those obligations or duties;
(4) incurred in connection with any violation of any state
or federal securities law; or
(5) imposed by any taxing authority if that loss, liability
or expense is not specifically reimbursable pursuant to
the terms of the related Agreement.
o Neither any servicer nor the depositor will be under any
obligation to appear in, prosecute or defend any legal action
that is not incidental to its respective responsibilities under
the Agreement and which in its opinion may involve it in any
expense or liability. Any servicer or the depositor may, however,
in its discretion undertake any action which it may deem
necessary or desirable with respect to the Agreement and the
rights and duties of the parties to the Agreement and the
interests of the securityholders under the Agreement. In that
event, the legal expenses and costs of that action and any
liability resulting will be expenses, costs and liabilities of
the securityholders, and the servicer or the depositor, as the
case may be, will be entitled to be reimbursed therefor and to
charge the Collection Account.
Any person into which the servicer or the depositor may be merged or
consolidated, or any person resulting from any merger or consolidation to which
the servicer or the depositor is a party, or any person succeeding to the
business of the servicer or the depositor, may be the successor of the servicer
or the depositor, as the case may be, under the terms of the related Agreement.
SPECIAL SERVICERS
If and to the extent specified in the prospectus supplement, a special
servicer (a "Special servicer") may be a party to the related Agreement or may
be appointed by the servicer or another specified party to perform specified
duties in respect of servicing the related mortgage loans that would otherwise
be performed by the servicer (for example, the workout and/or foreclosure of
defaulted mortgage loans). The rights and obligations of any Special servicer
will be specified in the prospectus supplement, and the servicer will be liable
for the performance of a Special servicer only if, and to the extent, set forth
in the prospectus supplement.
EVENTS OF DEFAULT UNDER THE AGREEMENT
Events of default under the related Agreement will generally include:
o any failure by the servicer to distribute or cause to be
distributed to securityholders, or to remit to the trustee for
distribution to securityholders, any required payment that
continues after a grace period, if any;
o any failure by the servicer duly to observe or perform in any
material respect any of its other covenants or obligations under
the Agreement that continues unremedied for 30 days after written
notice of that failure has been given to the servicer by the
trustee or the depositor, or to the servicer, the depositor and
the trustee by securityholders evidencing not less than 25% of
the voting rights for that series;
o any breach of a representation or warranty made by the servicer
under the Agreement that materially and adversely affects the
interests of securityholders and which continues unremedied for
30 days after written notice of that breach has been given to the
servicer by the trustee or the depositor, or to the servicer, the
depositor and the trustee by the holders of Notes or
Certificates, as applicable, evidencing not less than 25% of the
voting rights for that series; and
o some events of insolvency, readjustment of debt, marshaling of
assets and liabilities or similar proceedings and actions by or
on behalf of the servicer indicating its insolvency or inability
to pay its obligations.
Material variations to the foregoing events of default (other than to
shorten cure periods or eliminate notice requirements) will be specified in the
prospectus supplement. The trustee will, not later than the later of 60 days or
any other period specified in the prospectus supplement after the occurrence of
any event that constitutes or, with notice or lapse of time or both, would
constitute an event of default and five days after specific officers of the
trustee become aware of the occurrence of that event, transmit by mail to the
depositor and all securityholders of the applicable series notice of that
occurrence, unless that default has been cured or waived.
RIGHTS UPON EVENT OF DEFAULT UNDER THE AGREEMENTS
So long as an event of default under an Agreement remains unremedied,
the depositor or the trustee may, and at the direction of holders of Notes or
Certificates, as applicable, evidencing not less than 51% (or any other
percentage specified in the Agreement) of the voting rights for that series, the
trustee will terminate all of the rights and obligations of the servicer under
the Agreement and in and to the mortgage loans (other than as a securityholder
or as the owner of any Retained Interest), whereupon the trustee will succeed to
all of the responsibilities, duties and liabilities of the servicer under the
Agreement (except that if the trustee is prohibited by law from obligating
itself to make advances regarding delinquent Assets, or if the prospectus
supplement so specifies, then the trustee will not be obligated to make those
advances) and will be entitled to similar compensation arrangements. If the
trustee is unwilling or unable so to act, it may or, at the written request of
the holders of Notes or Certificates, as applicable, entitled to at least 51%
(or any other percentage specified in the Agreement) of the voting rights for
that series, it must appoint, or petition a court of competent jurisdiction for
the appointment of, a loan servicing institution acceptable to the rating agency
with a net worth at the time of that appointment of at least $15,000,000 (or any
other amount specified in the Agreement) to act as successor to the servicer
under the Agreement. Pending that appointment, the trustee is obligated to act
in that capacity. The trustee and any successor servicer may agree upon the
servicing compensation to be paid, which in no event may be greater than the
compensation payable to the servicer under the Agreement.
The holders of Notes or Certificates, as applicable, representing at
least 66 2/3% (or any other percentage specified in the Agreement) of the voting
rights allocated to the respective classes of Notes or Certificates, as
applicable, affected by any event of default will be entitled to waive that
event of default; provided, however, that an Event of Default involving a
failure to distribute a required payment to securityholders described in clause
(1) under "Events of Default under the Agreements" may be waived only by all of
the securityholders. Upon any waiver of an event of default, that event of
default will cease to exist and will be deemed to have been remedied for every
purpose under the Agreement.
No securityholders will have the right under any Agreement to
institute any proceeding with respect to the Agreement unless that holder
previously has given to the trustee written notice of default and unless the
holders of Notes or Certificates, as applicable, evidencing not less than 25%
(or any other percentage specified in the Agreement) of the voting rights have
made written request upon the trustee to institute that proceeding in its own
name as trustee under the Agreement and have offered to the trustee reasonable
indemnity, and the trustee for 60 days (or any other number of days specified in
the Agreement) has neglected or refused to institute any proceeding. The
trustee, however, is under no obligation to exercise any of the trusts or powers
vested in it by any Agreement or to make any investigation of matters arising
under the Agreement or to institute, conduct or defend any litigation under the
Agreement or in relation to the Agreement at the request, order or direction of
any of the securityholders covered by that Agreement, unless those
securityholders have offered to the trustee reasonable security or indemnity
against the costs, expenses and liabilities that may be incurred.
The manner of determining the voting rights of a Security or class or
classes of Notes or Certificates, as applicable, will be specified in the
Agreement.
AMENDMENT
In general, each Agreement may be amended by the parties to it,
without the consent of any securityholders covered by the Agreement, to
(1) cure any ambiguity or mistake;
(2) correct, modify or supplement any provision in the Agreement
that may be inconsistent with any other provision in the Agreement or
with the prospectus supplement;
(3) make any other provisions with respect to matters or
questions arising under the Agreement that are not materially
inconsistent with the provisions of the Agreement; or
(4) comply with any requirements imposed by the Code; provided
that, in the case of clause (3), that amendment will not adversely
affect in any material respect the interests of any securityholders
covered by the Agreement as evidenced either by an opinion of counsel
to that effect or the delivery to the trustee of written notification
from each rating agency that provides, at the request of the
depositor, a rating for the Offered Notes or Offered Certificates, as
applicable, of the related series to the effect that that amendment or
supplement will not cause that rating agency to lower or withdraw the
then current rating assigned to those Notes or Certificates, as
applicable.
In general, each Agreement may also be amended by the depositor, the
servicer, if any, and the trustee, with the consent of the securityholders
affected by the amendment evidencing not less than 51% (or any other percentage
specified in the Agreement) of the voting rights, for any purpose; provided,
however, no amendment may (1) reduce in any manner the amount of, or delay the
timing of, payments received or advanced on Assets that are required to be
distributed on any Security without the consent of the securityholder or (2)
reduce the consent percentages described in this paragraph without the consent
of all the securityholders covered by the Agreement then outstanding. However,
for any series of Notes or Certificates, as applicable, as to which a REMIC
election is to be made, the trustee will not consent to any amendment of the
Agreement unless it has first have received an opinion of counsel to the effect
that that amendment will not result in the imposition of a tax on the related
trust fund or, if applicable, cause the related trust fund to fail to qualify as
a REMIC, at any time that the related Notes or Certificates, as applicable, are
outstanding.
THE TRUSTEE
The trustee under each Agreement will be named in the prospectus
supplement. The commercial bank, national banking association, banking
corporation or trust company serving as trustee may have a banking relationship
with the depositor and its affiliates, with any servicer and its affiliates and
with any master servicer and its affiliates. To the extent consistent with its
fiduciary obligations as trustee, the trustee may delegate its duties to one or
more agents as provided in the Agreement.
DUTIES OF THE TRUSTEE
The trustee will make no representations as to the validity or
sufficiency of any Agreement, the Notes or Certificates, as applicable, or any
Asset or related document and is not accountable for the use or application by
or on behalf of any servicer of any funds paid to the master servicer or its
designee in respect of the Notes or Certificates, as applicable, or the Assets,
or deposited into or withdrawn from the Collection Account or any other account
by or on behalf of the servicer. If no Event of Default has occurred and is
continuing, the trustee is required to perform only those duties specifically
required under the related Agreement, as applicable. However, upon receipt of
the various certificates, reports or other instruments required to be furnished
to it, the trustee is required to examine those documents and to determine
whether they conform to the requirements of the Agreement.
CERTAIN MATTERS REGARDING THE TRUSTEE
The trustee and any director, officer, employee or agent of the
trustee will be entitled to indemnification out of the Collection Account for
any loss, liability or expense (including costs and expenses of litigation, and
of investigation, counsel fees, damages, judgments and amounts paid in
settlement) incurred in connection with the trustee's
(1) enforcing its rights and remedies and protecting the interests of
the securityholders during the continuance of an Event of
Default,
(2) defending or prosecuting any legal action in respect of the
related Agreement or series of Notes or Certificates, as
applicable,
(3) being the mortgagee of record for the mortgage loans in a trust
fund and the owner of record for any Mortgaged Property acquired
in respect thereof for the benefit of securityholders, or
(4) acting or refraining from acting in good faith at the direction
of the holders of the related series of Notes or Certificates, as
applicable, entitled to not less than 25% (or any other
percentage as is specified in the related Agreement for any
particular matter) of the voting rights for that series;
provided, however, that this indemnification will not extend to any loss,
liability or expense that constitutes a specific liability of the trustee
pursuant to the related Agreement, or to any loss, liability or expense incurred
by reason of willful misfeasance, bad faith or negligence on the part of the
trustee in the performance of its obligations and duties under the Agreement, or
by reason of its reckless disregard of those obligations or duties, or as may
arise from a breach of any representation, warranty or covenant of the trustee
made in the Agreement.
RESIGNATION AND REMOVAL OF THE TRUSTEE
The trustee may at any time resign from its obligations and duties
under an Agreement by giving written notice of its resignation to the depositor,
the servicer, if any, each rating agency, and all securityholders. Upon
receiving that notice of resignation, the depositor is required promptly to
appoint a successor trustee acceptable to the servicer, if any. If no successor
trustee has been so appointed and has accepted appointment within 30 days after
the giving of that notice of resignation, the resigning trustee may petition any
court of competent jurisdiction for the appointment of a successor trustee.
If at any time the trustee ceases to be eligible to continue as a
trustee under the related Agreement, or if at any time the trustee becomes
incapable of acting, or is adjudged bankrupt or insolvent, or a receiver of the
trustee or of its property is appointed, or any public officer takes charge or
control of the trustee or of its property or affairs for the purpose of
rehabilitation, conservation or liquidation, or if a change in the financial
condition of the trustee has adversely affected or will adversely affect the
rating on any class of the Notes or Certificates, as applicable, then the
depositor and/or a party specified in the related Agreement may remove the
trustee and appoint a successor trustee acceptable to the master servicer, if
any, according to the terms of the related Agreement. Securityholders of any
series entitled to at least 51% (or any other percentage specified in the
prospectus supplement) of the voting rights for that series may at any time
remove the trustee without cause and appoint a successor trustee.
Any resignation or removal of the trustee and appointment of a
successor trustee will not become effective until acceptance of appointment by
the successor trustee.
MATERIAL TERMS OF THE INDENTURE
GENERAL
The following summary describes the material provisions that may
appear in each indenture. The prospectus supplement for a series of Notes will
describe any provision of the indenture relating to that series that materially
differs from the description of that provision contained in this prospectus. The
summaries do not purport to be complete and are subject to, and are qualified by
reference to, all of the provisions of the indenture for a series of Notes. A
form of an indenture has been filed as an exhibit to the Registration Statement
of which this prospectus is a part. The depositor will provide a copy of the
indenture (without exhibits) relating to any series of Notes without charge upon
written request of a securityholder of that series addressed to ACE Securities
Corp., 6525 Morrison Boulevard, Suite 318, Charlotte, North Carolina 28211,
Attention: Elizabeth S. Eldridge.
EVENTS OF DEFAULT
Events of default under the indenture for each series of Notes will
generally include:
o a default for thirty days (or any other number of days specified
in the prospectus supplement) or more in the payment of any
principal of or interest on a Note of that series, to the extent
specified in the prospectus supplement;
o failure to perform any other covenant of the depositor or the
trust fund in the indenture that continues for a period of sixty
days (or any other number of days specified in the prospectus
supplement or the indenture) after notice of the failure is given
in accordance with the procedures described in the prospectus
supplement;
o any representation or warranty made by the depositor or the trust
fund in the indenture or in any certificate or other writing
delivered pursuant to the indenture or in connection with the
indenture with respect to or affecting that series having been
incorrect in a material respect as of the time made, and that
breach is not cured within sixty days (or any other number of
days specified in the prospectus supplement) after notice of the
breach is given in accordance with the procedures described in
the prospectus supplement;
o specified events of bankruptcy, insolvency, receivership or
liquidation of the trust fund; or
o any other event of default provided with respect to Notes of that
series.
If an event of default with respect to the Notes of any series at the
time outstanding occurs and is continuing, subject to and in accordance with the
terms of the indenture, either the indenture trustee or the holders of a
majority of the then total outstanding amount of the Notes of that series may
declare the principal amount (or, if the Notes of that series are Accrual
Securities, that portion of the principal amount as may be specified in the
terms of that series, as provided in the indenture) of all the Notes of that
series to be due and payable immediately. That declaration may, under some
circumstances, be rescinded and annulled by the securityholders of a majority in
total outstanding amount of the Notes of that series.
If, following an event of default with respect to any series of Notes,
the Notes of that series have been declared to be due and payable, the indenture
trustee may, in its discretion, notwithstanding that acceleration, elect to
maintain possession of the collateral securing the Notes of that series and to
continue to apply distributions on that collateral as if there had been no
declaration of acceleration if that collateral continues to provide sufficient
funds for the payment of principal of and interest on the Notes of that series
as they would have become due if there had not been that declaration. In
addition, the indenture trustee may not sell or otherwise liquidate the
collateral securing the Notes of a series following an event of default, other
than a default in the payment of any principal or interest on any Note of that
series for thirty days or more, unless
(1) the holders of 100% (or any other percentage specified in the
indenture) of the then total outstanding amount of the Notes of that
series consent to that sale;
(2) the proceeds of that sale or liquidation are sufficient to
pay in full the principal of and accrued interest, due and unpaid, on
the outstanding Notes of that series at the date of that sale; or
(3) the indenture trustee determines that that collateral would
not be sufficient on an ongoing basis to make all payments on the
Notes as those payments would have become due if the Notes had not
been declared due and payable, and the indenture trustee obtains the
consent of the holders of 66 2/3% (or any other percentage specified
in the indenture) of the then total outstanding amount of the Notes of
that series.
If so specified in the prospectus supplement, only holders of
particular classes of Notes will have the right to declare the Notes of that
series to be immediately due and payable in the event of a payment default, as
described above, and to exercise the remedies described above.
If the indenture trustee liquidates the collateral in connection with
an event of default involving a default for thirty days (or any other number of
days specified in the indenture) or more in the payment of principal of or
interest on the Notes of a series, the indenture provides that the indenture
trustee will have a prior lien on the proceeds of any liquidation for unpaid
fees and expenses. As a result, upon the occurrence of that event of default,
the amount available for distribution to the securityholders would be less than
would otherwise be the case. However, the indenture trustee may not institute a
proceeding for the enforcement of its lien except in connection with a
proceeding for the enforcement of the lien of the indenture for the benefit of
the securityholders after the occurrence of that event of default.
To the extent provided in the prospectus supplement, in the event the
principal of the Notes of a series is declared due and payable, as described
above, the holders of any Notes issued at a discount from par may be entitled to
receive no more than an amount equal to the unpaid principal amount of the Notes
less the amount of the discount that is unamortized.
Subject to the provisions of the indenture relating to the duties of
the indenture trustee, in case an event of default occurs and continues for a
series of Notes, the indenture trustee will be under no obligation to exercise
any of the rights or powers under the indenture at the request or direction of
any of the securityholders of that series, unless those holders offer to the
indenture trustee security or indemnity satisfactory to it against the costs,
expenses and liabilities that might be incurred by it in complying with that
request or direction. Subject to those provisions for indemnification and some
limitations contained in the indenture, the holders of a majority of the then
total outstanding amount of the Notes of that series 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 any trust or power conferred on
the indenture trustee with respect to the Notes of that series, and the holders
of a majority of the then total outstanding amount of the Notes of that series
may, in some cases, waive any default with respect to the Notes, except a
default in the payment of principal or interest or a default in respect of a
covenant or provision of the indenture that cannot be modified without the
waiver or consent of all the holders of the outstanding Notes of that series
affected.
DISCHARGE OF INDENTURE
The indenture will be discharged, subject to the provisions of the
indenture, for a series of Notes (except for continuing rights specified in the
indenture) upon the delivery to the indenture trustee for cancellation of all
the Notes of that series or, with some limitations, upon deposit with the
indenture trustee of funds sufficient for the payment in full of all of the
Notes of that series.
With some limitations, the indenture will provide that, if specified
for the Notes of any series, the related trust fund will be discharged from any
and all obligations in respect of the Notes of that series (except for
obligations specified in the indenture including obligations relating to
temporary Notes and exchange of Notes, to register the transfer of or exchange
Notes of that series, to replace stolen, lost or mutilated Notes of that series,
to maintain paying agencies and to hold monies for payment in trust) upon the
deposit with the indenture trustee, in trust, of money and/or direct obligations
of or obligations guaranteed by the United States of America which through the
payment of interest and principal in respect of the Notes in accordance with
their terms will provide money in an amount sufficient to pay the principal of
and each installment of interest on the Notes of that series on the maturity
date for those Notes and any installment of interest on those Notes in
accordance with the terms of the indenture and the Notes of that series. In the
event of any defeasance and discharge of Notes of that series, holders of Notes
of that series would be able to look only to that money and/or those direct
obligations for payment of principal and interest, if any, on their Notes until
maturity.
INDENTURE TRUSTEE'S ANNUAL REPORT
The indenture trustee for each series of Notes will be required to
mail each year to all related securityholders a brief report, as provided in the
indenture, relating to its eligibility and qualification to continue as
indenture trustee under the related indenture, any amounts advanced by it under
the indenture, the amount, interest rate and maturity date of indebtedness owing
by that Trust to the applicable indenture trustee in its individual capacity,
the property and funds physically held by the indenture trustee in its capacity
as indenture trustee and any action taken by it that materially affects the
Notes and that has not been previously reported.
THE INDENTURE TRUSTEE
The indenture trustee for a series of Notes will be specified in the
prospectus supplement. The indenture trustee for any series may resign at any
time in accordance with the terms of the indenture, in which event the depositor
or the appropriate party designated in the indenture will be obligated to
appoint a successor trustee for that series. The depositor or the appropriate
party designated in the indenture may also remove any indenture trustee if that
indenture trustee ceases to be eligible to continue as the indenture trustee
under the related indenture, if that indenture trustee becomes insolvent or for
any other grounds specified in the indenture. In those circumstances the
depositor or the appropriate party designated in the indenture will be obligated
to appoint a successor trustee for the applicable series of Notes. Any
resignation or removal of the indenture trustee and appointment of a successor
trustee for any series of Notes does not become effective until acceptance of
the appointment by the successor trustee for that series.
The bank or trust company serving as indenture trustee may have a
banking relationship with the depositor or any of its affiliates, a servicer or
any of its affiliates or the master servicer or any of its affiliates. To the
extent consistent with its fiduciary obligations as indenture trustee, the
indenture trustee may delegate its duties to one or more agents as provided in
the indenture and the Agreement.
DESCRIPTION OF CREDIT SUPPORT
GENERAL
For any series of Notes or Certificates, as applicable, credit support
may be provided for one or more classes of the series or the related Assets.
Credit support may be in the form of:
o the subordination of one or more classes of Notes or
Certificates, as applicable,;
o letters of credit;
o insurance policies;
o guarantees;
o the establishment of one or more reserve funds; or
o any other method of credit support described in the prospectus
supplement, or any combination of the foregoing.
Any form of credit support may be structured so as to be drawn upon by
more than one series to the extent described in the prospectus supplement.
The coverage provided by any credit support will be described in the
prospectus supplement. Generally, that coverage will not provide protection
against all risks of loss and will not guarantee repayment of the entire
Security Balance of the Notes or Certificates, as applicable, and interest on
the Security Balance. If losses or shortfalls occur that exceed the amount
covered by credit support or that are not covered by credit support,
securityholders will bear their allocable share of deficiencies. Moreover, if a
form of credit support covers more than one series of Notes or Certificates, as
applicable, (each, a "Covered Trust"), securityholders evidencing interests in
any of those Covered Trusts will be subject to the risk that the credit support
will be exhausted by the claims of other Covered Trusts before that Covered
Trust receiving any of its intended share of that coverage.
If credit support is provided for one or more classes of Notes or
Certificates, as applicable, of a series, or the related Assets, the prospectus
supplement will include a description of
(a) the nature and amount of coverage under that credit support,
(b) any conditions to payment under the prospectus supplement not
otherwise described in this prospectus,
(c) the conditions (if any) under which the amount of coverage under
that credit support may be reduced and under which that credit
support may be terminated or replaced and
(d) the material provisions relating to that credit support.
Additionally, the prospectus supplement will set forth information with respect
to the obligor under any financial guaranty insurance policy, letter of credit,
guarantee or similar instrument of credit support, including
(1) a brief description of its principal business activities,
(2) its principal place of business, place of incorporation and the
jurisdiction under which it is chartered or licensed to do
business,
(3) if applicable, the identity of regulatory agencies that exercise
primary jurisdiction over the conduct of its business and
(4) its total assets, and its stockholders' or policyholders'
surplus, if applicable, as of the date specified in the
prospectus supplement.
SUBORDINATE SECURITIES
One or more classes of Notes or Certificates, as applicable, of a
series may be Subordinate Notes or Subordinate Certificates, as applicable, if
specified in the prospectus supplement. The rights of the holders of Subordinate
Notes or Subordinate Certificates, as applicable, to receive distributions of
principal and interest from the Collection Account on any Distribution Date will
be subordinated to those rights of the holders of Senior Notes or Senior
Certificates, as applicable. The subordination of a class may apply only in the
event of (or may be limited to) particular types of losses or shortfalls. The
prospectus supplement will set forth information concerning the amount of
subordination of a class or classes of Subordinate Notes or Subordinate
Certificates, as applicable, in a series, the circumstances in which that
subordination will be applicable and the manner, if any, in which the amount of
subordination will be effected.
CROSS-SUPPORT PROVISIONS
If the Assets for a series are divided into separate groups, each
supporting a separate class or classes of Notes or Certificates, as applicable,
of a series, credit support may be provided by cross-support provisions
requiring that distributions be made on Senior Notes or Senior Certificates, as
applicable, evidencing interests in one group of mortgage loans before
distributions on Subordinate Notes or Subordinate Certificates, as applicable,
evidencing interests in a different group of mortgage loans within the trust
fund. The prospectus supplement for a series that includes a cross-support
provision will describe the manner and conditions for applying those provisions.
LIMITED GUARANTEE
If specified in the prospectus supplement for a series of Notes or
Certificates, as applicable, credit enhancement may be provided in the form of a
limited guarantee issued by a guarantor named in the prospectus supplement.
FINANCIAL GUARANTY INSURANCE POLICY OR SURETY BOND
Credit enhancement may be provided in the form of a financial guaranty
insurance policy or a surety bond issued by an insurer named in the policy or
surety bond, if specified in the prospectus supplement.
LETTER OF CREDIT
Alternative credit support for a series of Notes or Certificates, as
applicable, may be provided by the issuance of a letter of credit by the bank or
financial institution specified in the prospectus supplement. The coverage,
amount and frequency of any reduction in coverage provided by a letter of credit
issued for a series of Notes or Certificates, as applicable, will be set forth
in the prospectus supplement relating to that series.
POOL INSURANCE POLICIES
If specified in the prospectus supplement relating to a series of
Notes or Certificates, as applicable, a pool insurance policy for the mortgage
loans in the related trust fund will be obtained. The pool insurance policy will
cover any loss (subject to the limitations described in the prospectus
supplement) by reason of default to the extent a related mortgage loan is not
covered by any primary mortgage insurance policy. The amount and principal terms
of any pool insurance coverage will be set forth in the prospectus supplement.
SPECIAL HAZARD INSURANCE POLICIES
A special hazard insurance policy may also be obtained for the related
trust fund, if specified in the prospectus supplement, in the amount set forth
in the prospectus supplement. The special hazard insurance policy will, subject
to the limitations described in the prospectus supplement, protect against loss
by reason of damage to Mortgaged Properties caused by hazards not insured
against under the standard form of hazard insurance policy for the respective
states, in which the Mortgaged Properties are located. The amount and principal
terms of any special hazard insurance coverage will be set forth in the
prospectus supplement.
BORROWER BANKRUPTCY BOND
Losses resulting from a bankruptcy proceeding relating to a borrower
affecting the mortgage loans in a trust fund for a series of Notes or
Certificates, as applicable, will, if specified in the prospectus supplement, be
covered under a borrower bankruptcy bond (or any other instrument that will not
result in a downgrading of the rating of the Notes or Certificates, as
applicable, of a series by the rating agency or agencies that rate that series).
Any borrower bankruptcy bond or any other instrument will provide for coverage
in an amount meeting the criteria of the rating agency or agencies rating the
Notes or Certificates, as applicable, of the related series, which amount will
be set forth in the prospectus supplement. The amount and principal terms of any
borrower bankruptcy coverage will be set forth in the prospectus supplement.
RESERVE FUNDS
If so provided in the prospectus supplement for a series of Notes or
Certificates, as applicable, deficiencies in amounts otherwise payable on those
Notes or Certificates, as applicable, or specific classes of Notes or
Certificates, as applicable, will be covered by one or more reserve funds in
which cash, a letter of credit, Permitted Investments, a demand note or a
combination of these will be deposited, in the amounts so specified in the
prospectus supplement. The reserve funds for a series may also be funded over
time by depositing a specified amount of the distributions received on the
related Assets as specified in the prospectus supplement.
Amounts on deposit in any reserve fund for a series, together with the
reinvestment income on these amounts, if any, will be applied for the purposes,
in the manner, and to the extent specified in the prospectus supplement. A
reserve fund may be provided to increase the likelihood of timely distributions
of principal of and interest on the Notes or Certificates, as applicable. If
specified in the prospectus supplement, reserve funds may be established to
provide limited protection against only some types of losses and shortfalls.
Following each Distribution Date amounts in a reserve fund in excess of any
amount required to be maintained in the reserve fund may be released from the
reserve fund under the conditions and to the extent specified in the prospectus
supplement and will not be available for further application to the Notes or
Certificates, as applicable.
Money deposited in any reserve funds will be invested in Permitted
Investments, to the extent specified in the prospectus supplement. To the extent
specified in the prospectus supplement, any reinvestment income or other gain
from those investments will be credited to the related reserve fund for that
series, and any loss resulting from those investments will be charged to the
reserve fund. However, that income may be payable to any related servicer or
another service provider or other entity. To the extent specified in the
prospectus supplement, the reserve fund, if any, for a series will not be a part
of the trust fund.
Additional information concerning any reserve fund will be set forth
in the prospectus supplement, including the initial balance of the reserve fund,
the balance required to be maintained in the reserve fund, the manner in which
the required balance will decrease over time, the manner of funding the reserve
fund, the purposes for which funds in the reserve fund may be applied to make
distributions to securityholders and use of investment earnings from the reserve
fund, if any.
OVERCOLLATERALIZATION
If specified in the prospectus supplement, subordination provisions of
a trust fund may be used to accelerate to a limited extent the amortization of
one or more classes of Notes or Certificates, as applicable, relative to the
amortization of the related Assets. The accelerated amortization is achieved by
the application of excess interest to the payment of principal of one or more
classes of Notes or Certificates, as applicable. This acceleration feature
creates, for the Assets or groups of Assets, overcollateralization, which is the
excess of the total principal balance of the related Assets, or a group of
related Assets, over the principal balance of the related class or classes of
Notes or Certificates, as applicable. This acceleration may continue for the
life of the related Security, or may be limited. In the case of limited
acceleration, once the required level of overcollateralization is reached, and
subject to the provisions specified in the prospectus supplement, the limited
acceleration feature may cease, unless necessary to maintain the required level
of overcollateralization.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains summaries, which are general in
nature, of legal aspects of loans secured by single-family or multi-family
residential properties. Because these legal aspects are governed primarily by
applicable state law (which laws may differ substantially), the summaries do not
purport to be complete nor to reflect the laws of any particular state, nor to
encompass the laws of all states in which the security for the mortgage loans is
situated. The summaries are qualified in their entirety by reference to the
applicable federal and state laws governing the mortgage loans. In this regard,
the following discussion does not fully reflect federal regulations for FHA
loans and VA loans. See "Description of The Trust Funds--FHA Loans and VA
Loans," "Description of the Agreements--Material Terms of the Pooling and
Servicing Agreements and Underlying Servicing Agreements--FHA Insurance and VA
Guarantees" and "Description of the Trust Funds--Assets."
GENERAL
All of the mortgage loans are evidenced by a note or bond and secured
by instruments granting a security interest in real property which may be
mortgages, deeds of trust, security deeds or deeds to secure debt, depending on
the prevailing practice and law in the state in which the Mortgaged Property is
located. Mortgages, deeds of trust and deeds to secure debt are in this
prospectus collectively referred to as "mortgages." Any of the foregoing types
of mortgages will create a lien upon, or grant a title interest in, the subject
property, the priority of which will depend on the terms of the particular
security instrument, as well as separate, recorded, contractual arrangements
with others holding interests in the mortgaged property, the knowledge of the
parties to that instrument as well as the order of recordation of the instrument
in the appropriate public recording office. However, recording does not
generally establish priority over governmental claims for real estate taxes and
assessments and other charges imposed under governmental police powers.
TYPES OF MORTGAGE INSTRUMENTS
A mortgage either creates a lien against or constitutes a conveyance
of real property between two parties--a borrower (usually the owner of the
subject property) and a mortgagee (the lender). In contrast, a deed of trust is
a three-party instrument, among a trustor (the equivalent of a borrower), a
trustee to whom the mortgaged property is conveyed, and a beneficiary (the
lender) for whose benefit the conveyance is made. As used in this prospectus,
unless the context otherwise requires, "borrower" includes the trustor under a
deed of trust and a grantor under a security deed or a deed to secure debt.
Under a deed of trust, the borrower grants the property, irrevocably
until the debt is paid, in trust, generally with a power of sale as security for
the indebtedness evidenced by the related note. A deed to secure debt typically
has two parties. By executing a deed to secure debt, the grantor conveys title
to, as opposed to merely creating a lien upon, the subject property to the
grantee until the underlying debt is repaid, generally with a power of sale as
security for the indebtedness evidenced by the related mortgage note.
In case the borrower under a mortgage is a land trust, there would be
an additional party because legal title to the property is held by a land
trustee under a land trust agreement for the benefit of the borrower. At
origination of a mortgage loan involving a land trust, the borrower executes a
separate undertaking to make payments on the mortgage note. The mortgagee's
authority under a mortgage, the trustee's authority under a deed of trust and
the grantee's authority under a deed to secure debt are governed by the express
provisions of the mortgage, the law of the state in which the real property is
located, some federal laws (including the Soldiers' and Sailors' Civil Relief
Act of 1940) and, in some cases, in deed of trust transactions, the directions
of the beneficiary.
The mortgages that encumber multifamily properties may contain an
assignment of rents and leases, pursuant to which the borrower assigns to the
lender the borrower's right, title and interest as landlord under each lease and
the income derived therefrom, while retaining a revocable license to collect the
rents for so long as there is no default. If the borrower defaults, the license
terminates and the lender is entitled to collect the rents. Local law may
require that the lender take possession of the property and/or obtain a
court-appointed receiver before becoming entitled to collect the rents.
INTEREST IN REAL PROPERTY
The real property covered by a mortgage, deed of trust, security deed
or deed to secure debt is most often the fee estate in land and improvements.
However, that instrument may encumber other interests in real property such as a
tenant's interest in a lease of land or improvements, or both, and the leasehold
estate created by that lease. An instrument covering an interest in real
property other than the fee estate requires special provisions in the instrument
creating that interest or in the mortgage, deed of trust, security deed or deed
to secure debt, to protect the mortgagee against termination of that interest
before the mortgage, deed of trust, security deed or deed to secure debt is
paid. The depositor, the Asset Seller or other entity specified in the
prospectus supplement will make representations and warranties in the Agreement
or representations and warranties will be assigned to the trustee for any
mortgage loans secured by an interest in a leasehold estate. Those
representation and warranties, if applicable, will be set forth in the
prospectus supplement.
COOPERATIVE LOANS
If specified in the prospectus supplement, the mortgage loans may also
consist of cooperative apartment loans ("Cooperative Loans") secured by security
interests in shares issued by a cooperative housing corporation (a
"Cooperative") and in the related proprietary leases or occupancy agreements
granting exclusive rights to occupy specific dwelling units in the cooperatives'
buildings. The security agreement will create a lien upon, or grant a title
interest in, the property that it covers, the priority of which will depend on
the terms of the particular security agreement as well as the order of
recordation of the agreement in the appropriate recording office. That lien or
title interest is not prior to the lien for real estate taxes and assessments
and other charges imposed under governmental police powers.
Each Cooperative owns in fee or has a leasehold interest in all the
real property and owns in fee or leases the building and all separate dwelling
units in the building. The Cooperative is directly responsible for property
management and, in most cases, payment of real estate taxes, other governmental
impositions and hazard and liability insurance. If there is a blanket mortgage
or mortgages on the cooperative apartment building or underlying land, as is
generally the case, or an underlying lease of the land, as is the case in some
instances, the Cooperative, as property borrower, or lessee, as the case may be,
is also responsible for meeting these mortgage or rental obligations. A blanket
mortgage is ordinarily incurred by the cooperative in connection with either the
construction or purchase of the Cooperative's apartment building or obtaining of
capital by the Cooperative. The interest of the occupant under proprietary
leases or occupancy agreements as to which that Cooperative is the landlord are
generally subordinate to the interest of the holder of a blanket mortgage and to
the interest of the holder of a land lease.
If the Cooperative is unable to meet the payment obligations (1)
arising under a blanket mortgage, the mortgagee holding a blanket mortgage could
foreclose on that mortgage and terminate all subordinate proprietary leases and
occupancy agreements or (2) arising under its land lease, the holder of the
landlord's interest under the land lease could terminate it and all subordinate
proprietary leases and occupancy agreements. Also, a blanket mortgage on a
cooperative may provide financing in the form of a mortgage that does not fully
amortize, with a significant portion of principal being due in one final payment
at maturity. The inability of the Cooperative to refinance a mortgage and its
consequent inability to make that final payment could lead to foreclosure by the
mortgagee. Similarly, a land lease has an expiration date and the inability of
the Cooperative to extend its term or, in the alternative, to purchase the land
could lead to termination of the Cooperative's interest in the property and
termination of all proprietary leases and occupancy agreement. In either event,
a foreclosure by the holder of a blanket mortgage or the termination of the
underlying lease could eliminate or significantly diminish the value of any
collateral held by the lender that financed the purchase by an individual tenant
stockholder of cooperative shares or, in the case of the mortgage loans, the
collateral securing the Cooperative Loans.
The Cooperative is owned by tenant-stockholders who, through ownership
of stock or shares in the corporation, receive proprietary lease or occupancy
agreements that confer exclusive rights to occupy specific units. Generally, a
tenant-stockholder of a Cooperative must make a monthly payment to the
Cooperative representing that tenant-stockholder's pro rata share of the
Cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a Cooperative and accompanying occupancy rights are financed through
a Cooperative Loan evidenced by a promissory note and secured by an assignment
of and a security interest in the occupancy agreement or proprietary lease and a
security interest in the related Cooperative shares. The lender generally takes
possession of the share certificate and a counterpart of the proprietary lease
or occupancy agreement and a financing statement covering the proprietary lease
or occupancy agreement and the cooperative shares is filed in the appropriate
state and local offices to perfect the lender's interest in its collateral.
Subject to the limitations discussed below, upon default of the
tenant-stockholder, the lender may sue for judgment on the promissory note,
dispose of the collateral at a public or private sale or otherwise proceed
against the collateral or tenant-stockholder as an individual as provided in the
security agreement covering the assignment of the proprietary lease or occupancy
agreement and the pledge of Cooperative shares. See "--Foreclosure--Cooperative
Loans" below.
LAND SALE CONTRACTS
Under an installment land sale contract for the sale of real estate (a
"land sale contract") the contract seller (hereinafter referred to as the
"contract lender") retains legal title to the property and enters into an
agreement with the contract purchaser (hereinafter referred to as the "contract
borrower") for the payment of the purchase price, plus interest, over the term
of the land sale contract. Only after full performance by the borrower of the
contract is the contract lender obligated to convey title to the real estate to
the purchaser. As with mortgage or deed of trust financing, during the effective
period of the land sale contract, the contract borrower is responsible for
maintaining the property in good condition and for paying real estate taxes,
assessments and hazard insurance premiums associated with the property.
The method of enforcing the rights of the contract lender under an
installment contract varies on a state-by-state basis depending on the extent to
which state courts are willing, or able pursuant to state statute, to enforce
the contract strictly according to its terms. The terms of land sale contracts
generally provide that upon default by the contract borrower, the borrower loses
his or her right to occupy the property, the entire indebtedness is accelerated,
and the buyer's equitable interest in the property is forfeited. The contract
lender in that situation does not have to foreclose to obtain title to the
property, although in some cases a quiet title action is in order if the
contract borrower has filed the land sale contract in local land records and an
ejectment action may be necessary to recover possession.
In a few states, particularly in cases of contract borrower default
during the early years of a land sale contract, the courts will permit ejectment
of the buyer and a forfeiture of his or her interest in the property. However,
most state legislatures have enacted provisions by analogy to mortgage law
protecting borrowers under land sale contracts from the harsh consequences of
forfeiture. Under those statues, a judicial contract may be reinstated upon full
payment of the default amount and the borrower may have a post-foreclosure
statutory redemption right. In other states, courts in equity may permit a
contract borrower with significant investment in the property under a land sale
contract for the sale of real estate to share the proceeds of sale of the
property after the indebtedness is repaid or may otherwise refuse to enforce the
forfeiture clause. Nevertheless, generally speaking, the contract lender's
procedures for obtaining possession and clear title under a land sale contract
for the sale of real estate in a particular state are simpler and less time
consuming and costly than are the procedures for foreclosing and obtaining clear
title to a mortgaged property.
FORECLOSURE
GENERAL
Foreclosure is a legal procedure that allows the mortgagee to recover
its mortgage debt by enforcing its rights and available legal remedies under the
mortgage. If the mortgagor defaults in payment or performance of its obligations
under the note or mortgage, the mortgagee has the right to institute foreclosure
proceedings to sell the mortgaged property at public auction to satisfy the
indebtedness.
Foreclosure procedures for the enforcement of a mortgage vary from
state to state. Two primary methods of foreclosing a mortgage are judicial
foreclosure and non-judicial foreclosure pursuant to a power of sale granted in
the mortgage instrument. There are several other foreclosure procedures
available in some states that are either infrequently used or available only in
some limited circumstances, such as strict foreclosure.
JUDICIAL FORECLOSURE
A judicial foreclosure proceeding is conducted in a court having
jurisdiction over the mortgaged property. Generally, the action is initiated by
the service of legal pleadings upon all parties having an interest of record in
the real property. Delays in completion of the foreclosure may occasionally
result from difficulties in locating defendants. When the lender's right to
foreclose is contested, the legal proceedings can be time-consuming. Upon
successful completion of a judicial foreclosure proceeding, the court generally
issues a judgment of foreclosure and appoints a referee or other officer to
conduct a public sale of the mortgaged property, the proceeds of which are used
to satisfy the judgment. Those sales are made in accordance with procedures that
vary from state to state.
EQUITABLE LIMITATIONS ON ENFORCEABILITY OF CERTAIN PROVISIONS
United States courts have traditionally imposed general equitable
principles to limit the remedies available to a mortgagee in connection with
foreclosure. These equitable principles are generally designed to relieve the
borrower from the legal effect of mortgage defaults, to the extent that the
effect is perceived as harsh or unfair. Relying on those principles, a court may
alter the specific terms of a loan to the extent it considers necessary to
prevent or remedy an injustice, undue oppression or overreaching, or may require
the lender to undertake affirmative and expensive actions to determine the cause
of the borrower's default and the likelihood that the borrower will be able to
reinstate the loan.
In some cases, courts have substituted their judgment for the lender's
and have required that lenders reinstate loans or recast payment schedules to
accommodate borrowers who are suffering from a temporary financial disability.
In other cases, courts have limited the right of the lender to foreclose if the
default under the mortgage is not monetary, e.g., the borrower failed to
maintain the mortgaged property adequately or the borrower executed a junior
mortgage on the mortgaged property. The exercise by the court of its equity
powers will depend on the individual circumstances of each case presented to it.
Finally, some courts have been faced with the issue of whether federal or state
constitutional provisions reflecting due process concerns for adequate notice
require that a borrower receive notice in addition to statutorily-prescribed
minimum notice. For the most part, these cases have upheld the reasonableness of
the notice provisions or have found that a public sale under a mortgage
providing for a power of sale does not involve sufficient state action to afford
constitutional protections to the borrower.
NON-JUDICIAL FORECLOSURE/POWER OF SALE
Foreclosure of a deed of trust is generally accomplished by a
non-judicial trustee's sale pursuant to the power of sale granted in the deed of
trust. A power of sale is typically granted in a deed of trust. It may also be
contained in any other type of mortgage instrument. A power of sale allows a
non-judicial public sale to be conducted generally following a request from the
beneficiary/lender to the trustee to sell the property upon any default by the
borrower under the terms of the mortgage note or the mortgage instrument and
after notice of sale is given in accordance with the terms of the mortgage
instrument, as well as applicable state law.
In some states, before the sale, the trustee under a deed of trust
must record a notice of default and notice of sale and send a copy to the
borrower and to any other party who has recorded a request for a copy of a
notice of default and notice of sale. In addition, in some states the trustee
must provide notice to any other party having an interest of record in the real
property, including junior lienholders. A notice of sale must be posted in a
public place and, in most states, published for a specified period of time in
one or more newspapers. The borrower or junior lienholder may then have the
right, during a reinstatement period required in some states, to cure the
default by paying the entire actual amount in arrears (without acceleration)
plus the expenses incurred in enforcing the obligation. In other states, the
borrower or the junior lienholder is not provided a period to reinstate the
loan, but has only the right to pay off the entire debt to prevent the
foreclosure sale. Generally, the procedure for public sale, the parties entitled
to notice, the method of giving notice and the applicable time periods are
governed by state law and vary among the states. Foreclosure of a deed to secure
debt is also generally accomplished by a non-judicial sale similar to that
required by a deed of trust, except that the lender or its agent, rather than a
trustee, is typically empowered to perform the sale in accordance with the terms
of the deed to secure debt and applicable law.
PUBLIC SALE
A third party may be unwilling to purchase a mortgaged property at a
public sale because of the difficulty in determining the value of that property
at the time of sale, due to, among other things, redemption rights that may
exist and the possibility of physical deterioration of the property during the
foreclosure proceedings. For these reasons, it is common for the lender to
purchase the mortgaged property for an amount equal to or less than the
underlying debt and accrued and unpaid interest plus the expenses of
foreclosure. Generally, state law controls the amount of foreclosure costs and
expenses that may be recovered by a lender. Thereafter, subject to the
borrower's right in some states to remain in possession during a redemption
period, if applicable, the lender will become the owner of the property and have
both the benefits and burdens of ownership of the mortgaged property. For
example, the lender will become obligated to pay taxes, obtain casualty
insurance and to make those repairs at its own expense as are necessary to
render the property suitable for sale. The lender will commonly obtain the
services of a real estate broker and pay the broker's commission in connection
with the sale of the property. Depending on market conditions, the ultimate
proceeds of the sale of the property may not equal the lender's investment in
the property. Moreover, a lender commonly incurs substantial legal fees and
court costs in acquiring a mortgaged property through contested foreclosure
and/or bankruptcy proceedings. Generally, state law controls the amount of
foreclosure expenses and costs, including attorneys' fees, that may be recovered
by a lender.
A junior mortgagee may not foreclose on the property securing the
junior mortgage unless it forecloses subject to senior mortgages and any other
prior liens, in which case it may be obliged to make payments on the senior
mortgages to avoid their foreclosure. In addition, if the foreclosure of a
junior mortgage triggers the enforcement of a "due-on-sale" clause contained in
a senior mortgage, the junior mortgagee may be required to pay the full amount
of the senior mortgage to avoid its foreclosure. Accordingly, for those mortgage
loans, if any, that are junior mortgage loans, if the lender purchases the
property the lender's title will be subject to all senior mortgages, prior liens
and specific governmental liens.
The proceeds received by the referee or trustee from the sale are
applied first to the costs, fees and expenses of sale and then in satisfaction
of the indebtedness secured by the mortgage under which the sale was conducted.
Any proceeds remaining after satisfaction of senior mortgage debt are generally
payable to the holders of junior mortgages and other liens and claims in order
of their priority, whether or not the borrower is in default. Any additional
proceeds are generally payable to the borrower. The payment of the proceeds to
the holders of junior mortgages may occur in the foreclosure action of the
senior mortgage or a subsequent ancillary proceeding or may require the
institution of separate legal proceedings by those holders.
RIGHTS OF REDEMPTION
The purposes of a foreclosure action are to enable the mortgagee to
realize upon its security and to bar the borrower, and all persons who have an
interest in the property that is subordinate to the mortgage being foreclosed,
from exercise of their "equity of redemption." The doctrine of equity of
redemption provides that, until the property covered by a mortgage has been sold
in accordance with a properly conducted foreclosure and foreclosure sale, those
having an interest that is subordinate to that of the foreclosing mortgagee have
an equity of redemption and may redeem the property by paying the entire debt
with interest. In addition, in some states, when a foreclosure action has begun,
the redeeming party must pay some of the costs of that action. Those having an
equity of redemption must generally be made parties and joined in the
foreclosure proceeding in order for their equity of redemption to be cut off and
terminated.
The equity of redemption is a common-law (non-statutory) right that
exists before completion of the foreclosure, is not waivable by the borrower,
must be exercised before foreclosure sale and should be distinguished from the
post-sale statutory rights of redemption. In some states, after sale pursuant to
a deed of trust or foreclosure of a mortgage, the borrower and foreclosed junior
lienors are given a statutory period in which to redeem the property from the
foreclosure sale. In some states, statutory redemption may occur only upon
payment of the foreclosure sale price. In other states, redemption may be
authorized if the former borrower pays only a portion of the sums due. The
effect of a statutory right of redemption is to diminish the ability of the
lender to sell the foreclosed property. The exercise of a right of redemption
would defeat the title of any purchaser from a foreclosure sale or sale under a
deed of trust. Consequently, the practical effect of the redemption right is to
force the lender to maintain the property and pay the expenses of ownership
until the redemption period has expired. In some states, a post-sale statutory
right of redemption may exist following a judicial foreclosure, but not
following a trustee's sale under a deed of trust.
Under the REMIC Provisions currently in effect, property acquired by
foreclosure generally must not be held for more than three years from the close
of the calendar year of its acquisition. For a series of Notes or Certificates,
as applicable, for which an election is made to qualify the trust fund or a part
of the trust fund as a REMIC, the Agreement will permit foreclosed property to
be held for more than such three year period if the Internal Revenue Service
grants an extension of time within which to sell the property or independent
counsel renders an opinion to the effect that holding the property for that
additional period is permissible under the REMIC Provisions.
COOPERATIVE LOANS
The Cooperative shares owned by the tenant-stockholder and pledged to
the lender are, in almost all cases, subject to restrictions on transfer as set
forth in the Cooperative's certificate of incorporation and bylaws, as well as
the proprietary lease or occupancy agreement, and may be canceled by the
Cooperative for failure by the tenant-stockholder to pay rent or other
obligations or charges owed by that tenant-stockholder, including mechanics'
liens against the cooperative apartment building incurred by that
tenant-stockholder. The proprietary lease or occupancy agreement generally
permit the Cooperative to terminate the lease or agreement in the event a
borrower fails to make payments or defaults in the performance of covenants
required under the proprietary lease or occupancy agreement. Typically, the
lender and the Cooperative enter into a recognition agreement that establishes
the rights and obligations of both parties in the event of a default by the
tenant-stockholder under the proprietary lease or occupancy agreement will
usually constitute a default under the security agreement between the lender and
the tenant-stockholder.
The recognition agreement generally provides that, if the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate that lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the Cooperative will recognize the
lender's lien against proceeds from the sale of the Cooperative apartment,
subject, however, to the Cooperative's right to sums due under that proprietary
lease or occupancy agreement. The total amount owed to the Cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the Cooperative Loan and accrued and unpaid interest on the
Cooperative Loan.
Recognition agreements also provide that in the event of a foreclosure
on a Cooperative Loan, the lender must obtain the approval or consent of the
Cooperative as required by the proprietary lease before transferring the
Cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited in any rights it may have to dispossess the tenant-stockholders.
In some states, foreclosure on the Cooperative shares is accomplished
by a sale in accordance with the provisions of Article 9 of the UCC and the
security agreement relating to those shares. Article 9 of the UCC requires that
a sale be conducted in a "commercially reasonable" manner. Whether a foreclosure
sale has been conducted in a "commercially reasonable" manner will depend on the
facts in each case. In determining commercial reasonableness, a court will look
to the notice given the debtor and the method, manner, time, place and terms of
the foreclosure. Generally, a sale conducted according to the usual practice of
banks selling similar collateral will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be
applied first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the Cooperatives to receive sums due under the
proprietary lease or occupancy agreement. If there are proceeds remaining, the
lender must account to the tenant-stockholder for the surplus. Conversely, if a
portion of the indebtedness remains unpaid, the tenant-stockholder is generally
responsible for the deficiency.
In the case of foreclosure on a building that was converted from a
rental building to a building owned by a Cooperative under a non-eviction plan,
some states require that a purchaser at a foreclosure sale take the property
subject to rent control and rent stabilization laws that apply to tenants who
elected to remain in a building so converted.
JUNIOR MORTGAGES
Some of the mortgage loans may be secured by junior mortgages or deeds
of trust, that are subordinate to first or other senior mortgages or deeds of
trust held by other lenders. The rights of the trust fund as the holder of a
junior deed of trust or a junior mortgage are subordinate in lien and in payment
to those of the holder of the senior mortgage or deed of trust, including the
prior rights of the senior mortgagee or beneficiary to receive and apply hazard
insurance and condemnation proceeds and, upon default of the borrower, to cause
a foreclosure on the property. Upon completion of the foreclosure proceedings by
the holder of the senior mortgage or the sale pursuant to the deed of trust, the
junior mortgagee's or junior beneficiary's lien will be extinguished unless the
junior lienholder satisfies the defaulted senior loan or asserts its subordinate
interest in a property in foreclosure proceedings. See "--Foreclosure" above.
Furthermore, because the terms of the junior mortgage or deed of trust
are subordinate to the terms of the first mortgage or deed of trust, in the
event of a conflict between the terms of the first mortgage or deed of trust and
the junior mortgage or deed of trust, the terms of the first mortgage or deed of
trust will generally govern. Upon a failure of the borrower or trustor to
perform any of its obligations, the senior mortgagee or beneficiary, subject to
the terms of the senior mortgage or deed of trust, may have the right to perform
the obligation itself. Generally, all sums so expended by the mortgagee or
beneficiary become part of the indebtedness secured by the mortgage or deed of
trust. To the extent a first mortgagee expends these sums, these sums will
generally have priority over all sums due under the junior mortgage.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Statutes in some states limit the right of a beneficiary under a deed
of trust or a mortgagee under a mortgage to obtain a deficiency judgment against
the borrower following foreclosure or sale under a deed of trust. A deficiency
judgment would be a personal judgment against the former borrower equal to the
difference between the net amount realized upon the public sale of the real
property and the amount due to the lender.
Some states require the lender to exhaust the security afforded under
a mortgage by foreclosure in an attempt to satisfy the full debt before bringing
a personal action against the borrower. In some other states, the lender has the
option of bringing a personal action against the borrower on the debt without
first exhausting that security; however, in some of these states, the lender,
following judgment on the personal action, may be deemed to have elected a
remedy and may be precluded from exercising remedies with respect to the
security. In some cases, a lender will be precluded from exercising any
additional rights under the note or mortgage if it has taken any prior
enforcement action. Consequently, the practical effect of the election
requirement, in those states permitting that election, is that lenders will
usually proceed against the security first rather than bringing a personal
action against the borrower. Finally, other statutory provisions limit any
deficiency judgment against the former borrower following a judicial sale to the
excess of the outstanding debt over the fair market value of the property at the
time of the public sale. The purpose of these statutes is generally to prevent a
lender from obtaining a large deficiency judgment against the former borrower as
a result of low or no bids at the judicial sale.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws
and state laws affording relief to debtors, may interfere with or affect the
ability of a secured mortgage lender to realize upon its security. For example,
numerous statutory provisions under the United States Bankruptcy Code, 11 U.S.C.
Sections 101 et seq. (the "Bankruptcy Code"), may interfere with or affect the
ability of the secured mortgage lender to obtain payment of a mortgage loan, to
realize upon collateral and/or enforce a deficiency judgment. Under federal
bankruptcy law, virtually all actions (including foreclosure actions and
deficiency judgment proceedings) are automatically stayed upon the filing of a
bankruptcy petition, and often no interest or principal payments are made during
the course of the bankruptcy proceeding. In a case under the Bankruptcy Code,
the secured party is precluded from foreclosing without authorization from the
bankruptcy court. In addition, a court with federal bankruptcy jurisdiction may
permit a debtor through his or her Chapter 11 or Chapter 13 plan to cure a
monetary default in respect of a mortgage loan by paying arrearages within a
reasonable time period and reinstating the original mortgage loan payment
schedule even though the lender accelerated the mortgage loan and final judgment
of foreclosure had been entered in state court (provided no foreclosure sale had
yet occurred) before the filing of the debtor's petition. Some courts with
federal bankruptcy jurisdiction have approved plans, based on the particular
facts of the case, that affected the curing of a mortgage loan default by paying
arrearages over a number of years.
If a mortgage loan is secured by property not consisting solely of the
debtor's principal residence, the Bankruptcy Code also permits that mortgage
loan to be modified. These modifications may include reducing the amount of each
monthly payment, changing the rate of interest, altering the repayment schedule,
and reducing the lender's security interest to the value of the property, thus
leaving the lender in the position of a general unsecured creditor for the
difference between the value of the property and the outstanding balance of the
mortgage loan. Some courts have permitted these modifications when the mortgage
loan is secured both by the debtor's principal residence and by personal
property.
In the case of income-producing multifamily properties, federal
bankruptcy law may also have the effect of interfering with or affecting the
ability of the secured lender to enforce the borrower's assignment of rents and
leases related to the mortgaged property. Under Section 362 of the Bankruptcy
Code, the lender will be stayed from enforcing the assignment, and the legal
proceedings necessary to resolve the issue could be time-consuming, with
resulting delays in the lender's receipt of the rents.
Some tax liens arising under the Code may in some circumstances
provide priority over the lien of a mortgage or deed of trust. In addition,
substantive requirements are imposed upon mortgage lenders in connection with
the origination and the servicing of mortgage loans by numerous federal and some
state consumer protection laws. These laws include the federal Truth-in-Lending
Act, Real Estate Settlement Procedures Act, Equal Credit Opportunity Act, Fair
Credit Billing Act, Fair Credit Reporting Act and related statutes. These
federal laws impose specific statutory liabilities upon lenders who originate
mortgage loans and who fail to comply with the provisions of the law. In some
cases this liability may affect assignees of the mortgage loans.
Generally, Article 9 of the UCC governs foreclosure on Cooperative
shares and the related proprietary lease or occupancy agreement. Some courts
have interpreted Section 9-504 of the UCC to prohibit a deficiency award unless
the creditor establishes that the sale of the collateral (which, in the case of
a Cooperative Loan, would be the shares of the Cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner.
ENVIRONMENTAL CONSIDERATIONS
A lender may be subject to unforeseen environmental risks when taking
a security interest in real or personal property. Property subject to a security
interest may be subject to federal, state, and local laws and regulations
relating to environmental protection. These laws may regulate, among other
things: emissions of air pollutants; discharges of wastewater or storm water;
generation, transport, storage or disposal of hazardous waste or hazardous
substances; operation, closure and removal of underground storage tanks; removal
and disposal of asbestos-containing materials; and/or management of electrical
or other equipment containing polychlorinated biphenyls ("PCBs"). Failure to
comply with these laws and regulations may result in significant penalties,
including civil and criminal fines. Under the laws of some states, environmental
contamination on a property may give rise to a lien on the property to ensure
the availability and/or reimbursement of cleanup costs. Generally all subsequent
liens on that property are subordinated to the environmentally-related lien and,
in some states, even prior recorded liens are subordinated to these liens
("Superliens"). In the latter states, the security interest of the trustee in a
property that is subject to a Superlien could be adversely affected.
Under the federal Comprehensive Environmental Response, Compensation
and Liability Act, as amended ("CERCLA"), and under state law in some states, a
secured party that takes a deed in lieu of foreclosure, purchases a mortgaged
property at a foreclosure sale, operates a mortgaged property or undertakes
particular types of activities that may constitute management of the mortgaged
property may become liable in some circumstances for the cleanup costs of
remedial action if hazardous wastes or hazardous substances have been released
or disposed of on the property. These cleanup costs may be substantial. CERCLA
imposes strict, as well as joint and several, liability for environmental
remediation and/or damage costs on several classes of "potentially responsible
parties," including current "owners and/or operators" of property, irrespective
of whether those owners or operators caused or contributed to the contamination
on the property. In addition, owners and operators of properties that generate
hazardous substances that are disposed of at other "off-site" locations may be
held strictly, jointly and severally liable for environmental remediation and/or
damages at those off-site locations. Many states also have laws that are similar
to CERCLA. Liability under CERCLA or under similar state law could exceed the
value of the property itself as well as the total assets of the property owner.
Although some provisions of the Asset Conservation Act (as defined in
this prospectus) apply to trusts and fiduciaries, the law is somewhat unclear as
to whether and under what precise circumstances cleanup costs, or the obligation
to take remedial actions, could be imposed on a secured lender, such as the
trust fund. Under the laws of some states and under CERCLA, a lender may be
liable as an "owner or operator" for costs of addressing releases or threatened
releases of hazardous substances on a mortgaged property if that lender or its
agents or employees have "participated in the management" of the operations of
the borrower, even though the environmental damage or threat was caused by a
prior owner or current owner or operator or other third party. Excluded from
CERCLA's definition of "owner or operator" is a person "who without
participating in the management of . . . [the] facility, holds indicia of
ownership primarily to protect his security interest" (the "secured-creditor
exemption"). This exemption for holders of a security interest such as a secured
lender applies only to the extent that a lender seeks to protect its security
interest in the contaminated facility or property. Thus, if a lender's
activities begin to encroach on the actual management of that facility or
property, the lender faces potential liability as an "owner or operator" under
CERCLA. Similarly, when a lender forecloses and takes title to a contaminated
facility or property, the lender may incur potential CERCLA liability in various
circumstances, including among others, when it holds the facility or property as
an investment (including leasing the facility or property to a third party),
fails to market the property in a timely fashion or fails to properly address
environmental conditions at the property or facility.
The Resource Conservation and Recovery Act, as amended ("RCRA"),
contains a similar secured-creditor exemption for those lenders who hold a
security interest in a petroleum underground storage tank ("UST") or in real
estate containing a UST, or that acquire title to a petroleum UST or facility or
property on which a UST is located. As under CERCLA, a lender may lose its
secured-creditor exemption and be held liable under RCRA as a UST owner or
operator if that lender or its employees or agents participate in the management
of the UST. In addition, if the lender takes title to or possession of the UST
or the real estate containing the UST, under some circumstances the
secured-creditor exemption may be deemed to be unavailable.
A decision in May 1990 of the United States Court of Appeals for the
Eleventh Circuit in United States v. Fleet Factors Corp. very narrowly construed
CERCLA's secured-creditor exemption. The court's opinion suggested that a lender
need not have involved itself in the day-to-day operations of the facility or
participated in decisions relating to hazardous waste to be liable under CERCLA;
rather, liability could attach to a lender if its involvement with the
management of the facility were broad enough to support the inference that the
lender had the capacity to influence the borrower's treatment of hazardous
waste. The court added that a lender's capacity to influence these decisions
could be inferred from the extent of its involvement in the facility's financial
management. A subsequent decision by the United States Court of Appeals for the
Ninth Circuit in re Bergsoe Metal Corp., apparently disagreeing with, but not
expressly contradicting, the Fleet Factors court, held that a secured lender had
no liability absent "some actual management of the facility" on the part of the
lender.
Court decisions have taken varying views of the scope of the
secured-creditor exemption, leading to administrative and legislative efforts to
provide guidance to lenders on the scope of activities that would trigger CERCLA
and/or RCRA liability. Until recently, these efforts have failed to provide
substantial guidance.
On September 28, 1996, however, Congress enacted, and on September 30,
1996, the President signed into law the Asset Conservation Lender Liability and
Deposit Insurance Protection Act of 1996 (the "Asset Conservation Act"). The
Asset Conservation Act was intended to clarify the scope of the secured creditor
exemption under both CERCLA and RCRA. The Asset Conservation Act more explicitly
defined the kinds of "participation in management" that would trigger liability
under CERCLA and specified activities that would not constitute "participation
in management" or otherwise result in a forfeiture of the secured-creditor
exemption before foreclosure or during a workout period. The Asset Conservation
Act also clarified the extent of protection against liability under CERCLA in
the event of foreclosure and authorized specific regulatory clarifications of
the scope of the secured-creditor exemption for purposes of RCRA, similar to the
statutory protections under CERCLA. However, since the courts have not yet had
the opportunity to interpret the new statutory provisions, the scope of the
additional protections offered by the Asset Conservation Act is not fully
defined. It also is important to note that the Asset Conservation Act does not
offer complete protection to lenders and that the risk of liability remains.
If a secured lender does become liable, it may be entitled to bring an
action for contribution against the owner or operator who created the
environmental contamination or against some other liable party, but that person
or entity may be bankrupt or otherwise judgment-proof. It is therefore possible
that cleanup or other environmental liability costs could become a liability of
the trust fund and occasion a loss to the trust fund and to securityholders in
some circumstances. The new secured creditor amendments to CERCLA, also, would
not necessarily affect the potential for liability in actions by either a state
or a private party under other federal or state laws that may impose liability
on "owners or operators" but do not incorporate the secured-creditor exemption.
Traditionally, residential mortgage lenders have not taken steps to
evaluate whether hazardous wastes or hazardous substances are present with
respect to any mortgaged property before the origination of the mortgage loan or
before foreclosure or accepting a deed-in-lieu of foreclosure. Neither the
depositor nor any servicer makes any representations or warranties or assumes
any liability with respect to: environmental conditions of the Mortgaged
Property; the absence, presence or effect of hazardous wastes or hazardous
substances on, near or emanating from the Mortgaged Property; the impact on
securityholders of any environmental condition or presence of any substance on
or near the Mortgaged Property; or the compliance of any Mortgaged Property with
any environmental laws. In addition, no agent, person or entity otherwise
affiliated with the depositor is authorized or able to make any representation,
warranty or assumption of liability relative to any Mortgaged Property.
DUE-ON-SALE CLAUSES
The mortgage loans may contain due-on-sale clauses. These clauses
generally provide that the lender may accelerate the maturity of the loan if the
borrower sells, transfers or conveys the related Mortgaged Property. The
enforceability of due-on-sale clauses has been the subject of legislation or
litigation in many states and, in some cases, the enforceability of these
clauses was limited or denied. However, for some loans the Garn-St. Germain
Depository Institutions Act of 1982 (the "Garn-St. Germain Act") preempts state
constitutional, statutory and case law that prohibits the enforcement of
due-on-sale clauses and permits lenders to enforce these clauses in accordance
with their terms, subject to limited exceptions. Due-on-sale clauses contained
in mortgage loans originated by federal savings and loan associations of federal
savings banks are fully enforceable pursuant to regulations of the United States
Federal Home Loan Bank Board, as succeeded by the Office of Thrift Supervision,
which preempt state law restrictions on the enforcement of those clauses.
Similarly, "due-on-sale" clauses in mortgage loans made by national banks and
federal credit unions are now fully enforceable pursuant to preemptive
regulations of the Comptroller of the Currency and the National Credit Union
Administration, respectively.
The Garn-St. Germain Act also sets forth nine specific instances in
which a mortgage lender covered by the act (including federal savings and loan
associations and federal savings banks) may not exercise a "due-on-sale" clause,
notwithstanding the fact that a transfer of the property may have occurred.
These include intra-family transfers, some transfers by operation of law, leases
of fewer than three years and the creation of a junior encumbrance. Regulations
promulgated under the Garn-St. Germain Act also prohibit the imposition of a
prepayment penalty upon the acceleration of a loan pursuant to a due-on-sale
clause. The inability to enforce a "due-on-sale" clause may result in a mortgage
that bears an interest rate below the current market rate being assumed by a new
home buyer rather than being paid off, which may affect the average life of the
mortgage loans and the number of mortgage loans which may extend to maturity.
PREPAYMENT CHARGES
Under some state laws, prepayment charges may not be imposed after a
certain period of time following the origination of mortgage loans secured by
liens encumbering owner-occupied residential properties, if those loans are paid
before maturity. For Mortgaged Properties that are owner-occupied, it is
anticipated that prepayment charges may not be imposed for many of the mortgage
loans. The absence of a restraint on prepayment, particularly for fixed rate
mortgage loans having higher mortgage rates, may increase the likelihood of
refinancing or other early retirement of those loans.
SUBORDINATE FINANCING
Where a borrower encumbers mortgaged property with one or more junior
liens, the senior lender is subjected to additional risks, such as:
o The borrower may have difficulty repaying multiple loans. In
addition, if the junior loan permits recourse to the borrower (as
junior loans often do) and the senior loan does not, a borrower
may be more likely to repay sums due on the junior loan than
those on the senior loan.
o Acts of the senior lender that prejudice the junior lender or
impair the junior lender's security may create a superior equity
in favor of the junior lender. For example, if the borrower and
the senior lender agree to an increase in the principal amount of
or the interest rate payable on the senior loan, the senior
lender may lose its priority to the extent any existing junior
lender is harmed or the borrower is additionally burdened.
o If the borrower defaults on the senior loan and/or any junior
loan or loans, the existence of junior loans and actions taken by
junior lenders can impair the security available to the senior
lender and can interfere with or delay the taking of action by
the senior lender. Moreover, the bankruptcy of a junior lender
may operate to stay foreclosure or similar proceedings by the
senior lender.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, enacted in March 1980 ("Title V"), provides that state
usury limitations will not apply to some types of residential first mortgage
loans originated by lenders after March 31, 1980. A similar federal statute was
in effect for mortgage loans made during the first three months of 1980. The
Office of Thrift Supervision is authorized to issue rules and regulations and to
publish interpretations governing implementation of Title V. The statute
authorized any state to reimpose interest rate limits by adopting, before April
1, 1983, a law or constitutional provision that expressly rejects application of
the federal law. In addition, even where Title V is not so rejected, any state
is authorized by the law to adopt a provision limiting discount points or other
charges on mortgage loans covered by Title V. Some states have taken action to
reimpose interest rate limits and/or to limit discount points or other charges.
The depositor believes that a court interpreting Title V would hold
that residential first mortgage loans that are originated on or after January 1,
1980, are subject to federal preemption. Therefore, in a state that has not
taken the requisite action to reject application of Title V or to adopt a
provision limiting discount points or other charges before origination of those
mortgage loans, any limitation under that state's usury law would not apply to
those mortgage loans.
In any state in which application of Title V has been expressly
rejected or a provision limiting discount points or other charges is adopted, no
mortgage loan originated after the date of that state action will be eligible
for inclusion in a trust fund unless (1) the mortgage loan provides for the
interest rate, discount points and charges as are permitted in that state or (2)
the mortgage loan provides that its terms will be construed in accordance with
the laws of another state under which the interest rate, discount points and
charges would not be usurious and the borrower's counsel has rendered an opinion
that the choice of law provision would be given effect.
Statutes differ in their provisions as to the consequences of a
usurious loan. One group of statutes requires the lender to forfeit the interest
due above the applicable limit or impose a specified penalty. Under this
statutory scheme, the borrower may cancel the recorded mortgage or deed of trust
upon paying its debt with lawful interest, and the lender may foreclose, but
only for the debt plus lawful interest. A second group of statutes is more
severe. A violation of this type of usury law results in the invalidation of the
transaction, thus permitting the borrower to cancel the recorded mortgage or
deed of trust without any payment or prohibiting the lender from foreclosing.
ALTERNATIVE MORTGAGE INSTRUMENTS
Alternative mortgage instruments, including adjustable rate mortgage
loans and early ownership mortgage loans, originated by non-federally chartered
lenders have historically been subject to a variety of restrictions. Those
restrictions differed from state to state, resulting in difficulties in
determining whether a particular alternative mortgage instrument originated by a
state-chartered lender was in compliance with applicable law. These difficulties
were alleviated substantially as a result of the enactment of Title VIII of the
Garn-St. Germain Act ("Title VIII"). Title VIII provides that, notwithstanding
any state law to the contrary, state-chartered banks may originate alternative
mortgage instruments in accordance with regulations promulgated by the
Comptroller of the Currency with respect to origination of alternative mortgage
instruments by national banks; state-chartered credit unions may originate
alternative mortgage instruments in accordance with regulations promulgated by
the National Credit Union Administration with respect to origination of
alternative mortgage instruments by federal credit unions; and all other
non-federally chartered housing creditors, including state-chartered savings and
loan associations, state-chartered savings banks and mutual savings banks and
mortgage banking companies, may originate alternative mortgage instruments in
accordance with the regulations promulgated by the Federal Home Loan Bank Board,
predecessor to the Office of Thrift Supervision, with respect to origination of
alternative mortgage instruments by federal savings and loan associations. Title
VIII provides that any state may reject applicability of the provisions of Title
VIII by adopting, before October 15, 1985, a law or constitutional provision
expressly rejecting the applicability of those provisions. Some states have
taken that action.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of
1940, as amended (the "Relief Act"), a borrower who enters military service
after the origination of the borrower's mortgage loan (including a borrower who
was in reserve status and is called to active duty after origination of the
mortgage loan) may not be charged interest (including fees and charges) above an
annual rate of 6% during the period of the borrower's active duty status, unless
a court orders otherwise upon application of the lender. The Relief Act applies
to borrowers who are members of the Army, Navy, Air Force, Marines, National
Guard, Reserves, Coast Guard and officers of the U.S. Public Health Service
assigned to duty with the military. Because the Relief Act applies to borrowers
who enter military service (including reservists who are called to active duty)
after origination of the related mortgage loan, no information can be provided
as to the number of loans that may be affected by the Relief Act.
Application of the Relief Act would adversely affect, for an
indeterminate period of time, the ability of the servicer to collect full
amounts of interest on some of the mortgage loans. Any shortfalls in interest
collections resulting from the application of the Relief Act would result in a
reduction of the amounts distributable to the holders of the related series of
Notes or Certificates, as applicable, and would not be covered by advances.
These shortfalls will be covered by the credit support provided in connection
with the Notes or Certificates, as applicable, only to the extent provided in
the prospectus supplement. In addition, the Relief Act imposes limitations that
would impair the ability of the servicer to foreclose on an affected mortgage
loan during the borrower's period of active duty status, and, under some
circumstances, during an additional three month period thereafter. Thus, if an
affected mortgage loan goes into default, there may be delays and losses
occasioned thereby.
FORFEITURES IN DRUG AND RICO PROCEEDINGS
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ("RICO") statute can be seized by the government if the
property was used in, or purchased with the proceeds of, those crimes. Under
procedures contained in the Comprehensive Crime Control Act of 1984 (the "Crime
Control Act"), the government may seize the property even before conviction. The
government must publish notice of the forfeiture proceeding and may give notice
to all parties "known to have an alleged interest in the property," including
the holders of mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (1) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (2) the lender was, at the
time of execution of the mortgage, "reasonably without cause to believe" that
the property was used in, or purchased with the proceeds of, illegal drug or
RICO activities.
CERTAIN LEGAL ASPECTS OF THE CONTRACTS
The following discussion contains summaries, which are general in
nature, of certain legal matters relating to the contracts. Because these legal
aspects are governed primarily by applicable state law, which laws may differ
substantially, the summaries do not purport to be complete nor to reflect the
laws of any particular state, nor to encompass the laws of all states in which
the security for the contracts is situated. The summaries are qualified in their
entirety by reference to the appropriate laws of the states in which contracts
may be originated.
GENERAL
As a result of the assignment of the contracts to the trustee, the
trustee will succeed collectively to all of the rights including the right to
receive payment on the contracts, of the obligee under the contracts. Each
contract evidences both
(a) the obligation of the borrower to repay the loan evidenced
thereby, and
(b) the grant of a security interest in the manufactured home to
secure repayment of the loan. Aspects of both features of the
contracts are described more fully below.
The contracts generally are "chattel paper" as defined in the UCC in
effect in the states in which the manufactured homes initially were registered.
Pursuant to the UCC, the sale of chattel paper is treated in a manner similar to
perfection of a security interest in chattel paper. Under the agreement, the
servicer will transfer physical possession of the contracts to the trustee. In
addition, the servicer will make an appropriate filing of a UCC-1 financing
statement in the appropriate states to give notice of the trustee's ownership of
the contracts. The contracts will be stamped or marked otherwise to reflect
their assignment from the depositor to the trustee only if provided in the
prospectus supplement. Therefore, if, through negligence, fraud or otherwise, a
subsequent purchaser were able to take physical possession of the contracts
without notice of the assignment, the trustee's interest in contracts could be
defeated.
SECURITY INTERESTS IN THE MANUFACTURED HOMES
The manufactured homes securing the contracts may be located in all 50
states, Security interests in manufactured homes may be perfected either by
notation of the secured party's lien on the certificate of title or by delivery
of the required documents and payment of a fee to the state motor vehicle
authority, depending on state law. In some nontitle states, perfection pursuant
to the provisions of the UCC is required. The asset seller may effect that
notation or delivery of the required documents and fees, and obtain possession
of the certificate of title, as appropriate under the laws of the state in which
any manufactured home securing a manufactured housing conditional sales contract
is registered. In the event the asset seller fails, due to clerical error, to
effect that notation or delivery, or files the security interest under the wrong
law, the asset seller may not have a first priority security interest in the
manufactured home securing a contract. As manufactured homes have become larger
and often have been attached to their sites without any apparent intention to
move them, courts in many states have held that manufactured homes, under some
circumstances, may become subject to real estate title and recording laws. As a
result, a security interest in a manufactured home could be rendered subordinate
to the interests of other parties claiming an interest in the home under
applicable state real estate law.
To perfect a security interest in a manufactured home under real
estate laws, the holder of the security interest must file either a fixture
filing under the provisions of the UCC or a real estate mortgage under the real
estate laws of the state where the home is located. These filings must be made
in the real estate records office of the county where the home is located.
Substantially all of the contracts contain provisions prohibiting the borrower
from permanently attaching the manufactured home to its site. So long as the
borrower does not violate this agreement, a security interest in the
manufactured home will be governed by the certificate of title laws or the UCC,
and the notation of the security interest on the certificate of title or the
filing of a UCC financing statement will be effective to maintain the priority
of the security interest in the manufactured home. If, however, a manufactured
home is permanently attached to its site, other parties could obtain an interest
in the manufactured home that is prior to the security interest originally
retained by the asset seller and transferred to the depositor. For a series of
securities and if so described in the prospectus supplement, the servicer may be
required to perfect a security interest in the manufactured home under
applicable real estate laws. The warranting party will represent that as of the
date of the sale to the depositor it has obtained a perfected first priority
security interest by proper notation or delivery of the required documents and
fees for substantially all of the manufactured homes securing the contracts.
The depositor will cause the security interests in the manufactured
homes to be assigned to the trustee on behalf of the securityholders. The
depositor or the trustee will amend the certificates of title, or file UCC-3
statements, to identify the trustee as the new secured party, and will deliver
the certificates of title to the trustee or note thereon the interest of the
trustee only if specified in the prospectus supplement. Accordingly, the asset
seller, or other originator of the contracts, will continue to be named as the
secured party on the certificates of title relating to the manufactured homes.
In some states, that assignment is an effective conveyance of the security
interest without amendment of any lien noted on the related certificate of title
and the new secured party succeeds to servicer's rights as the secured party.
However, in some states, in the absence of an amendment to the certificate of
title and the new secured party succeeds to servicer's rights as the secured
party. However, in some states, in the absence of an amendment to the
certificate of title, or the filing of a UCC-3 statement, the assignment of the
security interest in the manufactured home may not be held effective or the
security interest in the manufactured home may not be held effective or the
security interests may not be perfected and in the absence of that notation or
delivery to the trustee, the assignment of the security interest in the
manufactured home may not be effective against creditors of the asset seller, or
any other originator of the contracts, or a trustee in bankruptcy of the asset
seller, or any other originator.
In the absence of fraud, forgery or permanent affixation of the
manufactured home to its site by the manufactured home owner, or administrative
error by state recording officials, the notation of the lien of the asset
seller, or other originator of the Contracts, on the certificate of title or
delivery of the required documents and fees will be sufficient to protect the
securityholders against the rights or subsequent purchasers of a manufactured
home or subsequent lenders who take a security interest in the manufactured
home. If there are any manufactured homes as to which the security interest
assigned to the trustee is not perfected, that security interest would be
subordinate to, among others, subsequent purchasers for value of manufactured
homes and holders of perfected security interests. There also exists a risk in
not identifying the trustee as the new secured party on the certificate of title
that, through fraud or negligence, the security interest of the trustee could be
released.
If the owner of a manufactured home moves it to a state other than the
state in which the manufactured home initially is registered, under the laws of
most states the perfected security interest in the manufactured home would
continue for four months after the relocation and thereafter only if and after
the owner re-registers the manufactured home in that state. If the owner were to
relocate a manufactured home to another state and not re-register the
manufactured home in that state, and if steps are not taken to re-perfect the
trustee's security interest in that state, the security interest in the
manufactured home would cease to be perfected. A majority of states generally
require surrender of a certificate of title to re-register a manufactured home;
accordingly, the servicer must surrender possession if it holds the certificate
of title to the manufactured home or, in the case of manufactured homes
registered n states that provide for notation of lien, the asset seller, or
other originator, would receive notice of surrender if the security interest in
the manufactured home is noted on the certificate of title. Accordingly, the
trustee would have the opportunity to re-perfect its security interest in the
manufactured home in the state of relocation. In states that do not require a
certificate of title for registration of a manufactured home, re-registration
could defeat perfection. In the ordinary course of servicing the manufactured
housing contracts, the servicer takes steps to effect re-perfection upon receipt
of notice of re-registration or information from the borrower as to relocation.
Similarly, when a borrower under a manufactured housing contract sells
a manufactured home, the servicer must surrender possession of the certificate
of title or, if it is noted as lienholder on the certificate of title, will
receive notice as a result of its lien noted thereon and accordingly will have
an opportunity to require satisfaction of the related manufactured housing
conditional sales contract before release of the lien. Under the Agreement, the
servicer is obligated to take those steps, at the servicer's expense, as are
necessary to maintain perfection of security interests in the manufactured
homes.
Under the laws of most states, liens for repairs performed on a
manufactured home and liens for personal property taxes take priority even over
a perfected security interest. The warranting party will represent in the
agreement that it has no knowledge of any of these liens for any manufactured
home securing payment on any contract. However, these liens could arise at any
time during the term of a contract. No notice will be given to the trustee or
securityholders if a lien arises.
ENFORCEMENT OF SECURITY INTERESTS IN THE MANUFACTURED HOMES
The servicer on behalf of the trustee, to the extent required by the
related agreement, may take action to enforce the trustee's security interest
with respect to contracts in default by repossession and resale of the
manufactured homes securing those defaulted contracts. So long as the
manufactured home has not become subject to the real estate law, a creditor can
repossess a manufactured home securing a contract by voluntary surrender, by
"self-help" repossession that is "peaceful" or, in the absence of voluntary
surrender and the ability to repossess without breach of the peace, by judicial
process. The holder of a contract must give the debtor a number of days' notice,
which varies from 10 to 30 days depending on that state, before beginning any
repossession. The UCC and consumer protection laws in most states place
restrictions on repossession sales, including requiring prior notice to the
debtor and commercial reasonableness in effecting that sale. The law in most
states also requires that the debtor be given notice of any sale before resale
of the unit so that the debtor may redeem at or before that resale. In the event
of repossession and resale of a manufactured home, the trustee would be entitled
to be paid out of the sale proceeds before the proceeds could be applied to the
payment of the claims of unsecured creditors or the holders of subsequently
perfected security interests or, thereafter, to the debtor.
Under the laws applicable in mot states, a creditor is entitled to
obtain a deficiency judgment from a debtor for any deficiency on repossession
and resale of the manufactured home securing the debtor's loan. However, some
states impose prohibitions or limitations on deficiency judgments, and in many
cases the defaulting borrower would have no assets with which to pay a judgment.
Other statutory provisions, including federal and state bankruptcy and
insolvency laws and general equitable principles, may limit or delay the ability
of a lender to repossess and resell collateral or enforce a deficiency judgment.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
The terms of the Relief Act apply to a borrower on a Contract as
described for a borrower on a mortgage loan under "Certain Legal Aspects of
Mortgage Loans-Soldiers' and Sailors' Civil Act of 1940."
CONSUMER PROTECTION LAWS
The so-called Holder-in-Due-Course rule of the Federal Trade
Commission is intended to defeat the ability of the transferor of a consumer
credit contract that is the seller of goods which gave rise to the transaction,
and some related lenders and assignees, to transfer the contract free of notice
of claims by the debtor thereunder. The effect of this rule is to subject the
assignee of the contract to all claims and defenses that the debtor could assert
against the seller of goods. Liability under this rule is limited to amounts
paid under a contract; however, the borrower also may be able to assert the rule
to set off remaining amounts due as a defense against a claim brought by the
trustee against the borrower. Numerous other federal and state consumer
protection laws impose requirements applicable to the origination and lending
pursuant to the contracts, including the Truth in Lending Act, the Federal Trade
Commission Act, the Fair Credit Billing Act, the Fair Credit Reporting Act, the
Equal Credit Opportunity Act, the Fair Debt Collection Practices Act and the
Uniform Consumer Credit Code. In the case of some of these laws, the failure to
comply with their provisions may affect the enforceability of the related
contract.
TRANSFERS OF MANUFACTURED HOMES; ENFORCEABILITY OF "DUE-ON-SALE" CLAUSES
The contracts, in general, prohibit the sale or transfer of the
related manufactured homes without the consent of the servicer and permit the
acceleration of the maturity of the contracts by the servicer upon any sale or
transfer that is not consented to. Generally, it is expected that the servicer
will permit most transfers of manufactured homes and not accelerate the maturity
of the related contracts. In some cases, the transfer may be made by a
delinquent borrower to avoid a repossession proceeding for a manufactured home.
In the case of a transfer of a manufactured home after which the
servicer desires to accelerate the maturity of the related contract, the
servicer's ability to do so will depend on the enforceability under state law of
the due-on-sale clauses applicable to the manufactured homes. Consequently, in
some states the servicer may be prohibited from enforcing a due-on-sale clause
in respect of some manufactured homes.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, as amended (Title V), provides that, subject to the
following conditions, state usury limitations will not apply to any loan that is
secured by a first lien on certain kinds of manufactured housing. The contracts
would be covered if they satisfy certain conditions, among other things,
governing the terms of any prepayments, late charges and deferral fees and
requiring a 30-day notice period before instituting any action leading to
repossession of or foreclosure on the related unit.
Title V authorized any state to re-impose limitations on interest
rates and finance charges by adopting before April 1, 1983, a law or
constitutional provision that expressly rejects application of the federal law.
Fifteen states adopted a similar law before the April 1, 1983 deadline. In
addition, even where Title V was not so rejected, any state is authorized by the
law to adopt a provision limiting discount points or other charges on loans
covered by Title V. The related asset seller will represent that all of the
contracts comply with applicable usury law.
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following discussion represents the opinion of Stroock & Stroock &
Lavan LLP as to the material federal income tax consequences of the purchase,
ownership and disposition of the Notes or Certificates, as applicable, offered
under this prospectus. This opinion assumes compliance with all provisions of
the Agreements pursuant to which the Notes or Certificates, as applicable, are
issued. This discussion is directed solely to securityholders that hold the
Notes or Certificates, as applicable, as capital assets within the meaning of
Section 1221 of the Internal Revenue Code of 1986, as amended (the "Code"), and
does not purport to discuss all federal income tax consequences that may be
applicable to particular categories of investors, some of which (such as banks,
insurance companies and foreign investors) may be subject to special rules.
Further, the authorities on which this discussion, and the opinions referred to
below, are based are subject to change or differing interpretations, which could
apply retroactively.
In addition to the federal income tax consequences described in this
prospectus, potential investors should consider the state and local tax
consequences, if any, of the purchase, ownership and disposition of the Notes or
Certificates, as applicable. See "State and Other Tax Considerations." The
depositor recommends that securityholders consult their own tax advisors
concerning the federal, state, local or other tax consequences to them of the
purchase, ownership and disposition of the Notes or Certificates, as applicable,
offered under this prospectus.
The following discussion addresses securities of five general types:
o securities ("REMIC Securities") representing interests in a trust
fund, or a portion of a trust fund, that the trustee will elect
to have treated as a real estate mortgage investment conduit
("REMIC") under Sections 860A through 860G (the "REMIC
Provisions") of the Code;
o securities ("FASIT Securities") representing interests in a trust
fund, or a portion of a trust fund, that the trustee will elect
to have treated as a financial asset securitization investment
trust ("FASIT") under Sections 860H through 860L (the "FASIT
Provisions") of the Code;
o securities ("Grantor Trust Securities") representing interests in
a trust fund (a "Grantor Trust Fund") as to which no election
will be made;
o securities ("Partnership Certificates") representing equity
interests in a trust fund (a "Partnership Trust Fund") which is
treated as a partnership for federal income tax purposes; and
o securities ("Debt Securities") representing indebtedness of a
Partnership Trust Fund or a trust fund which is disregarded as a
separate entity for federal income tax purposes.
The prospectus supplement for each series of Notes or Certificates, as
applicable, will indicate which of the foregoing treatments will apply to that
series and, if a REMIC election (or elections) will be made for the related
trust fund, will identify all "regular interests" and "residual interests" in
the REMIC or, if a FASIT election will be made for the related trust fund, will
identify all "regular interests" and "ownership interests" in the FASIT. For
purposes of this tax discussion,
(1) references to a "securityholder" or a "holder" are to the
beneficial owner of a Security,
(2) references to "REMIC Pool" are to an entity or portion thereof as
to which a REMIC election will be made and
(3) to the extent specified in the prospectus supplement, references
to "mortgage loans" include Contracts. Except to the extent
specified in the prospectus supplement, no REMIC election will be
made for Unsecured Home Improvement Loans.
The following discussion is based in part upon the rules governing
original issue discount that are set forth in Sections 1271 through 1275 of the
Code and in the Treasury regulations promulgated thereunder (the "OID
Regulations"), in part upon the REMIC Provisions and the Treasury regulations
promulgated thereunder (the "REMIC Regulations"), and in part upon the FASIT
Provisions. Although the FASIT Provisions of the Code became effective on
September 1, 1997, the Treasury regulations issued with respect to those
provisions are still in proposed form only. Accordingly, the discussion herein
does not address the proposed FASIT regulations (which will be discussed in the
related prospectus supplement if and to the extent they are relevant) and
definitive guidance cannot be provided with respect to many aspects of the tax
treatment of the holders of FASIT Securities. In addition, the OID Regulations
do not adequately address some issues relevant to, and in some instances provide
that they are not applicable to, securities such as the Notes or Certificates,
as applicable.
TAXABLE MORTGAGE POOLS
Corporate income tax can be imposed on the net income of some entities
issuing non-REMIC and non-FASIT debt obligations secured by real estate
mortgages ("Taxable Mortgage Pools"). Any entity other than a REMIC or a FASIT
(as defined in this prospectus) will be considered a Taxable Mortgage Pool if
(1) substantially all of the assets of the entity consist of debt
obligations and more than 50% of those obligations consist of
"real estate mortgages,"
(2) that entity is the borrower under debt obligations with two or
more maturities, and
(3) under the terms of the debt obligations on which the entity is
the borrower, payments on those obligations bear a relationship
to payments on the obligations held by the entity.
Furthermore, a group of assets held by an entity can be treated as a separate
Taxable Mortgage Pool if the assets are expected to produce significant cash
flow that will support one or more of the entity's issues of debt obligations.
The depositor generally will structure offerings of non-REMIC and non-FASIT
Securities to avoid the application of the Taxable Mortgage Pool rules.
REMICS
CLASSIFICATION OF REMICS
For each series of REMIC Securities, assuming compliance with all
provisions of the related pooling and servicing agreement, in the opinion of
Stroock & Stroock & Lavan LLP, the related trust fund (or each applicable
portion of the trust fund) will qualify as a REMIC and the REMIC Securities
offered with respect thereto will be considered to evidence ownership of
"regular interests" ("Regular Securities") or "residual interests" ("Residual
Securities") in the REMIC within the meaning of the REMIC Provisions.
In order for the REMIC Pool to qualify as a REMIC, there must be
ongoing compliance on the part of the REMIC Pool with the requirements set forth
in the Code. The REMIC Pool must fulfill an asset test, which requires that no
more than a de minimis portion of the assets of the REMIC Pool, as of the close
of the third calendar month beginning after the "Startup Day" (which for
purposes of this discussion is the date of issuance of the REMIC Securities) and
at all times thereafter, may consist of assets other than "qualified mortgages"
and "permitted investments." The REMIC Regulations provide a safe harbor
pursuant to which the de minimis requirement will be met if at all times the
total adjusted basis of the nonqualified assets is less than 1% of the total
adjusted basis of all the REMIC Pool's assets. An entity that fails to meet the
safe harbor may nevertheless demonstrate that it holds no more than a de minimis
amount of nonqualified assets. A REMIC Pool also must provide "reasonable
arrangements" to prevent its residual interests from being held by "disqualified
organizations" or agents of "disqualified organizations" and must furnish
applicable tax information to transferors or agents that violate this
requirement. The pooling and servicing agreement for each series of REMIC
Securities will contain provisions meeting these requirements. See "--Taxation
of Owners of Residual Securities--Tax-Related Restrictions on Transfer of
Residual Securities--Disqualified Organizations" below.
A qualified mortgage is any obligation that is principally secured by
an interest in real property and that is either transferred to the REMIC Pool on
the Startup Day or is purchased by the REMIC Pool within a three-month period
thereafter pursuant to a fixed price contract in effect on the Startup Day.
Qualified mortgages include whole mortgage loans and, generally, certificates of
beneficial interest in a grantor trust that holds mortgage loans and regular
interests in another REMIC, such as lower-tier regular interests in a tiered
REMIC. The REMIC Regulations specify that loans secured by timeshare interests,
shares held by a tenant stockholder in a cooperative housing corporation, and
manufactured housing that qualifies as a "single family residence" under Code
Section 25(e)(10) can be qualified mortgages. A qualified mortgage includes a
qualified replacement mortgage, which is any property that would have been
treated as a qualified mortgage if it were transferred to the REMIC Pool on the
Startup Day and that is received either:
(1) in exchange for any qualified mortgage within a three-month
period from the Startup Day; or
(2) in exchange for a "defective obligation" within a two-year
period from the Startup Day.
A "defective obligation" includes:
(1) a mortgage in default or as to which default is reasonably
foreseeable;
(2) a mortgage as to which a customary representation or warranty
made at the time of transfer to the REMIC Pool has been breached;
(3) a mortgage that was fraudulently procured by the borrower;
and
(4) a mortgage that was not in fact principally secured by real
property (but only if the mortgage is disposed of within 90 days of
discovery).
A mortgage loan that is "defective" as described in clause (4) above that is not
sold or, if within two years of the Startup Day, exchanged, within 90 days of
discovery, ceases to be a qualified mortgage after that 90-day period.
Permitted investments include cash flow investments, qualified reserve
assets, and foreclosure property. A cash flow investment is an investment,
earning a return in the nature of interest, of amounts received on or with
respect to qualified mortgages for a temporary period, not exceeding 13 months,
until the next scheduled distribution to holders of interests in the REMIC Pool.
A qualified reserve asset is any intangible property held for investment that is
part of any reasonably required reserve maintained by the REMIC Pool to provide
for payments of expenses of the REMIC Pool or amounts due on the regular or
residual interests in the event of defaults (including delinquencies) on the
qualified mortgages, lower than expected reinvestment returns, prepayment
interest shortfalls and other contingencies. The reserve fund will be
disqualified if more than 30% of the gross income from the assets in that fund
for the year is derived from the sale or other disposition of property held for
less than three months, unless required to prevent a default on the regular
interests caused by a default on one or more qualified mortgages. A reserve fund
must be reduced "promptly and appropriately" as payments on the mortgage loans
are received. Foreclosure property is real property acquired by the REMIC Pool
in connection with the default or imminent default of a qualified mortgage and
generally may not be held for more than three taxable years after the taxable
year of acquisition unless extensions are granted by the Secretary of the
Treasury.
In addition to the foregoing requirements, the various interests in a
REMIC Pool also must meet specific requirements. All of the interests in a REMIC
Pool must be either of the following: (1) one or more classes of regular
interests or (2) a single class of residual interests on which distributions, if
any, are made pro rata.
o A regular interest is an interest in a REMIC Pool that is issued
on the Startup Day with fixed terms, is designated as a regular
interest, and unconditionally entitles the holder to receive a
specified principal amount (or other similar amount), and
provides that interest payments (or other similar amounts), if
any, at or before maturity either are payable based on a fixed
rate or a qualified variable rate, or consist of a specified,
nonvarying portion of the interest payments on qualified
mortgages. That specified portion may consist of a fixed number
of basis points, a fixed percentage of the total interest, or a
qualified variable rate, inverse variable rate or difference
between two fixed or qualified variable rates on some or all of
the qualified mortgages. The specified principal amount of a
regular interest that provides for interest payments consisting
of a specified, nonvarying portion of interest payments on
qualified mortgages may be zero.
o A residual interest is an interest in a REMIC Pool other than a
regular interest that is issued on the Startup Day and that is
designated as a residual interest.
An interest in a REMIC Pool may be treated as a regular interest even
if payments of principal for that interest are subordinated to payments on other
regular interests or the residual interest in the REMIC Pool, and are dependent
on the absence of defaults or delinquencies on qualified mortgages or permitted
investments, lower than reasonably expected returns on permitted investments,
unanticipated expenses incurred by the REMIC Pool or prepayment interest
shortfalls. Accordingly, in the opinion of Stroock & Stroock & Lavan LLP, the
Regular Securities of a series will constitute one or more classes of regular
interests, and the Residual Securities for that series will constitute a single
class of residual interests for each REMIC Pool.
If an entity electing to be treated as a REMIC fails to comply with
one or more of the ongoing requirements of the Code for that status during any
taxable year, the Code provides that the entity will not be treated as a REMIC
for that year and thereafter. In that event, that entity may be taxable as a
corporation under Treasury regulations, and the related REMIC Securities may not
be accorded the status or given the tax treatment described below. Although the
Code authorizes the Treasury Department to issue regulations providing relief in
the event of an inadvertent termination of REMIC status, none of these
regulations have been issued. Any relief provided, moreover, may be accompanied
by sanctions, such as the imposition of a corporate tax on all or a portion of
the trust fund's income for the period in which the requirements for that status
are not satisfied. The pooling and servicing agreement for each REMIC Pool will
include provisions designed to maintain the trust fund's status as a REMIC under
the REMIC Provisions. It is not anticipated that the status of any trust fund as
a REMIC will be terminated.
CHARACTERIZATION OF INVESTMENTS IN REMIC SECURITIES
The REMIC Securities will be treated as "real estate assets" within
the meaning of Section 856(c)(4)(A) of the Code and assets described in Section
7701(a)(19)(C) of the Code in the same proportion that the assets of the REMIC
Pool underlying these Notes or Certificates, as applicable, would be so treated.
Moreover, if 95% or more of the assets of the REMIC Pool qualify for either of
the foregoing treatments at all times during a calendar year, the REMIC
Securities will qualify for the corresponding status in their entirety for that
calendar year.
If the assets of the REMIC Pool include Buydown Mortgage Loans, it is
possible that the percentage of those assets constituting "loans . . . secured
by an interest in real property which is . . . residential real property" for
purposes of Code Section 7701(a)(19)(C)(v) may be required to be reduced by the
amount of the related funds paid thereon (the "Buydown Funds"). No opinion is
expressed as to the treatment of those Buydown Funds because the law is unclear
as to whether the Buydown Funds represent an account held by the lender that
reduces the lender's investment in the mortgage loan. This reduction of a
holder's investment may reduce the assets qualifying for the 60% of assets test
for meeting the definition of a "domestic building and loan association."
Interest (including original issue discount) on the Regular Securities and
income allocated to the class of Residual Securities will be interest described
in Section 856(c)(3)(B) of the Code to the extent that the Notes or
Certificates, as applicable, are treated as "real estate assets" within the
meaning of Section 856(c)(4)(A) of the Code. In addition, the Regular Securities
generally will be "qualified mortgages" within the meaning of Section 860G(a)(3)
of the Code if transferred to another REMIC on its Startup Day in exchange for
regular or residual interests in the REMIC.
The assets of the REMIC Pool will include, in addition to mortgage
loans, payments on mortgage loans held pending distribution on the REMIC
Securities and property acquired by foreclosure held pending sale, and may
include amounts in reserve accounts. It is unclear whether property acquired by
foreclosure held pending sale and amounts in reserve accounts would be
considered to be part of the mortgage loans, or whether those assets (to the
extent not invested in assets described in the foregoing sections) otherwise
would receive the same treatment as the mortgage loans for purposes of all of
the foregoing sections. The REMIC Regulations do provide, however, that payments
on mortgage loans held pending distribution are considered part of the mortgage
loans for purposes of Section 856(c)(4)(A) of the Code. Furthermore, foreclosure
property generally will qualify as "real estate assets" under Section
856(c)(4)(A) of the Code.
TIERED REMIC STRUCTURES
For some series of REMIC Securities, two or more separate elections
may be made to treat designated portions of the related trust fund as REMICs
("Tiered REMICs") for federal income tax purposes. Upon the issuance of any of
these series of REMIC Securities, Stroock & Stroock & Lavan LLP will deliver its
opinion that, assuming compliance with all provisions of the related pooling and
servicing agreement, the Tiered REMICs will each qualify as a REMIC and the
respective REMIC Securities issued by each Tiered REMIC will be considered to
evidence ownership of Regular Securities or Residual Securities in the related
REMIC within the meaning of the REMIC Provisions.
Solely for purposes of determining whether the REMIC Securities will
be "real estate assets" within the meaning of Section 856(c)(4)(A) of the Code
and "loans secured by an interest in real property" under Section 7701(a)(19)(C)
of the Code, and whether the income on those Notes or Certificates, as
applicable, is interest described in Section 856(c)(3)(B) of the Code, the
Tiered REMICs will be treated as one REMIC.
TAXATION OF OWNERS OF REGULAR SECURITIES
(1) General
Except as otherwise indicated herein, the Regular Securities will be
treated for federal income tax purposes as debt instruments that are issued by
the REMIC and not as beneficial interests in the REMIC or the REMIC's assets. In
general, interest, original issue discount, and market discount on a Regular
Security will be treated as ordinary income to a holder of the Regular Security
(the "Regular Securityholder"), and principal payments on a Regular Security
will be treated as a return of capital to the extent of the Regular
Securityholder's basis in the Regular Security allocable thereto. Regular
Securityholders must use the accrual method of accounting with regard to Regular
Securities, regardless of the method of accounting otherwise used by that
Regular Securityholder.
Payments of interest on Regular Securities may be based on a fixed
rate, a variable rate as permitted by the REMIC Regulations, or may consist of a
specified portion of the interest payments on qualified mortgages where such
portion does not vary during the period the Regular Security is outstanding. The
definition of a variable rate for purposes of the REMIC Regulations is based on
the definition of a qualified floating rate for purposes of the rules governing
original issue discount set forth in the OID Regulations, with certain
modifications and permissible variations. See "--Variable Rate Regular
Securities" below for a discussion of the definition of a qualified floating
rate for purposes of the OID Regulations. In contrast to the OID Regulations,
for purposes of the REMIC Regulations, a qualified floating rate does not
include any multiple of a qualified floating rate (also excluding multiples of
qualified floating rates that themselves would constitute qualified floating
rates under the OID Regulations), and the characterization of a variable rate
that is subject to a cap, floor or similar restriction as a qualified floating
rate for purposes of the REMIC Regulations will not depend upon the OID
Regulations relating to caps, floors, and similar restrictions. See "--Variable
Rate Regular Securities" below for discussion of the OID Regulations relating to
caps, floors and similar restrictions. A qualified floating rate, as defined
above for purposes of the REMIC Regulations (a "REMIC qualified floating rate"),
qualifies as a variable rate for purposes of the REMIC Regulations if such REMIC
qualified floating rate is set at a "current rate" as defined in the OID
Regulations. In addition, a rate equal to the highest, lowest or an average of
two or more REMIC qualified floating rates qualifies as a variable rate for
REMIC purposes. A Regular Security may also have a variable rate based on a
weighted average of the interest rates on some or all of the qualified mortgages
held by the REMIC where each qualified mortgage taken into account has a fixed
rate or a variable rate that is permissible under the REMIC Regulations.
Further, a Regular Security may have a rate that is the product of a REMIC
qualified floating rate or a weighted average rate and a fixed multiplier, is a
constant number of basis points more or less than a REMIC qualified floating
rate or a weighted average rate, or is the product, plus or minus a constant
number of basis points, of a REMIC qualified floating rate or a weighted average
rate and a fixed multiplier. An otherwise permissible variable rate for a
Regular Security, described above, will not lose its character as such because
it is subject to a floor or a cap, including a "funds available cap" as that
term is defined in the REMIC Regulations. Lastly, a Regular Security will be
considered as having a permissible variable rate if it has a fixed or otherwise
permissible variable rate during one or more payment or accrual periods and
different fixed or otherwise permissible variable rates during other payment or
accrual periods.
(2) Original Issue Discount
Accrual Securities will be, and other classes of Regular Securities
may be, issued with "original issue discount" within the meaning of Code Section
1273(a). Holders of any Class or Subclass of Regular Securities having original
issue discount generally must include original issue discount in ordinary income
for federal income tax purposes as it accrues, in accordance with a constant
yield method that takes into account the compounding of interest, in advance of
the receipt of the cash attributable to that income. The following discussion is
based in part on the "OID Regulations" and in part on the provisions of the Tax
Reform Act of 1986 (the "1986 Act"). Regular Securityholders should be aware,
however, that the OID Regulations do not adequately address some of the issues
relevant to prepayable securities, such as the Regular Securities. To the extent
that those issues are not addressed in the regulations, the Seller intends to
apply the methodology described in the Conference Committee Report to the 1986
Act. No assurance can be provided that the Internal Revenue Service will not
take a different position as to those matters not currently addressed by the OID
Regulations. Moreover, the OID Regulations include an anti-abuse rule allowing
the Internal Revenue Service to apply or depart from the OID Regulations where
necessary or appropriate to ensure a reasonable tax result because of the
applicable statutory provisions. A tax result will not be considered
unreasonable under the anti-abuse rule in the absence of a substantial effect on
the present value of a taxpayer's tax liability. Investors are advised to
consult their own tax advisors as to the discussion in the OID Regulations and
the appropriate method for reporting interest and original issue discount for
the Regular Securities.
Each Regular Security will be treated as a single installment
obligation for purposes of determining the original issue discount includible in
a Regular Securityholder's income. The total amount of original issue discount
on a Regular Security is the excess of the "stated redemption price at maturity"
of the Regular Security over its "issue price." The issue price of a Class of
Regular Securities offered pursuant to this prospectus generally is the first
price at which a substantial amount of that Class is sold to the public
(excluding bond houses, brokers and underwriters). Although unclear under the
OID Regulations, it is anticipated that the trustee will treat the issue price
of a Class as to which there is no substantial sale as of the issue date or that
is retained by the depositor as the fair market value of the Class as of the
issue date. The issue price of a Regular Security also includes any amount paid
by an initial Regular Securityholder for accrued interest that relates to a
period before the issue date of the Regular Security, unless the Regular
Securityholder elects on its federal income tax return to exclude that amount
from the issue price and to recover it on the first Distribution Date.
The stated redemption price at maturity of a Regular Security always
includes the original principal amount of the Regular Security, but generally
will not include distributions of interest if those distributions constitute
"qualified stated interest." Under the OID Regulations, qualified stated
interest generally means interest payable at a single fixed rate or a qualified
variable rate (as described below), provided that the interest payments are
unconditionally payable at intervals of one year or less during the entire term
of the Regular Security. Because there is no penalty or default remedy in the
case of nonpayment of interest for a Regular Security, it is possible that no
interest on any Class of Regular Securities will be treated as qualified stated
interest. However, except as provided in the following three sentences or in the
prospectus supplement, because the underlying mortgage loans provide for
remedies in the event of default, it is anticipated that the trustee will treat
interest for the Regular Securities as qualified stated interest. Distributions
of interest on an Accrual Security, or on other Regular Securities for which
deferred interest will accrue, will not constitute qualified stated interest, in
which case the stated redemption price at maturity of those Regular Securities
includes all distributions of interest as well as principal on the Regular
Securities. Likewise, it is anticipated that the trustee will treat an
interest-only Class or a Class on which interest is substantially
disproportionate to its principal amount (a so-called "super-premium" Class) as
having no qualified stated interest. Where the interval between the issue date
and the first Distribution Date on a Regular Security is shorter than the
interval between subsequent Distribution Dates, the interest attributable to the
additional days will be included in the stated redemption price at maturity.
Under a de minimis rule, original issue discount on a Regular Security
will be considered to be zero if the original issue discount is less than 0.25%
of the stated redemption price at maturity of the Regular Security multiplied by
the weighted average maturity of the Regular Security. For this purpose, the
weighted average maturity of the Regular Security is computed as the sum of the
amounts determined by multiplying the number of full years (i.e., rounding down
partial years) from the issue date until each distribution in reduction of
stated redemption price at maturity is scheduled to be made by a fraction, the
numerator of which is the amount of each distribution included in the stated
redemption price at maturity of the Regular Security and the denominator of
which is the stated redemption price at maturity of the Regular Security. The
Conference Committee Report to the 1986 Act provides that the schedule of those
distributions should be determined in accordance with the assumed rate of
prepayment of the mortgage loans (the "Prepayment Assumption") and the
anticipated reinvestment rate, if any, relating to the Regular Securities. The
Prepayment Assumption for a series of Regular Securities will be set forth in
the prospectus supplement. Holders generally must report de minimis original
issue discount pro rata as principal payments are received, and that income will
generally be capital gain if the Regular Security is held as a capital asset.
Under the OID Regulations, however, Regular Securityholders may elect to accrue
all de minimis original issue discount as well as market discount and market
premium, under the constant yield method. See "-Election to Treat All Interest
Under the Constant Yield Method" below.
A Regular Securityholder generally must include in gross income for
any taxable year the sum of the "daily portions," as defined below, of the
original issue discount on the Regular Security accrued during an accrual period
for each day on which it holds the Regular Security, including the date of
purchase but excluding the date of disposition. The trustee will treat the
monthly period ending on the day before each Distribution Date as the accrual
period. For each Regular Security, a calculation will be made of the original
issue discount that accrues during each successive full accrual period (or
shorter period from the date of original issue) that ends on the day before the
related Distribution Date on the Regular Security. The Conference Committee
Report to the 1986 Act states that the rate of accrual of original issue
discount is intended to be based on the Prepayment Assumption. The original
issue discount accruing in a full accrual period would be the excess, if any,
of:
(1) the sum of:
(a) the present value of all of the remaining distributions
to be made on the Regular Security as of the end of that accrual
period and
(b) the distributions made on the Regular Security during
the accrual period that are included in the Regular Security's
stated redemption price at maturity, over
(2) the adjusted issue price of the Regular Security at the
beginning of the accrual period.
The present value of the remaining distributions referred to in the preceding
sentence is calculated based on:
(1) the yield to maturity of the Regular Security at the
issue date; and
(2) the Prepayment Assumption.
For these purposes, the adjusted issue price of a Regular Security at the
beginning of any accrual period equals the issue price of the Regular Security,
increased by the total amount of original issue discount for the Regular
Security that accrued in all prior accrual periods and reduced by the amount of
distributions included in the Regular Security's stated redemption price at
maturity that were made on the Regular Security in those prior periods. The
original issue discount accruing during any accrual period (as determined in
this paragraph) will then be divided by the number of days in the period to
determine the daily portion of original issue discount for each day in the
period. For an initial accrual period shorter than a full accrual period, the
daily portions of original issue discount must be determined according to an
appropriate allocation under any reasonable method.
Under the method described above, the daily portions of original issue
discount required to be included in income by a Regular Securityholder generally
will increase to take into account prepayments on the Regular Securities as a
result of prepayments on the mortgage loans that exceed the Prepayment
Assumption, and generally will decrease (but not below zero for any period) if
the prepayments are slower than the Prepayment Assumption. An increase in
prepayments on the mortgage loans for a series of Regular Securities can result
in both a change in the priority of principal payments for some Classes of
Regular Securities and either an increase or decrease in the daily portions of
original issue discount for those Regular Securities.
(3) Acquisition Premium
A purchaser of a Regular Security having original issue discount at a
price greater than its adjusted issue price but less than its stated redemption
price at maturity will be required to include in gross income the daily portions
of the original issue discount on the Regular Security reduced pro rata by a
fraction, the numerator of which is the excess of its purchase price over the
adjusted issue price and the denominator of which is the excess of the remaining
stated redemption price at maturity over the adjusted issue price.
Alternatively, a subsequent purchaser may elect to treat all that acquisition
premium under the constant yield method, as described below under the heading
"--Election to Treat All Interest Under the Constant Yield Method" below.
(4) Variable Rate Regular Securities
Regular Securities may provide for interest based on a variable rate.
Under the OID Regulations, interest is treated as payable at a qualified
variable rate if, generally, (1) the issue price does not exceed the original
principal balance by more than a specified amount (2) it does not provide for
any principal payments that are contingent, within the meaning of the OID
Regulations, except as provided in (1), and (3) the interest compounds or is
payable at least annually at current values of
(a) one or more "qualified floating rates,"
(b) a single fixed rate and one or more qualified floating rates,
(c) a single "objective rate," or (d) a single fixed rate and a
single objective rate that is a "qualified inverse floating
rate."
A floating rate is a qualified floating rate if variations can reasonably be
expected to measure contemporaneous variations in the cost of newly borrowed
funds. A multiple of a qualified floating rate is considered a qualified
floating rate only if the rate is equal to either (a) the product of a qualified
floating rate and a fixed multiple that is greater than 0.65 but not more than
1.35 or (b) the product of a qualified floating rate and a fixed multiple that
is greater than 0.65 but not more than 1.35, increased or decreased by a fixed
rate. That rate may also be subject to a fixed cap or floor, or a cap or floor
that is not reasonably expected as of the issue date to affect the yield of the
instrument significantly. An objective rate is any rate (other than a qualified
floating rate) that is determined using a single fixed formula and that is based
on objective financial or economic information, provided that the information is
not (1) within the control of the issuer or a related party or (2) unique to the
circumstances of the issuer or a related party. However, an objective rate does
not include a rate if it is reasonably expected that the average value of such
rate during the first half of the Regular Security's term will be either
significantly less than or significantly greater than the average value of the
rate during the final half of the Regular Security's term. A qualified inverse
floating rate is a rate equal to a fixed rate minus a qualified floating rate
that inversely reflects contemporaneous variations in the qualified floating
rate; an inverse floating rate that is not a qualified inverse floating rate may
nevertheless be an objective rate. A Class of Regular Securities may be issued
under this prospectus that does not have a qualified variable rate under the
foregoing rules, for example, a Class that bears different rates at different
times during the period it is outstanding that it is considered significantly
"front-loaded" or "back-loaded" within the meaning of the OID Regulations. It is
possible that a Class may be considered to bear "contingent interest" within the
meaning of the OID Regulations. The OID Regulations, as they relate to the
treatment of contingent interest, are by their terms not applicable to Regular
Securities. However, if final regulations dealing with contingent interest for
Regular Securities apply the same principles as the OID Regulations, those
regulations may lead to different timing of income inclusion than would be the
case under the OID Regulations. Furthermore, application of those principles
could lead to the characterization of gain on the sale of contingent interest
Regular Securities as ordinary income. Investors should consult their tax
advisors regarding the appropriate treatment of any Regular Security that does
not pay interest at a fixed rate or qualified variable rate as described in this
paragraph.
The amount of original issue discount for a Regular Security bearing a
qualified variable rate of interest will accrue in the manner described above
under "--Original Issue Discount," with the yield to maturity and future
payments on that Regular Security generally to be determined by assuming that
interest will be payable for the life of the Regular Security based on the
initial rate (or, if different, the value of the applicable variable rate as of
the pricing date) for the relevant Class, if the Class bears interest at a
qualified floating rate or qualified inverse floating rate, or based on a fixed
rate which reflects the reasonably expected yield for the relevant Class, if the
Class bears interest at an objective rate (other than a qualified inverse
floating rate). Unless required otherwise by applicable final regulations, it is
anticipated that the trustee will treat interest, other than variable interest
on an interest-only or super-premium Class, as qualified stated interest at the
qualified variable rate. However, the qualified stated interest allocable to an
accrual period will be increased (or decreased) if the interest actually paid
during the accrual period exceed (or is less than) the interest assumed to be
paid under the rate just described.
(5) Market Discount
A subsequent purchaser of a Regular Security also may be subject to
the market discount rules of Code Sections 1276 through 1278. Under these
sections and the principles applied by the OID Regulations in the context of
original issue discount, "market discount" is the amount by which the
purchaser's original basis in the Regular Security (1) is exceeded by the
remaining outstanding principal payments and interest payments other than
qualified stated interest payments due on a Regular Security, or (2) in the case
of a Regular Security having original issue discount, is exceeded by the
adjusted issue price of that Regular Security at the time of purchase. The
purchaser generally will be required to recognize ordinary income to the extent
of accrued market discount on that Regular Security as distributions includible
in the stated redemption price at maturity of the Regular Security are received,
in an amount not exceeding that distribution. The market discount would accrue
in a manner to be provided in Treasury regulations and should take into account
the Prepayment Assumption. The Conference Committee Report to the 1986 Act
provides that until these regulations are issued, the market discount would
accrue either (1) on the basis of a constant interest rate, or (2) in the ratio
of stated interest allocable to the relevant period to the sum of the interest
for that period plus the remaining interest as of the end of that period, or in
the case of a Regular Security issued with original issue discount, in the ratio
of original issue discount accrued for the relevant period to the sum of the
original issue discount accrued for that period plus the remaining original
issue discount as of the end of that period. The purchaser also generally will
be required to treat a portion of any gain on a sale or exchange of the Regular
Security as ordinary income to the extent of the market discount accrued to the
date of disposition under one of the foregoing methods, less any accrued market
discount previously reported as ordinary income as partial distributions in
reduction of the stated redemption price at maturity were received. The
purchaser will be required to defer deduction of a portion of the excess of the
interest paid or accrued on indebtedness incurred to purchase or carry a Regular
Security over the interest distributable on the Regular Security. The deferred
portion of the interest expense in any taxable year generally will not exceed
the accrued market discount on the Regular Security for that year. Any deferred
interest expense is, in general, allowed as a deduction not later than the year
in which the related market discount income is recognized or the Regular
Security is disposed of.
As an alternative to the inclusion of market discount in income on the
foregoing basis, the Regular Securityholder may elect to include market discount
in income currently as it accrues on all market discount instruments acquired by
the Regular Securityholder in that taxable year or thereafter, in which case the
interest deferral rule will not apply. See "--Election to Treat All Interest
Under the Constant Yield Method" below regarding an alternative manner in which
that election may be deemed to be made. A person who purchases a Regular
Security at a price lower than the remaining amounts includible in the stated
redemption price at maturity of the security, but higher than its adjusted issue
price, does not acquire the Regular Security with market discount, but will be
required to report original issue discount, appropriately adjusted to reflect
the excess of the price paid over the adjusted issue price.
Market discount for a Regular Security will be considered to be zero
if the market discount is less than 0.25% of the remaining stated redemption
price at maturity of the Regular Security (or, in the case of a Regular Security
having original issue discount, the adjusted issue price of that Regular
Security) multiplied by the weighted average maturity of the Regular Security
(presumably determined as described above in the third paragraph under
"--Original Issue Discount" above) remaining after the date of purchase. It
appears that de minimis market discount would be reported in a manner similar to
de minimis original issue discount. See "--Original Issue Discount" above.
Treasury regulations implementing the market discount rules have not
yet been issued, and uncertainty exists with respect to many aspects of those
rules. Due to the substantial lack of regulatory guidance with respect to the
market discount rules, it is unclear how those rules will affect any secondary
market that develops for a particular Class of Regular Securities. Prospective
investors in Regular Securities should consult their own tax advisors regarding
the application of the market discount rules to the Regular Securities and the
elections to include market discount in income currently and to accrue market
discount on the basis of the constant yield method.
(6) Amortizable Premium
A Regular Security purchased at a cost greater than its remaining
stated redemption price at maturity generally is considered to be purchased at a
premium. If the Regular Securityholder holds that Regular Security as a "capital
asset" within the meaning of Code Section 1221, the Regular Securityholder may
elect under Code Section 171 to amortize the premium under a constant yield
method that reflects compounding based on the interval between payments on the
Regular Security. The election will apply to all taxable debt obligations
(including REMIC regular interests) acquired by the Regular Securityholder at a
premium held in that taxable year or thereafter, unless revoked with the
permission of the Internal Revenue Service. The Conference Committee Report to
the 1986 Act indicates a Congressional intent that the same rules that apply to
the accrual of market discount on installment obligations will also apply to
amortizing bond premium under Code Section 171 on installment obligations as the
Regular Securities, although it is unclear whether the alternatives to the
constant interest method described above under "Market Discount" are available.
Amortizable bond premium generally will be treated as an offset to interest
income on a Regular Security, rather than as a separate deductible item. See
"--Election to Treat All Interest Under the Constant Yield Method" below
regarding an alternative manner in which the Code Section 171 election may be
deemed to be made.
(7) Election to Treat All Interest Under the Constant Yield Method
A holder of a debt instrument such as a Regular Security may elect to
treat all interest that accrues on the instrument using the constant yield
method, with none of the interest being treated as qualified stated interest.
For purposes of applying the constant yield method to a debt instrument subject
to this election, (1) "interest" includes stated interest, original issue
discount, de minimis original issue discount, market discount and de minimis
market discount, as adjusted by any amortizable bond premium or acquisition
premium and (2) the debt instrument is treated as if the instrument were issued
on the holder's acquisition date in the amount of the holder's adjusted basis
immediately after acquisition. It is unclear whether, for this purpose, the
initial Prepayment Assumption would continue to apply or if a new prepayment
assumption as of the date of the holder's acquisition would apply. A holder
generally may make this election on an instrument by instrument basis or for a
class or group of debt instruments. However, if the holder makes this election
for a debt instrument with amortizable bond premium, the holder is deemed to
have made elections to amortize bond premium currently as it accrues under the
constant yield method for all premium bonds held by the holder in the same
taxable year or thereafter. Alternatively, if the holder makes this election for
a debt instrument with market discount, the holder is deemed to have made
elections to report market discount income currently as it accrues under the
constant yield method for all market discount bonds acquired by the holder in
the same taxable year or thereafter. The election is made on the holder's
federal income tax return for the year in which the debt instrument is acquired
and is irrevocable except with the approval of the Internal Revenue Service.
Investors should consult their own tax advisors regarding the advisability of
making this election.
(8) Treatment of Losses
Regular Securityholders will be required to report income for Regular
Securities on the accrual method of accounting, without giving effect to delays
or reductions in distributions attributable to defaults or delinquencies on the
mortgage loans, except to the extent it can be established that the losses are
uncollectible. Accordingly, the holder of a Regular Security, particularly a
Subordinate Security, may have income, or may incur a diminution in cash flow as
a result of a default or delinquency, but may not be able to take a deduction
(subject to the discussion below) for the corresponding loss until a subsequent
taxable year. In this regard, investors are cautioned that while they may
generally cease to accrue interest income if it reasonably appears that the
interest will be uncollectible, the Internal Revenue Service may take the
position that original issue discount must continue to be accrued in spite of
its uncollectibility until the debt instrument is disposed of in a taxable
transaction or becomes worthless in accordance with the rules of Code Section
166.
To the extent the rules of Code Section 166 regarding bad debts are
applicable, it appears that Regular Securityholders that are corporations or
that otherwise hold the Regular Securities in connection with a trade or
business should in general be allowed to deduct as an ordinary loss that loss
with respect to principal sustained during the taxable year on account of any
Regular Securities becoming wholly or partially worthless, and that, in general,
Regular Securityholders that are not corporations and do not hold the Regular
Securities in connection with a trade or business should be allowed to deduct as
a short-term capital loss any loss sustained during the taxable year on account
of a portion of any Regular Securities becoming wholly worthless. Although the
matter is not free from doubt, non-corporate Regular Securityholders should be
allowed a bad debt deduction at the time the principal balance of the Regular
Securities is reduced to reflect losses resulting from any liquidated mortgage
loans. The Internal Revenue Service, however, could take the position that
non-corporate holders will be allowed a bad debt deduction to reflect those
losses only after all the mortgage loans remaining in the trust fund have been
liquidated or the applicable Class of Regular Securities has been otherwise
retired. The Internal Revenue Service could also assert that losses on the
Regular Securities are deductible based on some other method that may defer
those deductions for all holders, such as reducing future cashflow for purposes
of computing original issue discount. This may have the effect of creating
"negative" original issue discount that would be deductible only against future
positive original issue discount or otherwise upon termination of the Class.
Regular Securityholders are urged to consult their own tax advisors
regarding the appropriate timing, amount and character of any loss sustained for
their Regular Securities. While losses attributable to interest previously
reported as income should be deductible as ordinary losses by both corporate and
non-corporate holders, the Internal Revenue Service may take the position that
losses attributable to accrued original issue discount may only be deducted as
capital losses in the case of non-corporate holders who do not hold the Regular
Securities in connection with a trade or business. Special loss rules are
applicable to banks and thrift institutions, including rules regarding reserves
for bad debts. These taxpayers are advised to consult their tax advisors
regarding the treatment of losses on Regular Securities.
(9) Sale or Exchange of Regular Securities
If a Regular Securityholder sells or exchanges a Regular Security, the
Regular Securityholder will recognize gain or loss equal to the difference, if
any, between the amount received and its adjusted basis in the Regular Security.
The adjusted basis of a Regular Security generally will equal the original cost
of the Regular Security to the seller, increased by any original issue discount
or market discount previously included in the seller's gross income for the
Regular Security and reduced by amounts included in the stated redemption price
at maturity of the Regular Security that were previously received by the seller,
by any amortized premium, and by any recognized losses.
Except as described above regarding market discount, and except as
provided in this paragraph, any gain or loss on the sale or exchange of a
Regular Security realized by an investor who holds the Regular Security as a
capital asset will be capital gain or loss and will be long-term or short-term
depending on whether the Regular Security has been held for the long-term
capital gain holding period (currently, more than one year). That gain will be
treated as ordinary income
(1) if a Regular Security is held as part of a "conversion
transaction" as defined in Code Section 1258(c), up to the amount of
interest that would have accrued on the Regular Securityholder's net
investment in the conversion transaction at 120% of the appropriate
applicable federal rate in effect at the time the taxpayer entered
into the transaction minus any amount previously treated as ordinary
income for any prior disposition of property that was held as part of
that transaction;
(2) in the case of a non-corporate taxpayer, to the extent that
the taxpayer has made an election under Code Section 163(d)(4) to have
net capital gains taxed as investment income at ordinary income rates;
or
(3) to the extent that the gain does not exceed the excess, if
any, of (a) the amount that would have been includible in the gross
income of the holder if its yield on that Regular Security were 110%
of the applicable federal rate as of the date of purchase, over (b)
the amount of income actually includible in the gross income of the
holder for that Regular Security (the "110% yield rule").
In addition, gain or loss recognized from the sale of a Regular
Security by some banks or thrift institutions will be treated as ordinary income
or loss pursuant to Code Section 582(c). Long-term capital gains of noncorporate
taxpayers generally are subject to a lower maximum tax rate (20%) than ordinary
income of those taxpayers (39.6%) for property held for more than one year with
further rate reductions for property held for more than five years. Currently,
the maximum tax rate for corporations is the same for both ordinary income and
capital gains.
TAXATION OF OWNERS OF RESIDUAL SECURITIES
(1) Taxation of REMIC Income
Generally, the "daily portions" of REMIC taxable income or net loss
will be includible as ordinary income or loss in determining the federal taxable
income of holders of Residual Securities ("Residual Holders"), and will not be
taxed separately to the REMIC Pool. The daily portions of REMIC taxable income
or net loss of a Residual Holder are determined by allocating the REMIC Pool's
taxable income or net loss for each calendar quarter ratably to each day in that
quarter and by allocating that daily portion among the Residual Holders in
proportion to their respective holdings of Residual Securities in the REMIC Pool
on that day. REMIC taxable income is generally determined in the same manner as
the taxable income of an individual using the accrual method of accounting,
except that
(1) the limitations on deductibility of investment interest
expense and expenses for the production of income do not apply;
(2) all bad loans will be deductible as business bad debts; and
(3) the limitation on the deductibility of interest and expenses
related to tax-exempt income will apply.
The REMIC Pool's gross income includes interest, original issue discount income
and market discount income, if any, on the mortgage loans, reduced by
amortization of any premium on the mortgage loans, plus income from amortization
of issue premium, if any, on the Regular Securities, plus income on reinvestment
of cash flows and reserve assets, plus any cancellation of indebtedness income
upon allocation of realized losses to the Regular Securities. The REMIC Pool's
deductions include interest and original issue discount expense on the Regular
Securities, servicing fees on the mortgage loans, other administrative expenses
of the REMIC Pool and realized losses on the mortgage loans. The requirement
that Residual Holders report their pro rata share of taxable income or net loss
of the REMIC Pool will continue until there are no Notes or Certificates, as
applicable, of any class of the related series outstanding.
The taxable income recognized by a Residual Holder in any taxable year
will be affected by, among other factors, the relationship between the timing of
recognition of interest, original issue discount or market discount income or
amortization of premium for the mortgage loans, on the one hand, and the timing
of deductions for interest (including original issue discount) or income from
amortization of issue premium on the Regular Securities, on the other hand. If
an interest in the mortgage loans is acquired by the REMIC Pool at a discount,
and one or more of these mortgage loans is prepaid, the prepayment may be used
in whole or in part to make distributions in reduction of principal on the
Regular Securities, and the discount on the mortgage loans that is includible in
income may exceed the original issue discount deductions allowed with respect to
the Regular Securities. When there is more than one Class of Regular Securities
that distribute principal sequentially, this mismatching of income and
deductions is particularly likely to occur in the early years following issuance
of the Regular Securities when distributions in reduction of principal are being
made in respect of earlier Classes of Regular Securities to the extent that
those Classes are not issued with substantial discount or are issued at a
premium. If taxable income attributable to that mismatching is realized, in
general, losses would be allowed in later years as distributions on the later
maturing Classes of Regular Securities are made.
Taxable income may also be greater in earlier years than in later
years as a result of the fact that interest expense deductions, expressed as a
percentage of the outstanding principal amount of that series of Regular
Securities, may increase over time as distributions in reduction of principal
are made on the lower yielding Classes of Regular Securities, whereas, to the
extent the REMIC Pool consists of fixed rate mortgage loans, interest income for
any particular mortgage loan will remain constant over time as a percentage of
the outstanding principal amount of that loan. Consequently, Residual Holders
must have sufficient other sources of cash to pay any federal, state, or local
income taxes due as a result of that mismatching or unrelated deductions against
which to offset that income, subject to the discussion of "excess inclusions"
below under "--Limitations on Offset or Exemption of REMIC Income." The timing
of mismatching of income and deductions described in this paragraph, if present
for a series of Notes or Certificates, as applicable, may have a significant
adverse effect upon a Residual Holder's after-tax rate of return.
A portion of the income of a Residual Holder may be treated
unfavorably in three contexts:
(1) it may not be offset by current or net operating loss
deductions;
(2) it will be considered unrelated business taxable income to
tax-exempt entities; and
(3) it is ineligible for any statutory or treaty reduction in the
30% withholding tax otherwise available to a foreign Residual Holder.
See "--Limitations on Offset or Exemption of REMIC Income" below. In addition, a
Residual Holder's taxable income during some periods may exceed the income
reflected by those Residual Holders for those periods in accordance with
generally accepted accounting principles. Investors should consult their own
accountants concerning the accounting treatment of their investment in Residual
Securities.
(2) Basis and Losses
The amount of any net loss of the REMIC Pool that may be taken into
account by the Residual Holder is limited to the adjusted basis of the Residual
Security as of the close of the quarter (or time of disposition of the Residual
Security if earlier), determined without taking into account the net loss for
the quarter. The initial adjusted basis of a purchaser of a Residual Security is
the amount paid for that Residual Security. The adjusted basis will be increased
by the amount of taxable income of the REMIC Pool reportable by the Residual
Holder and will be decreased (but not below zero), first, by a cash distribution
from the REMIC Pool and, second, by the amount of loss of the REMIC Pool
reportable by the Residual Holder. Any loss that is disallowed on account of
this limitation may be carried over indefinitely with respect to the Residual
Holder as to whom the loss was disallowed and may be used by the Residual Holder
only to offset any income generated by the same REMIC Pool.
A Residual Holder will not be permitted to amortize directly the cost of its
Residual Security as an offset to its share of the taxable income of the related
REMIC Pool. However, if, in any year, cash distributions to a Residual Holder
exceed its share of the REMIC's taxable income, the excess will constitute a
return of capital to the extent of the holder's basis in its Residual Security.
A return of capital is not treated as income for federal income tax purposes,
but will reduce the tax basis of the Residual Holder (but not below zero). If a
Residual Security's basis is reduced to zero, any cash distributions with
respect to that Residual Security in any taxable year in excess of its share of
the REMIC's income would be taxable to the holder as gain on the sale or
exchange of its interest in the REMIC.
A Residual Security may have a negative value if the net present value
of anticipated tax liabilities exceeds the present value of anticipated cash
flows. The REMIC Regulations appear to treat the issue price of the residual
interest as zero rather than the negative amount for purposes of determining the
REMIC Pool's basis in its assets. The preamble to the REMIC Regulations states
that the Internal Revenue Service may provide future guidance on the proper tax
treatment of payments made by a transferor of the residual interest to induce
the transferee to acquire the interest, and Residual Holders should consult
their own tax advisors in this regard.
Further, to the extent that the initial adjusted basis of a Residual
Holder (other than an original holder) in the Residual Security is greater than
the corresponding portion of the REMIC Pool's basis in the mortgage loans, the
Residual Holder will not recover a portion of the basis until termination of the
REMIC Pool unless future Treasury regulations provide for periodic adjustments
to the REMIC income otherwise reportable by the holder. The REMIC Regulations
currently in effect do not so provide. See "--Treatment of Certain Items of
REMIC Income and Expense--Market Discount" below regarding the basis of mortgage
loans to the REMIC Pool and "--Sale or Exchange of a Residual Security" below
regarding possible treatment of a loss upon termination of the REMIC Pool as a
capital loss.
(3) Treatment of Certain Items of REMIC Income and Expense
Although it is anticipated that the trustee will compute REMIC income
and expense in accordance with the Code and applicable regulations, the
authorities regarding the determination of specific items of income and expense
are subject to differing interpretations. The depositor makes no representation
as to the specific method that will be used for reporting income with respect to
the mortgage loans and expenses for the Regular Securities, and different
methods could result in different timing or reporting of taxable income or net
loss to Residual Holders or differences in capital gain versus ordinary income.
Original Issue Discount and Premium. Generally, the REMIC Pool's
deductions for original issue discount and income from amortization of premium
will be determined in the same manner as original issue discount income on
Regular Securities as described above under "--Taxation of Owners of Regular
Securities--Original Issue Discount" and "--Variable Rate Regular Securities,"
without regard to the de minimis rule described therein, and "--Amortizable
Premium."
MARKET DISCOUNT. The REMIC Pool will have market discount income in
respect of mortgage loans if, in general, the basis of the REMIC Pool in those
mortgage loans is exceeded by their unpaid principal balances. The REMIC Pool's
basis in those mortgage loans is generally the fair market value of the mortgage
loans immediately after the transfer of the mortgage loans to the REMIC Pool.
The REMIC Regulations provide that the basis is equal to the total of the issue
prices of all regular and residual interests in the REMIC Pool. The market
discount must be recognized currently as an item of ordinary income as it
accrues, rather than being included in income upon the sale of mortgage loans or
as principal on the mortgage loans is paid. Market discount income generally
should accrue in the manner described above under "--Taxation of Owners of
Regular Securities--Market Discount."
Premium. Generally, if the basis of the REMIC Pool in the mortgage
loans exceeds the unpaid principal balances of the mortgage loans, the REMIC
Pool will be considered to have acquired those mortgage loans at a premium equal
to the amount of that excess. As stated above, the REMIC Pool's basis in
mortgage loans is generally the fair market value of the mortgage loans and is
based on the total of the issue prices of the regular and residual interests in
the REMIC Pool immediately after the transfer of the mortgage loans to the REMIC
Pool. In a manner analogous to the discussion above under "--Taxation of Owners
of Regular Securities--Amortizable Premium," a person that holds a mortgage loan
as a capital asset under Code Section 1221 may elect under Code Section 171 to
amortize premium on mortgage loans originated after September 27, 1985, under
the constant yield method. Amortizable bond premium will be treated as an offset
to interest income on the mortgage loans, rather than as a separate deduction
item. Because substantially all of the borrowers on the mortgage loans are
expected to be individuals, Code Section 171 will not be available for premium
on mortgage loans originated on or before September 27, 1985. Premium for those
mortgage loans may be deductible in accordance with a reasonable method
regularly employed by the holder of those mortgage loans. The allocation of that
premium pro rata among principal payments should be considered a reasonable
method; however, the Internal Revenue Service may argue that the premium should
be allocated in a different manner, such as allocating the premium entirely to
the final payment of principal.
(4) Limitations on Offset or Exemption of REMIC Income
A portion (or all) of the REMIC taxable income includible in
determining the federal income tax liability of a Residual Holder will be
subject to special treatment. That portion, referred to as the "excess
inclusion," is equal to the excess of REMIC taxable income for the calendar
quarter allocable to a Residual Security over the daily accruals for that
quarterly period of (1) 120% of the long-term applicable federal rate that would
have applied to the Residual Security (if it were a debt instrument) on the
Startup Day under Code Section 1274(d), multiplied by (2) the adjusted issue
price of the Residual Security at the beginning of the quarterly period. For
this purpose, the adjusted issue price of a Residual Security at the beginning
of a quarter is the issue price of the Residual Security, plus the amount of
those daily accruals of REMIC income described in this paragraph for all prior
quarters, decreased by any distributions made with respect to the Residual
Security before the beginning of that quarterly period.
The portion of a Residual Holder's REMIC taxable income consisting of
the excess inclusions generally may not be offset by other deductions, including
net operating loss carryforwards, on the Residual Holder's return. However, net
operating loss carryovers are determined without regard to excess inclusion
income. Further, if the Residual Holder is an organization subject to the tax on
unrelated business income imposed by Code Section 511, the Residual Holder's
excess inclusions will be treated as unrelated business taxable income of the
Residual Holder for purposes of Code Section 511. In addition, REMIC taxable
income is subject to 30% withholding tax for persons who are not U.S. Persons
(as defined below under "--Tax-Related Restrictions on Transfer of Residual
Securities--Foreign Investors"), and the portion thereof attributable to excess
inclusions is not eligible for any reduction in the rate of withholding tax (by
treaty or otherwise). See "--Taxation of Certain Foreign Investors--Residual
Securities" below. Finally, if a real estate investment trust or a regulated
investment company owns a Residual Security, a portion (allocated under Treasury
regulations yet to be issued) of dividends paid by the real estate investment
trust or regulated investment company could not be offset by net operating
losses of its shareholders, would constitute unrelated business taxable income
for tax-exempt shareholders, and would be ineligible for reduction of
withholding to persons who are not U.S. Persons.
Provisions governing the relationship between excess inclusions and the
alternative minimum tax provide that (i) alternative minimum taxable income for
a Residual Holder is determined without regard to the special rule, discussed
above, that taxable income cannot be less than excess inclusions, (ii) a
Residual Holder's alternative minimum taxable income for a taxable year cannot
be less than the excess inclusions for the year, and (iii) the amount of any
alternative minimum tax net operating loss deduction must be computed without
regard to any excess inclusions.
The Internal Revenue Service has authority to promulgate regulations
providing that if the aggregate value of the Residual Securities is not
considered to be "significant," then the entire share of REMIC taxable income of
a Residual Holder may be treated as excess inclusions subject to the foregoing
limitations. This authority has not been exercised to date.
(5) Tax-Related Restrictions on Transfer of Residual Securities
DISQUALIFIED ORGANIZATIONS. If any legal or beneficial interest in a
Residual Security is transferred to a Disqualified Organization (as defined
below), a tax would be imposed in an amount equal to the product of (1) the
present value of the total anticipated excess inclusions for that Residual
Security for periods after the transfer and (2) the highest marginal federal
income tax rate applicable to corporations. The REMIC Regulations provide that
the anticipated excess inclusions are based on actual prepayment experience to
the date of the transfer and projected payments based on the Prepayment
Assumption. The present value rate equals the applicable federal rate under Code
Section 1274(d) as of the date of the transfer for a term ending with the last
calendar quarter in which excess inclusions are expected to accrue. That rate is
applied to the anticipated excess inclusions from the end of the remaining
calendar quarters in which they arise to the date of the transfer. That tax
generally would be imposed on the transferor of the Residual Security, except
that where the transfer is through an agent (including a broker, nominee, or
other middleman) for a Disqualified Organization, the tax would instead be
imposed on the agent. However, a transferor of a Residual Security would in no
event be liable for the tax for a transfer if the transferee furnished to the
transferor an affidavit stating that the transferee is not a Disqualified
Organization and, as of the time of the transfer, the transferor does not have
actual knowledge that the affidavit is false. Under the REMIC Regulations, an
affidavit will be sufficient if the transferee furnishes (A) a social security
number, and states under penalties of perjury that the social security number is
that of the transferee, or (B) a statement under penalties of perjury that it is
not a disqualified organization.
"Disqualified Organization" means the United States, any state or
political subdivision of the United States, any foreign government, any
international organization, any agency or instrumentality of any of the
foregoing (provided, that the term does not include an instrumentality if all of
its activities are subject to tax and a majority of its board of directors in
not selected by any governmental entity), any cooperative organization
furnishing electric energy or providing telephone service to persons in rural
areas as described in Code Section 1381(a)(2)(C), and any organization (other
than a farmers' cooperative described in Code Section 531) that is exempt from
taxation under the Code unless the organization is subject to the tax on
unrelated business income imposed by Code Section 511.
In addition, if a "Pass-Through Entity" (as defined below) has excess
inclusion income for a Residual Security during a taxable year and a
Disqualified Organization is the record holder of an equity interest in that
entity, then a tax is imposed on the entity equal to the product of (1) the
amount of excess inclusions that are allocable to the interest in the
Pass-Through Entity during the period that interest is held by the Disqualified
Organization, and (2) the highest marginal federal corporate income tax rate.
That tax would be deductible from the ordinary gross income of the Pass-Through
Entity for the taxable year. The Pass-Through Entity would not be liable for the
tax if (1) it has received an affidavit from the record holder stating, under
penalties of perjury, that it is not a Disqualified Organization, or providing
the holder's taxpayer identification number and stating, under penalties of
perjury, that the social security number is that of the record owner, and (2)
during the period that person is the record holder of the Residual Security, the
Pass-Through Entity does not have actual knowledge that the affidavit is false.
"Pass-Through Entity" means any regulated investment company, real
estate investment trust, common trust fund, partnership, trust or estate and
corporations operating on a cooperative basis. Except as may be provided in
Treasury regulations, any person holding an interest in a Pass-Through Entity as
a nominee for another will, with respect to that interest, be treated as a
Pass-Through Entity.
If an "electing large partnership" holds a Residual Security, all
interests in the electing large partnership are treated as held by Disqualified
Organizations for purposes of the tax imposed upon a Pass-Through Entity by
Section 860E(c) of the Code. The exception to this tax, otherwise available to a
Pass-Through Entity that is furnished particular affidavits by record holders of
interests in the entity and that does not know those affidavits are false, is
not available to an electing large partnership.
The pooling and servicing agreement for a series will provide that no
legal or beneficial interest in a Residual Security may be transferred or
registered unless (1) the proposed transferee furnished to the transferor and
the trustee an affidavit providing its taxpayer identification number and
stating that the transferee is the beneficial owner of the Residual Security and
is not a Disqualified Organization and is not purchasing the Residual Security
on behalf of a Disqualified Organization (i.e., as a broker, nominee or
middleman) and (2) the transferor provides a statement in writing to the trustee
that it has no actual knowledge that the affidavit is false. Moreover, the
pooling and servicing agreement will provide that any attempted or purported
transfer in violation of these transfer restrictions will be null and void and
will vest no rights in any purported transferee. Each Residual Security for a
series will bear a legend referring to those restrictions on transfer, and each
Residual Holder will be deemed to have agreed, as a condition of ownership of
the Residual Security, to any amendments to the related pooling and servicing
agreement required under the Code or applicable Treasury regulations to
effectuate the foregoing restrictions. Information necessary to compute an
applicable excise tax must be furnished to the Internal Revenue Service and to
the requesting party within 60 days of the request, and the Seller or the
trustee may charge a fee for computing and providing that information.
NONECONOMIC RESIDUAL INTERESTS. The REMIC Regulations would disregard
some transfers of Residual Securities, in which case the transferor would
continue to be treated as the owner of the Residual Securities and thus would
continue to be subject to tax on its allocable portion of the net income of the
REMIC Pool. Under the REMIC Regulations, a transfer of a "noneconomic residual
interest" (as defined below) to a Residual Holder (other than a Residual Holder
who is not a U.S. Person as defined below under "--Foreign Investors") is
disregarded to all federal income tax purposes if a significant purpose of the
transfer is to impede the assessment or collection of tax. A residual interest
in a REMIC (including a residual interest with a positive value at issuance) is
a "noneconomic residual interest" unless, at the time of the transfer, (1) the
present value of the expected future distributions on the residual interest at
least equals the product of the present value of the anticipated excess
inclusions and the highest corporate income tax rate in effect for the year in
which the transfer occurs, and (2) the transferor reasonably expects that the
transferee will receive distributions from the REMIC at or after the time at
which taxes accrue on the anticipated excess inclusions in an amount sufficient
to satisfy the accrued taxes on each excess inclusion. The anticipated excess
inclusions and the present value rate are determined in the same manner as set
forth above under "--Disqualified Organizations." The REMIC Regulations explain
that a significant purpose to impede the assessment or collection of tax exists
if the transferor, at the time of the transfer, either knew or should have known
that the transferee would be unwilling or unable to pay taxes due on its share
of the taxable income of the REMIC. A safe harbor is provided if (1) the
transferor conducted, at the time of the transfer, a reasonable investigation of
the financial condition of the transferee and found that the transferee
historically had paid its debts as they came due and found no significant
evidence to indicate that the transferee would not continue to pay its debts as
they came due in the future, (2) the transferee represents to the transferor
that it understands that, as the holder of the non-economic residual interest,
the transferee may incur liabilities in excess of any cash flows generated by
the interest and that the transferee intends to pay taxes associated with
holding the residual interest as they become due, and (3) either the formula
test or the asset test (each as described below) is satisfied.
The formula test is satisfied if the present value of the anticipated
tax liabilities associated with holding the Residual Security does not exceed
the sum of the present values of (1) any consideration given to the transferee
to the acquire the Residual Security, (2) the expected future distributions on
the Residual Security, and (3) the anticipated tax savings associated with
holding the Residual Security as the REMIC generates losses. For purposes of
this calculation, the present values generally are calculated using a discount
rate equal to the applicable federal rate, and the transferee is assumed to pay
tax at the highest corporate rate of tax.
The asset test is satisfied if
1. at the time of the transfer of the Residual Security, and at the close
of each of the transferee's two fiscal years preceding the year of
transfer, the transferee's gross assets for financial reporting
purposes exceed $100 million and its net assets for financial
reporting purposes exceed $10 million,
2. the transferee is a taxable domestic C corporation, other than a RIC,
REIT, REMIC or Subchapter T cooperative (an "Eligible Corporation"),
that makes a written agreement that any subsequent transfer of the
Residual Security will be to another Eligible Corporation in a
transaction that satisfies the safe harbor described above, and the
transferor does not know, or have reason to know, that the transferee
will not honor such agreement, and
3. the facts and circumstances known to the transferor on or before the
date of transfer do not reasonably indicate that the taxes associated
with the Residual Security will not be paid.
For purposes of requirement (1), the gross and net assets of a transferee do not
include any obligations of a person related to the transferee or any other asset
if a principal purpose for holding or acquiring the asset is to permit the
transferee to satisfy the asset test. Further, requirement (2) will not be
treated as satisfied in the case of any transfer or assignment of the Residual
Security to a foreign branch of an Eligible Corporation or any other arrangement
by which the Residual Security is at any time subject to net tax by a foreign
country or possession of the United States.
FOREIGN INVESTORS. The REMIC Regulations provide that the transfer of
a Residual Security that has "tax avoidance potential" to a "foreign person"
will be disregarded for all federal tax purposes. This rule appears intended to
apply to a transferee who is not a "U.S. Person" (as defined below), unless the
transferee's income is effectively connected with the conduct of a trade or
business within the United States. A Residual Security is deemed to have tax
avoidance potential unless, at the time of the transfer, the transferor
reasonably expects that (1) the future distributions on the Residual Security
will equal at least 30% of the anticipated excess inclusions after the transfer,
and (2) such amounts will be distributed at or after the time at which the
excess inclusions accrue and before the end of the next succeeding taxable year.
A safe harbor in the REMIC Regulations provides that the reasonable expectation
requirement will be satisfied if the above test would be met at all assumed
prepayment rates for the mortgage loans from 50 percent to 200 percent of the
Prepayment Assumption. If the non-U.S. Person transfers the Residual Security
back to a U.S. Person, the transfer will be disregarded and the foreign
transferor will continue to be treated as the owner unless arrangements are made
so that the transfer does not have the effect of allowing the transferor to
avoid tax on accrued excess inclusions.
The prospectus supplement relating to the Certificates of a series may
provide that a Residual Security may not be purchased by or transferred to any
person that is not a U.S. Person or may describe the circumstances and
restrictions pursuant to which the transfer may be made. The term "U.S. Person"
means a citizen or resident of the United States, a corporation or partnership
(or other entity properly treated as a partnership or as a corporation for
federal income tax purposes) created or organized in or under the laws of the
United States or of any state (including, for this purpose, the District of
Columbia), an estate that is subject to U.S. federal income tax regardless of
the source of its income, or a trust if 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 the authority to control all substantial decisions of the
trust (or, to the extent provided in applicable Treasury regulations, trusts in
existence on August 20, 1996, which are eligible to elect and do elect to be
treated as U.S. Persons).
(6) Sale or Exchange of a Residual Security
Upon the sale or exchange of a Residual Security, the Residual Holder
will recognize gain or loss equal to the excess, if any, of the amount realized
over the adjusted basis (as described above under "--Taxation of Owners of
Residual Securities--Basis and Losses") of the Residual Holder in the Residual
Security at the time of the sale or exchange.
Further, as described above under "--Taxation of Owners of Residual
Securities--Basis and Losses", if a Residual Security's basis is reduced to
zero, any cash distributions with respect to that Residual Security in any
taxable year in excess of its share of the REMIC's income for that year would be
taxable to the holder as gain on the sale or exchange of its interest in the
REMIC. If a Residual Holder has an adjusted basis in its Residual Security when
its interest in the REMIC Pool terminates, then it will recognize a capital loss
(assuming the Residual Security was held as a capital asset) at that time in an
amount equal to the remaining adjusted basis.
Any gain on the sale of a Residual Security will be treated as
ordinary income (1) if a Residual Security is held as part of a "conversion
transaction" as defined in Code Section 1258(c), up to the amount of interest
that would have accrued on the Residual Holder's net investment in the
conversion transaction at 120% of the appropriate applicable federal rate in
effect at the time the taxpayer entered into the transaction minus any amount
previously treated as ordinary income for any prior disposition of property that
was held as a part of that transaction or (2) in the case of a non-corporate
taxpayer, to the extent that the taxpayer has made an election under Code
Section 163(d)(4) to have net capital gains taxed as investment income at
ordinary income rates. In addition, gain or loss recognized from the sale of a
Residual Security by some banks or thrift institutions will be treated as
ordinary income or loss pursuant to Code Section 582(c).
Except as provided in Treasury regulations yet to be issued, the wash
sale rules of Code Section 1091 will apply to dispositions of Residual
Securities where the seller of the Residual Security, during the period
beginning six months before the sale or disposition of the Residual Security and
ending six months after the sale or disposition, acquires (or enters into any
other transaction that results in the application of Code Section 1091) any
residual interest in any REMIC or any interest in a "taxable mortgage pool"
(such as a non-REMIC owner trust) that is economically comparable to a Residual
Security.
(7) Mark to Market Regulations
Treasury regulations provide that a Residual Security acquired on or
after January 4, 1995 is not treated as a security and thus may not be marked to
market pursuant to Section 475 of the Code.
TAXES THAT MAY BE IMPOSED ON THE REMIC POOL
(1) Prohibited Transactions
Income from transactions by the REMIC Pool, called prohibited
transactions, will not be part of the calculation of income or loss includible
in the federal income tax returns of Residual Holders, but rather will be taxed
directly to the REMIC Pool at a 100% rate. Prohibited transactions generally
include:
(1) the disposition of a qualified mortgages other than for
(a) substitution for a defective (including a defaulted)
obligation within two years of the Startup Day
(or repurchase in lieu of substitution of a defective (including
a defaulted) obligation at any time) or for any qualified
mortgage within three months of the Startup Day;
(b) foreclosure, default, or imminent default of a qualified
mortgage;
(c) bankruptcy or insolvency of the REMIC Pool; or
(d) a qualified (complete) liquidation;
(2) the receipt of income from assets that are not the type of
mortgages or investments that the REMIC Pool is permitted to hold;
(3) the receipt of compensation for services; or
(4) the receipt of gain from disposition of cash flow investments
other than pursuant to a qualified liquidation.
Notwithstanding (1) and (4) above, it is not a prohibited transaction
to sell a qualified mortgage or cash flow investment held by a REMIC Pool to
prevent a default on Regular Securities as a result of a default on qualified
mortgages or to facilitate a clean-up call (generally, an optional termination
to save administrative costs when no more than a small percentage of the Notes
or Certificates, as applicable, is outstanding). The REMIC Regulations indicate
that the modification of a mortgage loan generally will not be treated as a
disposition if it is occasioned by a default or reasonably foreseeable default,
an assumption of the mortgage loan, the waiver of a due-on-sale or
due-on-encumbrance clause, or the conversion of an interest rate by a borrower
pursuant to the terms of a convertible adjustable rate mortgage loan.
(2) Contributions to the REMIC Pool After the Startup Day
In general, the REMIC Pool will be subject to a tax at a 100% rate on
the value of any property contributed to the REMIC Pool after the Startup Day.
Exceptions are provided for cash contributions to the REMIC Pool
(1) during the three months following the Startup Day,
(2) made to a qualified reserve fund by a Residual Holder,
(3) in the nature of a guarantee,
(4) made to facilitate a qualified liquidation or clean-up call, and
(5) as otherwise permitted in Treasury regulations yet to be issued.
It is not anticipated that there will be any contributions to the REMIC Pool
after the Startup Day.
(3) Net Income from Foreclosure Property
The REMIC Pool will be subject of federal income tax at the highest
corporate rate on "net income from foreclosure property," determined by
reference to the rules applicable to real estate investment trusts. Generally,
property acquired by deed in lieu of foreclosure would be treated as
"foreclosure property" until the close of the third calendar year after the year
in which the REMIC Pool acquired that property, with possible extensions. Net
income from foreclosure property generally means gain from the sale of a
foreclosure property that is inventory property and gross income from
foreclosure property other than qualifying rents and other qualifying income for
a real estate investment trust. It is not anticipated that the REMIC Pool will
have any taxable net income from foreclosure property.
(4) Liquidation of the REMIC Pool
If a REMIC Pool adopts a plan of complete liquidation, within the
meaning of Code Section 860F(a)(4)(A)(i), which may be accomplished by
designating in the REMIC Pool's final tax return a date on which that adoption
is deemed to occur, and sells all of its assets (other than cash) within a
90-day period beginning on that date, the REMIC Pool will not be subject to the
prohibited transaction rules on the sale of its assets, provided that the REMIC
Pool credits or distributes in liquidation all of the sale proceeds plus its
cash (other than amounts retained to meet claims) to holders of Regular
Securities and Residual Holders within the 90-day period.
(5) Administrative Matters
The REMIC Pool will be required to maintain its books on a calendar
year basis and to file federal income tax returns for federal income tax
purposes in a manner similar to a partnership. The form for the income tax
return is Form 1066, U.S. Real Estate Mortgage Investment Conduit Income Tax
Return. The trustee will be required to sign the REMIC Pool's returns. Treasury
regulations provide that, except where there is a single Residual Holder for an
entire taxable year, the REMIC Pool will be subject to the procedural and
administrative rules of the Code applicable to partnerships, including the
determination by the Internal Revenue Service of any adjustments to, among other
things, items of REMIC income, gain, loss, deduction, or credit in a unified
administrative proceeding. The master servicer will be obligated to act as "tax
matters person," as defined in applicable Treasury regulations, for the REMIC
Pool as agent of the Residual Holders holding the largest percentage interest in
the Residual Securities. If the Code or applicable Treasury regulations do not
permit the master servicer to act as tax matters person in its capacity as agent
of the Residual Holder, the Residual Holder or any other person specified
pursuant to Treasury regulations will be required to act as tax matters person.
The tax matters person generally has responsibility for overseeing and providing
notice to the other Residual Holders of administrative and judicial proceedings
regarding the REMIC Pool's tax affairs, although other holders of the Residual
Securities of the same series would be able to participate in those proceedings
in appropriate circumstances.
(6) Limitations on Deduction of Certain Expenses
An investor who is an individual, estate, or trust will be subject to
limitation with respect to some itemized deductions described in Code Section
67, to the extent that those itemized deductions, in total, do not exceed 2% of
the investor's adjusted gross income. In the case of a partnership that has 100
or more partners and elects to be treated as an "electing large partnership,"
70% of that partnership's miscellaneous itemized deductions will be disallowed,
although the remaining deductions will generally be allowed at the partnership
level and will not be subject to the 2% floor that would otherwise be applicable
to individual partners. In addition, Code Section 68 provides that itemized
deductions otherwise allowable for a taxable year of an individual taxpayer will
be reduced by the lesser or (1) 3% of the excess, if any, of adjusted gross
income over $100,000 ($50,000 in the case of a married individual filing a
separate return) (subject to adjustment for inflation), or (2) 80% of the amount
of itemized deductions otherwise allowable for that year. In the case of a REMIC
Pool, those deductions may include deductions under Code Section 212 for the
Servicing Fee and all administrative and other expenses relating to the REMIC
Pool, or any similar expenses allocated to the REMIC Pool for a regular interest
it holds in another REMIC. Those investors who hold REMIC Securities either
directly or indirectly through pass-through entities may have their pro rata
share of those expenses allocated to them as additional gross income, but may be
subject to that limitation on deductions. In addition, those expenses are not
deductible at all for purposes of computing the alternative minimum tax, and may
cause those investors to be subject to significant additional tax liability.
Temporary Treasury regulations provide that the additional gross income and
corresponding amount of expenses generally are to be allocated entirely to the
holders of Residual Securities in the case of a REMIC Pool that would not
qualify as a fixed investment trust in the absence of a REMIC election. For a
REMIC Pool that would be classified as an investment trust in the absence of a
REMIC election or that is substantially similar to an investment trust, any
holder of a Regular Security that is an individual, trust, estate, or
pass-through entity also will be allocated its pro rata share of those expenses
and a corresponding amount of income and will be subject to the limitations or
deductions imposed by Code Sections 67 and 68, as described above. The
prospectus supplement will indicate if all those expenses will not be allocable
to the Residual Securities.
TAXATION OF CERTAIN FOREIGN INVESTORS
(1) Regular Securities
Interest, including original issue discount, distributable to Regular
Securityholders who are non-resident aliens, foreign corporations, or other
Non-U.S. Persons (as defined below), generally will be considered "portfolio
interest" and, therefore, generally will not be subject to 30% United States
withholding tax, provided that (1) the interest is not effectively connected
with the conduct of a trade or business in the United States of the
securityholder, (2) the Non-U.S. Person is not a "10-percent shareholder" within
the meaning of Code Section 871(h)(3)(B) or a controlled foreign corporation
described in Code Section 881(c)(3)(C) and (3) that Non-U.S. Person complies to
the extent necessary with certain certification requirements, which generally
relate to the identity of the beneficial owner and the status of the beneficial
owner as a person that is a Non-U.S. person. Each Regular Securityholder should
consult its tax advisors regarding the tax documentation and certifications that
must be provided to secure the exemption from United States withholding taxes.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Regular Security by a Non-U.S. Person generally will be
exempt from United States federal income and withholding tax, provided that (i)
such gain is not effectively connected with the conduct of a trade or business
in the United States by the Non-U.S. Person and (ii) in the case of an
individual Non-U.S. Person, the Non-U.S. Person is not present in the United
States for 183 days or more in the taxable year.
If the interest on the Regular Security is effectively connected with
the conduct of a trade or business within the United States by that Non-U.S.
Person, the Non-U.S. Person, although exempt from the withholding tax previously
discussed if the holder provides an appropriate statement establishing that such
income is so effectively connected, will be subject to United States federal
income tax at regular rates. Investors who are Non-U.S. Persons should consult
their own tax advisors regarding the specific tax consequences to them of owning
a Regular Security. The term "Non-U.S. Person" means any person who is not a
U.S. Person.
(2) Residual Securities
The Conference Committee Report to the 1986 Act indicates that amounts
paid to Residual Holders who are Non-U.S. Persons generally should be treated as
interest for purposes of the 30% (or lower treaty rate) United States
withholding tax. Treasury regulations provide that amount distributed to
Residual Holders may qualify as "portfolio interest," subject to the conditions
described in "Regular Securities" above, but only to the extent that (1) the
mortgage loans were issued after July 18, 1984, and (2) the trust fund or
segregated pool of assets in the trust fund (as to which a separate REMIC
election will be made), to which the Residual Security relates, consists of
obligations issued in "registered form" within the meaning of Code Section 163
(f) (1). Generally, mortgage loans will not be, but regular interests in another
REMIC Pool will be, considered obligations issued in registered form.
Furthermore, Residual Holders will not be entitled to any exemption from the 30%
withholding tax (or lower treaty rate) to the extent of that portion of REMIC
taxable income that constitutes an "excess inclusion." See "--Taxation of Owners
of Residual Securities--Limitations on Offset or Exemption of REMIC Income"
above. If the amounts paid to Residual Holders who are Non-U.S. Persons are
effectively connected with the conduct of a trade or business within the United
States by those Non-U.S. Persons, although exempt from the withholding tax
previously discussed if the holder provides an appropriate statement
establishing that such income is so effectively connected, the amounts paid to
those Non-U.S. Persons will be subject to United States federal income tax at
regular rates. See "--Tax-Related Restrictions on Transfer of Residual
Securities--Foreign Investors" above concerning the disregard of transfers
having "tax avoidance potential." Investors who are Non-U.S. Persons should
consult their own tax advisors regarding the specific tax consequences to them
of owning Residual Securities.
(3) Backup Withholding
Distributions made on the REMIC Securities, and proceeds from the sale
of the REMIC Securities to or through certain brokers, may be subject to a
"backup" withholding tax under Code Section 3406 of 31% on "reportable payments"
(including interest distributions, original issue discount, and, under some
circumstances, principal distributions) if the Holder fails to comply with
certain identification procedures, unless the Holder is otherwise an exempt
recipient under applicable provisions of the Code, and, if necessary,
demonstrates such status. Any amounts to be withheld from distribution on the
REMIC Securities would be refunded by the Internal Revenue Service or allowed as
a credit against the Regular Holder's federal income tax liability.
FASITs
CLASSIFICATION OF FASITS
For each series of FASIT Securities, assuming compliance with all
provisions of the related pooling and servicing agreement, in the opinion of
Stroock & Stroock & Lavan LLP, the related trust fund (or each applicable
portion of the trust fund) will qualify as a FASIT. The trust fund will qualify
under the Code as a FASIT in which FASIT regular securities (the "FASIT Regular
Securities") and the ownership interest security (the "FASIT Ownership
Security") will constitute the "regular interests" and the "ownership interest,"
respectively, if
(1) a FASIT election is in effect;
(2) tests concerning
(a) the composition of the FASIT's assets and
(b) the nature of the securityholders' interests in the
FASIT are met on a continuing basis; and
(3) the trust fund is not a regulated investment company as
defined in Section 851(a) of the Code.
A segregated pool of assets may also qualify as a FASIT.
(1) Asset Composition
In order for the trust fund to be eligible for FASIT status,
substantially all of the assets of the trust fund must consist of "permitted
assets" as of the close of the third month beginning after the closing date and
at all times thereafter. Permitted assets include:
(1) cash or cash equivalents;
(2) debt instruments with fixed terms that would qualify as regular
interests if issued by a REMIC as defined in Section 860D of the Code
(generally, instruments that provide for interest at a fixed rate, a qualifying
variable rate, or a qualifying interest-only type rate);
(3) foreclosure property;
(4) some hedging instruments (generally, interest and currency rate
swaps and credit enhancement contracts) that are reasonably required to
guarantee or hedge against the FASIT's risks associated with being the obligor
on FASIT interests;
(5) contract rights to acquire qualifying debt instruments or
qualifying hedging instruments;
(6) FASIT regular interests; and
(7) REMIC regular interests.
Permitted assets do not include any debt instruments issued by the
holder of the FASIT's ownership interest or by any person related to that
holder. A debt instrument is a permitted asset only if the instrument is
indebtedness for federal income tax purposes, including regular interests in a
REMIC or regular interests issued by another FASIT, and it bears (1) fixed
interest or (2) variable interest of a type that relates to qualified variable
rate debt (as defined in Treasury regulations prescribed under section
860G(a)(1)(B)). Permitted hedges include interest rate or foreign currency
notional principal contracts, letters of credit, insurance, guarantees against
payment default and similar instruments to be provided in regulations, and which
are reasonably required to guarantee or hedge against the FASIT's risks
associated with being the obligor on interests issued by the FASIT. Foreclosure
property is real property acquired by the FASIT in connection with the default
or imminent default of a debt instrument, provided the depositor had no
knowledge or reason to know as of the date the debt instrument was acquired by
the FASIT that a default had occurred or would occur.
(2) Interests in a FASIT
In addition to the foregoing asset qualification requirements, the
interests in a FASIT also must meet specific requirements. All of the interests
in a FASIT must belong to either of the following:
(1) one or more classes of regular interests or
(2) a single class of ownership interest that is held by an
Eligible Corporation (as defined in this prospectus).
FASIT regular interests generally will be treated as debt for federal
income tax purposes. FASIT ownership interests generally will not treated as
debt for federal income tax purposes, but rather as representing rights and
responsibilities with respect to the taxable income or loss of the related
FASIT. The prospectus supplement for each Series of Notes or Certificates, as
applicable, will indicate which securities of the Series will be designated as
regular interests, and which, if any, will be designated as ownership interests.
A FASIT interest generally qualifies as a regular interest if:
(1) it is designated as a regular interest;
(2) it has a stated maturity no greater than thirty years;
(3) it entitles its holder to a specified principal amount;
(4) the issue price of the interest does not exceed 125% of its
stated principal amount;
(5) the yield to maturity of the interest is less than the
applicable Treasury rate published by the IRS plus 5%; and
(6) if it pays interest, this interest is payable at either:
(a) a fixed rate with respect to the principal amount of the
regular interest or
(b) a permissible variable rate with respect to the
principal amount.
Permissible variable rates for FASIT regular interests are the same as those for
REMIC regular interests. See "REMICs--Taxation of Owners of Regular
Securities--(1) General" for a discussion of permissible variable rates for
REMIC regular interests.
If an interest in a FASIT fails to meet one or more of the
requirements set out in clauses (3), (4), or (5) in the immediately preceding
paragraph, but otherwise meets all requirements to be treated as a FASIT, it may
still qualify as a type of regular interest known as a "high-yield interest." In
addition, if an interest in a FASIT fails to meet the requirement of clause (6),
but the interest payable on the interest consists of a specified portion of the
interest payments on permitted assets and that portion does not vary over the
life of the security, the interest will also qualify as a high-yield interest.
See "--Taxation of Owners of FASIT Regular Securities," "--Taxation of
Owners of High-Yield Interests" and "--Taxation of FASIT Ownership Securities"
below.
(3) Consequences of Disqualification
If the trust fund fails to comply with one or more of the Code's
ongoing requirements for FASIT status during any taxable year, the Code provides
that it's FASIT status may be lost for that year and thereafter. If FASIT status
is lost, the treatment of the former FASIT and interests in the FASIT for U.S.
federal income tax purposes is uncertain. Although the Code authorizes the
Treasury to issue regulations that address situations where a failure to meet
the requirements for FASIT status occurs inadvertently and in good faith, final
regulations have not yet been issued. It is possible that disqualification
relief might be accompanied by sanctions, such as the imposition of a corporate
tax on all or a portion of the FASIT's income for the period of time in which
the requirements for FASIT status are not satisfied.
TAXATION OF OWNERS OF FASIT REGULAR SECURITIES
(1) General
Payments received by holders of FASIT Regular Securities generally
will be accorded the same tax treatment under the Code as payments received on
other taxable debt instruments. Holders of FASIT Regular Securities must report
income from these Notes or Certificates, as applicable, under an accrual method
of accounting, even if they otherwise would have used the cash receipts and
disbursements method. Except in the case of FASIT Regular Securities issued with
original issue discount, interest paid or accrued on a FASIT Regular Security
generally will be treated as ordinary income to the Holder and a principal
payment on the security will be treated as a return of capital to the extent
that the securityholder's basis is allocable to that payment.
(2) Original Issue Discount; Market Discount; Acquisition Premium
FASIT Regular Securities issued with original issue discount or
acquired with market discount or acquisition premium generally will treat
interest and principal payments on these Notes or Certificates, as applicable,
in the same manner described for REMIC Regular Securities. See "--REMICs -
Taxation of Owners of Regular Securities" above.
(3) Sale or Exchange
If the FASIT Regular Securities are sold, the holder generally will
recognize gain or loss upon the sale in the manner described above for REMIC
Regular Securities. See "--REMICs--Taxation of Owners of Regular
Securities--Sale or Exchange of Regular Securities."
TAXATION OF OWNERS OF HIGH-YIELD INTERESTS
(1) General
The treatment of high-yield interests is intended to ensure that the
return on instruments issued by a FASIT yielding an equity-like return continues
to have a corporate level tax. High-yield interests are subject to special rules
regarding the eligibility of holders of this interest, and the ability of these
holders to offset income derived from their FASIT Security with losses.
High-yield interests may only be held by Eligible Corporations, other
FASITs, and dealers in securities who acquire such interests such as inventory
(together, "Eligible Holders").
o An "Eligible Corporation" is a taxable domestic C corporation
that does not qualify as a regulated investment company, a real
estate investment trust, a REMIC, or a cooperative.
If a securities dealer (other than an Eligible Corporation) initially
acquires a high-yield interest as inventory, but later begins to hold it for
investment, the dealer will be subject to an excise tax equal to the income from
the high-yield interest multiplied by the highest corporate income tax rate. In
addition, transfers of high-yield interests to a person that is not an Eligible
Holder will be disregarded for federal income tax purposes, and the transferor
will continue to be treated as the holder of the high-yield interest.
In addition, the FASIT Provisions contain an anti-abuse rule that
imposes corporate income tax on income derived from a FASIT Regular Interest
that is held by a pass-through entity (other than another FASIT) that issues
debt or equity securities backed by the FASIT Regular Interest and that have an
original yield to maturity that is both five percentage points above the
applicable federal rate and more than the yield on the FASIT Regular Interest.
The excise tax is limited to those arrangements that have a principal purpose of
avoiding the ownership restriction relating to high-yield interests.
(2) Treatment of Losses
The holder of a high-yield interest may not use non-FASIT current
losses or net operating loss carryforwards or carrybacks to offset any income
derived from the high-yield interest, for either regular federal income tax
purposes or for alternative minimum tax purposes.
TAXATION OF FASIT OWNERSHIP SECURITY
(1) General
A FASIT Ownership Security represents the residual equity interest in
a FASIT. As such, the holder of a FASIT Ownership Security determines its
taxable income by taking into account all assets, liabilities, and items of
income, gain, deduction, loss, and credit of a FASIT. The holder, however, does
not take into account any item of income, gain or deduction allocable to a
"prohibited transaction" as discussed below. In general, the character of the
income to the holder of a FASIT Ownership Security will be the same as the
character of the income to the FASIT, except that any tax-exempt interest income
taken into account by the holder of a FASIT Ownership Security is treated as
ordinary income. In determining that taxable income, the holder of a FASIT
Ownership Security must determine the amount of interest, original issue
discount, market discount, and premium recognized with respect to each debt
instrument held by the FASIT according to a constant yield methodology and under
an accrual method of accounting. In addition, a holder of a FASIT Ownership
Security is subject to the same limitations on their ability to use losses to
offset income from their FASIT Regular Securities as are holders of high-yield
interest. See "--Taxation of Owners of High-Yield Interests" above.
Rules similar to the wash sale rules applicable to REMIC Residual
Securities also will apply to FASIT Ownership Security. Accordingly, losses on
dispositions of a FASIT Ownership Security generally will be disallowed where
within six months before or after the disposition, the seller of the Security
acquires any other FASIT Ownership Security that is economically comparable to a
FASIT Ownership Security. In addition, if any security that is sold or
contributed to a FASIT by the holders of the related FASIT Ownership Security
was required to be marked-to-market under Section 475 of the Code by the holder,
then Section 475 of the Code will continue to apply to these securities, except
that the amount realized under the mark-to-market rules cannot be less than the
securities' value determined after applying special valuation rules contained in
the FASIT Provisions. Those special valuation rules generally require that the
value of debt instruments that are not traded on an established securities
market be determined by calculating the present value of the reasonably expected
payments under the instrument using a discount rate of 120% of the applicable
federal rate, compounded semi-annually.
(2) Prohibited Transaction
The holder of a FASIT Ownership Security is required to pay a penalty
excise tax equal to 100 percent of net income derived from:
(1) an asset that is not a permitted asset;
(2) any disposition of an asset other than a permitted disposition
(as described below);
(3) any income attributable to loans originated by the FASIT; and
(4) compensation for services (other than fees for a waiver,
amendment, or consent with respect to permitted assets other than
foreclosure property).
A permitted disposition is any disposition of any permitted asset:
(1) arising from complete liquidation of a class of regular interest;
(2) incident to the foreclosure, default (or imminent default) on the
asset;
(3) incident to the bankruptcy or insolvency of the FASIT;
(4) necessary to avoid a default on any indebtedness of the a FASIT
attributable to a default (or imminent default) on an asset of
the FASIT;
(5) to facilitate a clean-up call; or
(6) to substitute a permitted debt instrument for another permitted
debt instrument or in order to reduce over-collateralization by
distributing a debt instrument contributed by the holder of the
FASIT Ownership Security to such holder, but only if a principal
purpose of acquiring the debt instrument which is disposed of was
not the recognition of gain arising from an increase in its
market value after its acquisition by the FASIT.
Notwithstanding this rule, the holder of an Ownership Security may currently
deduct its losses incurred in prohibited transactions in computing its taxable
income for the year of the loss. A Series of Notes or Certificates, as
applicable, for which a FASIT election is made generally will be structured in
order to avoid application of the prohibited transactions tax.
(3) Backup Withholding, Reporting and Tax Administration
Holders of FASIT Securities will be subject to backup withholding to
the same extent as holders of REMIC Securities.
GRANTOR TRUST FUNDS
CHARACTERIZATION. For each series of Grantor Trust Securities, Federal
Tax Counsel will deliver its opinion that the Grantor Trust Fund will not be
classified as an association taxable as a corporation and that the Grantor Trust
Fund will be classified as a grantor trust under subpart E, Part I of subchapter
J of the Code. In this case, beneficial owners of Grantor Trust Securities
(referred to in this Prospectus as "Grantor Trust Securityholders") will be
treated for federal income tax purposes as owners of a portion of the Grantor
Trust Fund's assets as described below.
TAXATION OF GRANTOR TRUST SECURITYHOLDERS. Subject to the discussion
below under "Stripped Certificates" and "Subordinated Certificates," each
Grantor Trust Securityholder will be treated as the owner of a pro rata
undivided interest in the assets of the Grantor Trust Fund. Accordingly, and
subject to the discussion below of the recharacterization of the servicing fee,
each Grantor Trust Securityholder must include in income its pro rata share of
the interest and other income from the assets of the Grantor Trust Fund,
including any interest, original issue discount, market discount, prepayment
fees, assumption fees, and late payment charges with respect to the assets, and,
subject to limitations discussed below, may deduct its pro rata share of the
fees and other deductible expenses paid by the Grantor Trust Fund, at the same
time and to the same extent as these items would be included or deducted by the
Grantor Trust Securityholder if the Grantor Trust Securityholder held directly a
pro rata interest in the assets of the Grantor Trust Fund and received and paid
directly the amounts received and paid by the Grantor Trust Fund. Any amounts
received by a Grantor Trust Securityholder in lieu of amounts due with respect
to any asset of the Grantor Trust Fund because of a default or delinquency in
payment will be treated for federal income tax purposes as having the same
character as the payments they replace.
Each Grantor Trust Securityholder will be entitled to deduct its pro
rata share of servicing fees, prepayment fees, assumption fees, any loss
recognized upon an assumption and late payment charges retained by the servicer,
provided that these amounts are reasonable compensation for services rendered to
the Grantor Trust Fund. Grantor Trust Securityholders that are individuals,
estates or trusts will be entitled to deduct their share of expenses only to the
extent these expenses plus all other miscellaneous itemized deductions exceed
two percent of the Grantor Trust Securityholder's adjusted gross income, and
will be allowed no deduction for these expenses in determining their liabilities
for alternative minimum tax. In addition, Section 68 of the Code provides that
the amount of itemized deductions otherwise allowable for the taxable year for
an individual whose adjusted gross income exceeds a prescribed threshold amount
will be reduced by the lesser of (1) 3% of the excess of adjusted gross income
over the specified threshold amount or (2) 80% of the amount of itemized
deductions otherwise allowable for the applicable taxable year. In the case of a
partnership that has 100 or more partners and elects to be treated as an
"electing large partnership," 70% of the partnership's miscellaneous itemized
deductions will be disallowed, although the remaining deductions will generally
be allowed at the partnership level and will not be subject to the 2% floor that
would otherwise be applicable to individual partners.
The servicing compensation to be received by the servicer may be
questioned by the IRS as exceeding a reasonable fee for the services being
performed in exchange for the servicing compensation, and a portion of the
servicing compensation could be recharacterized as an ownership interest
retained by the servicer or other party in a portion of the interest payments to
be made with respect to the Grantor Trust Fund's assets. In this event, a
certificate might be treated as a Stripped Certificate subject to the stripped
bond rules of Section 1286 of the Code, and either the original issue discount
or the market discount rules. See the discussion below under "--Stripped
Certificates". Except as discussed below under "Stripped Certificates" or
"--Subordinated Certificates," this discussion assumes that the servicing fees
paid to the servicer do not exceed reasonable servicing compensation.
A purchaser of a Grantor Trust Security will be treated as purchasing
an interest in each asset in the Grantor Trust Fund at a price determined by
allocating the purchase price paid for the certificate among all asset of the
Grantor Trust Fund in proportion to their fair market values at the time of the
purchase of the certificate. To the extent that the portion of the purchase
price of a Grantor Trust Security allocated to an asset of the Grantor Trust
Fund is less than or greater than the stated redemption price at maturity of the
asset, the interest in the asset will have been acquired at a discount or
premium. See "--Market Discount" and "--Premium," below.
The treatment of any discount on an asset of the Grantor Trust Fund
will depend on whether the discount represents original issue discount or market
discount. Except as indicated otherwise in the applicable Prospectus Supplement,
it is not expected that any asset of the Grantor Trust Fund (other than a
Stripped Agency Security or other instrument evidencing ownership of specific
interest and/or principal of a particular bond) will have original issue
discount (except as discussed below under "Stripped Certificates" or
"Subordinated Certificates"). For the rules governing original issue discount,
see "REMICs--Taxation of Owners of Regular Securities--Original Issue Discount"
above.
The information provided to Grantor Trust Securityholders will not
include information necessary to compute the amount of discount or premium, if
any, at which an interest in each asset of the Grantor Trust Fund is acquired.
MARKET DISCOUNT. A Grantor Trust Securityholder that acquires an
undivided interest in the Grantor Trust Fund's assets may be subject to the
market discount rules of Sections 1276 through 1278 to the extent an undivided
interest in an asset of the Grantor Trust Fund is considered to have been
purchased at a "market discount". For a discussion of the market discount rules
under the Code, see "REMICs--Taxation of Owners of Regular Securities--Market
Discount" above. As discussed above, to the extent an asset of the Grantor Trust
Fund is a Stripped Agency Security or other instrument evidencing ownership of
specific interest and/or principal of a particular bond, it will be subject to
the rules relating to original issue discount (in lieu of the rules relating to
market discount). See "REMICs--Taxation of Owners of Regular
Securities--Original Issue Discount" above.
PREMIUM. To the extent a Grantor Trust Securityholder is considered to
have purchased an undivided interest in an asset of the Grantor Trust Fund for
an amount that is greater than the stated redemption price at maturity of the
interest, the Grantor Trust Securityholder will be considered to have purchased
the interest in the asset with "amortizable bond premium" equal in amount to the
excess. For a discussion of the rules applicable to amortizable bond premium,
see "REMICs--Taxation of Owners of Regular Securities--Amortizable Premium"
above.
STATUS OF THE GRANTOR TRUST SECURITIES. Except for that portion of a
trust fund consisting of unsecured home improvement loans and except as
qualified below, a Grantor Trust Security owned by a:
o "domestic building and loan association" within the meaning of
Code Section 7701(a)(19) will be considered to represent "loans .
. . secured by an interest in real property" within the meaning
of Code Section 7701(a)(19)(C)(v), provided that the real
property securing the mortgage loans represented by that Grantor
Trust Security is of the type described in that section of the
Code.
o real estate investment trust will be considered to represent
"real estate assets" within the meaning of Code Section
856(c)(4)(A) to the extent that the assets of the related Grantor
Trust Fund consist of qualified assets, and interest income on
those assets will be considered "interest on obligations secured
by mortgages on real property" to that extent within the meaning
of Code Section 856(c)(3)(B).
o REMIC will be considered to represent an "obligation (including
any participation or certificate of beneficial ownership therein)
which is principally secured by an interest in real property"
within the meaning of Code Section 860G(a)(3)(A) to the extent
that the assets of the related Grantor Trust Fund consist of
"qualified mortgages" within the meaning of Code Section
860G(a)(3).
An issue arises as to whether Buydown Mortgage Loans may be
characterized in their entirety under the Code provisions cited in the first two
bullet points of the immediately preceding paragraph or whether the amount
qualifying for that treatment must be reduced by the amount of the Buydown
Mortgage Funds. Further, although it is not entirely clear, Grantor Trust
Certificates that are Stripped Certificates (as described below under "Stripped
Certificates") should be treated as qualifying under the Code provisions cited
in the bullet points above to the same extent as Grantor Trust Certificates that
are not Stripped Certificate. Grantor Trust Securityholders are urged to consult
their own tax advisors concerning the characterization of the securityholder's
investment for federal income tax purposes.
STRIPPED CERTIFICATES. Some classes of certificates may be subject to
the stripped bond rules of Section 1286 of the Code and for purposes of this
discussion will be referred to as "Stripped Certificates." In general, a
Stripped Certificate will be subject to the stripped bond rules where there has
been a separation of ownership of the right to receive some or all of the
principal payments on a mortgage loan held by the Grantor Trust Fund from
ownership of the right to receive some or all of the related interest payments.
Generally, where a separation has occurred, under the stripped bond rules of
Section 1286 of the Code, the holder of a right to receive a principal or
interest payment on the bond is required to accrue into income, on a constant
yield basis under rules governing original issue discount (see "REMICs--Taxation
of Owners of Regular Securities--Original Issue Discount"), the difference
between the holder's initial purchase price for the right to receive principal
or interest, and the principal or interest payment to be received with respect
to that right. However, a holder of a Stripped Certificate will account for any
discount on the Stripped Certificate (other than an interest treated as a
"stripped coupon") as market discount rather than original issue discount if
either (i) the amount of original issue discount with respect to the Stripped
Certificate was treated as zero under the original issue discount DE MINIMIS
rule when the Stripped Certificate was stripped or (ii) no more than 100 basis
points (including any amount of servicing in excess of reasonable servicing) is
stripped off from the mortgage assets.
Certificates will constitute Stripped Certificates and will be subject
to these rules under various circumstances, including the following:
o if any servicing compensation is deemed to exceed a reasonable
amount;
o if the company or any other party retains a retained yield with
respect to the assets held by the Grantor Trust Fund;
o if two or more classes of certificates are issued representing
the right to non-pro rata percentages of the interest or
principal payments on the Grantor Trust Fund's assets; or
o if certificates are issued which represent the right to
interest-only payments or principal-only payments.
The tax treatment of the Stripped Certificates with respect to the
application of the original issue discount provisions of the Code is currently
unclear. However, the trustee intends to treat each Stripped Certificate as a
single debt instrument issued on the day it is purchased for purposes of
calculating any original issue discount. Original issue discount with respect to
a Stripped Certificate must be included in ordinary gross income for federal
income tax purposes as it accrues in accordance with the constant yield method
that takes into account the compounding of interest and this accrual of income
may be in advance of the receipt of any cash attributable to that income. See
"REMICs--Taxation of Owners of Regular Securities--Original Issue Discount"
above. For purposes of applying the original issue discount provisions of the
Code, the issue price of a Stripped Certificate will be the purchase price paid
by each holder of the Stripped Certificate and the stated redemption price at
maturity may include the aggregate amount of all payments to be made with
respect to the Stripped Certificate whether or not denominated as interest. The
amount of original issue discount with respect to a Stripped Certificate may be
treated as zero under the original issue discount DE MINIMIS rules described
above.
SUBORDINATED CERTIFICATES. In the event the Grantor Trust Fund issues
two classes of Grantor Trust Securities that are identical except that one class
is a subordinate class, with a relatively high certificate pass-through rate,
and the other is a senior class, with a relatively low certificate pass-through
rate (referred to in this Prospectus as the "Subordinate Certificates" and
"Senior Certificates", respectively), the Grantor Trust Securityholders in the
aggregate will be deemed to have acquired the following assets: (1) the
principal portion of each mortgage loan plus a portion of the interest due on
each mortgage loan (the "Grantor Trust Fund Stripped Bond"), and (2) a portion
of the interest due on each mortgage loan equal to the difference between the
Interest Rate on the Subordinate Certificates and the Interest Rate on the
Senior Certificates, if any, which difference is then multiplied by the
Subordinate Class Percentage (the "Grantor Trust Fund Stripped Coupon"). The
"Subordinate Class Percentage" equals the initial aggregate principal amount of
the Subordinate Certificates divided by the sum of the initial aggregate
principal amount of the Subordinate Certificates and the Senior Certificates.
The "Senior Class Percentage" equals the initial aggregate principal amount of
the Senior Certificates divided by the sum of the initial aggregate principal
amount of the Subordinate Certificates and the Senior Certificates.
The Senior Certificateholders in the aggregate will own the Senior
Class Percentage of the Grantor Trust Fund Stripped Bond and accordingly each
Senior Certificateholder will be treated as owning its pro rata share of such
asset. The Senior Certificateholders will not own any portion of the Grantor
Trust Fund Stripped Coupon. The Subordinate Certificateholders in the aggregate
own both the Subordinate Class Percentage of the Grantor Trust Fund Stripped
Bond plus 100% of the Grantor Trust Fund Stripped Coupon, if any, and
accordingly each Subordinate Certificateholder will be treated as owning its pro
rata share in both assets. The Grantor Trust Fund Stripped Bond will be treated
as a "stripped bond" and the Grantor Trust Fund Stripped Coupon will be treated
as "stripped coupons" within the meaning of Section 1286 of the Code.
Although not entirely clear, the interest income on the Subordinate
Certificates and the portion of the servicing fee allocable to such certificates
that does not constitute excess servicing will be treated by the Grantor Trust
Fund as qualified stated interest, assuming the interest with respect to the
mortgage loans held by the Grantor Trust Fund would otherwise qualify as
qualified stated interest. Accordingly, except to the extent modified below, the
income of the Subordinate Certificates will be reported in the same manner as
described generally above for holders of Senior Certificates.
If the Subordinate Certificateholders receive distribution of less
than their share of the Grantor Trust Fund's receipts of principal or interest
(the "Shortfall Amount") because of the subordination of the Subordinate
Certificates, holders of Subordinate Certificates would probably be treated for
federal income tax purposes as if they had
o received as distributions their full share of receipts;
o paid over to the Senior Certificateholders an amount equal to the
Shortfall Amount; and
o retained the right to reimbursement of the relevant amounts to
the extent these amounts are otherwise available as a result of
collections on the mortgage loans or amounts available from a
reserve account or other form of credit enhancement, if any.
Under this analysis,
o Subordinate Certificateholders would be required to accrue as
current income any interest income, original issue discount, or
(to the extent paid on assets of the Grantor Trust Fund) accrued
market discount of the Grantor Trust Fund that was a component of
the Shortfall Amount, even though that amount was in fact paid to
the Senior Certificateholders;
o a loss would only be allowed to the Subordinate
Certificateholders when their right to receive reimbursement of
the Shortfall Amount became worthless (i.e., when it becomes
clear that amount will not be available from any source to
reimburse the loss); and
o reimbursement of the Shortfall Amount prior to a claim of
worthlessness would not be taxable income to Subordinate
Certificateholders because the amount was previously included in
income.
Those results should not significantly affect the inclusion of income for
Subordinate Certificateholders on the accrual method of accounting, but could
accelerate inclusion of income to Subordinate Certificateholders on the cash
method of accounting by, in effect, placing them on the accrual method.
Moreover, the character and timing of loss deductions are unclear. Subordinate
Certificateholders are strongly urged to consult their own tax advisors
regarding the appropriate timing, amount and character of any losses sustained
with respect to the Subordinate Certificates including any loss resulting from
the failure to recover previously accrued interest or discount income.
ELECTION TO TREAT ALL INTEREST AS ORIGINAL ISSUE DISCOUNT. The
Treasury Regulations relating to original issue discount permit a Grantor Trust
Securityholder to elect to accrue all interest, discount, including DE MINIMIS
market or original issue discount, reduced by any premium, in income as
interest, based on a constant yield method. If an election were to be made with
respect to an interest in a mortgage loan with market discount, the Grantor
Trust Securityholder would be deemed to have made an election to include in
income currently market discount with respect to all other debt instruments
having market discount that the Grantor Trust Securityholder acquires during the
year of the election or afterward. See "--Market Discount" above. Similarly, a
Grantor Trust Securityholder that makes this election for an interest in a
mortgage loan that is acquired at a premium will be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that the Grantor Trust Securityholder owns at the
beginning of the first taxable year to which the election applies or acquires
afterward. See "--Premium" above. The election to accrue interest, discount and
premium on a constant yield method with respect to a Grantor Trust Security is
irrevocable.
PREPAYMENTS. The Taxpayer Relief Act of 1997 (the "1997 Act") contains
a provision requiring original issue discount on any pool of debt instruments
the yield on which may be affected by reason of prepayments be calculated taking
into account the Prepayment Assumption and requiring the discount to be taken
into income on the basis of a constant yield to assumed maturity taking account
of actual prepayments. The legislative history to the 1986 Act states that
similar rules apply with respect to market discount and amortizable bond premium
on debt instruments.
SALE OR EXCHANGE OF A GRANTOR TRUST SECURITY. Sale or exchange of a
Grantor Trust Security prior to its maturity will result in gain or loss equal
to the difference, if any, between the amount realized, exclusive of amounts
attributable to accrued and unpaid interest (which will be treated as ordinary
income allocable to the related asset of the Grantor Trust Fund), and the
owner's adjusted basis in the Grantor Trust Security. The adjusted basis
generally will equal the seller's cost for the Grantor Trust Security, increased
by the original issue discount and any market discount included in the seller's
gross income with respect to the Grantor Trust Security, and reduced, but not
below zero, by any premium amortized by the seller and by principal payments on
the Grantor Trust Security previously received by the seller. The gain or loss
will, except as discussed below, be capital gain or loss to an owner for which
the assets of the Grantor Trust Fund represented by a Grantor Trust Security are
"capital assets" within the meaning of Section 1221. A capital gain or loss will
be long-term or short-term depending on whether or not the Grantor Trust
Security has been owned for the long-term capital gain holding period, currently
more than one year.
Notwithstanding the foregoing, any gain realized on the sale or
exchange of a Grantor Trust Security will be ordinary income to the extent of
the seller's interest in accrued market discount on Grantor Trust Fund assets
not previously taken into income. See "--Market Discount," above. Further,
Grantor Trust Securities will be "evidences of indebtedness" within the meaning
of Section 582(c)(1), so that gain or loss recognized from the sale of a Grantor
Trust Security by a bank or thrift institution to which such section applied
will be treated as ordinary gain or loss.
FOREIGN INVESTORS IN GRANTOR TRUST SECURITIES. A holder of a Grantor
Trust Security who is not a "U.S. person" (as defined above at "REMICs--Tax
Related Restrictions on Transfer of Residual Securities--Foreign Investors") and
is not subject to federal income tax as a result of any direct or indirect
connection to the United States other than its ownership of a Grantor Trust
Security generally will not be subject to United States income or withholding
tax in respect of payments of interest or original issue discount on its Grantor
Trust Security to the extent attributable to debt obligations held by the
Grantor Trust Fund that were originated after July 18, 1984, provided that the
Grantor Trust Securityholder complies to the extent necessary with certain
certification requirements which generally relate to the identity of the
beneficial owner and the status of the beneficial owner as a person that is not
a U.S. person. Interest or original issue discount on a Grantor Trust Security
attributable to debt obligations held by the Grantor Trust Fund that were
originated prior to July 19, 1984 will be subject to a 30% withholding tax
(unless such tax is reduced or eliminated by an applicable tax treaty). All
holders of Grantor Trust Securities should consult their tax advisors regarding
the tax documentation and certifications that must be provided to secure any
applicable exemptions from United States withholding taxes.
Any capital gain realized on the sale or other taxable disposition of
a Grantor Trust Security by a Non-U.S. Person (as defined above at
"REMICs--Taxation of Certain Foreign Investors--Regular Securities") generally
will be exempt from United States federal income and withholding tax, provided
that (i) such gain is not effectively connected with the conduct of a trade or
business in the United States by the Non-U.S. Person and (ii) in the case of an
individual Non-U.S. Person, the Non-U.S. Person is not present in the United
States for 183 days or more in the taxable year.
If the interest, gain or income with respect to a Grantor Trust
Security held by a Non-U.S. Person is effectively connected with the conduct of
a trade or business in the United States by the Non-U.S. Person (although exempt
from the withholding tax previously discussed if the holder provides an
appropriate statement establishing that such income is so effectively
connected), the holder generally will be subject to United States federal income
tax on the interest, gain or income at regular federal income tax rates. In
addition, if the Non-U.S. Person is a foreign corporation, it may be subject to
a branch profits tax equal to 30% of its "effectively connected earnings and
profits," within the meaning of the Code, for the taxable year, as adjusted for
certain items, unless it qualifies for a lower rate under an applicable tax
treaty (as modified by the branch profits tax rules).
BACKUP WITHHOLDING. Distributions made on the Grantor Trust Securities
and proceeds from the sale of the Grantor Trust Securities will be subject to a
"backup" withholding tax of 31% if, in general, the Grantor Trust Securityholder
fails to comply with particular identification procedures, unless the holder is
an exempt recipient under applicable provisions of the Code and, if necessary,
demonstrates such status. Any amounts so withheld would be refunded by the IRS
or allowable as a credit against the Grantor Trust Securityholder's federal
income tax.
PARTNERSHIP TRUST FUNDS AND DISREGARDED TRUST FUNDS
CLASSIFICATION OF TRUST FUNDS
For each series of Partnership Certificates or Debt Securities,
Stroock & Stroock & Lavan LLP will deliver its opinion that the trust fund will
not be a taxable mortgage pool or an association (or publicly traded
partnership) taxable as a corporation for federal income tax purposes. This
opinion will be based on the assumption that the terms of the related Agreement
and related documents will be complied with, and on counsel's opinion that the
nature of the income of the trust fund will exempt it from the rule that some
publicly traded partnerships are taxable as corporations.
TAXATION OF DEBT SECURITYHOLDERS
The depositor will agree, and the securityholders will agree by their
purchase of Debt Securities, to treat the Debt Securities as debt for federal
income tax purposes. No regulations, published rulings, or judicial decisions
exist that discuss the characterization for federal income tax purposes of
securities with terms substantially the same as the Debt Securities. However,
for each series of Debt Securities, Stroock & Stroock & Lavan LLP will deliver
its opinion that the Debt Securities will be classified as indebtedness for
federal income tax purposes. The discussion below assumes this characterization
of the Debt Securities is correct.
If, contrary to the opinion of counsel, the Internal Revenue Service
successfully asserted that the Debt Securities were not debt for federal income
tax purposes, the Debt Securities might be treated as equity interests in the
trust fund. If so treated, the trust fund might be treated as a publicly traded
partnership that would be taxable as a corporation unless it met particular
qualifying income tests, and the resulting taxable corporation would not be able
to reduce its taxable income by deductions for interest expense on Debt
Securities recharacterized as equity. Treatment of the Debt Securities as equity
interests in a partnership could have adverse tax consequences to some holders,
even if the trust fund were not treated as a publicly traded partnership taxable
as a corporation. For example, income allocable to foreign holders might be
subject to United States tax and United States tax return filing and withholding
requirements, income allocable to tax-exempt holders might constitute "unrelated
business taxable income" (if some, but not all, of the Debt Securities were
recharacterized as equity in a partnership), individual holders might be subject
to limitations on their ability to deduct their share of trust fund expenses,
and income from the trust fund's assets would be taxable to owners of Debt
Securities without regard to whether cash distributions are made to such owners
and without regard to the owners' method of tax accounting.
Debt Securities generally will be subject to the same rules of
taxation as Regular Securities issued by a REMIC, as described above, except
that (1) income reportable on Debt Securities is not required to be reported
under the accrual method unless the holder otherwise uses the accrual method and
(2) the special 110% yield rule treating a portion of the gain on sale or
exchange of a Regular Security as ordinary income is inapplicable to Debt
Securities. See "--REMICs--Taxation of Owners of Regular Securities" and "--Sale
or Exchange of Regular Securities."
Further, for federal income tax purposes, (i) Debt Securities held by
a thrift institution taxed as a domestic building and loan association will not
constitute "loans . . . secured by an interest in real property" within the
meaning of Section 7701(a)(19)(C)(v) of the Code; (ii) interest on Debt
Securities held by a real estate investment trust will not be treated as
"interest on obligations secured by mortgages on real property or on interests
in real property "within the meaning of Code Section 856(c)(3)(B); (iii) Debt
Securities held by a real estate investment trust will not constitute "real
estate assets" or "Government securities" within the meaning of Section
856(c)(4)(A) of the Code; (iv) Debt Securities held by a regulated investment
company will not constitute "Government securities" within the meaning of
Section 851(b)(3)(A)(i) of the Code; and (v) Debt Securities will not constitute
"qualified mortgages" with in the meaning of Section 860G(a)(3) of the Code for
REMICs.
TAXATION OF OWNERS OF PARTNERSHIP CERTIFICATES
(1) Treatment of the Trust Fund as a Partnership
The Partnership Trust Fund will agree, and the related owners of
Partnership Certificates ("Partnership Certificate Owners") will agree by their
purchase of Partnership Certificates, if there is more than one Partnership
Certificate Owner, to treat the Partnership Trust Fund as a partnership for
purposes of federal and state income tax, franchise tax and any other tax
measured in whole or in part by income, with the assets of the partnership being
the assets held by the Partnership Trust Fund, the partners of the partnership
being the Partnership Certificate Owners, including, to the extent relevant, the
depositor in its capacity as recipient of distributions from any reserve fund,
and the Debt Securities, if any, being debt of the partnership, and if there is
one Partnership Certificate Owner, to treat the Partnership Certificate Owner as
the owner of the assets of the Partnership Trust Fund and to treat the
Partnership Trust Fund as a disregarded entity. However, the proper
characterization of the arrangement involving the Partnership Trust Fund, the
Partnership Certificates, the Debt Securities and the depositor is not certain
because there is no authority on transactions closely comparable to that
contemplated in this prospectus.
A variety of alternative characterizations are possible. For example,
because the Partnership Certificates have certain features characteristic of
debt, the Partnership Certificates might be considered debt of the Partnership
Trust Fund. Generally, provided such Partnership Certificates are issued at or
close to face value, any such characterization would not result in materially
adverse tax consequences to holders of Partnership Certificates as compared to
the consequences from treatment of the Partnership Certificates as equity in a
partnership, described below. The following discussion assumes that the
Partnership Certificates represent equity interests in a partnership. The
following discussion also assumes that all payments on the Partnership
Certificates are denominated in U.S. dollars, none of the Partnership
Certificates have Interest Rates which would qualify as contingent interest
under the Treasury regulations relating to original issue discount, and that a
series of securities includes a single class of Partnership Certificates. If
these conditions are not satisfied with respect to any given series of
Partnership Certificates, additional tax considerations with respect to such
Partnership Certificates will be disclosed in the applicable prospectus
supplement.
(2) Partnership Taxation
As a partnership, the Partnership Trust Fund will not be subject to
federal income tax. Rather, each Partnership Certificate Owner will be required
to take into account separately the Partnership Certificate Owner's allocable
share of income, gains, losses, deductions and credits of the Partnership Trust
Fund, whether or not there is a corresponding cash distribution. Thus, cash
basis holders will in effect be required to report income from the Partnership
Certificates on the accrual basis and Partnership Certificate Owners may become
liable for taxes on Partnership Trust Fund income even if they have not received
cash from the Partnership Trust Fund to pay the taxes. The Partnership Trust
Fund's income will consist primarily of interest and finance charges earned on
the related mortgage loans, including appropriate adjustments for market
discount, original issue discount and bond premium, and any gain upon collection
or disposition of the mortgage loans.
The Partnership Trust Fund's deductions will consist primarily of
interest accruing with respect to the Debt Securities, servicing and other fees,
and losses or deductions upon collection or disposition of mortgage loans.
The tax items of a partnership are allocable to the partners in
accordance with the Code, Treasury regulations and the partnership agreement
(i.e., the Agreement and related documents). The Agreement will provide, in
general, that the Partnership Certificate Owners will be allocated taxable
income of the Partnership Trust Fund for each month equal to the sum of:
o the interest or other income that accrues on the Partnership
Certificates in accordance with their terms for the relevant
month including, as applicable, interest accruing at the related
Partnership Certificate Interest Rate for that month and interest
on amounts previously due on the Partnership Certificates but not
yet distributed;
o any income of the Partnership Trust Fund attributable to discount
on the related mortgage loans that corresponds to any excess of
the principal amount of the Partnership Certificates over their
initial issue price;
o any prepayment premium payable to the Partnership Certificate
Owners for the applicable month; and
o any other amounts of income payable to the Partnership
Certificate Owners for the applicable month.
The allocation will be reduced by any amortization by the Partnership Trust Fund
of premium on mortgage loans that corresponds to any excess of the issue price
of Partnership Certificates over their principal amount. All remaining taxable
income of the Partnership Trust Fund will be allocated to the depositor. Losses
will generally be allocated in the manner in which they are borne.
Based on the economic arrangement of the parties, the foregoing
approach for allocating income of the Partnership Trust Fund should be
permissible under applicable Treasury regulations, although no assurance can be
given that the IRS would not require a greater amount of income to be allocated
to Partnership Certificate Owners. Moreover, even under the foregoing method of
allocation, Partnership Certificate Owners may be allocated income equal to the
entire Partnership Certificate Interest Rate plus the other items described
above, even though the Partnership Trust Fund might not have sufficient cash to
make current cash distributions of the amount. In addition, because tax
allocations and tax reporting will be done on a uniform basis for all
Partnership Certificate Owners, but Partnership Certificate Owners may be
purchasing Partnership Certificates at different times and at different prices,
Partnership Certificate Owners may be required to report on their tax returns
taxable income that is greater or less than the amount reported to them by the
Partnership Trust Fund.
Assuming Debt Securities are also issued, all or substantially all of
the taxable income allocated to a Partnership Certificate Owner that is a
pension, profit sharing or employee benefit plan or other tax-exempt entity,
including an individual retirement account, will constitute "unrelated business
taxable income" generally taxable to the holder under the Code.
An individual taxpayer's share of expenses of the Partnership Trust
Fund, including fees to the servicer, but not interest expense, would be
miscellaneous itemized deductions and thus deductible only to the extent such
expenses plus all other miscellaneous itemized deductions exceeds two percent of
the individual's adjusted gross income. An individual taxpayer will be allowed
no deduction for his share of expenses of the Partnership Trust Fund, other than
interest, in determining his liability for alternative minimum tax. In addition,
Section 68 of the Code provides that the amount of itemized deductions otherwise
allowable for the taxable year for an individual whose adjusted gross income
exceeds a prescribed threshold amount will be reduced by the lesser of (1) 3% of
the excess of adjusted gross income over the specified threshold amount or (2)
80% of the amount of itemized deductions otherwise allowable for the applicable
taxable year. Accordingly, deductions might be disallowed to the individual in
whole or in part and might result in the Partnership Certificate Owner being
taxed on an amount of income that exceeds the amount of cash actually
distributed to the holder over the life of the Partnership Trust Fund. In the
case of a partnership that has 100 or more partners and elects to be treated as
an "electing large partnership," 70% of that partnership's miscellaneous
itemized deductions will be disallowed, although the remaining deductions will
generally be allowed at the partnership level and will not be subject to the 2%
floor that would otherwise be applicable to individual partners.
The Partnership Trust Fund intends to make all tax calculations
relating to income and allocations to Partnership Certificate Owners on an
aggregate basis to the extent relevant. If the IRS were to require that the
calculations be made separately for each mortgage loan, the calculations may
result in some timing and character differences under some circumstances.
(3) Discount and Premium
The purchase price paid by the Partnership Trust Fund for the related
mortgage loans may be greater or less than the remaining principal balance of
the mortgage loans at the time of purchase. If so, the mortgage loans will have
been acquired at a premium or market discount, as the case may be. See
"REMICs--Taxation of Owners of Regular Securities--Acquisition Premium" and "--
Market Discount" above. As indicated above, the Partnership Trust Fund will make
this calculation on an aggregate basis, but it is possible that the IRS might
require that it be recomputed on a mortgage loan-by-mortgage loan basis.
Further, with respect to any asset of the Partnership Trust Fund that is a
Stripped Agency Security or other instrument evidencing ownership of specific
interest and/or principal of a particular bond, it will be subject to the rules
relating to original issue discount with respect to such security or instrument
(in lieu of the rules relating to market discount). See "REMICs--Taxation of
Owners of Regular Securities--Original Issue Discount" above.
If the Partnership Trust Fund acquires the mortgage loans at a market
discount or premium, the Partnership Trust Fund will elect to include any market
discount in income currently as it accrues over the life of the mortgage loans
or to offset any premium against interest income on the mortgage loans. As
indicated above, a portion of the market discount income or premium deduction
may be allocated to Partnership Certificate Owners.
(4) Section 708 Termination
Under Section 708 of the Code, the Partnership Trust Fund will be
deemed to terminate for federal income tax purposes if 50% or more of the
capital and profits interests in the Partnership Trust Fund are sold or
exchanged within a 12-month period. If a termination occurs under Section 708 of
the Code, the Partnership Trust Fund will be considered to contribute its assets
to a new Partnership Trust Fund, which would be treated as a new partnership, in
exchange for Partnership Certificates in the new Partnership Trust Fund. The
original Partnership Trust Fund will then be deemed to distribute the
Partnership Certificates in the new Partnership Trust Fund to each of the owners
of Partnership Certificates in the original Partnership Trust Fund in
liquidation of the original Partnership Trust Fund. The Partnership Trust Fund
will not comply with particular technical requirements that might apply when a
constructive termination occurs. As a result, the Partnership Trust Fund may be
subject to some tax penalties and may incur additional expenses if it is
required to comply with those requirements. Furthermore, the Partnership Trust
Fund might not be able to comply with these requirements due to lack of data.
(5) Disposition of Partnership Certificates
Generally, capital gain or loss will be recognized on a sale of
Partnership Certificates in an amount equal to the difference between the amount
realized and the seller's tax basis in the Partnership Certificates sold. Any
gain or loss would be long-term capital gain or loss if the Partnership
Certificate Owner's holding period exceeded one year. A Partnership Certificate
Owner's tax basis in a Partnership Certificate will generally equal its cost,
increased by its share of Partnership Trust Fund income allocable to the
Partnership Certificate Owner and decreased by any distributions received or
losses allocated with respect to the Partnership Certificate. In addition, both
the tax basis in the Partnership Certificates and the amount realized on a sale
of a Partnership Certificate would include the Partnership Certificate Owner's
share, determined under Treasury Regulations, of the Debt Securities and other
liabilities of the Partnership Trust Fund. A Partnership Certificate Owner
acquiring Partnership Certificates at different prices will generally be
required to maintain a single aggregate adjusted tax basis in the Partnership
Certificates and, upon a sale or other disposition of some of the Partnership
Certificates, allocate a portion of the aggregate tax basis to the Partnership
Certificates sold, rather than maintaining a separate tax basis in each
Partnership Certificate for purposes of computing gain or loss on a sale of that
Partnership Certificate.
If a Partnership Certificate Owner is required to recognize an
aggregate amount of income (not including income attributable to disallowed
itemized deductions described above) over the life of the Partnership
Certificates that exceeds the aggregate cash distributions with respect to the
Partnership Certificates, the excess will generally give rise to a capital loss
upon the retirement of the Partnership Certificates.
(6) Allocations Between Transferors and Transferees
In general, the Partnership Trust Fund's taxable income and losses
will be determined each Due Period and the tax items for a particular Due Period
will be apportioned among the Partnership Certificate Owners in proportion to
the principal amount of Partnership Certificates owned by them as of the close
of the last day of that Due Period. As a result, a Partnership Certificate Owner
purchasing Partnership Certificates may be allocated tax items, which will
affect the purchaser's tax liability and tax basis, attributable to periods
before the actual transaction.
The use of a Due Period convention may not be permitted by existing
Treasury regulations. If a Due Period convention is not allowed, or only applies
to transfers of less than all of the partner's interest, taxable income or
losses of the Partnership Trust Fund might be reallocated among the Partnership
Certificate Owners. The Partnership Trust Fund's method of allocation between
transferors and transferees may be revised to conform to a method permitted by
future laws, regulations or other IRS guidance.
(7) Section 731 Distributions
In the case of any distribution to a Partnership Certificate Owner, no
gain will be recognized to that Partnership Certificate Owner to the extent that
the amount of any money distributed for that Partnership Certificate exceeds the
adjusted basis of that Partnership Certificate Owner's interest in the
Partnership Certificate. To the extent that the amount of money distributed
exceeds that Partnership Certificate Owner's adjusted basis, gain will be
currently recognized. In the case of any distribution to a Partnership
Certificate Owner, no loss will be recognized except upon a distribution in
liquidation of a Partnership Certificate Owner's interest. Any gain or loss
recognized by a Partnership Certificate Owner generally will be capital gain or
loss.
(8) Section 754 Election
In the event that a Partnership Certificate Owner sells its
Partnership Certificates at a profit (or loss), the purchasing Partnership
Certificate Owner will have a higher (or lower) basis in the Partnership
Certificates than the selling Partnership Certificate Owner had. The tax basis
of the Partnership Trust Fund's assets will not be adjusted to reflect that
higher (or lower) basis unless the Partnership Trust Fund were to file an
election under Section 754 of the Code. In order to avoid the administrative
complexities that would be involved in keeping accurate accounting records, as
well as potentially onerous information reporting requirements, the Partnership
Trust Fund current does not intend to make an election under Section 754 of the
Code. As a result, Partnership Certificate Owners might be allocated a greater
or lesser amount of Partnership Trust Fund income than would be appropriate
based on their own purchase price for Partnership Certificates.
(9) Administrative Matters
The trustee is required to keep or cause to be kept complete and
accurate books of the Partnership Trust Fund. The trustee will file a
partnership information return (IRS Form 1065) with the IRS for each taxable
year of the Partnership Trust Fund and will report each Partnership Certificate
Owner's allocable share of items of Partnership Trust Fund income and expense to
Partnership Certificate Owners and the IRS on Schedule K-1. The Partnership
Trust Fund will provide the Schedule K-1 information to nominees that fail to
provide the Partnership Trust Fund with the information statement described
below and the nominees will be required to forward this information to the
beneficial owners of the Partnership Certificates. Generally, holders must
timely file tax returns that are consistent with the information return filed by
the Partnership Trust Fund or be subject to penalties unless the holder notifies
the IRS of all the inconsistencies.
Under Section 6031 of the Code, any person that holds Partnership
Certificates as a nominee at any time during a calendar year is required to
furnish the Partnership Trust Fund with a statement containing specific
information on the nominee, the beneficial owners and the Partnership
Certificates so held. The information includes (1) the name, address and
taxpayer identification number of the nominee and (2) as to each beneficial
owner
o the name, address and identification number of such person,
o whether such person is a United States person, a tax-exempt
entity or a foreign government, an international organization, or
any wholly owned agency or instrumentality of either of the
foregoing, and
o particular information on Partnership Certificates that were
held, bought or sold on behalf of the person throughout the year.
In addition, brokers and financial institutions that hold Partnership
Certificates through a nominee are required to furnish directly to the
Partnership Trust Fund information as to themselves and their ownership of
Partnership Certificates. A clearing agency registered under Section 17A of the
Exchange Act is not required to furnish any information statement to the
Partnership Trust Fund. The information referred to above for any calendar year
must be furnished to the Partnership Trust Fund on or before the following
January 31. Nominees, brokers and financial institutions that fail to provide
the Partnership Trust Fund with the information described above may be subject
to penalties.
Unless another designation is made, the depositor will be designated
as the tax matters partner for each Partnership Trust Fund in the pooling and
servicing greement and, as the tax matters partner, will be responsible for
representing the Partnership Certificate Owners in some specific disputes with
the IRS. The Code provides for administrative examination of a partnership as if
the partnership were a separate and distinct taxpayer. Generally, the statute of
limitations for partnership items does not expire before the later of three
years after the date on which the partnership information return is filed or the
last day for filing the return for the applicable year, determined without
regard to extensions. Any adverse determination following an audit of the return
of the Partnership Trust Fund by the appropriate taxing authorities could result
in an adjustment of the returns of the Partnership Certificate Owners, and,
under some circumstances, a Partnership Certificate Owner may be precluded from
separately litigating a proposed adjustment to the items of the Partnership
Trust Fund. An adjustment could also result in an audit of a Partnership
Certificate Owner's returns and adjustments of items not related to the income
and losses of the Partnership Trust Fund.
A special audit system exists for qualifying large partnerships that
have elected to apply a simplified flow-through reporting system under Sections
771 through 777 of the Code. Unless otherwise specified in the applicable
prospectus supplement, a Partnership Trust Fund will not elect to apply the
simplified flow-through reporting system.
(10) Taxation of Certain Foreign Partnership Certificate Owners
As used below, the term "Non-United States Owner" means a Partnership
Certificate Owner that is not a U.S. Person, as defined under "REMICs--Taxation
of Owners of Residual Securities--Tax Related Restrictions on Transfer of
Residual Securities--Foreign Investors," above.
It is not clear whether the Partnership Trust Fund would be considered
to be engaged in a trade or business in the United States for purposes of
federal withholding taxes with respect to Non-United States Owners because there
is no clear authority dealing with that issue under facts substantially similar
to those described in this Prospectus. Although it is not expected that the
Partnership Trust Fund would be engaged in a trade or business in the United
States for these purposes, the Partnership Trust Fund will withhold as if it
were so engaged in order to protect the Partnership Trust Fund from possible
adverse consequences of a failure to withhold. The Partnership Trust Fund
expects to withhold on the portion of its taxable income that is allocable to
Non-United States Owners pursuant to Section 1446 of the Code, as if the income
were effectively connected to a U.S. trade or business, at a rate of 35% for
Non-United States Owners that are taxable as corporations and 39.6% for all
other Non-United States Owners.
Subsequent adoption of Treasury regulations or the issuance of other
administrative pronouncements may require the Partnership Trust Fund to change
its withholding procedures.
Each Non-United States Owner might be required to file a U.S.
individual or corporate income tax return on its share of the income of the
Partnership Trust Fund including, in the case of a corporation, a return in
respect of the branch profits tax. Assuming the Partnership Trust Fund is not
engaged in a U.S. trade or business, a Non-United States Owner would be entitled
to a refund with respect to all or a portion of taxes withheld by the
Partnership Trust Fund if, in particular, the Owner's allocable share of
interest from the Partnership Trust Fund constituted "portfolio interest" under
the Code.
The interest, however, may not constitute "portfolio interest" if,
among other reasons, the underlying obligation is not in registered form or if
the interest is determined without regard to the income of the Partnership Trust
Fund, in the later case, the interest being properly characterized as a
guaranteed payment under Section 707(c) of the Code. If this were the case,
Non-United States Owners would be subject to a United States federal income and
withholding tax at a rate of 30 percent on the Partnership Trust Fund's gross
income, without any deductions or other allowances for costs and expenses
incurred in producing the income, unless reduced or eliminated pursuant to an
applicable treaty. In this case, a Non-United States Owner would only be
entitled to a refund for that portion of the taxes, if any, in excess of the
taxes that should have been withheld with respect to the interest.
(11) Backup Withholding
Distributions made on the Partnership Certificates and proceeds from
the sale of the Partnership Certificates will be subject to a "backup"
withholding tax of 31% if, in general, the Partnership Certificate Owner fails
to comply with particular identification procedures, unless the holder is an
exempt recipient under applicable provisions of the Code and, if necessary,
demonstrates such status. Any amounts so withheld would be refunded by the IRS
or allowable as a credit against the Non-United States Owner's federal income
tax.
CONSEQUENCES FOR PARTICULAR INVESTORS
The federal tax discussions above may not be applicable depending on a
securityholder's particular tax situation. The depositor recommends that
prospective purchasers consult their tax advisors for the tax consequences to
them of the purchase, ownership and disposition of REMIC Securities, FASIT
Securities, Grantor Trust Securities, Partnership Certificates and Debt
Securities, including the tax consequences under state, local, foreign and other
tax laws and the possible effects of changes in federal or other tax laws.
STATE AND OTHER TAX CONSIDERATIONS
In addition to the federal income tax consequences described in
"Material Federal Income Tax Considerations," potential investors should
consider the state and local tax consequences of the acquisition, ownership, and
disposition of the Notes or Certificates, as applicable, offered under this
prospectus. State tax law may differ substantially from the corresponding
federal tax law, and the discussion above does not purport to describe any
aspect of the tax laws of any state or other jurisdiction. Therefore,
prospective investors should consult their own tax advisors for the various tax
consequences of investments in the Notes or Certificates, as applicable, offered
under this prospectus.
ERISA CONSIDERATIONS
GENERAL
A fiduciary of a pension, profit-sharing, retirement or other employee
benefit plan subject to Title I of ERISA should consider the fiduciary standards
under the Employee Retirement Income Security Act of 1974, as amended ("ERISA")
in the context of the plan's particular circumstances before authorizing an
investment of a portion of such plan's assets in the Securities. Accordingly,
pursuant to Section 404 of ERISA, such fiduciary should consider among other
factors (i) whether the investment is for the exclusive benefit of plan
participants and their beneficiaries; (ii) whether the investment satisfies the
applicable diversification requirements; (iii) whether the investment is in
accordance with the documents and instruments governing the plan; and (iv)
whether the investment is prudent, considering the nature of the investment.
Fiduciaries of plans also should consider ERISA's prohibition on improper
delegation of control over, or responsibility for, plan assets.
In addition, employee benefit plans or other retirement arrangements
subject to ERISA, as well as individual retirement accounts, certain types of
Keogh plans not subject to ERISA but subject to Section 4975 of the Code, or any
entity (including insurance company separate or general accounts) whose
underlying assets include plan assets by reason of such plans, arrangements or
accounts investing in the entity (each, a "Plan") are prohibited from engaging
in a broad range of transactions involving Plan assets and persons having
certain specified relationships to a Plan ("parties in interest" and
"disqualified persons"). Such transactions are treated as "prohibited
transactions" under Sections 406 of ERISA and excise taxes and/or other
penalties are imposed upon such persons under ERISA and/or Section 4975 of the
Code unless an exemption applies. The depositor, Underwriter, each master
servicer or other servicer, any insurer, the trustee, the indenture trustee and
certain of their affiliates might be considered "parties in interest" or
"disqualified persons" with respect to a Plan. If so, the acquisition, holding
or disposition of Securities by or on behalf of such Plan could be considered to
give rise to a "prohibited transaction" within the meaning of ERISA and the Code
unless a statutory, regulatory or administrative exception or exemption is
available.
ERISA CONSIDERATIONS RELATING TO CERTIFICATES
Plan Assets
In 29 C.R.F ss.2510.3-101 (the "Plan Asset Regulations"), the U.S.
Department of Labor ("DOL") has defined what constitutes "plan assets" for
purposes of ERISA and Section 4975 of the Code. The Plan Asset Regulations
provide that if a Plan makes an investment in an "equity interest" in an entity,
an undivided portion of the assets of the entity will be considered the assets
of such Plan unless certain exceptions set forth in such Regulations apply. The
Certificates will be deemed an equity interest for purposes of the Plan Asset
Regulations, and the depositor can give no assurance that the Certificates will
qualify for any of the exceptions under the Plan Asset Regulations. As a result,
(i) a Plan may be deemed to have acquired an interest in the Assets of the trust
fund and not merely an interest in the Certificates, (ii) the fiduciary
investment standards of ERISA could apply to such Assets and (iii) transactions
occurring in the course of managing, operating and servicing the trust fund and
its Assets might constitute prohibited transactions, unless a statutory,
regulatory or administrative exemption applies. Prohibited Transaction Class
Exemption 83-1
The DOL has issued an administrative exemption, Prohibited Transaction
Class Exemption 83-1 ("PTCE 83-1"), which under certain conditions exempts from
the application of the prohibited transaction rules of ERISA and the excise tax
provisions of Section 4975 of the Code transactions involving a Plan in
connection with the operation of a "mortgage pool" and the purchase, sale and
holding of Certificates which are "mortgage pool pass-through certificates." A
"mortgage pool" is defined as a fixed investment pool consisting solely of
interest-bearing obligations secured by first or second mortgages or deeds of
trust on single-family residential property, property acquired in foreclosure
and undistributed cash. A "mortgage pool pass-through certificate" is defined as
a Certificate which represents a beneficial undivided interest in a mortgage
pool which entitles the holder to pass through payments of principal and
interest from the mortgage loans. PTCE 83-1 requires that: (i) the depositor and
the trustee maintain a system of insurance or other protection for the mortgage
loans, the property securing such mortgage loans and for indemnifying holders of
Certificates against reductions in pass-through payments due to defaults in loan
payments or property damage in an amount at least equal to the greater of (x) 1%
of the aggregate principal balance of the mortgage loans or (y) 1% of the
principal balance of the largest covered pooled mortgage loans; (ii) the trustee
may not be an affiliate of the depositor; and (iii) the payments made to, and
retained by, the depositor in connection with the trust fund, together with all
funds inuring to its benefit for administering the trust fund, represent no more
than "adequate consideration" for selling the mortgage loans, plus reasonable
compensation for services provided to the trust fund. In addition, PTCE 83-1
exempts the initial sale of Certificates to a Plan with respect to which the
depositor, the insurer, the master servicer or other servicer or the trustee is
a party in interest if the Plan does not pay more than fair market value for
such Certificates and the rights and interests evidenced by such Certificates
are not subordinated to the rights and interests evidenced by other Certificates
of the same pool.
PTCE 83-1 also exempts from the prohibited transaction rules any
transactions in connection with the servicing and operation of the mortgage
pool, provided that any payments made to the master servicer in connection with
the servicing of the trust fund are made in accordance with a binding agreement,
copies of which must be made available to prospective Plan investors. In the
case of any Plan with respect to which the depositor, the master servicer, the
insurer or the trustee is a fiduciary, PTCE 83-1 will only apply if, in addition
to the other requirements: (i) the initial sale, exchange or transfer of
Certificates is expressly approved by an independent fiduciary who has authority
to manage and control those Plan assets being invested in Certificates; (ii) the
Plan pays no more for the Certificates than would be paid in an arm's-length
transaction; (iii) no investment management, advisory or underwriting fee, sales
commission or similar compensation is paid to the depositor with regard to the
sale, exchange or transfer of Certificates to the Plan; (iv) the total value of
the Certificates purchased by such Plan does not exceed 25% of the amount issued
and (v) at least 50% of the aggregate amount of Certificates is acquired by
persons independent of the depositor, the trustee, the master servicer and the
insurer. Before purchasing Certificates, a fiduciary of a Plan should confirm
that the trust fund is a "mortgage pool," that the Certificates constitute
"mortgage pool pass-through certificates" and that the conditions set forth in
PTCE 83-1 would be satisfied. In addition to making its own determination as to
the availability of the exemptive relief provided in PTCE 83-1, the Plan
fiduciary should consider the availability of any other prohibited transaction
exemptions. The Plan fiduciary should also consider its general fiduciary
obligations under ERISA in determining whether to purchase any Certificates on
behalf of a Plan pursuant to PTCE 83-1.
Underwriter Exemption
The DOL has granted to Deutsche Bank Alex. Brown an individual
exemption, Prohibited Transaction Exemption 94-84, and to Deutsche Morgan
Grenfell/C.J. Lawrence Inc., similar approval (FAN 97-03E), which were both
amended by Prohibited Transaction Exemption 97-34 ("PTE 97-34") and further
recently amended pursuant to Prohibited Transaction Exemption 2000-58 ("PTE
2000-58") (collectively, the "Exemption") which is applicable to Certificates
which meet its requirements whenever the Underwriter or its affiliate is the
sole underwriter, manager or co-manager of an underwriting syndicate or is the
selling or placement agent. The Exemption generally exempts certain transactions
from the application of certain of the prohibited transaction provisions of
ERISA and the Code provided that the conditions set forth in the Exemption are
satisfied. These transactions include the servicing, managing and operation of
investment trusts holding fixed (generally non-revolving pools) of enumerated
categories of assets which include: single and multi-family residential mortgage
loans, home equity loans or receivables (including cooperative housing loans),
manufactured housing loans and guaranteed government mortgage pool certificates
and the purchase, sale and holding of Certificates which represent beneficial
ownership interests in the assets of such trusts.
GENERAL CONDITIONS OF EXEMPTION
The Exemption sets forth general conditions which must be satisfied
for a transaction involving the purchase, sale and holding of the Certificates
to be eligible for exemptive relief thereunder. First, the acquisition of
Certificates by Plans must be on terms that are at least as favorable to the
Plan as they would be in an arm's-length transaction with an unrelated party.
Second, the Assets held by the trust fund must be fully secured (other than
one-to-four family residential mortgage loans and home equity loans or
receivables backing certain types of Certificates, as described below).
(Mortgage loans, loans, obligations and receivables will be collectively
referred to herein as "loans."). Third, unless the Certificates are issued in
"designated transactions" (as described below) and are backed by fully-secured
loans, they may not be subordinated. Fourth, the Certificates at the time of
acquisition by the Plan must generally be rated in one of the three (or in the
case of designated transactions, four) highest generic rating categories by
Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies,
Inc., Moody's Investors Services, Inc. or Fitch, Inc. (each, a "Rating Agency").
Fifth, the trustee and the indenture trustee generally cannot be affiliates of
any member of the "Restricted Group" which consists of any (i) underwriter as
defined in the Exemption, (ii) the depositor, (iii) the master servicer, (iv)
each servicer, (v) the insurer, (vi) the counterparty of any "interest swap" (as
described below) held as an Asset of the trust fund and (vii) any obligor with
respect to loans constituting more than 5% of the aggregate unamortized
principal balance of the loans held in the trust fund as of the date of initial
issuance of the Certificates. Sixth, the sum of all payments made to, and
retained by, such underwriters must represent not more than reasonable
compensation for underwriting the Certificates; the sum of all payments made to,
and retained by, the depositor pursuant to the assignment of the loans to the
related trust fund must represent not more than the fair market value of such
loans; and the sum of all payments made to, and retained by, the master servicer
and any servicer must represent not more than reasonable compensation for such
person's services under the Agreement and reimbursement of such person's
reasonable expenses in connection therewith. Seventh, (i) the investment pool
must consist only of assets of the type enumerated in the Exemption and which
have been included in other investment pools; (ii) Certificates evidencing
interests in such other investment pools must have been rated in one of the
three (or in the case of designated transactions, four) highest generic rating
categories by one of the Rating Agencies for at least one year prior to a Plan's
acquisition of Certificates; and (iii) Certificates evidencing interests in such
other investment pools must have been purchased by investors other than Plans
for at least one year prior to a Plan's acquisition of Certificates. Finally,
the investing Plan must be an accredited investor as defined in Rule 501(a)(1)
of Regulation D of the Commission under the Securities Act of 1933, as amended.
The depositor assumes that only Plans which are accredited investors under the
federal securities laws will be permitted to purchase the Certificates.
RECENT AMENDMENTS TO EXEMPTION
PTE 2000-58 (the "Amendment") recently amended the Exemption to make
the acquisition of Certificates by Plans in an initial offering or in a
secondary market transaction, the holding or transfer of Certificates and the
servicing, management and operation of the trust fund and its Assets on or after
November 13, 2000 eligible for exemptive relief to a broader range of
Certificates. Prior to such amendment, the Exemption generally permitted Plans
to purchase only unsubordindated Certificates rated within the highest three
generic rating categories backed by secured collateral. Such Certificates had to
be issued by a trust fund which was a grantor trust, REMIC or a FASIT whose
corpus could not include certain types of Assets such as interest-rate swaps.
TYPES OF TRUST FUNDS
The Amendment has expanded the types of permitted trust funds to
include owner-trusts, as well as grantor trusts, REMICs and FASITs. Owner-trusts
are subject to certain restrictions in their governing documents to ensure that
their Assets may not be reached by the creditors of the depositor in the event
of bankruptcy or other insolvency and must provide certain legal opinions.
DESIGNATED TRANSACTIONS
In the case where the Certificates are backed by trust fund Assets
which are residential, home equity, manufactured housing or multi-family loans
which are described and defined in the Exemption as designated transactions
("Designated Transactions"), the Amendment permits the Certificates issued by
the trust fund in such transactions to be rated in one of the highest four
generic rating categories by a Rating Agency and/or to be subordinated. The
Assets will qualify for Designated Transaction treatment under the Exemption
unless otherwise specified in the prospectus supplement. In addition, one subset
of Designated Transactions, residential (one- to-four family) and home equity
loans, may be less than fully secured, provided that the rights and interests
evidenced by Certificates issued in such Designated Transactions are: (a) not
subordinated to the rights and interests evidenced by Securities of the same
trust fund; (b) such Certificates acquired by the Plan have received a rating
from a Rating Agency at the time of such acquisition that is in one of the two
highest generic rating categories; and (c) any loan included in the corpus or
Assets of the trust fund is secured by collateral whose fair market value on the
closing date of the Designated Transactions is at least equal to 80% of the sum
of: (i) the outstanding principal balance due under the loan which is held by
the trust fund and (ii) the outstanding principal balance(s) of any other
loan(s) of higher priority (whether or not held by the trust fund) which are
secured by the same collateral.
INSURANCE COMPANY GENERAL ACCOUNTS
In the event that Certificates do not meet the requirements of the
Exemption solely because they are Subordinate Certificates or fail to meet a
minimum rating requirement under the Exemption, certain Plans may be eligible to
purchase Certificates pursuant to Section III of Prohibited Transaction Class
Exemption 95-60 ("PTCE 95-60") which permits insurance company general accounts
as defined in PTCE 95-60 to purchase such Certificates if they otherwise meet
all of the other requirements of the Exemption.
PERMITTED ASSETS
The Amendment permits an interest-rate swap to be an Asset of a trust
fund which issues Certificates acquired by Plans in an initial offering or in
the secondary market on or after November 13, 2000 and clarifies the
requirements regarding yield supplement agreements. An interest-rate swap (or if
purchased by or on behalf of the trust fund) an interest-rate cap contract
(collectively, a "Swap" or "Swap Agreement") is a permitted trust fund Asset if
it: (a) is an "eligible Swap;" (b) is with an "eligible counterparty;" (c) is
purchased by a "qualified plan investor;" (d) meets certain additional specific
conditions which depend on whether the Swap is a "ratings dependent Swap" or a
"non-ratings dependent Swap" and (e) permits the trust fund to make termination
payments to the Swap (other than currently scheduled payments) solely from
excess spread or amounts otherwise payable to the servicer or depositor.
An "eligible Swap" is one which: (a) is denominated in U.S. dollars;
(b) pursuant to which the trust fund pays or receives, on or immediately prior
to the respective payment or distribution date for the class of Certificates to
which the Swap relates, a fixed rate of interest or a floating rate of interest
based on a publicly available index (E.G., LIBOR or the U.S. Federal Reserve's
Cost of Funds Index (COFI)), with the trust fund receiving such payments on at
least a quarterly basis and obligated to make separate payments no more
frequently than the counterparty, with all simultaneous payments being netted
("Allowable Interest Rate"); (c) has a notional amount that does not exceed
either: (i) the principal balance of the class of Certificates to which the Swap
relates, or (ii) the portion of the principal balance of such class represented
by obligations ("Allowable Notional Amount"); (d) is not leveraged (I.E.,
payments are based on the applicable notional amount, the day count fractions,
the fixed or floating rates permitted above, and the difference between the
products thereof, calculated on a one-to-one ratio and not on a multiplier of
such difference) ("Leveraged"); (e) has a final termination date that is either
the earlier of the date on which the issuer terminates or the related class of
Certificates are fully repaid and (f) does not incorporate any provision which
could cause a unilateral alteration in the interest rate requirements described
above or the prohibition against leveraging.
An "eligible counterparty" means a bank or other financial institution
which has a rating at the date of issuance of the Certificates, which is in one
of the three highest long-term credit rating categories or one of the two
highest short-term credit rating categories, utilized by at least one of the
Rating Agencies rating the Certificates; provided that, if a counterparty is
relying on its short-term rating to establish eligibility hereunder, such
counterparty must either have a long-term rating in one of the three highest
long-term rating categories or not have a long-term rating from the applicable
Rating Agency.
A "qualified plan investor" is a Plan or Plans where the decision to
buy such class of Certificates is made on behalf of the Plan by an independent
fiduciary qualified to understand the Swap transaction and the effect the Swap
would have on the rating of the Certificates and such fiduciary is either (a) a
"qualified professional asset manager" ("QPAM") under Prohibited Transaction
Class Exemption 84-14 ("PTCE 84-14") (see below), (b) an "in-house asset
manager" under Prohibited Transaction Class Exemption 96-23 ("PTCE 96-23") (see
below) or (c) has total assets (both Plan and non-Plan) under management of at
least $100 million at the time the Certificates are acquired by the Plan.
In "ratings dependent Swaps" (where the rating of a class of
Certificates is dependent on the terms and conditions of the Swap), the Swap
Agreement must provide that if the credit rating of the counterparty is
withdrawn or reduced by any Rating Agency below a level specified by the Rating
Agency, the servicer must, within the period specified under the Swap Agreement:
(a) obtain a replacement Swap Agreement with an eligible counterparty which is
acceptable to the Rating Agency and the terms of which are substantially the
same as the current Swap Agreement (at which time the earlier Swap Agreement
must terminate); or (b) cause the Swap counterparty to establish any
collateralization or other arrangement satisfactory to the Rating Agency such
that the then current rating by the Rating Agency of the particular class of
Certificates will not be withdrawn or reduced (and the terms of the Swap
Agreement must specifically obligate the counterparty to perform these duties
for any class of Certificates with a term of more than one year). In the event
that the servicer fails to meet these obligations, Plan certificateholders must
be notified in the immediately following periodic report which is provided to
certificateholders but in no event later than the end of the second month
beginning after the date of such failure. Sixty days after the receipt of such
report, the exemptive relief provided under the Exemption will prospectively
cease to be applicable to any class of Certificates held by a Plan which
involves such ratings dependent Swap.
"Non-ratings dependent Swaps" (those where the rating of the
Certificates does not depend on the terms and conditions of the Swap) are
subject to the following conditions. If the credit rating of the counterparty is
withdrawn or reduced below the lowest level permitted above, the servicer will,
within a specified period after such rating withdrawal or reduction: (a) obtain
a replacement Swap Agreement with an eligible counterparty, the terms of which
are substantially the same as the current Swap Agreement (at which time the
earlier Swap Agreement must terminate); (b) cause the counterparty to post
collateral with the trust fund in an amount equal to all payments owed by the
counterparty if the Swap transaction were terminated; or (c) terminate the Swap
Agreement in accordance with its terms.
An "eligible yield supplement agreement" is any yield supplement
agreement or similar arrangement (or if purchased by or on behalf of the trust
fund) an interest rate cap contract to supplement the interest rates otherwise
payable on obligations held by the trust fund ("EYS Agreement"). If the EYS
Agreement has a notional principal amount and/or is written on an International
Swaps and Derivatives Association, Inc. (ISDA) form, the EYS Agreement may only
be held as an Asset of the trust fund with respect to Certificates purchased by
Plans on or after April 7, 1998 if it meets the following conditions: (a) it is
denominated in U.S. dollars; (b) it pays an Allowable Interest Rate; (c) it is
not Leveraged; (d) it does not allow any of these three preceding requirements
to be unilaterally altered without the consent of the trustee; (e) it is entered
into between the trust fund and an eligible counterparty and (f) it has an
Allowable Notional Amount.
PRE-FUNDING ACCOUNTS
The Exemption was amended by PTE 97-34 to extend exemptive relief to
Certificates issued in transactions using pre-funding accounts whereby a portion
of the loans backing the Certificates are transferred to the trust fund within a
specified period following the closing date ("DOL Pre-Funding Period") (see
below) instead of requiring that all such loans be either identified or
transferred on or before the closing date. The relief is effective for
transactions occurring on or after May 23, 1997 provided that the following
conditions are met. First, the ratio of the amount allocated to the Pre-Funding
Account to the total principal amount of the Certificates being offered
("Pre-Funding Limit") must not exceed twenty-five percent (25%). Second, all
loans transferred after the closing date (referred to here as "additional
loans") must meet the same terms and conditions for eligibility as the original
loans used to create the trust fund, which terms and conditions have been
approved by the Rating Agency. Third, the transfer of such additional loans to
the trust fund during the DOL Pre-Funding Period must not result in the
Certificates receiving a lower credit rating from the Rating Agency upon
termination of the DOL Pre-Funding Period than the rating that was obtained at
the time of the initial issuance of the Certificates by the trust fund. Fourth,
solely as a result of the use of pre-funding, the weighted average annual
percentage interest rate (the "average interest rate") for all of the loans in
the trust fund at the end of the DOL Pre-Funding Period must not be more than
100 basis points lower than the average interest rate for the loans which were
transferred to the trust fund on the closing date. Fifth, either: (i) the
characteristics of the additional loans must be monitored by an insurer or other
credit support provider which is independent of the depositor; or (ii) an
independent accountant retained by the depositor must provide the depositor with
a letter (with copies provided to the Rating Agency, the underwriter and the
trustee) stating whether or not the characteristics of the additional loans
conform to the characteristics described in the Prospectus, Prospectus
Supplement, Private Placement Memorandum ("Offering Documents") and/or the
Agreement. In preparing such letter, the independent accountant must use the
same type of procedures as were applicable to the loans which were transferred
as of the closing date. Sixth, the DOL Pre-Funding Period must end no later than
three months or 90 days after the closing date or earlier, in certain
circumstances, if the amount on deposit in the Pre-Funding Account is reduced
below the minimum level specified in the Agreement or an event of default occurs
under the Agreement. Seventh, amounts transferred to any Pre-Funding Account
and/or Capitalized Interest Account used in connection with the pre-funding may
be invested only in investments which are permitted by the Rating Agency and (i)
are direct obligations of, or obligations fully guaranteed as to timely payment
of principal and interest by, the United States or any agency or instrumentality
thereof (provided that such obligations are backed by the full faith and credit
of the United States); or (ii) have been rated (or the obligor has been rated)
in one of the three highest generic rating categories by the Rating Agency
("Acceptable Investments"). Eighth, certain disclosure requirements must be met.
REVOLVING POOL FEATURES
The Exemption only covers Certificates backed by "fixed" pools of
loans which require that all the loans must be transferred to the trust fund or
identified at closing (or transferred within the DOL Pre-Funding Period, if
pre-funding meeting the conditions described above is used). Accordingly,
Certificates issued by trust funds which feature revolving pools of Assets will
not be eligible for a purchase by Plans. However, Securities which are Notes
backed by revolving pools of Assets may be eligible for purchase by Plans
pursuant to certain other prohibited transaction exemptions. See discussion
below in "ERISA Considerations Relating to Notes."
LIMITATIONS ON SCOPE OF THE EXEMPTION
If the general conditions of the Exemption are satisfied, the
Exemption may provide an exemption from the restrictions imposed by ERISA and
the Code in connection with the initial acquisition, transfer or holding, and
the acquisition or disposition in the secondary market, of the Certificates by
Plans. However, no exemption is provided from the restrictions of ERISA for the
acquisition or holding of a Certificates on behalf of an "Excluded Plan" by any
person who is a fiduciary with respect to the assets of such Excluded Plan. For
those purposes, an Excluded Plan is a Plan sponsored by any member of the
Restricted Group. Exemptive relief may also be provided for the acquisition,
holding and disposition of Certificates by Plans if the fiduciary or its
affiliate is the obligor with respect to 5% or less of the fair market value of
the Loans in the trust fund provided that: (i) the Plan is not an Excluded Plan,
(ii) each Plan's investment in each class of Certificates does not exceed 25% of
the outstanding Certificates in the class, (iii) after the Plan's acquisition of
the Certificates, no more than 25% of the assets over which the fiduciary has
investment authority are invested in Certificates of a trust containing assets
which are sold or serviced by the same entity and (iv) in the case of initial
issuance (but not secondary market transactions), at least 50% of each class of
Certificates and at least 50% of the aggregate interests in the trust fund are
acquired by persons independent of the Restricted Group.
ERISA CONSIDERATIONS RELATING TO NOTES
Under the Plan Asset Regulations, the Assets of the trust fund would
be treated as "plan assets" of a Plan for the purposes of ERISA and the Code
only if the Plan acquires an "equity interest" in the trust fund and none of the
exceptions contained in the Plan Asset Regulations is applicable. An equity
interest is defined under the Plan Asset Regulations as an interest other than
an instrument which is treated as indebtedness under applicable local law and
which has no substantial equity features. Assuming that the Notes are treated as
indebtedness without substantial equity features for purposes of the Plan Asset
Regulations, then such Notes will be eligible for purchase by Plans. However,
without regard to whether the Notes are treated as an "equity interest" for such
purposes, the acquisition or holding of Notes by or on behalf of a Plan could be
considered to give rise to a prohibited transaction if the trust fund or any of
its affiliates is or becomes a party in interest or disqualified person with
respect to such Plan, or in the event that a Note is purchased in the secondary
market and such purchase constitutes a sale or exchange between a Plan and a
party in interest or disqualified person with respect to such Plan. There can be
no assurance that the trust fund or any of its affiliates will not be or become
a party in interest or a disqualified person with respect to a Plan that
acquires Notes.
The Amendment to the Exemption permits trust funds which are grantor
trusts, owner-trusts, REMICs or FASITs to issue Notes, as well as Certificates,
provided a legal opinion is received to the effect that the noteholders have a
perfected security interest in the trust fund's Assets. The exemptive relief
provided under the Exemption for any prohibited transactions which could be
caused as a result of the operation, management or servicing of the trust fund
and its Assets would not be necessary with respect to Notes with no substantial
equity features which are issued as obligations of the trust fund. However,
effective for the acquisition, holding or transfer of Notes between a Plan and a
party in interest which occurs on or after November 13, 2000, the Exemption
would provide prohibited transaction exemptive relief, provided that the same
conditions of the Exemption described above relating to Certificates are met
with respect to the Notes. The same limitations of such exemptive relief
relating to acquisitions of Certificates by fiduciaries with respect to Excluded
Plans would also be applicable to the Notes as described herein in "LIMITATIONS
ON SCOPE OF THE EXEMPTION."
In the event that the Exemption is not applicable to the Notes, one or
more other prohibited transactions exemptions may be available to Plans
purchasing or transferring the Notes depending in part upon the type of Plan
fiduciary making the decision to acquire the Notes and the circumstances under
which such decision is made. These exemptions include, but are not limited to,
Prohibited Transaction Class Exemption 90-1 (regarding investments by insurance
company pooled separate accounts), Prohibited Transaction Class Exemption 91-38
(regarding investments by bank collective investments funds), PTCE 84-14
(regarding transactions effected by "qualified professional asset managers"),
PTCE 95-60 (regarding investments by insurance company general accounts) and
PTCE 96-23 (regarding transactions effected by "in-house asset managers")
(collectively, the "Investor-Based Exemptions"). However, even if the conditions
specified in these Investor-Based Exemptions are met, the scope of the relief
provided under such Exemptions might or might not cover all acts which might be
construed as prohibited transactions.
EACH PROSPECTUS SUPPLEMENT WILL CONTAIN INFORMATION CONCERNING
CONSIDERATIONS RELATING TO ERISA AND THE CODE THAT ARE APPLICABLE TO THE RELATED
SECURITIES. BEFORE PURCHASING SECURITIES IN RELIANCE ON PTCE 83-1, THE
EXEMPTION, THE INVESTOR-BASED EMEMPTIONS OR ANY OTHER EXEMPTION, A FIDUCIARY OF
A PLAN SHOULD ITSELF CONFIRM THAT REQUIREMENTS SET FORTH IN SUCH EXEMPTION WOULD
BE SATISFIED.
ANY PLAN INVESTOR WHO PROPOSES TO USE "PLAN ASSETS" OF ANY PLAN TO
PURCHASE SECURITIES OF ANY SERIES OR CLASS SHOULD CONSULT WITH ITS COUNSEL WITH
RESPECT TO THE POTENTIAL CONSEQUENCES UNDER ERISA AND SECTION 4975 OF THE CODE
OF THE ACQUISITION AND OWNERSHIP OF SUCH SECURITIES.
Governmental plans and church plans as defined in ERISA are not
subject to ERISA or Code Section 4975, although they may elect to be qualified
under Section 401(a) of the Code and exempt from taxation under Section 501(a)
of the Code and would then be subject to the prohibited transaction rules set
forth in Section 503 of the Code. In addition, governmental plans may be subject
to federal, state and local laws which are to a material extent similar to the
provisions of ERISA or a Code Section 4975 ("Similar Law"). A fiduciary of a
governmental plan should make its own determination as to the propriety of an
investment in Securities under applicable fiduciary or other investment
standards and the need for the availability of any exemptive relief under any
Similar Law.
LEGAL INVESTMENT
The prospectus supplement will specify which classes of the Notes or
Certificates, as applicable, if any, will constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984, as amended ("SMMEA"). Generally, only classes of Offered Notes or Offered
Certificates, as applicable, that (1) are rated in one of the two highest rating
categories by one or more rating agencies and (2) are part of a series
representing interests in, or secured by, a trust fund consisting of loans
secured by first liens on real property and originated by particular types of
originators specified in SMMEA, will be "mortgage related securities" for
purposes of SMMEA.
Those classes of Offered Notes or Offered Certificates, as applicable,
qualifying as "mortgage related securities" will constitute legal investments
for persons, trusts, corporations, partnerships, associations, business trusts
and business entities (including, but not limited to, state chartered savings
banks, commercial banks, savings and loan associations and insurance companies,
as well as trustees and state government employee retirement systems) created
pursuant to or existing under the laws of the United States or of any state
(including the District of Columbia and Puerto Rico) whose authorized
investments are subject to state regulation to the same extent that, under
applicable law, obligations issued by or guaranteed as to principal and interest
by the United States or any agency or instrumentality of the United States
constitute legal investments for those entities. Pursuant to SMMEA, a number of
states enacted legislation, on or before the October 3, 1991 cut-off for those
enactments, limiting to varying extents the ability of some entities (in
particular, insurance companies) to invest in mortgage related securities
secured by liens on residential, or mixed residential and commercial,
properties, in most cases by requiring the affected investors to rely solely
upon existing state law, and not SMMEA.
SMMEA also amended the legal investment authority of
federally-chartered depository institutions as follows: federal savings and loan
associations and federal savings banks may invest in, sell or otherwise deal in
"mortgage related securities" without limitation as to the percentage of their
assets represented thereby, federal credit unions may invest in these
securities, and national banks may purchase these securities for their own
account without regard to the limitations generally applicable to investment
securities set forth in 12 U.S.C. ss.24 (Seventh), subject in each case to
regulations that the applicable federal regulatory authority may prescribe. In
this connection, the Office of the Comptroller of the Currency (the "OCC") has
amended 12 C.F.R. Part 1 to authorize national banks to purchase and sell for
their own account, without limitation as to a percentage of the bank's capital
and surplus (but subject to compliance with general standards concerning "safety
and soundness" and retention of credit information in 12 C.F.R. ss.1.5), some
"Type IV securities," defined in 12 C.F.R. ss.1.2(l) to include some
"residential mortgage related securities." As so defined, "residential
mortgage-related security" means, in relevant part, "mortgage related security"
within the meaning of SMMEA. The National Credit Union Administration ("NCUA")
has adopted rules, codified at 12 C.F.R. Part 703, which permit federal credit
unions to invest in "mortgage related securities" under some limited
circumstances, other than stripped mortgage related securities, residual
interests in mortgage related securities, and commercial mortgage related
securities, unless the credit union has obtained written approval from the NCUA
to participate in the "investment pilot program" described in 12 C.F.R.
ss.703.140. Thrift institutions that are subject to the jurisdiction of the
Office of Thrift Supervision (the "OTS") should consider the OTS' Thrift
Bulletin 13a (December 1, 1998), "Management of Interest Rate Risk, Investment
Securities, and Derivatives Activities," before investing in any of the Offered
Notes or Offered Certificates, as applicable.
All depository institutions considering an investment in the
Certificates should review the "Supervisory Policy Statement on Investment
Securities and End-User Derivatives Activities" (the "1998 Policy Statement") of
the Federal Financial Institutions Examination Council ("FFIEC"), which has been
adopted by the Board of Governors of the Federal Reserve System, the Federal
Deposit Insurance Corporation, the OCC and the OTS, effective May 26, 1998, and
by the NCUA, effective October 1, 1998. The 1998 Policy Statement sets forth
general guidelines which depository institutions must follow in managing risks
(including market, credit, liquidity, operational (transaction), and legal
risks) applicable to all securities (including mortgage pass-through securities
and mortgage-derivative products) used for investment purposes.
If specified in the prospectus supplement, other classes of Offered
Notes or Offered Certificates, as applicable, offered pursuant to this
prospectus will not constitute "mortgage related securities" under SMMEA. The
appropriate characterization of those classes under various legal investment
restrictions, and thus the ability of investors subject to these restrictions to
purchase these Offered Notes or Offered Certificates, as applicable, may be
subject to significant interpretive uncertainties.
Institutions whose investment activities are subject to regulation by
federal or state authorities should review rules, policies and guidelines
adopted from time to time by those authorities before purchasing any Offered
Notes or Offered Certificates, as applicable, as some classes or subclasses may
be deemed unsuitable investments, or may otherwise be restricted, under those
rules, policies or guidelines (in some instances irrespective of SMMEA).
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, "prudent investor" provisions, percentage-of-assets limits provisions that
may restrict or prohibit investment in securities that are not "interest
bearing" or "income paying," and with regard to any Offered Notes or Offered
Certificates, as applicable, issued in book-entry form, provisions that may
restrict or prohibit investments in securities that are issued in book-entry
form.
Except as to the status of some classes of Offered Notes or Offered
Certificates, as applicable, as "mortgage related securities," no representation
is made as to the proper characterization of the Offered Notes or Offered
Certificates, as applicable, for legal investment, financial institution
regulatory, or other purposes, or as to the ability of particular investors to
purchase any Offered Notes or Offered Certificates, as applicable, under
applicable legal investment restrictions. The uncertainties described above (and
any unfavorable future determinations concerning legal investment or financial
institution regulatory characteristics of the Offered Notes or Offered
Certificates, as applicable,) may adversely affect the liquidity of the Offered
Notes or Offered Certificates, as applicable.
Accordingly, all investors whose investment activities are subject to
legal investment laws and regulations, regulatory capital requirements or review
by regulatory authorities should consult with their own legal advisors in
determining whether and to what extent the Offered Notes or Offered
Certificates, as applicable, of any class constitute legal investments for them
or are subject to investment, capital or other restrictions, and, if applicable,
whether SMMEA has been overridden in any jurisdiction relevant to that investor.
METHODS OF DISTRIBUTION
The Notes or Certificates, as applicable, offered by this prospectus
and by the supplements to this prospectus will be offered in series. The
distribution of the Notes or Certificates, as applicable, may be effected from
time to time in one or more transactions, including negotiated transactions, at
a fixed public offering price or at varying prices to be determined at the time
of sale or at the time of commitment therefor. If specified in the prospectus
supplement, the Notes or Certificates, as applicable, will be distributed in a
firm commitment underwriting, subject to the terms and conditions of the
underwriting agreement, by Deutsche Bank Securities Inc. ("DBSI") acting as
underwriter with other underwriters, if any, named in the underwriting
agreement. In that event, the prospectus supplement may also specify that the
underwriters will not be obligated to pay for any Notes or Certificates, as
applicable, agreed to be purchased by purchasers pursuant to purchase agreements
acceptable to the depositor. In connection with the sale of the Notes or
Certificates, as applicable, underwriters may receive compensation from the
depositor or from purchasers of the Notes or Certificates, as applicable, in the
form of discounts, concessions or commissions. The prospectus supplement will
describe any compensation paid by the depositor.
Alternatively, the prospectus supplement may specify that the Notes or
Certificates, as applicable, will be distributed by DBSI acting as agent or in
some cases as principal with respect to Notes or Certificates, as applicable,
that it has previously purchased or agreed to purchase. If DBSI acts as agent in
the sale of Notes or Certificates, as applicable, DBSI will receive a selling
commission for each series of Notes or Certificates, as applicable, depending on
market conditions, expressed as a percentage of the total principal balance of
the related mortgage loans as of the Cut-off Date. The exact percentage for each
series of Notes or Certificates, as applicable, will be disclosed in the
prospectus supplement. To the extent that DBSI elects to purchase Notes or
Certificates, as applicable, as principal, DBSI may realize losses or profits
based upon the difference between its purchase price and the sales price. The
prospectus supplement for any series offered other than through underwriters
will contain information regarding the nature of that offering and any
agreements to be entered into between the depositor and purchasers of Notes or
Certificates, as applicable, of that series.
The depositor will indemnify DBSI and any underwriters against
particular civil liabilities, including liabilities under the Securities Act of
1933, or will contribute to payments DBSI and any underwriters may be required
to make in respect of these civil liabilities.
In the ordinary course of business, DBSI and the depositor may engage
in various securities and financing transactions, including repurchase
agreements to provide interim financing of the depositor's mortgage loans
pending the sale of those mortgage loans or interests in those mortgage loans,
including the Notes or Certificates, as applicable. DBSI performs management
services for the depositor.
The depositor anticipates that the Notes or Certificates, as
applicable, will be sold primarily to institutional investors. Purchasers of
Notes or Certificates, as applicable, including dealers, may, depending on the
facts and circumstances of those purchases, be deemed to be "underwriters"
within the meaning of the Securities Act of 1933 in connection with reoffers and
sales by them of Notes or Certificates, as applicable. securityholders should
consult with their legal advisors in this regard before any reoffer or sale of
Notes or Certificates, as applicable.
As to each series of Notes or Certificates, as applicable, only those
classes rated in one of the four highest rating categories by any rating agency
will be offered by this prospectus. Any lower rated or unrated class may be
initially retained by the depositor, and may be sold by the depositor at any
time to one or more institutional investors.
ADDITIONAL INFORMATION
The Depositor has filed with the Commission a registration statement
on Form S-3 under the Securities Act of 1933, as amended, with respect to the
Notes or Certificates, as applicable, (the "Registration Statement"). This
prospectus, which forms a part of the Registration Statement, omits some of the
information contained in the Registration Statement pursuant to the rules and
regulations of the Commission. The Registration Statement and the exhibits to
the Registration Statement can be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, and at Regional Offices in the following locations:
o Chicago Regional Office, Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511; and
o New York Regional Office, 7 World Trade Center, Suite 1300, New
York, New York 10048.
Copies of these materials can also be obtained from the Public Reference Section
of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates.
The Commission also maintains a site on the world wide web at
"http://www.sec.gov" at which users can view and download copies of reports,
proxy and information statements and other information filed electronically
through the Electronic Data Gathering, Analysis and Retrieval ("EDGAR") system.
The Depositor has filed the Registration Statement, including all exhibits to
the Registration Statement, through the EDGAR system and therefore these
materials should be available by logging onto the Commission's web site. The
Commission maintains computer terminals providing access to the EDGAR system at
each of the offices referred to above.
Copies of the most recent Fannie Mae prospectus for Fannie Mae
certificates and Fannie Mae's annual report and quarterly financial statements
as well as other financial information are available from the Director of
Investor Relations of Fannie Mae, 3900 Wisconsin Avenue, N.W., Washington, D.C.
20016 (202-752-7115). The Depositor did not participate in the preparation of
Fannie Mae's prospectus or its annual or quarterly reports or other financial
information and, accordingly, makes no representation as to the accuracy or
completeness of the information in those documents.
Copies of the most recent Offering Circular for Freddie Mac
certificates as well as Freddie Mac's most recent Information Statement and
Information Statement supplement and any quarterly report made available by
Freddie Mac may be obtained by writing or calling the Investor Inquiry
Department of Freddie Mac at 8200 Jones Branch Drive, McLean, Virginia 22102
(outside Washington, D.C. metropolitan area, telephone 800-336-3672; within
Washington, D.C. metropolitan area, telephone 703-759-8160). The Depositor did
not participate in the preparation of Freddie Mac's Offering Circular,
Information Statement or any supplement to the Information Statement or any
quarterly report of the Information Statement and, accordingly, makes no
representation as to the accuracy or completeness of the information in those
documents.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents subsequently filed by or on behalf of the trust fund
referred to in the prospectus supplement with the Commission pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act, after the date of this prospectus
and prior to the termination of any offering of the Notes or Certificates, as
applicable, issued by that trust fund will be deemed to be incorporated by
reference in this prospectus and to be a part of this prospectus from the date
of the filing of those documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference in this prospectus will
be deemed to be modified or superseded for all purposes of this prospectus to
the extent that a statement contained in this prospectus (or in the prospectus
supplement) or in any other subsequently filed document that also is or is
deemed to be incorporated by reference modifies or replaces that statement. Any
statement so modified or superseded will not be deemed, except as so modified or
superseded, to constitute a part of this prospectus.
The Trustee on behalf of any trust fund will provide without charge to
each person to whom this prospectus is delivered, upon request, a copy of any or
all of the documents referred to above that have been or may be incorporated by
reference in this prospectus (not including exhibits to the information that is
incorporated by reference unless the exhibits are specifically incorporated by
reference into the information that this prospectus incorporates). Requests for
information should be directed to the corporate trust office of the Trustee
specified in the prospectus supplement.
LEGAL MATTERS
Certain legal matters, including the federal income tax consequences
to securityholders of an investment in the Notes or Certificates, as applicable,
of a series, will be passed upon for the depositor by Stroock & Stroock & Lavan
LLP, Washington, D.C.
FINANCIAL INFORMATION
A new trust fund will be formed for each series of Notes or
Certificates, as applicable, and no trust fund will engage in any business
activities or have any assets or obligations before the issuance of the related
series of Notes or Certificates, as applicable. Accordingly, financial
statements for a trust fund will generally not be included in this prospectus or
in the prospectus supplement.
RATING
As a condition to the issuance of any class of Offered Notes or
Offered Certificates, as applicable, they must not be rated lower than
investment grade; that is, they must be rated in one of the four highest rating
categories, by a rating agency.
Ratings on mortgage pass-through certificates and mortgage-backed
notes address the likelihood of receipt by securityholders of all distributions
on the underlying mortgage loans. These ratings address the structural, legal
and issuer-related aspects associated with the Notes or Certificates, as
applicable, the nature of the underlying assets and the credit quality of the
guarantor, if any. Ratings on mortgage pass-through certificates,
mortgage-backed notes and other asset backed securities do not represent any
assessment of the likelihood of principal prepayments by borrowers or of the
degree by which prepayments might differ from those originally anticipated. As a
result, securityholders might suffer a lower than anticipated yield, and, in
addition, holders of stripped interest certificates in extreme cases might fail
to recoup their initial investments.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating.
INDEX OF DEFINED TERMS
1986 Act......................................................99
1998 Policy Statement........................................149
Accrual Period................................................20
Accrual Securities............................................27
Accrued Security Interest.....................................30
Adjustable Rate Assets.........................................3
Agency Securities..............................................3
Agreement.....................................................44
ARM Loans......................................................7
Asset Conservation Act........................................85
Asset Group...................................................27
Asset Seller...................................................3
Available Distribution Amount.................................28
Balloon Payment Assets.........................................4
Bankruptcy Code...............................................82
Beneficial Owner..............................................37
Bi-weekly Assets...............................................4
Book-Entry Securities.........................................28
borrower......................................................74
Buy Down Assets................................................4
Buydown Funds.................................................98
Buydown Mortgage Loans........................................24
Buydown Period................................................24
Capitalized Interest Account..................................18
Cash Flow Agreement...........................................19
Cedel.........................................................37
CERCLA........................................................83
Certificates..................................................27
Charter Act...................................................13
Code..........................................................93
Collection Account............................................48
Commission.....................................................7
contract borrower.............................................76
contract lender...............................................76
Convertible Assets.............................................4
Cooperative...................................................75
Cooperative Corporation.......................................39
Cooperative Loans.............................................75
Cooperatives...................................................5
Covered Trust.................................................70
CPR...........................................................22
credit support................................................18
Crime Control Act.............................................88
Cut-off Date...................................................6
DBS..........................................................150
Debt Securities...............................................94
defective obligation..........................................96
Definitive Securities.........................................28
Determination Date............................................28
Disqualified Holder..........................................125
Disqualified Organization....................................113
Distribution Date.............................................20
DOL..........................................................143
DTC...........................................................37
Due Period....................................................29
EDGAR........................................................152
Eligible Corporation.........................................125
ERISA........................................................142
Euroclear.....................................................37
Euroclear Operator............................................39
European Depositaries.........................................40
excess servicing.............................................130
Exchange Act..................................................38
Excluded Plan................................................145
Exemption....................................................143
Fannie Mae.....................................................3
FASIT.........................................................94
FASIT Ownership Security.....................................121
FASIT Provisions..............................................94
FASIT Regular Securities.....................................121
FASIT Securities..............................................94
FDIC..........................................................48
FFIEC........................................................149
FHA............................................................6
Financial Intermediary........................................40
Fitch........................................................144
Freddie Mac....................................................3
Freddie Mac Act...............................................14
Freddie Mac Certificate Group.................................14
Garn-St. Germain Act..........................................85
GEM Assets.....................................................4
Ginnie Mae.....................................................3
GPM Assets.....................................................4
Grantor Trust Fund............................................94
Grantor Trust Securities......................................94
Home Equity Loans..............................................5
Housing Act...................................................11
HUD...........................................................58
Increasing Payment Asset.......................................4
Indirect Participants.........................................38
Insurance Proceeds............................................29
Interest Rate.................................................30
Interest Reduction Assets......................................4
land sale contract............................................76
Land Sale Contracts............................................5
Level Payment Assets...........................................3
Liquidation Proceeds..........................................29
Loan-to-Value Ratio............................................6
Lock-out Date..................................................8
Lock-out Period................................................8
Mark to Market Regulations...................................115
Mortgage Securities............................................3
Mortgaged Properties...........................................5
Mortgages......................................................6
NCUA.........................................................149
new partnership..............................................138
New Regulations..............................................119
Non-Equity Securities........................................146
Non-Pro Rata Security.........................................99
Nonrecoverable Advance........................................33
Non-U.S. Person..............................................119
Notes.........................................................27
OCC..........................................................149
Offered Securities............................................27
OID Regulations...........................................94, 99
old partnership..............................................138
Participants..................................................38
Parties in Interest..........................................143
Partnership Securities........................................94
Partnership Trust Fund........................................94
Pass-Through Entity..........................................113
PCBs..........................................................83
Permitted Investments.........................................49
Plans........................................................142
pooling and servicing agreement...............................44
Pre-Funded Amount.............................................17
Pre-Funding Account...........................................17
Pre-Funding Limit............................................147
Pre-Funding Period............................................17
prepayment....................................................22
Prepayment Assumption........................................100
PTCE.........................................................146
Purchase Price................................................46
RCRA..........................................................84
Record Date...................................................28
Refinance Loans................................................6
Registration Statement.......................................151
Regular Securities............................................95
Regular Securityholder........................................99
Related Proceeds..............................................33
Relevant Depositary...........................................40
Relief Act....................................................88
REMIC.........................................................93
REMIC Pool....................................................94
REMIC Regulations.............................................94
REMIC Securities..............................................43
REO Property..................................................34
Residual Securities...........................................95
Restricted Group.............................................144
Retained Interest.............................................60
Revolving Credit Line Loans....................................8
RICO..........................................................88
Rules.........................................................40
S&P..........................................................144
SBJPA of 1996.................................................98
secured-creditor exemption....................................84
Securities....................................................27
Security Balance..............................................31
Senior Securities.............................................27
Servicemen's Readjustment Act.................................17
Servicing Standard............................................52
Single Family Property.........................................5
SMMEA........................................................148
SPA...........................................................22
Special servicer..............................................62
Standard Securities..........................................127
Startup Day...................................................95
Step-up Rate Assets............................................4
Strip Securities..............................................27
Stripped Agency Securities....................................15
Stripped Securities..........................................127
Subordinate Securities........................................27
Subsequent Assets.............................................17
Superliens....................................................83
super-premium................................................100
Taxable Mortgage Pools........................................94
Terms and Conditions..........................................40
thrift institutions..........................................112
Tiered REMICs.................................................98
Title V.......................................................87
Title VIII....................................................87
U.S. Person..................................................114
UCC...........................................................38
UST...........................................................84
VA.............................................................6
VA Guaranty Policy............................................59
Value..........................................................6
Warranting Party..............................................47
Yield Considerations..........................................31
SUBJECT TO COMPLETION, [ ]
PROSPECTUS SUPPLEMENT (to prospectus dated [ ])
$[ ] (APPROXIMATE)
ACE SECURITIES CORP.
[ ] TRUST [ ]
ASSET BACKED NOTES
[ ]
SERVICER
The information in this prospectus supplement is not complete and may
be changed. We may not sell these securities until the registration statement
filed with the Securities and Exchange Commission is effective. This prospectus
supplement is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-[ ] OF THIS
PROSPECTUS SUPPLEMENT AND ON PAGE [ ] OF THE PROSPECTUS.
For a list of capitalized terms used in this prospectus supplement and
the prospectus, see the glossary of defined terms beginning on page S-[ ] of
this prospectus supplement and on page [ ] of the prospectus.
The notes will represent obligations of the trust only and will not
represent interests in or obligations of any other entity.
This prospectus supplement may be used to offer and sell the notes
only if accompanied by the prospectus.
The trust will issue the following notes:
ORIGINAL CLASS INTEREST PRICE UNDERWRITING PROCEEDS
CLASS PRINCIPAL AMOUNT(1) RATE(2) TO PUBLIC DISCOUNT TO DEPOSITOR
- ----- ------------------- -------- --------- -------- ------------
[ ] $[ ] [ ]% $[ ] [ ]% $[ ]
- ------------------
(1) This amount is approximate, as described in this prospectus supplement.
(2) The interest rate is subject to increase as described in this prospectus
supplement
This prospectus supplment and the accompanying prospectus relate only
to the offering of the notes and not to the residual certificate that will be
issued by the trust as described in the prospectus supplement.
[Describe assets of trust fund.]
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THE NOTES OR DETERMINED THAT
THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS IS ACCURATE OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
[Describe underwriting arrangements.]
On or about [ ], delivery of the notes offered by this prospectus
supplement will be made through the book-entry facilities of The Depository
Trust Company.
UNDERWRITER:
DEUTSCHE BANC ALEX. BROWN
The date of this prospectus supplement is [ ]
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS:
We provide information to you about the notes offered by this
prospectus supplement in two separate documents that progressively provide more
detail: (1) the accompanying prospectus, which provides general information,
some of which may not apply to your notes, and (2) this prospectus supplement,
which describes the specific terms of your notes.
IF INFORMATION VARIES BETWEEN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS, YOU SHOULD RELY ON THE INFORMATION IN THIS PROSPECTUS
SUPPLEMENT.
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We have
not authorized anyone to provide you with different information.
We are not offering the notes in any state where the offer is not
permitted. We do not claim that the information in this prospectus supplement
and prospectus is accurate as of any date other than the dates stated on their
respective covers.
------------------------------------
Dealers will deliver a prospectus supplement and prospectus when
acting as underwriters of the notes and with respect to their unsold allotments
or subscriptions. In addition, all dealers selling the notes will be required to
deliver a prospectus supplement and prospectus for ninety days following the
date of this prospectus supplement.
------------------------------------
We include cross-references in this prospectus supplement and the
accompanying prospectus to captions in these materials where you can find
further related discussions. The following tables of contents and the table of
contents included in the accompanying prospectus provide the pages on which
these captions are located.
TABLES OF CONTENTS
PROSPECTUS SUPPLEMENT
PAGE
----
Summary of Terms...................................................S-4
Risk Factors.......................................................S-8
Description of the Trust..........................................S-12
Description of the Notes..........................................S-12
[The Insurance Policy.............................................S-17
Description of the Mortgage Pool..................................S-18
Additional Information............................................S-25
The Originator....................................................S-25
The Servicer......................................................S-25
Description of the Transfer and Servicing
Agreements.......................................................S-26
Yield Considerations..............................................S-32
Material Federal Income Tax Considerations........................S-39
State and Local Income Tax Considerations.........................S-39
ERISA Considerations..............................................S-39
Legal Investment Considerations...................................S-40
Use of Proceeds...................................................S-40
Underwriting......................................................S-40
Experts...........................................................S-41
Legal Matters.....................................................S-41
Ratings...........................................................S-41
Glossary of Defined Terms.........................................S-43
Annex I...........................................................S-44
PROSPECTUS
PAGE
----
Description of the Trust Funds....................................
Use of Proceeds...................................................
Yield Considerations..............................................
The Depositor.....................................................
Description of the Securities.....................................
Description of the Agreements.....................................
Description of Credit Support.....................................
Certain Legal Aspects of Mortgage Loans...........................
Material Federal Income Tax Considerations........................
State and Other Tax Considerations................................
ERISA Considerations..............................................
Legal Investment..................................................
Methods of Distribution...........................................
Additional Information............................................
Incorporation of Certain Documents by Reference...................
Legal Matters.....................................................
Financial Information.............................................
Rating............................................................
SUMMARY OF TERMS
o THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROSPECTUS
SUPPLEMENT AND DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU NEED TO
CONSIDER IN MAKING YOUR INVESTMENT DECISION. TO UNDERSTAND ALL OF THE TERMS
OF THE OFFERING OF THE NOTES, IT IS NECESSARY THAT YOU READ CAREFULLY THIS
ENTIRE PROSPECTUS SUPPLEMENT AND ACCOMPANYING PROSPECTUS.
O WHILE THIS SUMMARY CONTAINS AN OVERVIEW OF CERTAIN CALCULATIONS, CASH FLOW
PRIORITIES, AND OTHER INFORMATION TO AID YOUR UNDERSTANDING, YOU SHOULD
READ CAREFULLY THE FULL DESCRIPTION OF THESE CALCULATIONS, CASH FLOW
PRIORITIES AND OTHER INFORMATION IN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS BEFORE MAKING ANY INVESTMENT DECISION.
O WHENEVER WE REFER TO A PERCENTAGE OF SOME OR ALL OF THE MORTGAGE LOANS IN
THE TRUST, THAT PERCENTAGE HAS BEEN CALCULATED ON THE BASIS OF THE TOTAL
PRINCIPAL BALANCE OF THOSE MORTGAGE LOANS AS OF [ ], UNLESS WE SPECIFY
OTHERWISE. WE EXPLAIN IN THIS PROSPECTUS SUPPLEMENT UNDER "DESCRIPTION OF
THE NOTES" HOW THE PRINCIPAL BALANCE OF A MORTGAGE LOAN IS DETERMINED.
WHENEVER WE REFER IN THIS SUMMARY OF TERMS OR IN THE RISK FACTORS SECTION
OF THIS PROSPECTUS SUPPLEMENT TO THE TOTAL PRINCIPAL BALANCE OF ANY
MORTGAGE LOANS, WE MEAN THE TOTAL OF THEIR PRINCIPAL BALANCES DETERMINED BY
THAT METHOD, UNLESS WE SPECIFY OTHERWISE.
THE OFFERED NOTES
ACE Securities Corp. [ ] Trust [ ] is offering the Class [ ] Asset
Backed Notes as part of Series [ ]. The notes will be issued in book-entry form.
SEE "DESCRIPTION OF THE NOTES -- GENERAL" IN THIS PROSPECTUS
SUPPLEMENT FOR A DISCUSSION OF THE MINIMUM DENOMINATIONS AND THE INCREMENTAL
DENOMINATIONS OF THE NOTES.
The notes will represent obligations of the trust and will be secured
by the assets of the trust, which consist primarily of [describe assets of the
trust.]
The notes will have an approximate total initial principal amount of
$[ ]. Any difference between the total principal amount of the notes on the date
they are issued and the approximate total principal amount of the notes on the
date of this prospectus supplement will not exceed 5%.
PAYMENTS ON THE NOTES
Principal and interest on the notes will be payable on the [25]th day
of each month, beginning in [ ]. However, if the [25]th day is not a business
day, payments will be made on the next business day after the [25]th day of the
month.
INTEREST PAYMENTS
Interest will accrue on the notes at the annual rate described in this
prospectus supplement.
SEE "DESCRIPTION OF THE NOTES -- PAYMENTS -- PAYMENTS OF INTEREST" IN
THIS PROSPECTUS SUPPLEMENT.
PRINCIPAL PAYMENTS
The amount of principal payable on the notes will be determined by (1)
funds actually received on the mortgage loans that are available to make
payments on the notes, (2) the amount of interest received on the mortgage loans
that is used to pay principal on the notes, calculated as described in this
prospectus supplement, (3) [the amount of principal received on the mortgage
loans that is released to the residual certificate, calculated as described in
this prospectus supplement,] and (4) [ ]. Funds actually received on the
mortgage loans may consist of expected, scheduled payments, and unexpected
payments resulting from prepayments or defaults by borrowers, liquidation of
defaulted mortgage loans, or repurchases of mortgage loans under the
circumstances described in this prospectus supplement.
WE EXPLAIN HOW PRINCIPAL IS PAID ON THE NOTES UNDER "DESCRIPTION OF
THE NOTES -- PAYMENTS -- PAYMENTS OF PRINCIPAL" IN THIS PROSPECTUS SUPPLEMENT.
The last possible day on which the principal of the notes could become
payable in full is [ ] and is referred to as the maturity date. The notes could
be paid in full before the maturity date.
LIMITED RECOURSE
The only source of cash available to make interest and principal
payments on the notes will be the assets of the trust. The trust will have no
other source of cash and no entity other than the trust will be required or
expected to make any payments on the notes.
ENHANCEMENT OF LIKELIHOOD OF PAYMENT ON THE NOTES
[DESCRIBE ANY APPLICABLE FINANCIAL GUARANTY INSURANCE POLICY OR GUARANTEE.]
[SUBORDINATION OF PAYMENTS
No amounts will be paid to the holder of the residual certificate on
any distribution date until all amounts due to the notes on that date have been
paid and overcollateralization has reached the required level.]
[OVERCOLLATERALIZATION
On the closing date, the total principal balance of the mortgage loans
is expected to exceed the total principal amount of the notes by approximately [
]%. This condition is referred to as "overcollateralization." Any interest
received on the mortgage loans in excess of the amount needed to pay interest on
the notes and some expenses and fees of the trust will be used to reduce the
total principal amount of the notes to a level set by [ ], until the mortgage
loans have a total principal balance that exceeds the total outstanding
principal amount of the notes by the amount required by [ ]. We cannot assure
you that sufficient interest will be generated by the mortgage loans to increase
overcollateralization to the level required by [ ], or to maintain it at that
level.
SEE "DESCRIPTION OF THE NOTES -- OVERCOLLATERALIZATION" IN THIS
PROSPECTUS SUPPLEMENT.]
THE MORTGAGE LOANS
On the closing date, which is expected to be on or about [ ], the
assets of the trust will consist primarily of [describe mortgage loans.]
[Description of pre-funding account and additional mortgage loans as
applicable.]
SEE "DESCRIPTION OF THE MORTGAGE POOL" IN THIS PROSPECTUS SUPPLEMENT
FOR A GENERAL DESCRIPTION OF THE MORTGAGE LOANS AND "THE ORIGINATOR" IN THIS
PROSPECTUS SUPPLEMENT FOR A DESCRIPTION OF THE UNDERWRITING GUIDELINES APPLIED
IN ORIGINATING THE MORTGAGE LOANS.
[THE PRE-FUNDING ACCOUNT
On the closing date, approximately $[ ] will be deposited by [ ] in a
pre-funding account maintained by [ ]. It is intended that additional mortgage
loans will be sold to the trust by the depositor from time to time, from [ ]
until [ ], paid for with the funds on deposit in the pre-funding account.
[Description of pre-funding account and additional mortgage loans as
applicable.]
SEE "DESCRIPTION OF THE NOTES -- PRE-FUNDING ACCOUNT" IN THIS
PROSPECTUS SUPPLEMENT.]
SERVICING OF THE MORTGAGE LOANS
The mortgage loans will be serviced by [ ].
SEE "THE SERVICER" AND "DESCRIPTION OF THE TRANSFER AND SERVICING
AGREEMENTS" IN THIS PROSPECTUS SUPPLEMENT.
OPTIONAL PURCHASE OF MORTGAGE LOANS
[ ] will have the option to purchase all of the mortgage loans and the
other assets of the trust, after the total principal balance of the mortgage
loans declines to less than [ ]% of their initial total principal balance; if [
] does not exercise that option, [ ] may purchase the mortgage loans and other
assets of the trust.
If the mortgage loans and other assets are purchased, the noteholders
will be paid accrued interest, and principal equal to the outstanding principal
amount of the notes.
SEE "DESCRIPTION OF THE NOTES -- OPTIONAL REDEMPTION" IN THIS
PROSPECTUS SUPPLEMENT FOR A DESCRIPTION OF THE PURCHASE PRICE TO BE PAID FOR THE
MORTGAGE LOANS.
TAX STATUS
Stroock & Stroock & Lavan LLP, special federal tax counsel, will
deliver an opinion of counsel that for federal income tax purposes, the notes
will be treated as indebtedness and the trust will not be an association, or
publicly traded partnership, taxable as a corporation or a taxable mortgage
pool.
SEE "MATERIAL FEDERAL INCOME TAX CONSIDERATIONS" IN THIS PROSPECTUS
SUPPLEMENT AND IN THE ACCOMPANYING PROSPECTUS FOR ADDITIONAL INFORMATION
CONCERNING THE APPLICATION OF FEDERAL INCOME TAX LAWS TO THE NOTES.
ERISA CONSIDERATIONS
The Notes may be acquired by employee benefit plans and other
retirement arrangements subject to certain conditions.
SEE "ERISA CONSIDERATIONS" IN THIS PROSPECTUS SUPPLEMENT AND IN THE PROSPECTUS
FOR A MORE COMPLETE DISCUSSION OF THESE ISSUES.
LEGAL INVESTMENT CONSIDERATIONS
[The notes will not constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984.]
There are other restrictions on the ability of some types of investors
to purchase the notes that prospective investors should consider.
SEE "LEGAL INVESTMENT CONSIDERATIONS" IN THIS PROSPECTUS SUPPLEMENT
AND IN THE PROSPECTUS.
RATINGS OF THE NOTES
The notes will initially be rated "[ ]" by [Rating Agency], and "[ ]"
by [Rating Agency].
These ratings are not recommendations to buy, sell or hold these
notes. A rating may be changed or withdrawn at any time by the assigning rating
agency.
o The ratings do not address the possibility that, as a result of
principal prepayments, the yield on your notes may be lower than
anticipated.
SEE "RATINGS" IN THIS PROSPECTUS SUPPLEMENT FOR A MORE COMPLETE
DISCUSSION OF THE NOTE RATINGS.
RISK FACTORS
THE FOLLOWING INFORMATION, WHICH YOU SHOULD CAREFULLY CONSIDER,
IDENTIFIES CERTAIN SIGNIFICANT SOURCES OF RISK ASSOCIATED WITH AN INVESTMENT IN
THE NOTES. YOU SHOULD ALSO CAREFULLY CONSIDER THE INFORMATION SET FORTH UNDER
"RISK FACTORS" IN THE PROSPECTUS.
UNPREDICTABILITY Borrowers may prepay their mortgage loans in whole
AND EFFECT OF PREPAYMENTS or in part at any time; however, approximately [ ]
of the mortgage loans require the payment of a
prepayment penalty in connection with any
voluntary prepayment during [ ]. The prepayment
penalties may be waived by the servicer. A
prepayment of a mortgage loan will usually result
in a prepayment on the notes.
o If you purchase your notes at a discount and
principal is repaid slower than you
anticipate, then your yield may be lower than
you anticipate.
o If you purchase your notes at a premium and
principal is repaid faster than you
anticipate, then your yield may be lower than
you anticipate.
The rate at which defaults and losses occur on the
mortgage loans will affect the rate of payment of
principal on the notes. We encourage you to review
the information in this prospectus supplement
about the underwriting guidelines applied in
originating the mortgage loans, the credit quality
of the mortgage loans and the collateral for the
mortgage loans.
SEE "YIELD CONSIDERATIONS" IN THIS PROSPECTUS
SUPPLEMENT FOR A DESCRIPTION OF FACTORS THAT MAY
INFLUENCE THE RATE AND TIMING OF PREPAYMENTS ON
THE MORTGAGE LOANS.
[The prepayment experience of the mortgage loans
may differ significantly from that of first lien
residential mortgage loans, or junior lien
mortgage loans with a principal balance lower than
the value of the related property.]
[EFFECT OF CREATION AND We describe in this prospectus supplement the
MAINTENANCE OF underwriting guidelines used in originating the
OVERCOLLATERALIZATION ON mortgage loans, the collateral for the mortgage
PAYMENTS OF PRINCIPAL loans and the servicing of the mortgage loans.
ON THE NOTES These and other factors will affect the rate of
defaults and losses on the mortgage loans, which
in turn will affect the rate at which
overcollateralization is created or maintained.
When overcollateralization is less than the level
required by [ ], a portion of interest collections
on the mortgage loans will be used to make
principal payments on the notes. This will
accelerate the rate at which you receive payments
of principal. When overcollateralization is
greater than the level required by [ ], a portion
of principal collections on the mortgage loans
will be released to the residual certificate. This
will slow the rate at which you receive payments
of principal.]
GEOGRAPHIC CONCENTRATION OF Approximately [ ]% of the mortgage
MORTGAGE LOANS loans expected to be in the trust on the closing
date are secured by properties in [California].
The rate of delinquencies and defaults, and
therefore the rate of prepayments, on the mortgage
loans may be higher than if fewer of the mortgage
loans were concentrated in one state because the
following conditions in [California] will have a
disproportionate impact on the mortgage loans in
general:
o Weak economic conditions in [California]
(which may or may not affect real property
values) may affect the ability of borrowers
to repay their mortgage loans on time;
o Declines in the [California] residential real
estate market may reduce the values of
properties located in [California], which
would result in an increase in the combined
loan-to-value ratios;
o Properties in [California] may be more
susceptible than homes located in other parts
of the country to some types of uninsurable
hazards, such as earthquakes, as well as
floods, mudslides and other natural
disasters; and
o Any increase in the market value of
properties located in [California] would
reduce the combined loan-to-value ratios of
the mortgage loans and could, therefore, make
alternative sources of financing available to
the borrowers at lower interest rates, which
could result in an increased rate of
prepayment of the mortgage loans.
Natural disasters affect regions of the United
States from time to time, and may result in
increased losses on mortgage loans in those
regions, or in insurance payments that will
constitute prepayments of those mortgage loans.
FOR ADDITIONAL INFORMATION REGARDING THE
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGE LOANS IN
THE TRUST, SEE THE APPLICABLE TABLE UNDER
"DESCRIPTION OF THE MORTGAGE POOL" IN THIS
PROSPECTUS SUPPLEMENT.
[SOME OF THE LOANS IN THE The payment schedules for most of the mortgage
MORTGAGE POOL ARE MORE loans in the pool require the borrower to pay off
LIKELY TO DEFAULT THAN the principal balance of the loan gradually over
OTHERS, AND HIGHER THAN the life of the loan. Some of the mortgage loans
EXPECTED DEFAULTS ON in the pool, however, have payment schedules under
THESE LOANS COULD REDUCE which the borrowers makes relatively small
THE YIELD ON YOUR NOTES payments of principal over the life of the loan,
and then must make a large final payment at
maturity that pays off the entire principal
balance outstanding. This final payment is usually
much larger than the previous monthly payments.
Because the borrower's ability to make this final
payment usually depends on the ability to
refinance the loan or sell the underlying
property, the risk of default is greater than on
other types of loans. High rates of default on
these types of loans in the pool will result in
greater losses on your notes.
The ability of a borrower to refinance the type of
loan described above or sell the mortgaged
property will depend upon a number of factors,
including:
o the level of mortgage interest rates;
o the borrower's equity in the mortgage
property;
o general economic conditions; and
o the availability of credit.
We cannot predict how these factors will affect
the default rate of these mortgage loans in the
pool. You should refer to "Description of the
Mortgage Pool" for information on the percentage
of loans in the mortgage pool that consists of
these loans.]
[EFFECT OF LACK OF PRIMARY Approximately [ ]% of the mortgage loans have
MORTGAGE INSURANCE ON loan-to-value ratios greater than [ ]%. None of
THE NOTES the mortgage loans are covered by a primar
mortgage insurance policy. If borrowers default on
their mortgage loans, there is a greater
likelihood of losses than if the loans were
insured. We cannot assure you that the applicable
credit enhancement will be adequate to cover those
losses.
SEE "DESCRIPTION OF THE NOTES" IN THIS PROSPECTUS
SUPPLEMENT.]
REAL ESTATE MARKET MAY A decline in the real estate values or in economic
AFFECT PERFORMANCE OF conditions generally could increase the rates of
MORTGAGE LOANS delinquencies, foreclosures and losses on the
mortgage loans to a level that is significantly
higher than those experienced currently; and no
assurance can be given that values of the
properties securing the mortgage loans will not
decline since the date of origination of the
mortgage loan. If the credit enhancement described
in this prospectus supplement is not enough to
protect your notes from these losses, the yield on
your notes may be reduced.
[EARLY PRINCIPAL PAYMENT If the cash in the pre-funding account on the
FROM CASH REMAINING closing date is not used to acquire additional
IN PRE-FUNDING ACCOUNT mortgage loans by [ ], then that cash will be
[paid to you on a proportionate basis with the
other noteholders in reduction of the principal
balance of your notes.] If the amount of that cash
is substantial, you will receive a significant
unexpected early payment of principal in (or
before) [ ]. We cannot assure you that you will be
able to reinvest that money in another investment
with a comparable yield.]
YOU WILL NOT RECEIVE Your ownership of the notes will be registered
PHYSICAL NOTES, WHICH electronically with DTC. The lack of physical
CAN CAUSE DELAYS IN notes could:
DISTRIBUTIONS AND HAMPER
YOUR ABILITY TO PLEDGE o result in payment delays on the notes because
OR RESELL YOUR NOTES the indenture trustee will be sending
distributions on the notes to DTC instead of
directly to you;
o make it difficult for you; to pledge your
notes if physical notes are required by the
party demanding the pledge; and
o could hinder your ability to resell the notes
because some investors may be unwilling to
buy notes that are not in physical form.
SEE "DESCRIPTION OF THE NOTES -- BOOK-ENTRY
REGISTRATION" IN THIS PROSPECTUS SUPPLEMENT.
LIMITED ABILITY TO The underwriter is not required to assist in
RESELL NOTES resales of the notes, although it may do so. A
secondary market for the notes may not develop. If
a secondary market does develop, it might not
continue or it might not be sufficiently liquid to
allow you to resell any of your notes. The
certificates will not be listed on any securities
exchange.
[Additional risk factors to be provided as applicable.]
DESCRIPTION OF THE TRUST
GENERAL
ACE Securities Corp. [ ] Trust [ ] (the "Trust" or the "Issuer") will
be a [statutory business trust] [common law trust] formed under the laws of [ ]
pursuant to an amended and restated Trust Agreement (the "Trust Agreement")
dated as of [ ] (the "Cut-off Date") between ACE Securities Corp. as depositor
(the "Depositor") and [ ] as owner trustee (the "Owner Trustee"), for the
transactions described in this prospectus supplement. The Trust will not engage
in any activity other than acquiring, holding and managing the Mortgage Loans
(as defined in this prospectus supplement) and the other assets of the Trust and
proceeds from the Mortgage Loans and other assets, issuing the Securities (as
defined in this prospectus supplement), making payments on the Securities, and
engaging in related activities.
On or about [ ] (the "Closing Date"), the Trust will purchase the
Mortgage Loans from the Depositor pursuant to a Sale and Servicing Agreement (as
amended and supplemented from time to time, the "Sale and Servicing Agreement")
dated as of the Cut-off Date, among the Trust, the Depositor, the Servicer and [
], as indenture trustee (the "Indenture Trustee").
The Trust's principal offices are located in [ ].
THE OWNER TRUSTEE
[ ] will act not in its individual capacity but solely as the Owner
Trustee under the Trust Agreement. [ ] is a [ ] banking corporation and its
principal offices are located at [ ]. The compensation of the Owner Trustee will
be paid by [ ].
THE RESIDUAL CERTIFICATE
The equity interest in the Trust will be represented by a residual
interest certificate (the "Residual Certificate").
The holder of the Residual Certificate (the "Residual
Certificateholder," and together with the Noteholders (as defined in this
prospectus supplement), the "Securityholders") will be entitled to receive [to
be described as applicable].
DESCRIPTION OF THE NOTES
GENERAL
The Trust will issue the Class [ ] Notes (the "Notes") pursuant to an
Indenture dated as of the Cut-off Date (the "Indenture") between the Issuer and
the Indenture Trustee. The Trust will also issue the Residual Certificate
pursuant to the Trust Agreement. The Notes and the Residual Certificate are
referred to in this prospectus supplement as the "Securities." Only the Notes
are offered by this prospectus supplement. The Notes will be secured by the
Trust Estate (as defined below) pursuant to the Indenture.
The "Trust Estate" will consist primarily of [describe as applicable].
The Notes will be issued in the approximate initial total principal
amount specified on the cover page of this prospectus supplement (the "Original
Class Principal Amount"). The total principal amount of the Notes outstanding at
any time is referred to in this prospectus supplement as the "Class Principal
Amount." The Residual Certificate will be issued without a principal amount or
interest rate, and will be entitled only to the amounts that are described in
this prospectus supplement. The Original Class Principal Amount of the Notes may
be increased or decreased by up to 5% to the extent that the Cut-off Date
Balance (as defined in this prospectus supplement) of the Mortgage Loans is
increased or decreased as described under "Description of the Mortgage Pool" in
this prospectus supplement.
Payments on the Notes will be made on the [25th] day of each month or,
if the [25th] day is not a Business Day, on the next succeeding Business Day,
commencing in [ ] (each, a "Distribution Date"), to holders of Notes
("Noteholders") of record on the applicable Record Date. The "Record Date" for
each Distribution Date will be the close of business on the last Business Day of
the calendar month immediately before the month in which that Distribution Date
occurs.
o A "Business Day" is generally any day other than a Saturday or
Sunday or a day on which banks in [New York] are closed.
Payments on the Notes will be made to each registered holder entitled
to these payments, either (1) by check mailed to the Noteholder's address as it
appears on the books of the Indenture Trustee, or (2) at the request, submitted
to the Indenture Trustee in writing not later than the related Record Date, of
any Noteholder (at the Noteholder's expense) in immediately available funds;
provided, that the final payment for any Note will be made only upon
presentation and surrender of the Note at the Corporate Trust Office (as defined
in this prospectus supplement) of the Indenture Trustee or the office of the
Note Registrar (as defined in this prospectus supplement). See "-- The Indenture
Trustee" in this prospectus supplement.
[PRE-FUNDING ACCOUNT
On the Closing Date approximately $[ ] (the "Pre-Funded Amount") will
be deposited in an account (the "Pre-Funding Account") maintained by [ ]. During
the period (the "Pre-Funding Period") from [ ] until [ ], the Pre-Funding Amount
will be maintained in the Pre-Funding Account. The Pre-Funded Amount will be
reduced during the Pre-Funding Period by the amount of Subsequent Mortgage Loans
(as defined in this prospectus supplement) purchased by the Trust in accordance
with the [Sale and Servicing Agreement]. During the Pre-Funding Period, the
Pre-Funded Amount will be used only to purchase Subsequent Mortgage Loans.
Immediately following the Pre-Funding Period, any Pre-Funded Amount remaining
will be distributed to [to be provided as applicable].
Amounts on deposit in the Pre-Funding Account will be invested in [to
be provided as applicable] and all investment earnings on amounts on deposit in
the Pre-Funding Account will be distributed to [to be provided as applicable]
following the Pre-Funding Period.]
BOOK-ENTRY REGISTRATION
GENERAL. The Notes (the "Book-Entry Notes") will be issued, maintained
and transferred on the book-entry records of The Depository Trust Company
("DTC") in the United States [, or through Clearstream Luxembourg, societe
anonyme ("Clearstream Luxembourg") or the Euroclear System ("Euroclear") in
Europe] and through [its/their] participating organizations (each, a
"Participant"). The Book-Entry Notes will be issued in minimum denominations in
principal amount of $25,000 and integral multiples of $1 in excess of $25,000.
Each Class of Book-Entry Notes will be represented by one or more
certificates registered in the name of the nominee of DTC. ACE Securities Corp.
(the "Depositor") has been informed by DTC that DTC's nominee will be Cede & Co.
[Clearstream Luxembourg and Euroclear will hold omnibus positions on behalf of
their Participants through customers' securities accounts in Clearstream
Luxembourg's and Euroclear's names on the books of their respective
depositaries, which in turn will hold positions in customers' securities
accounts in the depositaries' names on the books of DTC.] No person acquiring an
interest in a Book-Entry Note (each, a "Beneficial Owner") will be entitled to
receive a certificate representing an interest (a "Definitive Note"), except as
set forth below under "-- Definitive Notes" and in the prospectus under
"Description of the Securities -- Book-Entry Registration and Definitive
Securities -- Definitive Securities."
Unless and until Definitive Notes are issued, it is anticipated that:
o the only "Noteholder" of the Notes will be Cede & Co., as nominee
of DTC, and Beneficial Owners will not be Noteholders as that
term is used in the Indenture.
o Beneficial Owners will receive all distributions of principal of,
and interest on, the Offered Notes from the Indenture Trustee
through DTC [, Clearstream Luxembourg or Euroclear, as
applicable,] and [its/their] Participants.
o while the Notes are outstanding, under the rules, regulations and
procedures creating and affecting DTC [Clearstream Luxembourg and
Euroclear] and [its/their] operations, DTC [Clearstream
Luxembourg and Euroclear] [is/are] required to make book-entry
transfers among Participants on whose behalf it acts with respect
to the Notes and is required to receive and transmit
distributions of principal of, and interest on, the Notes.
Participants and indirect participants with whom Beneficial
Owners have accounts with respect to Notes are similarly required
to make book-entry transfers and receive and transmit
distributions on behalf of their respective Beneficial Owners.
Accordingly, although Beneficial Owners will not possess
certificates, DTC [Clearstream Luxembourg and Euroclear]
[has/have] in place a mechanism by which Beneficial Owners will
receive distributions and will be able to transfer their
interest.
None of the Depositor, [ ] ("[ ]'), the Servicer , the Owner Trustee
or the Indenture Trustee [or additional parties] (as those terms are defined in
this prospectus supplement) will have any responsibility for any aspect of the
records relating to or payments made on account of beneficial ownership
interests of the Book-Entry Notes held by Cede & Co., as nominee for DTC, or for
maintaining, supervising or reviewing any records relating to those beneficial
ownership interests.
For a more complete description of book-entry registration and
clearance and the rules and regulations governing DTC [,Clearstream Luxembourg
and Euroclear], see "Description of the Securities -- Book-Entry Registration
and Definitive Securities" in the prospectus".
DEFINITIVE NOTES. Definitive Notes will be issued to Beneficial Owners
or their nominees, respectively, rather than to DTC or its nominee, only under
the limited conditions set forth in the prospectus under " Description of the
Securities -- Book-Entry Registration and Definitive Securities -- Definitive
Securities." Upon the occurrence of an event described in that section, the
Trustee is required to direct DTC to notify Participants who have ownership of
Book-Entry Notes as indicated on the records of DTC of the availability of
Definitive Notes for their Book-Entry Notes. Upon surrender by DTC of the
Definitive Notes representing the Book-Entry Notes and upon receipt of
instructions from DTC for re-registration, the Trustee will re-issue the
Book-Entry Notes as Definitive Notes in the respective principal amounts owned
by individual Beneficial Owners, and thereafter the Trustee will recognize the
holders of the Definitive Notes as Noteholders under the Indenture and the Sale
and Servicing Agreement.
PAYMENTS
Payments on the Notes on each Distribution Date will be made from the
Available Collection Amount. The Available Collection Amount will be determined
as [to be provided as applicable.]
o With respect to each Distribution Date, the "Due Period" is the
calendar month immediately before that Distribution Date.
PAYMENTS OF INTEREST. Interest on the Class Principal Amount of the
Notes will accrue during each Accrual Period (as defined in this prospectus
supplement) at the interest rate specified on the front cover of this prospectus
supplement (the "Interest Rate") and will be payable to Noteholders on each
Distribution Date, starting in [ ]. [If the Residual Certificateholder does not
exercise its option to purchase the Mortgage Loans and the other assets of the
Trust when it is first entitled to do so, as described under "--Optional
Redemption" in this prospectus supplement, then with respect to each succeeding
Distribution Date the Interest Rate will be increased [to be provided as
applicable.]] See "-- Optional Redemption" in this prospectus supplement.
Interest on the Notes will be calculated on the basis of a 360-day year of
twelve 30-day months.
o The "Accrual Period" for the Notes will be the calendar month
immediately preceding the month in which the related Distribution
Date occurs.
Payments of interest on the Notes will be made from [to be provided as
applicable].
PAYMENTS OF PRINCIPAL. Principal payments will be made to Noteholders
on each Distribution Date in an amount generally equal to [to be provided as
applicable].
o The "Principal Distribution Amount" for any Distribution Date
will be equal to the sum of [to be provided as applicable].
PAYMENT PRIORITIES
On each Distribution Date, the Available Funds will be applied in the
following order of priority:
[to be provided as applicable.]
OVERCOLLATERALIZATION
On the Closing Date the Cut-off Date Balance is expected to exceed the
Original Class Principal Amount of the Notes by approximately $[ ]. The weighted
average Net Mortgage Loan Rate (as defined below) of the Mortgage Loans is
generally expected to be higher than the Interest Rate of the Notes, thus
generating excess interest collections. To the extent described in this
prospectus supplement, Excess Spread will be applied on any Distribution Date as
[to be provided as applicable].
o The "Net Mortgage Loan Rate" for any Mortgage Loan equals [to be
provided as applicable].
MATURITY DATE
The Class Principal Amount of the Notes and all interest accrued and
unpaid on the Notes will be payable in full on [ ] (the "Maturity Date"). See
"--Rights of Noteholders Upon Occurrence of Event of Default" below. The actual
final Distribution Date for the Notes could be substantially earlier than the
Maturity Date.
REPORTS TO NOTEHOLDERS
On each Distribution Date the Indenture Trustee will make available to
each Noteholder a statement containing the following information:
o the amount of principal distributed on that date to Noteholders;
o the amount of interest distributed on that date to Noteholders;
o the amount of any outstanding Noteholders' Interest Carryforward
Amount for the Notes after distributions on that date;
o the Class Principal Amount of the Notes after distributions on
that date;
o the amount of the Servicing Fees paid with respect to that date;
o the Total Loan Balance as of the related Distribution Date;
o the number and total Principal Balance of Mortgage Loans (1)
remaining outstanding, (2) delinquent by one, two, three or four
or more monthly payments, (3) in foreclosure, and (4) with
respect to REO Property;
o any amount distributed to the holder of the Residual Certificate;
and
o other information to the extent provided in the Sale and
Servicing Agreement.
OPTIONAL REDEMPTION
On any Distribution Date after the date on which the Total Loan
Balance is less than [ ]% of the Cut-off Date Balance, [ ] will (subject to the
terms of the Sale and Servicing Agreement) have the option to purchase the
Mortgage Loans, any REO Property and any other assets of the Trust for the
Termination Price. If [ ] does not exercise that option, [ ] will then have the
same purchase option. If either purchase option is exercised, the Notes will be
redeemed and the Residual Certificate and the Trust will be terminated (this
event, an "Optional Redemption").
If the Residual Certificateholder does not exercise its option as
described above when it is first entitled to do so, the Interest Rate of the
Notes will be increased as described under "-- Payments of Interest" in this
prospectus supplement.
RIGHTS OF NOTEHOLDERS UPON OCCURRENCE OF EVENT OF DEFAULT
Under the Indenture, a failure to pay the full amount of the
Noteholders' Interest Distribution Amount within five days of the Distribution
Date on which that payment is due (without regard to the amount of Available
Funds) or failure to pay the entire outstanding principal amount of the Notes on
the Maturity Date, will constitute an event of default (an "Event of Default").
Upon the occurrence of an Event of Default, the holders of Notes
evidencing more than [ ]% of the Class Principal Amount of the Notes then
outstanding may exercise their remedies under the Indenture. These remedies
include [to be provided as applicable]. See "Description of the Agreements --
Material Terms of the Indenture" in the prospectus.
THE INDENTURE TRUSTEE
[ ], a [ ], will be the Indenture Trustee under the Indenture. The
Indenture Trustee will be entitled to [describe applicable fees of the indenture
trustee]. The Indenture Trustee's "Corporate Trust Office" is located at [ ], or
any address as the Indenture Trustee may designate from time to time by notice
to the Noteholders, the Depositor and the Servicer.
[THE INSURANCE POLICY
The following information has been provided by [ ] (the "Insurer") for
inclusion in this prospectus supplement. Neither the Depositor nor the
Underwriter makes any representation as to the accuracy or completeness of this
information.
The Insurer does not accept any responsibility for the accuracy or
completeness of this prospectus supplement or any information or disclosure
contained in this prospectus supplement, or omitted from this prospectus
supplement, other than with respect to the accuracy of the information regarding
the Note Guaranty Insurance Policy (the "Insurance Policy") and the Insurer set
forth below under this heading "The Insurance Policy." Additionally, the Insurer
makes no representation regarding the Notes or the advisability of investing in
the Notes.
THE INSURER
[To be provided as applicable.]
INSURER FINANCIAL INFORMATION
[To be provided as applicable.]
WHERE YOU CAN OBTAIN ADDITIONAL INFORMATION ABOUT THE INSURER
[To be provided as applicable.]
FINANCIAL STRENGTH RATINGS OF THE INSURER
[To be provided as applicable.]
THE INSURANCE POLICY
[To be provided as applicable.]]
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
The Mortgage Pool will consist of approximately [ ] Mortgage Loans
with original terms to maturity of not more than [thirty] years, having a total
Principal Balance as of the Cut-off Date of approximately $[ ] (the "Cut-off
Date Balance"). The Mortgage Loans are secured by [to be provided as applicable]
("Mortgages"). All of the Mortgage Loans will be [description of Mortgage
Loans.]
Generally, the Mortgage Loans were originated or acquired by the
Originator (as defined in this prospectus supplement) in one of the following
ways:
o [to be provided as applicable].
For a description of the underwriting criteria applicable to the
Mortgage Loans, see "The Originator -- Underwriting Criteria" in this prospectus
supplement.
The Servicer will be required to service the Mortgage Loans pursuant
to the Sale and Servicing Agreement and will be compensated for these services
as described under "Description of the Transfer and Servicing Agreements --
Servicing" in this prospectus supplement.
PAYMENTS ON THE MORTGAGE LOANS
[To be provided as applicable.]
CHARACTERISTICS OF THE MORTGAGE LOANS
The Mortgage Loans are expected to have the following approximate
total characteristics as of the Cut-off Date. Prior to the issuance of the
Notes, Mortgage Loans may be removed from the Mortgage Pool as a result of
incomplete documentation or otherwise, if the Depositor deems removal necessary
or appropriate. In addition, a limited number of other home loans may be
included in the Mortgage Pool prior to the issuance of the Notes.
Wherever reference is made in this prospectus supplement to a
percentage of some or all of the Mortgage Loans, the percentage is determined
(unless otherwise specified) on the basis of the total principal balance of the
related Mortgage Loans as of the Cut-off Date.
Approximately [ ] of the Mortgage Loans provide for payment by the
borrower of a prepayment premium in connection with full or partial prepayments
of principal within [three to five years] of the date of origination of the
loan, generally equal to [to be provided as applicable].
The Mortgage Loan Rates of the Mortgage Loans range from approximately
[ ]% annually to [ ]% annually. The weighted average Mortgage Loan Rate of the
Mortgage Loans is approximately [ ]% annually.
The Principal Balances of the Mortgage Loans range from approximately
$[ ] to $[ ]. The Mortgage Loans have an average Principal Balance of
approximately $[ ].
The weighted average Combined Loan-to-Value Ratio at origination of
the Mortgage Loans is approximately [ ]%.
No more than approximately [ ]% of the Mortgage Loans are secured by
Mortgaged Properties located in any one zip code area.
The following tables set forth as of the Cut-off Date the number,
total Principal Balance and percentage of the Mortgage Loans having the stated
characteristics shown in the tables in each range. (The sum of the amounts of
the total Principal Balances and the percentages in the following tables may not
equal the totals due to rounding.)
CUT-OFF DATE PRINCIPAL BALANCES
PERCENTAGE OF
RANGE OF MORTGAGE LOANS
PRINCIPAL NUMBER OF TOTAL BY TOTAL
BALANCES ($) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------ -------------- ----------------- -----------------
$ %
______ _________________ ______
Total...... $ 100.00%
The average Cut-off Date Principal Balance is approximately $
LOAN-TO-VALUE RATIOS
RANGE OF PERCENTAGE OF
ORIGINAL MORTGAGE LOANS
LOAN-TO-VALUE NUMBER OF TOTAL BY TOTAL
RATIOS (%) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------- -------------- ----------------- -----------------
$ %
______ _________________ ______
Total...... $ 100.00%
The weighted average original Loan-to-Value Ratio is approximately %.
MORTGAGE RATES
PERCENTAGE OF
RANGE OF MORTGAGE LOANS
MORTGAGE NUMBER OF TOTAL BY TOTAL
RATES(%) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------ -------------- ----------------- -----------------
$ %
______ _________________ ______
Total...... $ 100.00%
* Reflects current Mortgage Rates of Adjustable Rate Mortgage Loans.
The weighted average Mortgage Rate is approximately % per annum.
LOAN TYPES
PERCENTAGE OF
MORTGAGE LOANS
NUMBER OF TOTAL BY TOTAL
LOAN TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------ -------------- ----------------- -----------------
$ %
______ _________________ ______
Total...... $ 100.00%
ORIGINAL TERMS TO MATURITY
PERCENTAGE OF
RANGE OF MORTGAGE LOANS
MATURITIES NUMBER OF TOTAL BY TOTAL
(MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------- -------------- ----------------- -----------------
$ %
______ _________________ ______
Total...... $ 100.00%
The weighted average original term to maturity is approximately
months.
REMAINING TERMS TO MATURITY
PERCENTAGE OF
REMAINING TERM MORTGAGE LOANS
TO MATURITY NUMBER OF TOTAL BY TOTAL
(MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------- -------------- ----------------- -----------------
$ %
______ _________________ ______
Total...... $ 100.00%
The weighted average remaining term to maturity of the fully
amortizing Mortgage Loans is approximately months.
GEOGRAPHIC DISTRIBUTION
PERCENTAGE OF
MORTGAGE LOANS
NUMBER OF TOTAL BY TOTAL
STATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------- -------------- ----------------- -----------------
$ %
______ _________________ ______
Total...... $ 100.00%
PROPERTY TYPES
PERCENTAGE OF
MORTGAGE LOANS
PROPERTY NUMBER OF TOTAL BY TOTAL
TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------- -------------- ----------------- -----------------
$ %
______ _________________ ______
Total...... $ 100.00%
LOAN PURPOSES
PERCENTAGE OF
MORTGAGE LOANS
LOAN NUMBER OF TOTAL BY TOTAL
PURPOSE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------- -------------- ----------------- -----------------
$ %
______ _________________ ______
Total...... $ 100.00%
OCCUPANCY STATUS
PERCENTAGE OF
MORTGAGE LOANS
OCCUPANCY NUMBER OF TOTAL BY TOTAL
STATUS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------- -------------- ----------------- -----------------
$ %
______ _________________ ______
Total...... $ 100.00%
DOCUMENTATION TYPES
PERCENTAGE OF
MORTGAGE LOANS
DOCUMENTATION NUMBER OF TOTAL BY TOTAL
TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------- -------------- ----------------- -----------------
$ %
______ _________________ ______
Total...... $ 100.00%
CREDIT GRADES
PERCENTAGE OF
MORTGAGE LOANS
NUMBER OF TOTAL BY TOTAL
CREDIT GRADE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------- -------------- ----------------- -----------------
$ %
______ _________________ ______
Total...... $ 100.00%
PREPAYMENT PENALTIES
PERCENTAGE OF
MORTGAGE LOANS
PREPAYMENT NUMBER OF TOTAL BY TOTAL
PENALTY MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------- -------------- ----------------- -----------------
$ %
______ _________________ ______
Total...... $ 100.00%
[SUBSEQUENT MORTGAGE LOANS
The obligation of the Trust to purchase additional Mortgage Loans (the
"Subsequent Mortgage Loans") on [any] date, as specified in the [Sale and
Servicing Agreement] (each, a "Subsequent Transfer Date") will be subject to the
Subsequent Mortgage Loans meeting the following criteria: [to be provided as
applicable]. These criteria will be based on the characteristics of the
Subsequent Mortgage Loans on the related Subsequent Transfer Date.
The characteristics of Subsequent Mortgage Loans may vary
significantly from time to time, subject to the requirements described above,
and may bear no particular relationship to the characteristics of the initial
Mortgage Loans at any time. It is expected that a substantial portion of the
Subsequent Mortgage Loans will be [to be provided as applicable.]]
ADDITIONAL INFORMATION
The description in this prospectus supplement of the Mortgage Pool and
the Mortgaged Properties is based upon the Mortgage Pool as constituted at the
close of business on the Cut-off Date. A Current Report on Form 8-K will be
available to purchasers of the Notes and will be filed, together with the Sale
and Servicing Agreement, the Indenture and the Trust Agreement, with the
Securities and Exchange Commission (the "SEC") within fifteen days after the
initial issuance of the Notes. In the event that Mortgage Loans are removed from
or added to the Mortgage Pool as described in this prospectus supplement under
"Description of the Mortgage Pool," the removal or addition, to the extent
material, will be noted in the Current Report on Form 8-K.
THE ORIGINATOR
GENERAL
[Describe the Originator.]
UNDERWRITING CRITERIA
The information contained in this prospectus supplement regarding the
Originator's underwriting requirements and practices was obtained from publicly
available information regarding asset-backed notes secured by loans made by the
Originator that are similar to the Mortgage Loans and not from the Originator
directly. As a result, there can be no assurance that the Mortgage Loans were
originated, in whole or in part, in accordance with these underwriting
requirements and practices, or that these underwriting requirements and
practices were in effect when the Mortgage Loans were originated.
[Describe Originator's underwriting guidelines.]
THE SERVICER
The following information has been provided by the Servicer. Neither
the Depositor nor the Underwriter makes any representation as to the accuracy or
completeness of this information.
GENERAL
[ ] (the "Servicer") will service the Mortgage Loans
pursuant to the terms of the Sale and Servicing Agreement.
[Description of the servicer.]
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
The following summary describes terms of the Sale and Servicing
Agreement, the Indenture, the Trust Agreement, and the Administration Agreement
(collectively, 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. The
following summary supplements, and to the extent inconsistent, replaces, the
description of the general terms and provisions of the Transfer and Servicing
Agreements under the headings "Description of the Agreements" in the prospectus.
SALE AND ASSIGNMENT OF THE MORTGAGE LOANS
On the Closing Date, [ ] will sell the Mortgage Loans (other than the
right to receive some of the charges payable by borrowers) to the Depositor, and
the Depositor will sell the Mortgage Loans (other than those amounts) to the
Trust. The Trust will, concurrently, deliver or cause to be delivered the
Securities to the Depositor. The Trust will pledge and assign the Mortgage Loans
to the Indenture Trustee in exchange for the Notes. Each Mortgage Loan will be
identified in a schedule appearing as an exhibit to the Sale and Servicing
Agreement (the "Mortgage Loan Schedule").
[In addition, the Depositor will, as to each Mortgage Loan, deliver to
a custodian appointed by the Indenture Trustee (the "Custodian") the following
documents (together, with respect to each Mortgage Loan, a "Mortgage Loan
File"):
o the related Note endorsed to the order of the Indenture Trustee,
or in blank, without recourse,
o any assumption and modification agreements and the Mortgage with
evidence of recording indicated on the Mortgage (except for any
Mortgage not returned from the public recording office),
o an assignment of the Mortgage in the name of the Indenture
Trustee, or in blank, in recordable form, and
o any intervening assignments of the Mortgage.]
Assignments of the Mortgages to the Indenture Trustee will be recorded
following the Closing Date in the real property records of the states in which
the related Mortgaged Properties are located to protect the Indenture Trustee's
interest in the Mortgage Loans against the claims of creditors of [ ] or
subsequent purchasers. In the event that, with respect to any Mortgage Loan, the
Depositor cannot deliver the assignment with evidence of recording on the
Mortgage Loan concurrently with the conveyance of the Mortgage Loan under the
Sale and Servicing Agreement because they have not yet been returned by the
public recording office, the Depositor will deliver or cause to be delivered to
the Custodian a certified true photocopy of the assignment. The Depositor will
deliver or cause to be delivered to the Custodian any assignment with evidence
of recording indicated on the assignment upon receipt of the assignment from the
public recording office. The Custodian will review (or cause to be reviewed)
each Mortgage Loan File within ninety days after the conveyance of the related
Mortgage Loan to the Trust to ascertain that all required documents have been
executed and received.
Under the terms of the agreement (the "Mortgage Loan Sale Agreement")
pursuant to which the Depositor will purchase the Mortgage Loans from [ ], and
of the Sale and Servicing Agreement, the Custodian will conduct an initial
review of the Mortgage Loan documents and will notify the Depositor and [ ] as
to each Mortgage Loan document that either has not yet been delivered to the
Depositor as required or appears to be not properly executed, not in conformity
with the description of the Mortgage Loan on the Mortgage Loan schedule or
otherwise defective. If any Mortgage Loan document is not delivered or any
material defect in a document is not cured within the time period specified in
the Mortgage Loan Sale Agreement, [ ] will be required to repurchase the
affected Mortgage Loan for a price equal to the unpaid principal balance of the
Mortgage Loan plus accrued interest on the Mortgage Loan (the "Repurchase
Price") or, in some circumstances, to substitute another Mortgage Loan that
satisfies the requirements specified in the Sale and Servicing Agreement.
[ ] will make to the Depositor under the Mortgage Loan Sale Agreement
representations and warranties that include representations and warranties
similar to those summarized in the prospectus under the heading "Description of
the Agreements -- Material Terms of the Pooling and Servicing Agreements and
Underlying Servicing Agreements -- Representations and Warranties; Repurchases."
The Depositor's rights under these representations and warranties will be
assigned to the Indenture Trustee for the benefit of the Noteholders. In the
event of a breach of any of these representations or warranties that materially
and adversely affects the value of any Mortgage Loan or the interests of the
Noteholders, [ ] will be obligated, within 60 days following its discovery of a
breach or receipt of notice of a breach, to cure the breach or purchase the
affected Mortgage Loan from the Trust for the Repurchase Price or, in some
circumstances, to substitute another Mortgage Loan.
No assurance can be given that, at any particular time, [ ] will be
capable, financially or otherwise, of repurchasing defective Mortgage Loans or
substituting additional Mortgage Loans for defective Mortgage Loans.
TRUST FEES AND EXPENSES
The Servicer is entitled to the Servicing Fee and reimbursement for
specific expenses as described under "-- Servicing Compensation and Payment of
Expenses" below. The fees and expenses of the Indenture Trustee, the Owner
Trustee and the Custodian will be paid by [ ].
VOTING RIGHTS
Voting rights of Securityholders under the Transfer and Servicing
Agreements will be allocated among the Notes and the Residual Certificate as
provided in the Transfer and Servicing Agreements.
GENERAL SERVICING PROVISIONS
The Mortgage Loans will be serviced by the Servicer in accordance with
the provisions of the Sale and Servicing Agreement.
[Describe servicing provisions as applicable.]
NO DELINQUENCY ADVANCES
In the event of a delinquency or default with respect to a Mortgage
Loan, neither the Servicer nor any Subservicer (as defined below) will have any
obligation to advance scheduled monthly payments of principal or interest with
respect to the Mortgage Loan.
SERVICING ADVANCES
The Servicer or any Subservicer will make reasonable and customary
expense advances with respect to the Mortgage Loans (each, a "Servicing
Advance") and will be entitled to reimbursement for Servicing Advances as
described in this prospectus supplement. Servicing Advances may include costs
and expenses advanced for the preservation, restoration and protection of any
Mortgaged Property, including advances to pay delinquent real estate taxes and
assessments. Any Servicing Advances by the Servicer or any Subservicer will be
reimbursable from late collections on the related Mortgage Loan, or with respect
to any Liquidated Mortgage Loan from the related Liquidation Proceeds. Servicing
Advances remaining outstanding will be reimbursed, to the extent of Available
Funds, as described under "Description of the Notes -- Payment Priorities."
INSURANCE COVERAGE
The Servicer is required to obtain and thereafter maintain in effect a
bond or similar form of insurance coverage (which may provide blanket coverage)
insuring against loss occasioned by the errors and omissions of its officers and
employees.
EVIDENCE AS TO COMPLIANCE
The Sale and Servicing Agreement will provide that each year a firm of
independent accountants will furnish a statement to the Indenture Trustee to the
effect that the firm has examined the necessary documents and records relating
to the servicing of home loans by the Servicer and that, on the basis of that
examination, the firm is of the opinion that the servicing has been conducted in
accordance with applicable accounting standards, except for those exceptions
that the firm believes to be immaterial and those exceptions set forth in the
statement.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Servicer will be paid a monthly fee (the "Servicing Fee") with
respect to each Mortgage Loan calculated at [ ]% annually (the "Servicing Fee
Rate") on the outstanding principal balance of each Mortgage Loan. No Servicing
Fee will be payable on a Liquidated Mortgage Loan unless the Servicer determines
that additional collection efforts are warranted with respect to that Mortgage
Loan. The Servicer will be entitled to reimbursement from collections on the
Mortgage Loans for some of its expenses before any amounts are paid to
Noteholders.
SUBSERVICING
The Servicer will be prohibited from assigning the responsibility for
servicing the Mortgage Loans, except as permitted by the Sale and Servicing
Agreement, but it may employ one or more subservicers ("Subservicers") as
provided under the Sale and Servicing Agreement. If the Servicer chooses to
employ Subservicers, the Servicer will remain liable for fulfillment of its
obligations under the Sale and Servicing Agreement, and will be considered to
have itself received any payment received by a Subservicer whether or not the
Subservicer actually remits that payment.
RESIGNATION OR REMOVAL OF THE SERVICER
The Servicer will agree in the Sale and Servicing Agreement not to
resign except with the consent of [ ], unless the Servicer delivers to [ ] an
opinion of legal counsel to the effect that the Servicer is no longer permitted
under applicable law to perform the duties of the Servicer under the Sale and
Servicing Agreement.
If the Servicer is in default under the Sale and Servicing Agreement,
the Indenture Trustee or Noteholders having a majority of voting rights may
remove the Servicer. [Events of default include:
o failure by the Servicer to remit any required payment to the
Indenture Trustee for one Business Day after receipt of written
notice that the payment has not been made;
o failure by the Servicer to deposit collections or other
recoveries on the Mortgage Loans in the Collection Account on a
daily basis in accordance with the Sale and Servicing Agreement;
o failure by the Servicer to fulfill any other material requirement
under the Sale and Servicing Agreement within the applicable time
period;
o failure by the Servicer to be qualified to service home loans for
either Fannie Mae or Freddie Mac;
o failure by the Servicer to maintain any applicable licenses in
each jurisdiction where Mortgaged Properties are located;
o failure by the Servicer to maintain a minimum net worth of
$25,000,000;
o insolvency of the Servicer; and
o other events specified in the Sale and Servicing Agreement.]
[If the Servicer is removed, the Indenture Trustee will immediately
assume the role of Servicer under the Sale and Servicing Agreement unless
another Servicer is appointed pursuant to the Sale and Servicing Agreement. The
Indenture Trustee may continue to service the Mortgage Loans if it is legally
qualified to do so or may appoint a successor Servicer as provided in the Sale
and Servicing Agreement].
COLLECTION ACCOUNT, NOTE DISTRIBUTION ACCOUNT AND
CERTIFICATE DISTRIBUTION ACCOUNT
The Servicer is required to deposit in a segregated account (the
"Collection Account") within [ ] Business Days of receipt all payments received
on or after the Cut-off Date on account of principal and interest on the
Mortgage Loans, all Net Liquidation Proceeds, Insurance Proceeds, Released
Mortgaged Property Proceeds, any amounts payable in connection with the
repurchase or substitution of any Mortgage Loan and any amount required to be
deposited in the Collection Account in connection with the redemption of the
Notes. Withdrawals will be made from the Collection Account only for the
purposes specified in the Sale and Servicing Agreement. The Collection Account
may be maintained at any depository institution that satisfies the requirements
specified in the Sale and Servicing Agreement.
Amounts on deposit in the Collection Account will be invested as
provided in the Sale and Servicing Agreement. All interest and any other
investment earnings on amounts on deposit in the Collection Account will be paid
to [ ]. Any net losses on these investments will be paid by [ ].
The Servicer will establish and maintain with the Paying Agent an
account on behalf of the Noteholders, into which amounts released from the
Collection Account for payment to the Noteholders will be deposited and from
which all payments to the Noteholders will be made (the "Note Distribution
Account"). The Servicer will also establish and maintain with the Paying Agent
an account in the name of the Owner Trustee on behalf of the Residual
Certificateholder, into which amounts released from the Collection Account for
distribution to the Residual Certificateholder will be deposited and from which
all distributions to the Residual Certificateholder will be made (the
"Certificate Distribution Account").
On the [ ] day of each month, or if the [ ] day is not a Business Day,
the preceding Business Day, the Servicer will remit the Available Funds to the
Paying Agent for deposit into the Note Distribution Account and Certificate
Distribution Account by making appropriate withdrawals from the Collection
Account. On each Distribution Date, the Indenture Trustee will make withdrawals
from the Note Distribution Account and Certificate Distribution Account for
application as described under "Description of the Notes -- Payment Priorities"
in this prospectus supplement. Amounts on deposit in the Note Distribution
Account and Certificate Distribution Account will be invested as provided in the
Sale and Servicing Agreement. All interest and any other investment earnings on
amounts on deposit in the Note Distribution Account and Certificate Distribution
Account will be retained by the Indenture Trustee as its compensation. Any net
losses on these investments will be paid by the Indenture Trustee.
THE OWNER TRUSTEE AND INDENTURE TRUSTEE
The Owner Trustee, the Indenture Trustee and any of their respective
affiliates may hold Securities in their own names or as pledgees. For the
purpose of meeting the legal requirements of some jurisdictions, the Servicer,
the Owner Trustee and the Indenture Trustee acting jointly (or in some
instances, the Owner Trustee or the Indenture Trustee acting alone) will have
the power to appoint co-trustees or separate trustees of all or any part of the
Trust. In the event of an appointment of another trustee all rights, powers,
duties and obligations conferred or imposed upon the Owner Trustee by the Sale
and Servicing Agreement and the Trust Agreement and upon the Indenture Trustee
by the Indenture will be conferred or imposed upon the Owner Trustee and the
Indenture Trustee, respectively, and in each case the separate trustee or
co-trustee, jointly, or, in any jurisdiction in which the Owner Trustee or
Indenture Trustee will be incompetent or unqualified to perform particular acts,
singly upon the separate trustee or co-trustee, which will exercise and perform
these rights, powers, duties and obligations solely at the direction of the
Owner Trustee or the Indenture Trustee, as applicable.
The Owner Trustee and the Indenture Trustee may resign at any time, in
which event the Servicer will be obligated to appoint a successor to the Owner
Trustee or the Indenture Trustee, as the case may be. The Servicer may also
remove the Owner Trustee or the Indenture Trustee if either ceases to be
eligible to continue as Owner Trustee or Indenture Trustee under the Trust
Agreement or the Indenture, as the case may be, becomes legally unable to act or
becomes insolvent. In these circumstances, the Servicer will be obligated to
appoint a successor Owner Trustee or a successor Indenture Trustee, as
applicable. Any resignation or removal of the Owner Trustee or Indenture Trustee
and appointment of a successor Owner Trustee or Indenture Trustee will not
become effective until acceptance of the appointment by the successor.
The Trust Agreement and Indenture will provide that the Owner Trustee
and Indenture Trustee will be entitled to indemnification by [ ] and the
Depositor for, and will be held harmless against, any loss, liability or expense
incurred by the Owner Trustee or Indenture Trustee not resulting from its own
willful misfeasance, bad faith or negligence (other than by reason of a breach
of any of its representations or warranties to be set forth in the Trust
Agreement or Indenture, as the case may be).
DUTIES OF THE OWNER TRUSTEE AND INDENTURE TRUSTEE
The Owner Trustee will make no representations as to the validity or
sufficiency of the Trust Agreement, the Residual Certificate (other than the
execution and authentication of the Residual Certificate), the Notes or any
Mortgage Loans or related documents, and will not be accountable for the use or
application by the Depositor or the Servicer of any funds paid to the Depositor
or the Servicer in respect of the Securities or the Mortgage Loans, or the
investment of any monies by the Servicer before these monies are deposited into
the Collection Account, the Note Distribution Account or the Certificate
Distribution Account. So long as no Event of Default has occurred and is
continuing, the Owner Trustee will be required to perform only those duties
specifically required of it under the Trust Agreement. Generally, those duties
will be limited to the receipt of the various certificates, reports or other
instruments required to be furnished to the Owner Trustee under the Trust
Agreement, in which case it will only be required to examine them to determine
whether they conform to the requirements of the Trust Agreement. The Owner
Trustee will not be charged with knowledge of a failure by the Servicer to
perform its duties under the Sale and Servicing Agreement, which failure
constitutes an Event of Default, unless the Owner Trustee has actual knowledge
of any failure.
The Owner Trustee will be under no obligation to exercise any of the
rights or powers vested in it by the Trust Agreement or to make any
investigation of matters arising under the Trust Agreement or to institute,
conduct or defend any litigation under the Trust Agreement or in relation to the
Trust Agreement at the request, order or direction of the holder of the Residual
Certificate, unless the Residual Certificateholder has offered to the Owner
Trustee reasonable security or indemnity against the costs, expenses and
liabilities that may be incurred in or by the exercise of its rights or powers,
an investigation by it of matters arising or the institution or defense of any
litigation. Subject to the rights or consent of the Noteholders and Indenture
Trustee, the Residual Certificateholder will not have any right under the Trust
Agreement to institute any proceeding with respect to the Trust Agreement,
unless the Residual Certificateholder previously has given to the Owner Trustee
written notice of the occurrence of an Event of Default and (1) the Event of
Default arises from the Servicer's failure to remit payments when due or (2) the
holder of the Residual Certificate has made written request upon the Owner
Trustee to institute a proceeding in its own name as the Owner Trustee under the
Trust Agreement and have offered to the Owner Trustee reasonable indemnity, and
the Owner Trustee for 30 days has neglected or refused to institute any
proceedings.
The Indenture Trustee will make no representations as to the validity
or sufficiency of the Indenture, the Residual Certificate, the Notes (other than
the execution and authentication of the Notes) or any Mortgage Loans or related
documents, and will not be accountable for the use or application by the
Depositor, the Servicer or the Owner Trustee of any funds paid to the Depositor,
the Servicer or the Owner Trustee in respect of the Securities or the Mortgage
Loans, or the investment of any monies by the Servicer before those monies are
deposited into the Collection Account or the Note Distribution Account. So long
as no Event of Default under the Indenture or the Sale and Servicing Agreement
has occurred or is continuing, the Indenture Trustee will be required to perform
only those duties specifically required of it under the Transfer and Servicing
Agreements. Generally, those duties will be limited to the receipt of the
various certificates, reports or other instruments required to be furnished to
the Indenture Trustee under the Indenture, in which case it will only be
required to examine them to determine whether they conform to the requirements
of the Indenture. The Indenture Trustee will not be charged with knowledge of a
failure by the Servicer to perform its duties under the Sale and Servicing
Agreement, which failure constitutes an Event of Default under the Indenture or
the Sale and Servicing Agreement, unless the Indenture Trustee obtains actual
knowledge of any failure.
The Indenture Trustee will be under no obligation to exercise any of
the rights or powers vested in it by the Indenture or to make any investigation
of matters arising under the Indenture or to institute, conduct or defend any
litigation under the Indenture or in relation to the Indenture at the request,
order or direction of any of the Noteholders, unless those Noteholders have
offered to the Indenture Trustee reasonable security or indemnity against the
costs, expenses and liabilities that may be incurred in or by an exercise of any
of its rights or powers, an investigation of matters arising or the institution
or defense of any litigation. No Noteholder will have any right under the
Indenture to institute any proceeding with respect to the Indenture, unless the
holder previously has given to the Indenture Trustee written notice of the
occurrence of an Event of Default and (1) the Event of Default arises from the
Servicer's failure to remit payments when due or (2) Noteholders evidencing not
less than [ ]% of the Class Principal Amount of the Notes, acting together as a
single class, have made written request upon the Indenture Trustee to institute
a proceeding in its own name as the Indenture Trustee under the Indenture and
have offered to the Indenture Trustee reasonable indemnity, and the Indenture
Trustee for 30 days has neglected or refused to institute any proceedings. See
"Description of the Notes -- Rights of Noteholders Upon Occurrence of Event of
Default" in this prospectus supplement.
YIELD CONSIDERATIONS
GENERAL
The yields to maturity (or to early termination) on the Notes will be
affected by the rate of principal payments on the Mortgage Loans (including
prepayments, which may include amounts received by virtue of purchase,
condemnation, insurance or foreclosure) on the Mortgage Loans. Yields will also
be affected by the extent to which Mortgage Loans bearing higher Mortgage Loan
Rates prepay at a more rapid rate than Mortgage Loans with lower Mortgage Loan
Rates, the amount and timing of borrower delinquencies and defaults resulting in
Realized Losses, the application of Monthly Excess Cashflow, the purchase price
paid for the Notes and other factors.
Principal prepayments may be influenced by a variety of economic,
geographic, demographic, social, tax, legal and other factors. These factors may
include changes in borrowers' housing needs, job transfers, unemployment,
borrowers' net equity, if any, in the mortgaged properties, servicing decisions,
homeowner mobility, the existence and enforceability of "due-on-sale" clauses,
seasoning of loans, market interest rates for similar types of loans and the
availability of funds for the loans. Nearly all of the Mortgage Loans contain
due-on-sale provisions and the Servicer will generally enforce these provisions
unless (1) the Servicer, in a manner consistent with its servicing practices,
permits the purchaser of the related Mortgaged Property to assume the Mortgage
Loan, or (2) enforcement is not permitted by applicable law. In some cases, the
Servicer may, in a manner consistent with its servicing practices, permit a
borrower who is selling his principal residence and purchasing a new one to
substitute the new Mortgaged Property as collateral for the related Mortgage
Loan, or may simply release its lien on the existing collateral, leaving the
related Mortgage Loan unsecured. In that event, the Servicer will generally
require the borrower to make a partial prepayment in reduction of the principal
balance of the Mortgage Loan to the extent that the borrower has received
proceeds from the sale of the prior residence that will not be applied to the
purchase of the new residence.
Approximately [ ] of the Mortgage Loans are subject to prepayment
penalties during the first [three to five years] after origination. Prepayment
penalties may have the effect of reducing the amount or the likelihood of
prepayments on the Mortgage Loans. A prepayment premium may be waived by the
Servicer under some circumstances. The remaining Mortgage Loans may be prepaid
in full or in part at any time without penalty.
In general, if prevailing interest rates fall below the interest rates
on the Mortgage Loans, the Mortgage Loans are likely to be subject to higher
prepayments than if prevailing rates remain at or above the interest rates on
the Mortgage Loans. Conversely, if prevailing interest rates rise above the
interest rates on the Mortgage Loans, the rate of prepayment would be expected
to decrease.
The rate of principal payments on the Mortgage Loans will also be
affected by the amortization schedules of the Mortgage Loans, the rate and
timing of prepayments by the borrowers, liquidations of defaulted Mortgage Loans
and repurchases of Mortgage Loans due to breaches of representations and
warranties or defective documentation as described in this prospectus
supplement. The timing of changes in the rate of prepayments, liquidations and
purchases of the related Mortgage Loans may significantly affect the yield to an
investor, even if the average rate of principal payments experienced over time
is consistent with an investor's expectation. Because the rate and timing of
principal payments on the Mortgage Loans will depend on future events and on a
variety of factors (as described more fully in this prospectus supplement and in
the prospectus under "Yield Considerations") no assurance can be given as to the
rate or the timing of principal payments on the Notes. In general, the earlier a
prepayment of principal of the related Mortgage Loans, the greater the effect on
an investor's yield. The effect on an investor's yield of principal payments
occurring at a rate higher (or lower) than the rate anticipated by the investor
during the period immediately following the issuance of the Notes may not be
offset by a subsequent like decrease (or increase) in the rate of principal
payments.
From time to time, areas of the United States may be affected by
flooding, severe storms, landslides, wildfires or other natural disasters. Any
resulting Realized Losses could affect the rate of payment of principal no the
Notes. To the extent that the insurance proceeds received with respect to any
damaged Mortgage Properties are not applied to the restoration of those Mortgage
Properties, the proceeds will be used to prepay the related Mortgage Loans in
whole or in part. Any repurchases or repayments of the Mortgage Loans may reduce
the weighted average lives of the Notes and will reduce the yields on the Notes
to the extent they are purchased at a premium.
In addition, any future limitations on the rights of borrowers to
deduct interest payments on mortgage loans for federal income tax purposes may
result in a higher rate of prepayment on the Mortgage Loans.
The Depositor and [ ] make no representations as to the particular
factors that will affect the prepayment of the Mortgage Loans, as to the
relative importance of these factors, or as to the percentage of the principal
balance of the Mortgage Loans that will be paid as of any date.
Payments of principal at a faster rate than anticipated will decrease
the yield on Notes purchased at a premium; payments of principal at a slower
rate than anticipated will decrease the yield on Notes purchased at a discount.
The effect on an investor's yield due to payments of principal occurring at a
rate that is faster (or slower) than the rate anticipated by the investor during
any period following the issuance of the Notes will not be entirely offset by a
subsequent like reduction (or increase) in the rate of payments of principal
during any subsequent period.
The rate of delinquencies and defaults on the Mortgage Loans and of
recoveries, if any, on defaulted Mortgage Loans and foreclosed properties will
affect the rate and timing of principal payments on the Mortgage Loans, and,
accordingly, the weighted average life of the Notes. Some factors may influence
delinquencies and defaults, including origination and underwriting standards,
loan-to-value ratios and delinquency history. In general, defaults on Mortgage
Loans are expected to occur with greater frequency in their early years,
although little data is available with respect to the rate of default on similar
types of home loans. The rate of default on Mortgage Loans with high
loan-to-value ratios, or on Mortgage Loans secured by junior liens, may be
higher than that of home loans with lower loan-to-value ratios or secured by
first liens on comparable properties. In addition, the rate and timing of
prepayments, defaults and liquidations on the Mortgage Loans will be affected by
the general economic condition of the area in which the related Mortgaged
Properties are located or the related borrower is residing. See "Description of
the Mortgage Pool" in this prospectus supplement. The risk of delinquencies and
losses is greater and voluntary principal prepayments are less likely in regions
where a weak or deteriorating economy exists, as may be evidenced by, among
other factors, increasing unemployment or falling property values.
Investors in the Notes will bear the risk of reinvestment of amounts
received in respect of principal on the Notes at yields that may be lower than
the yield on the Notes.
The yields to investors in the Notes may be affected by the exercise
by [ ] of its right to purchase the Mortgage Loans, as described under
"Description of the Notes -- Optional Redemption" in this prospectus supplement,
or the failure of [ ] to exercise that right.
If the purchaser of a Note offered at a discount from its initial
principal amount calculates its anticipated yield to maturity (or early
termination) based on an assumed rate of payment of principal that is faster
than that actually experienced on the related Mortgage Loans, the actual yield
may be lower than that so calculated. Conversely, if the purchaser of a Note
offered at a premium calculates its anticipated yield based on an assumed rate
of payment of principal that is slower than that actually experienced on the
related Mortgage Loans, the actual yield may be lower than that so calculated.
The effective yield to holders of the Notes will be lower than the
yield otherwise produced by the Interest Rate and the purchase price because
monthly payments will not be payable until the [ ] day (or later) of the month
following the Accrual Period.
OVERCOLLATERALIZATION
[Describe as applicable.]
MATURITY DATE
The Maturity Date of the Notes is as set forth under "Description of
the Notes -- Maturity Date" in this prospectus supplement. The Maturity Date of
the Notes was determined by [to be provided as applicable]. The actual maturity
of the Notes may be significantly earlier than the Maturity Date.
WEIGHTED AVERAGE LIFE
The following information illustrates the effect of prepayments of the
Mortgage Loans on the weighted average life of the Notes under stated
assumptions and is not a prediction of the prepayment rate that might actually
be experienced on the Mortgage Loans. Weighted average life refers to the
average amount of time that will elapse from the date of issuance of a security
to the date of distribution to the investor of each dollar distributed in net
reduction of principal of the security (assuming no losses). The weighted
average life of the Notes will be influenced by, among other things, the rate at
which principal of the Mortgage Loans is paid, which may be in the form of
scheduled amortization or prepayments (for this purpose, the term "prepayment"
includes unscheduled reductions of principal, including without limitation those
resulting from full or partial prepayments, refinancings, liquidations and
write-offs due to defaults, casualties or other dispositions, substitutions and
repurchases by or on behalf of [ ] or the Depositor) and [to be provided as
applicable].
Prepayments on loans such as the Mortgage Loans are commonly measured
relative to a prepayment standard or model. The model used in this prospectus
supplement for the Mortgage Loans represents [to be provided as applicable]. [ ]
does not purport to be either a historical description of the prepayment
experience or any pool of loans or a prediction of the anticipated rate of
prepayment of any pool of loans, including the Mortgage Loans. Neither the
Depositor nor the Underwriter makes any representation about the appropriateness
of the [ ] model.
[The following table was prepared based on the following assumptions,
among other things (collectively, the "Modeling Assumptions"):
o the initial Class Principal Amount and the Interest Rate are as
set forth on the cover of this prospectus supplement;
o each scheduled payment of principal and interest on a Mortgage
Loan is timely received on the last day of each month starting in
[ ];
o principal prepayments are received in full on the last day of
each month starting in [ ], and each prepayment includes 30 days
of interest on the Mortgage Loan;
o prepayments are received on the Mortgage Loans at the applicable
constant rates indicated;
o there are no defaults or delinquencies on the Mortgage Loans;
o Distribution Dates occur on the [ ] day of each month, starting
in [ ];
o there are no re-purchases or substitutions of the Mortgage Loans;
o the Notes are issued on [ ]; and
o the Mortgage Loans were aggregated into assumed Mortgage Loans
having the following characteristics:]
HOME NET HOME REMAINING
HOME LOAN LOAN TERM TO
LOAN PRINCIPAL INTEREST INTEREST MATURITY
NUMBER BALANCE RATE RATE (IN MONTHS)
------------- -------------- ----------- ------------- ------------
The actual characteristics of the Mortgage Loans may, and the
performance of the Mortgage Loans will, differ from the assumptions used in
constructing the table below, which is hypothetical in nature and is provided
only to give a general sense of how the principal cash flows might behave under
varying prepayment scenarios. For example, it is not expected that the Mortgage
Loans will prepay at a constant rate until maturity, that all of the Mortgage
Loans will prepay at the same rate or that there will be no defaults or
delinquencies on the Mortgage Loans. Moreover, the diverse remaining terms to
maturity of the Mortgage Loans could produce slower or faster principal payments
than indicated in the table in the [assumed prepayment rate] specified, even if
the weighted average remaining term to maturity of the Mortgage Loans is as
assumed. Any difference between those assumptions and the actual characteristics
and performance of the Mortgage Loans or actual prepayment or loss experience
will cause the percentages of Original Principal Amounts outstanding over time
and the weighted average lives of the Notes to differ (which difference could be
material) from the corresponding information in the table for each indicated
[assumed prepayment rate].
Subject to the foregoing discussion and assumptions, the following
tables indicate the weighted average lives of the Notes and set forth the
percentages of the Original Principal Amount of the Notes that would be
outstanding after each of the Distribution Dates shown at the indicated [assumed
prepayment rate].
The weighted average life of the Notes is determined by (1)
multiplying the net reduction, if any, of the Class Principal Amount by the
number of years from the date of issuance of the Note to the related
Distribution Date, (2) adding the results and (3) dividing the sum by the total
of the net reductions of Class Principal Amount referred to in clause (1) and
rounding to one decimal place.
PERCENTAGE OF ORIGINAL PRINCIPAL AMOUNT OF THE NOTES
OUTSTANDING AT THE FOLLOWING [PREPAYMENT RATES]
Class [ ]
------------------------------------------------------
DISTRIBUTION DATE [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
- ----------------- ----- ----- ----- ----- ----- ----- -----
Initial Percentage........ 100 100 100 100 100 100 100
Weighted Average
Life in Years
With Optional Redemption.................
Without Optional Redemption..............
- ---------
* Based upon the assumption that [ ] does not exercise its option to
repurchase the Mortgage Loans as described under "Description of the Notes
-- Optional Redemption" in this prospectus supplement.
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
Upon the issuance of the notes, Stroock & Stroock & Lavan LLP, special
federal tax counsel, will deliver an opinion of counsel that for federal income
tax purposes, the Notes will be treated as indebtedness and the Trust will not
be an association, or publicly traded partnership, taxable as a corporation or a
taxable mortgage pool.
[The Trust does not anticipate treating the Notes as having been
issued with original issue discount.] [It is anticipated that the Notes will be
treated as issued with original issue discount. The prepayment assumption that
will be used in determining the rate of accrual of original issue discount with
respect to the Notes is [ ]. However, this rate does not represent the rate at
which prepayments have actually occurred and no representation is made as to the
rate at which prepayments actually will occur in the future.
All prospective purchasers of the Notes should see "Material Federal
Income Tax Consideration--Partnership Trust Funds and Disregarded Trust
Funds--Taxation of Debt Securityholders" in the accompanying prospectus for a
summary of the anticipated federal income tax consequences of the purchase,
ownership and disposition of the Notes.
STATE AND LOCAL INCOME TAX CONSIDERATIONS
In addition to the federal income tax matters described under
"Material Federal Income Tax Considerations" above, prospective investors should
consider the state and local income tax consequences of the acquisition,
ownership and disposition of the Notes. State income tax law may differ
substantially from the corresponding federal tax law, and this discussion does
not purport to describe any aspect of the income tax laws of any state or
locality. Therefore, prospective investors should consult their own tax advisors
with respect to the various tax consequences of investments in the Notes.
ERISA CONSIDERATIONS
The Notes may be purchased by an employee benefit plan or an
individual retirement account (a "Plan") subject to the Employee Retirement
Income Security Act of 1974, as amended ("ERISA") or Section 4975 of the
Internal Revenue Code of 1986, as amended (the "Code"). A fiduciary of a Plan
must determine that the purchase of a Note is consistent with its fiduciary
duties under ERISA and does not result in a nonexempt prohibited transaction as
defined in Section 406 of ERISA or Section 4975 of the Code. For additional
information regarding treatment of the Notes under ERISA, See "ERISA
Considerations" in the prospectus.
LEGAL INVESTMENT CONSIDERATIONS
[The Notes will [not] constitute "mortgage related securities" under
the Secondary Mortgage Market Enhancement Act of 1984. Accordingly, many
institutions with legal authority to invest in "mortgage related securities" may
[not] be legally authorized to invest in the Notes.]
There may be restrictions on the ability of some investors, including
depository institutions, either to purchase the Notes or to purchase Notes
representing more than a specified percentage of the investor's assets.
Investors should consult their own legal, tax and accounting advisors in
determining whether and to what extent the Notes constitute legal investments
for the investors and the applicable tax, regulatory and accounting treatment of
the Notes.
See "Certain Legal Aspects of Mortgage Loans" in the prospectus.
USE OF PROCEEDS
The net proceeds from the sale of the Notes will be applied by the
Depositor, or an affiliate of the Depositor, toward the purchase of the Mortgage
Loans. The Mortgage Loans will be acquired by the Depositor from [ ] in a
privately negotiated transaction.
UNDERWRITING
[Subject to the terms and conditions provided in the underwriting
agreement and in a terms agreement (collectively, the "Underwriting Agreement")
among the Depositor, [ ] and the Underwriter, the Depositor has agreed to sell
to the Underwriter, and the Underwriter has agreed to purchase from the
Depositor, all of the Notes.
The Underwriter has advised the Depositor that the Underwriter intends
to initially offer the Notes to the public at the price specified on the front
cover of this prospectus supplement. After the initial public offering of the
Notes, the public offering price may be changed. The Underwriting Agreement
provides that the Depositor will indemnify the Underwriter against some civil
liabilities, including liabilities under the Securities Act of 1933, as amended.
Until the distribution of the Notes is completed, the rules of the SEC
may limit the ability of the Underwriter and some selling group members to bid
for and purchase the Notes. As an exception to these rules, the Underwriter is
permitted to engage in transactions that stabilize the price of the Notes. These
transactions consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of the Notes.
If the Underwriter creates a short position in the Notes in connection
with the offering, that is, if they sell more Notes than the amount specified on
the cover page of this prospectus supplement, the Underwriter may reduce that
short position by purchasing Notes in the open market.
In general, purchases of a security for the purpose 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 those purchases.
Neither the Depositor nor the Underwriter makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Notes. In addition, neither the
Depositor nor the Underwriter makes any representation that the Underwriter will
engage in these transactions or that these transactions, once begun, will not be
discontinued without notice.]
Expenses incurred by the Depositor in connection with this offering
are expected to be approximately $[ ].
The Underwriter expects to make a secondary market in the Notes, but
has no obligation to do so. There can be no assurance that any secondary market
will develop, or, if it does develop, that it will continue.
[ ] has entered into an agreement with the Depositor to purchase the
Residual Certificate simultaneously with the purchase of the Notes.
The Underwriter is an affiliate of [ ] and performs management
services for the Depositor. The Underwriter has engaged in other transactions
with, arranged other transactions for or performed other services for the
Depositor and [ ] in the ordinary course of business.
EXPERTS
[To be provided as applicable].
LEGAL MATTERS
Certain legal matters with respect to the Notes will be passed upon
for the Depositor and for the Underwriter by [Stroock & Stroock & Lavan LLP, New
York, New York].
RATINGS
It is a condition to the issuance of the Notes that they be rated "[
]" by [Rating Agency] and "[ ]" by [Rating Agency]. [Rating Agency] and [Rating
Agency] are referred to in this prospectus supplement as the "Rating Agencies."
A securities rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. A securities rating addresses the likelihood of
the receipt by holders of Notes of distributions in the amount of scheduled
payments on the Mortgage Loans. The rating takes into consideration the
characteristics of the Mortgage Loans and the structural, legal and tax aspects
associated with the Notes. The ratings on the Notes do not represent any
assessment of the likelihood or rate of principal prepayments. The ratings do
not address the possibility that holders of Notes might suffer a lower than
anticipated yield due to prepayments.
The security ratings assigned to the Notes should be evaluated
independently from similar ratings on other types of securities. A security
rating is not a recommendation to buy, sell or hold securities and may be
subject to revision or withdrawal at any time by either Rating Agency.
The Depositor has not requested a rating of the Notes by any rating
agency other than the Rating Agencies; there can be no assurance, however, as to
whether any other rating agency will rate the Notes or, if it does, what rating
would be assigned by the other rating agency. The rating assigned by the other
rating agency to the Notes could be lower than the ratings assigned by the
Rating Agencies.
GLOSSARY OF DEFINED TERMS
[To be provided.]
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in some limited circumstances, the globally offered ACE
Securities Corp. [ ] Asset Backed Notes (the "Global Securities") will be
available only in book-entry form. Investors in the Global Securities may hold
the Global Securities through any of DTC, Clearstream Luxembourg or Euroclear.
The Global Securities will be tradable as home market instruments in both the
European and U.S. domestic markets. Initial settlement and all secondary trades
will settle in same-day funds.
Secondary market trading between investors holding Global Securities
through Clearstream Luxembourg and Euroclear will be conducted in the ordinary
way in accordance with their normal rules and operating procedures and in
accordance with conventional eurobond practice (i.e., seven calendar day
settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations and prior mortgage loan asset backed
certificates issues.
Secondary cross-market trading between Clearstream Luxembourg or
Euroclear and DTC Participants holding Certificates will be effected on a
delivery-against-payment basis through the respective Depositaries of
Clearstream Luxembourg and Euroclear and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless those holders meet specific
requirements and deliver appropriate U.S. tax documents to the securities
clearing organizations or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the
name of Cede & Co. as nominee of DTC. Investors' interests in the Global
Securities will be represented through financial institutions acting on their
behalf as direct and indirect Participants in DTC. As a result, Clearstream
Luxembourg and Euroclear will hold positions on behalf of their participants
through their respective Depositaries, which in turn will hold the positions in
accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow the settlement practices applicable to prior mortgage loan asset backed
certificates issues. Investor securities custody accounts will be credited with
their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Clearstream
Luxembourg or Euroclear accounts will follow the settlement procedures
applicable to conventional eurobonds, except that there will be no temporary
global security and no "lock-up" or restricted period. Global Securities will be
credited to the securities custody accounts on the settlement date against
payment in same-day funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
TRADING BETWEEN DTC PARTICIPANTS. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior mortgage
loan asset backed certificates issues in same-day funds.
TRADING BETWEEN CLEARSTREAM LUXEMBOURG AND/OR EUROCLEAR PARTICIPANTS.
Secondary market trading between Clearstream Luxembourg Participants or
Euroclear Participants will be settled using the procedures applicable to
conventional eurobonds in same-day funds.
TRADING BETWEEN DTC SELLER AND CLEARSTREAM LUXEMBOURG OR EUROCLEAR
PURCHASER. When Global Securities are to be transferred from the account of a
DTC Participant to the account of a Clearstream Luxembourg Participant or a
Euroclear Participant, the purchaser will send instructions to Clearstream
Luxembourg or Euroclear through a Clearstream Luxembourg Participant or
Euroclear Participant at least one business day prior to settlement. Clearstream
Luxembourg or Euroclear will instruct the respective Depositary, as the case may
be, to receive the Global Securities against payment. Payment will include
interest accrued on the Global Securities from and including the last interest
payment date to and excluding the settlement date, on the basis of either the
actual number of days in the accrual period and a year assumed to consist of 360
days or a 360-day year of twelve 30-day months as applicable to the related
class of Global Securities. For transactions settling on the 31st of the month,
payment will include interest accrued to and excluding the first day of the
following month. Payment will then be made by the respective Depositary of the
DTC Participant's account against delivery of the Global Securities. After
settlement has been completed, the Global Securities will be credited to the
respective clearing system and by the clearing system, in accordance with its
usual procedures, to the Clearstream Luxembourg Participant's or Euroclear
Participant's account. The securities credit will appear the next day (European
time) and the cash debt will be back-valued to, and the interest on the Global
Securities will accrue from, the value date (that would be the preceding day
when settlement occurred in New York). If settlement is not completed on the
intended value date (i.e., the trade fails), the Clearstream Luxembourg or
Euroclear cash debt will be valued instead as of the actual settlement date.
Clearstream Luxembourg Participants and Euroclear Participants will
need to make available to the respective clearing systems the funds necessary to
process same-day funds settlement. The most direct means of doing so is to
preposition funds for settlement, either from cash on hand or existing lines of
credit, as they would for any settlement occurring within Clearstream Luxembourg
or Euroclear. Under this approach, they may take on credit exposure to
Clearstream Luxembourg or Euroclear until the Global Securities are credited to
their accounts one day later.
As an alternative, if Clearstream Luxembourg or Euroclear has extended
a line of credit to them, Clearstream Luxembourg Participants or Euroclear
Participants can elect not to preposition funds and allow that credit line to be
drawn upon the finance settlement. Under this procedure, Clearstream Luxembourg
Participants or Euroclear Participants purchasing Global Securities would incur
overdraft charges for one day, assuming they cleared the overdraft when the
Global Securities were credited to their accounts. However, interest on the
Global Securities would accrue from the value date. Therefore, in many cases the
investment income on the Global Securities earned during that one-day period may
substantially reduce or offset the amount of overdraft charges, although this
result will depend on each Clearstream Luxembourg Participant's or Euroclear
Participant's particular cost of funds.
Since the settlement is taking place during New York business hours,
DTC Participants can employ their usual procedures for sending Global Securities
to the respective European Depositary for the benefit of Clearstream Luxembourg
Participants or Euroclear Participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC Participants a
cross-market transaction will settle no differently than a trade between two DTC
Participants.
TRADING BETWEEN CLEARSTREAM LUXEMBOURG OR EUROCLEAR SELLER AND DTC
PURCHASER. Due to time zone differences in their favor, Clearstream Luxembourg
Participants and Euroclear Participants may employ their customary procedures
for transactions in which Global Securities are to be transferred by the
respective clearing system, through the respective Depositary, to a DTC
Participant. The seller will send instructions to Clearstream Luxembourg or
Euroclear through a Clearstream Luxembourg Participant or Euroclear Participant
at least one business day prior to settlement. In these cases Clearstream
Luxembourg or Euroclear will instruct the respective Depositary, as appropriate,
to deliver the Global Securities to the DTC Participant's account against
payment. Payment will include interest accrued on the Global Securities from and
including the last interest payment to and excluding the settlement date on the
basis of either the actual number of days in the accrual period and a year
assumed to consist of 360 days or a 360-day year of twelve 30-day months as
applicable to the related class of Global Securities. For transactions settling
on the 31st of the month, payment will include interest accrued to and excluding
the first day of the following month. The payment will then be reflected in the
account of the Clearstream Luxembourg Participant or Euroclear Participant the
following day, and receipt of the cash proceeds in the Clearstream Luxembourg
Participant's or Euroclear Participant's account would be back-valued to the
value date (which would be the preceding day, when settlement occurred in New
York). Should the Clearstream Luxembourg Participant or Euroclear Participant
have a line of credit with its respective clearing system and elect to be in
debt in anticipation of receipt of the sale proceeds in its account, the
back-valuation will extinguish any overdraft incurred over that one day period.
If settlement is not completed on the intended value date (that is, the trade
fails), receipt of the cash proceeds in the Clearstream Luxembourg Participant's
or Euroclear Participant's account would instead be valued as of the actual
settlement date.
Finally, day traders that use Clearstream Luxembourg or Euroclear and
that purchase Global Securities from DTC Participants for delivery to
Clearstream Luxembourg Participants or Euroclear Participants should note that
these trades would automatically fail on the sale side unless affirmative action
were taken. At least three techniques should be readily available to eliminate
this potential problem:
o borrowing through Clearstream Luxembourg or Euroclear for one day
(until the purchase side of the day trade is reflected in their
Clearstream Luxembourg or Euroclear accounts) in accordance with
the clearing system's customary procedures;
o borrowing the Global Securities in the U.S. from a DTC
Participant no later than one day prior to the settlement, which
would give the Global Securities sufficient time to be reflected
in their Clearstream Luxembourg or Euroclear account in order to
settle the sale side of the trade; or
o staggering the value dates for the buy and sell sides of the
trade so that the value date for the purchase from the DTC
Participant is at least one day prior to the value date for the
sale to the Clearstream Luxembourg or Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global securities holding securities through
Clearstream, Luxembourg or Euroclear, or through DTC will be subject to the 30%
U.S. withholding tax that generally applies to payments of interest, including
original issue discount, on registered debt issued by U.S. Persons or to 31%
backup withholding, unless (1) each clearing system, bank or other financial
institution that holds customers' securities in the ordinary course of its trade
or business in the chain of intermediaries between the beneficial owner and the
U.S. entity required to withhold tax complies with applicable certification
requirements and (2) the beneficial owner takes one of the following steps to
obtain an exemption or reduced tax rate:
EXEMPTION FOR NON-U.S. PERSONS (FORM W-8BEN). Beneficial owners of
securities that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8BEN (Certificate of Foreign Status of
Beneficial Owner for United States Tax Withholding. If the information shown on
Form W-8 BEN changes, a new Form W-8 must be filed within 30 days of the change.
EXEMPTION FOR NON-U.S. PERSONS WITH EFFECTIVELY CONNECTED INCOME (FORM
W-8ECI). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form W-8ECI (Certificate of Foreign Person's Claim for
Exemption from Withholding on Income Effectively Connected with the Conduct of a
Trade or Business in the United States).
EXEMPTION OR REDUCED RATE FOR NON-U.S. PERSONS RESIDENT IN TREATY
COUNTRIES (FORM W-8BEN). Non-U.S. Persons that are beneficial owners of
securities residing in a country that has a tax treaty with the United States
can obtain an exemption or reduced tax rate, depending on the treaty terms, by
filing Form W-8BEN (including Part II thereof). If the treaty provides only for
a reduced rate, the beneficial owner may still be entitled to complete exemption
from withholding under item (1) above.
EXEMPTION FOR U.S. PERSONS (FORM W-9). U.S. Persons can obtain
complete exemption from the withholding tax by filing Form W-9 (Request for
Taxpayer Identification Number and Certification).
U.S. FEDERAL INCOME TAX REPORTING PROCEDURE. The beneficial owner of a
Global Security files by submitting the appropriate form to the person through
whom it holds, the clearing agency, in the case of persons holding directly on
the books of the clearing agency. Form W-8BEN and Form W-8ECI are generally
effective for three calendar years from the close of the calendar year in which
it is collected.
The term "U.S. Person" means (1) a citizen or resident of the United
States, (2) a corporation or partnership (or other entity properly classified as
a corporation or partnership for U.S. Federal income tax purposes) organized in
or under the laws of the United States or any state or the District of Columbia,
(3) an estate the income of which is includible in gross income for United
States tax purposes, regardless of its source, or (4) a trust if a court within
the United States is able to exercise primary supervision over the
administration of the trust and one or more United States persons have authority
to control all substantial decisions of the trust. Notwithstanding the preceding
sentence, to the extent provided in regulations, trusts in existence on August
20, 1996 and treated as United States persons prior to that date that elect to
continue to be so treated also will be considered U.S. Persons. Treasury
regulations provide certain presumptions regarding the entity classification and
foreign or U.S. status of a holder that a payor generally must apply in the
absence of appropriate documentation from the holder, and provide detailed
documentation and procedures for holders claiming withholding tax exemptions
through intermediaries. Prospective investors are urged to consult their tax
advisors regarding the effect of these regulations on their ability to claim and
the means for claiming exemptions from or reduced rates of U.S. withholding
taxes.
This summary does not deal with all aspects of U.S. Federal income tax
withholding that may be relevant to foreign holders of the Global securities.
Investors are advised to consult their own tax advisers for specific tax advice
concerning their holding and disposing of the Global securities.
$[ ]
(APPROXIMATE)
ACE SECURITIES CORP.
[ ] TRUST [ ]
ASSET BACKED NOTES
[ ]
SERVICER
-------------------------
PROSPECTUS SUPPLEMENT
-------------------------
DEUTSCHE BANC ALEX. BROWN
The information in this prospectus supplement is not complete and may be
changed. We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This prospectus
supplement is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
SUBJECT TO COMPLETION, [ ]
PROSPECTUS SUPPLEMENT (to prospectus dated [ ])
$[ ] (APPROXIMATE)
ACE SECURITIES CORP.
[ ] TRUST
[ ] PASS-THROUGH CERTIFICATES
[ ]
ORIGINATOR AND SERVICER
-----------
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-[ ] OF THIS
PROSPECTUS SUPPLEMENT AND ON PAGE [ ] OF THE PROSPECTUS.
For a list of capitalized terms used in this prospectus supplement and
the prospectus, see the index of defined terms beginning on page S-[ ] of this
prospectus supplement and on page [ ] of the prospectus.
The certificates will represent interests in the trustfund only and
will not representinterests in or obligations of anyother entity.
This prospectus supplement may be used to offer and sell the
certificates only if accompanied by the prospectus.
The trust fund will issue certificates including the following:
CLASS INTEREST
CLASS PRINCIPAL AMOUNT(1) RATE
----- ------------------- -----
[ ].................................. $[ ] [ ]
[ ].................................. [ ] [ ]
[ ].................................. [ ] [ ]
___________________
(1) These amounts are approximate, as described in this prospectus
supplement.
(2) Interest will accrue on the Class [ ] and [ ]
Certificates at [described as applicable].
This prospectus supplement and the accompanying prospectus relate only
to the offering of the certificates listed in the table above and not to the
other classes of certificates that will be issued by the trust fund as described
in this prospectus supplement.
[Describe assets of trust fund.]
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THE CERTIFICATES OR DETERMINED
THAT THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS IS ACCURATE OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
[Describe underwriting arrangements.]
On or about [ ], delivery of the certificates offered by this
prospectus supplement will be made through the book-entry facilities of [ ].
UNDERWRITER:
DEUTSCHE BANC ALEX. BROWN
The date of this prospectus supplement is [ ]
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS:
We provide information to you about the certificates offered by this
prospectus supplement in two separate documents that progressively provide more
detail: (1) the accompanying prospectus, which provides general information,
some of which may not apply to your certificates, and (2) this prospectus
supplement, which describes the specific terms of your certificates.
IF INFORMATION VARIES BETWEEN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS, YOU SHOULD RELY ON THE INFORMATION IN THIS PROSPECTUS
SUPPLEMENT.
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We have
not authorized anyone to provide you with different information.
We are not offering the certificates in any state where the offer is
not permitted. We do not claim that the information in this prospectus
supplement and prospectus is accurate as of any date other than the dates stated
on their respective covers.
-----------------------
Dealers will deliver a prospectus supplement and prospectus when acting
as underwriters of the certificates and with respect to their unsold allotments
or subscriptions. In addition, all dealers selling the certificates will be
required to deliver a prospectus supplement and prospectus for ninety days
following the date of this prospectus supplement.
-----------------------
We include cross-references in this prospectus supplement and the
accompanying prospectus to captions in these materials where you can find
further related discussions. The following table of contents and the table of
contents included in the accompanying prospectus provide the pages on which
these captions are located.
TABLES OF CONTENTS
PROSPECTUS SUPPLEMENT
PAGE
Summary of Terms............................................................S-4
Risk Factors................................................................S-8
Description of the Certificates............................................S-14
[The Insurance Policy......................................................S-22
Description of the Mortgage Pool...........................................S-23
Additional Information.....................................................S-32
[Originator/Servicer.......................................................S-33
The Pooling and Servicing Agreement........................................S-35
Yield Considerations.......................................................S-40
Material Federal Income Tax Considerations.................................S-45
State and Local Income Tax Considerations..................................S-45
Legal Investment Considerations............................................S-45
Use of Proceeds............................................................S-46
Underwriting...............................................................S-46
ERISA Considerations.......................................................S-46
Experts....................................................................S-46
Legal Matters..............................................................S-47
Ratings....................................................................S-47
Glossary of Defined Terms..................................................S-48
Annex I....................................................................S-49
PROSPECTUS
PAGE
----
Description of the Trust Funds.................................................
Use of Proceeds................................................................
Yield Considerations...........................................................
The Depositor..................................................................
Description of the Securities..................................................
Description of the Agreements..................................................
Certain Legal Aspects of Mortgage Loans........................................
Material Federal Income Tax
Considerations..............................................................
State and Other Tax Considerations.............................................
ERISA Considerations...........................................................
Legal Investment...............................................................
Methods of Distribution........................................................
Additional Information.........................................................
Incorporation of Certain Documents
by Reference................................................................
Legal Matters..................................................................
Financial Information..........................................................
Rating.........................................................................
Index of Defined Terms.........................................................
SUMMARY OF TERMS
O THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROSPECTUS
SUPPLEMENT AND DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU NEED TO
CONSIDER IN MAKING YOUR INVESTMENT DECISION. TO UNDERSTAND ALL OF THE TERMS
OF THE OFFERING OF THE CERTIFICATES, IT IS NECESSARY THAT YOU READ
CAREFULLY THIS ENTIRE PROSPECTUS SUPPLEMENT AND ACCOMPANYING PROSPECTUS.
O WHILE THIS SUMMARY CONTAINS AN OVERVIEW OF CERTAIN CALCULATIONS, CASH FLOW
PRIORITIES, AND OTHER INFORMATION TO AID YOUR UNDERSTANDING, YOU SHOULD
READ CAREFULLY THE FULL DESCRIPTION OF THESE CALCULATIONS, CASH FLOW
PRIORITIES AND OTHER INFORMATION IN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS BEFORE MAKING ANY INVESTMENT DECISION.
o [WHENEVER WE REFER TO A PERCENTAGE OF SOME OR ALL OF THE MORTGAGE LOANS IN
THE TRUST FUND OR IN ANY POOL, THAT PERCENTAGE HAS BEEN CALCULATED ON THE
BASIS OF THE TOTAL PRINCIPAL BALANCE OF THOSE MORTGAGE LOANS AS OF [ ],
UNLESS WE SPECIFY OTHERWISE. WE EXPLAIN IN THIS PROSPECTUS SUPPLEMENT UNDER
"DESCRIPTION OF THE CERTIFICATES -- DISTRIBUTIONS OF PRINCIPAL" HOW THE
PRINCIPAL BALANCE OF A MORTGAGE LOAN IS DETERMINED. WHENEVER WE REFER IN
THIS SUMMARY OF TERMS OR IN THE RISK FACTORS SECTION OF THIS PROSPECTUS
SUPPLEMENT TO THE TOTAL PRINCIPAL BALANCE OF ANY MORTGAGE LOANS, WE MEAN
THE TOTAL OF THEIR PRINCIPAL BALANCES, UNLESS WE SPECIFY OTHERWISE.]
THE OFFERED CERTIFICATES
ACE Securities Corp.'s [ ] Pass-Through Certificates consist of the
following classes: [ ]. Only the [ ] Certificates are being offered by this
prospectus supplement. These certificates will be issued in book-entry form.
SEE "DESCRIPTION OF THE CERTIFICATES -- GENERAL" IN THIS PROSPECTUS
SUPPLEMENT FOR A DISCUSSION OF THE MINIMUM DENOMINATIONS AND THE INCREMENTAL
DENOMINATIONS OF EACH CLASS OF CERTIFICATES.
The certificates represent ownership interests in a trust fund, the
assets of which consist primarily of [describe assets of trust fund.]
The certificates will have an approximate total initial principal
amount of $[ ]. Any difference between the total principal amount of the
certificates on the date they are issued and the approximate total principal
amount of the certificates on the date of this prospectus supplement will not
exceed 5%.
PAYMENTS ON THE CERTIFICATES
Principal and interest on the certificates will be payable on the
[25th] day of each month, beginning in [ ]. However, if the [25th] day is not a
business day, distributions will be made on the next business day after the
[25th] day of the month.
INTEREST PAYMENTS
Interest will accrue on each class of certificates, [other than the
Class [ ] Certificate], at the applicable annual rates described in this
prospectus supplement.
SEE "DESCRIPTION OF THE CERTIFICATES -- DISTRIBUTIONS OF INTEREST" IN THIS
PROSPECTUS SUPPLEMENT.
PRINCIPAL PAYMENTS
The amount of principal payable on the certificates, [other than the
Class [ ] Certificate], will be determined by (1) funds actually received on the
mortgage loans in [each] pool that are available to make payments on the
certificates, (2) the amount of interest received or advanced on the mortgage
loans that is used to pay principal on the certificates, calculated as described
in this prospectus supplement, (3) [formulas that allocate a portion of
principal payments received on the mortgage loans to each class of certificates,
as described in this prospectus supplement,] and (4) [ ]. Funds actually
received on the mortgage loans may consist of expected, scheduled payments, and
unexpected payments resulting from prepayments or defaults by borrowers,
liquidation of defaulted mortgage loans, or repurchases of mortgage loans under
the circumstances described in this prospectus supplement.
WE EXPLAIN HOW PRINCIPAL IS PAID ON THE CERTIFICATES UNDER
"DESCRIPTION OF THE CERTIFICATES -- DISTRIBUTIONS OF PRINCIPAL" IN THIS
PROSPECTUS SUPPLEMENT.
[PREPAYMENT PENALTIES ON THE MORTGAGE LOANS
The holder of the Class [ ] Certificate will be entitled to receive
any prepayment penalties received on the mortgage loans. These amounts will not
be available to make payments on other classes of certificates.
SEE "DESCRIPTION OF THE CERTIFICATES" AND "DESCRIPTION OF THE MORTGAGE
POOLS -- GENERAL" IN THIS PROSPECTUS SUPPLEMENT.]
LIMITED RECOURSE
The only source of cash available to make interest and principal
payments on the certificates will be the assets of the trust fund. The trust
fund will have no other source of cash and no entity other than the trust fund
will be required or expected to make any payments on the certificates.
ENHANCEMENT OF LIKELIHOOD OF PAYMENT ON THE CERTIFICATES
[DESCRIBE ANY APPLICABLE FINANCIAL GUARANTY INSURANCE POLICY OR GUARANTEE.]
[SUBORDINATION OF PAYMENTS
The [ ] certificates will have a payment priority as a group over the
Class [ ] Certificates both for payments of interest and payments of principal.
No amounts will be paid to the Holder of the Class [ ] Certificate on any
distribution date until all amounts due to the senior certificates and the Class
[ ] Certificates on that date have been paid and overcollateralization has
reached the required level.]
[OVERCOLLATERALIZATION
On the closing date, the total principal balance of the mortgage loans
is expected to [approximately equal the total principal amount of the
certificates]. Any interest received on the mortgage loans in excess of the
amount needed to pay interest on the certificates and some of the expenses and
fees of the trust fund will be used to reduce the total principal amount of the
certificates to a level set by the rating agencies until the mortgage loans have
a total principal balance that exceeds the total outstanding principal amount of
the certificates by the amount required by the rating agencies. This condition
is referred to as "overcollateralization." We cannot assure you that sufficient
interest will be generated by the mortgage loans to create
overcollateralization, to increase overcollateralization to the level required
by the rating agencies, or to maintain it at that level.
SEE "RISK FACTORS -- POTENTIAL INADEQUACY OF Credit ENHANCEMENT FOR
THE CLASS [ ] CERTIFICATES" AND "DESCRIPTION OF THE CERTIFICATES -- CREDIT
ENHANCEMENT -- SUBORDINATION" AND "-- OVERCOLLATERALIZATION" IN THIS PROSPECTUS
SUPPLEMENT.]
[ALLOCATION OF LOSSES
As described in this prospectus supplement, amounts representing
losses on the mortgage loans in excess of overcollateralization will be applied
to reduce the principal amount of the Class [ ] Certificates until their
principal amount has been reduced to zero.
o If a loss has been allocated to reduce the principal amount of your
Class [ ] Certificate, you will receive no payment in respect of that
reduction at that time.
o After overcollateralization has been created and has been increased to
the required level, you will receive the amount of that loss if there
are sufficient funds to pay you, as described in this prospectus
supplement, but you will not receive any interest on that amount.
After the principal amount of the Class [ ] Certificates has been
reduced to zero, amounts representing losses on the mortgage loans will be paid
to holders of the senior certificates by [ ], to the extent funds available are
insufficient to cover these losses.
SEE "DESCRIPTION OF THE CERTIFICATES -- CREDIT ENHANCEMENT --
ALLOCATION OF LOSSES" AND "THE INSURANCE POLICY" IN THIS PROSPECTUS SUPPLEMENT.]
THE MORTGAGE LOANS
On the closing date, which is expected to be on or about [ ], the
assets of the trust fund will consist of [two] pools of mortgage loans with a
total principal balance of approximately $[ ]. The mortgage loans will be
secured by mortgages, deeds of trust, or other security instruments, all of
which are referred to in this prospectus supplement as mortgages.
[Description of mortgage loans.]
[Description of pre-funding account and additional mortgage loans as
applicable.]
[The mortgage loans in the trust fund will not be insured or
guaranteed by any government agency.]
SEE "DESCRIPTION OF THE MORTGAGE POOLS" IN THIS PROSPECTUS SUPPLEMENT
FOR A GENERAL DESCRIPTION OF THE MORTGAGE LOANS AND "[ORIGINATOR/SERVICER]" IN
THIS PROSPECTUS SUPPLEMENT FOR A DESCRIPTION OF THE UNDERWRITING GUIDELINES
APPLIED IN ORIGINATING THE MORTGAGE LOANS.
[THE PRE-FUNDING ACCOUNT
On the closing date, approximately $[ ] will be deposited by [ ] in a
pre-funding account maintained by [ ]. It is intended that additional mortgage
loans will be sold to the trust fund by the depositor from time to time, from [
] until [ ], paid for with the funds on deposit in the pre-funding account.
[Description of pre-funding account and additional mortgage loans as
applicable.]
SEE "DESCRIPTION OF THE CERTIFICATES --PRE-FUNDING ACCOUNT" IN THIS
PROSPECTUS SUPPLEMENT.]
SERVICING OF THE MORTGAGE LOANS
The mortgage loans will be serviced by [ ].
SEE "[ORIGINATOR/SERVICER]" AND "THE POOLING AND SERVICING AGREEMENT"
IN THIS PROSPECTUS SUPPLEMENT.
OPTIONAL PURCHASE OF MORTGAGE LOANS
[ ] will have the option to purchase all of the mortgage loans and the
other property of the trust fund, [other than the insurance policy], after the
total principal balance of the mortgage loans declines to less than [ ]% of
their initial total principal balance; if [ ] does not exercise that option, [ ]
may purchase the Mortgage Loans and other property of the trust fund.
If the mortgage loans and other assets are purchased, the
certificateholders will be paid accrued interest and principal equal to the
outstanding principal amount of the certificates.
SEE "DESCRIPTION OF THE CERTIFICATES -- OPTIONAL PURCHASE OF MORTGAGE
LOANS; TERMINATION OF THE TRUST FUND" IN THIS PROSPECTUS SUPPLEMENT FOR A
DESCRIPTION OF THE PURCHASE PRICE TO BE PAID FOR THE MORTGAGE LOANS.
TAX STATUS
[The Trust Fund will make one or more elections to treat certain
assets of the trust as a real estate mortgage investment conduit (each, a
"REMIC") for federal income tax purposes. The Class [ ] Certificates will
represent regular interests in a REMIC and generally will be treated as debt
instruments for federal income tax purposes. The Class [R] Certificates will
represent the residual interest in each REMIC.]
[Alternatively, grantor trust, partnership or FASIT status to be
described as applicable.]
SEE "MATERIAL FEDERAL INCOME TAX CONSIDERATIONS" IN THIS PROSPECTUS
SUPPLEMENT AND IN THE ACCOMPANYING PROSPECTUS FOR ADDITIONAL INFORMATION
CONCERNING THE APPLICATION OF FEDERAL INCOME TAX LAWS TO THE CERTIFICATES.
ERISA CONSIDERATIONS
The Offered Certificates may be acquired by employee benefit plans and
other retirement arrangements, subject to certain conditions.
SEE "ERISA CONSIDERATIONS" IN THIS PROSPECTUS SUPPLEMENT AND IN THE
PROSPECTUS FOR A MORE COMPLETE DISCUSSION OF THESE ISSUES.
LEGAL INVESTMENT CONSIDERATIONS
[Only the Class [ ] Certificates] will constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984.
There are other restrictions on the ability of some types of investors
to purchase the certificates that prospective investors should consider.
SEE "LEGAL INVESTMENT CONSIDERATIONS" IN THIS PROSPECTUS SUPPLEMENT.
RATINGS OF THE CERTIFICATES
The certificates will initially have the following ratings from [ ]:
[Rating [Rating
CLASS AGENCY] AGENCY]
----- ------ ------
[ ] [ ] [ ]
[ ] [ ] [ ]
[ ] [ ] [ ]
These ratings are not recommendations to buy, sell or hold these certificates. A
rating may be changed or withdrawn at any time by the assigning rating agency.
o The ratings do not address the possibility that, as a result of
principal prepayments, the yield on your certificates may be lower
than anticipated.
SEE "RATINGS" IN THIS PROSPECTUS SUPPLEMENT FOR A MORE COMPLETE
DISCUSSION OF THE CERTIFICATE RATINGS.
RISK FACTORS
THE FOLLOWING INFORMATION, WHICH YOU SHOULD CAREFULLY CONSIDER,
IDENTIFIES CERTAIN SIGNIFICANT SOURCES OF RISK ASSOCIATED WITH AN INVESTMENT IN
THE CERTIFICATES. YOU SHOULD ALSO CAREFULLY CONSIDER THE INFORMATION SET FORTH
UNDER "RISK FACTORS" IN THE PROSPECTUS.
[SOME OF THE LOANS IN THE MORTGAGE The payment schedules for most of the
POOL ARE MORE LIKELY TO DEFAULT mortgage loans in the pool require the
THAN OTHERS, AND HIGHER THAN borrower to pay off the principal
EXPECTED DEFAULTS ON THESE LOANS balance of the loan gradually over the
COULD REDUCE THE YIELD ON YOUR life of the loan. Some of the mortgage
CERTIFICATES loans in the pool, however, have payment
schedules under which the borrowers
makes relatively small payments of
principal over the life of the loan, and
then must make a large final payment at
maturity that pays off the entire
principal balance outstanding. This
final payment is usually much larger
than the previous monthly payments.
Because the borrower's ability to make
this final payment usually depends on
the ability to refinance the loan or
sell the underlying property, the risk
of default is greater than on other
types of loans. High rates of default on
these types of loans in the pool will
result in greater losses on your
certificates.
The ability of a borrower to refinance
the type of loan described above or
sell the mortgaged property will
depend upon a number of factors,
including:
o the level of mortgage interest
rates;
o the borrower's equity in the
mortgage property;
o general economic conditions; and
o the availability of credit.
We cannot predict how these factors will
affect the default rate of these
mortgage loans in the pool. You should
refer to "Description of the Mortgage
Pool" for information on the percentage
of loans in the mortgage loan pool that
consists of these loans.]
[MORTGAGE LOAN INTEREST RATES MAY [LIBOR may increase or decrease at
LIMIT INTEREST RATES ON THE different times and in different amounts
CERTIFICATES than the index applicable to the
adjustable rate mortgage loans.]
[The trust fund will include a reserve
fund whose primary asset will be
[describe as applicable]].
SEE "DESCRIPTION OF THE CERTIFICATES --
THE RESERVE FUND" IN THIS PROSPECTUS
SUPPLEMENT. FOR DETAILED INFORMATION ON
THE INTEREST RATES OF THE MORTGAGE
LOANS, SEE "DESCRIPTION OF THE MORTGAGE
POOLS" IN THIS PROSPECTUS SUPPLEMENT.]
[POTENTIAL INADEQUACY OF CREDIT The Class [ ] Certificates are not
ENHANCEMENT FOR THE CLASS [ ] insured by any financial guaranty
CERTIFICATES insurance policy. The
overcollateralization feature described
in this prospectus supplement is
intended to enhance the likelihood that
holders of Class [ ] Certificates will
receive regular payments of interest and
principal, but is limited in nature and
may be insufficient to cover all losses
on the mortgage loans or shortfalls in
interest payments on the mortgage loans.
In order to create, increase and
maintain overcollateralization, it will
be necessary that the mortgage loans
generate more interest than is needed to
pay interest on the certificates as well
as fees and expenses of the trust fund
and other amounts that are described in
this prospectus supplement. We expect
that the mortgage loans will generate
more interest than is needed to pay
those amounts, at least during some
periods, because the weighted average of
the interest rates on the mortgage loans
will be higher, at the time the
certificates are issued, than the
weighted average of the interest rates
on the certificates. We cannot assure
you, however, that enough excess
interest will be generated to reach the
overcollateralization levels required by
the rating agencies. The following
factors will affect the amount of excess
interest that the mortgage loans will
generate:
o PREPAYMENTS. Every time a
mortgage loan with an interest
rate higher than the weighted
average of the interest rates on
the certificates is prepaid,
total excess interest after the
date of prepayment will be
reduced because that mortgage
loan will no longer be
outstanding and generating
interest. The effect on your
certificates of this reduction
will be influenced by the amount
of prepaid loans and the
characteristics of the prepaid
loans. Prepayment of a
disproportionately high number
of high interest rate mortgage
loans would have a greater
negative effect on future excess
interest.
o DEFAULTS. The rate of defaults
on the mortgage loans may turn
out to be higher than expected.
Defaulted mortgage loans may be
liquidated, and liquidated
mortgage loans will no longer be
outstanding and generating
interest.
o LEVEL OF LIBOR. If LIBOR
increases, more money will be
needed to pay interest to
certificateholders, so less
money will be available as
excess interest.]
[SPECIAL RISKS FOR THE CLASS [ ] The rights of holders of Class [ ]
CERTIFICATES Certificates to receive payments of
interest are subordinate to the rights
of holders of senior certificates to
receive payments of interest, and the
rights of holders of Class [ ]
Certificates to receive payments of
principal are subordinate to the rights
of holders of senior certificates to
receive payments of principal.
In addition, you should consider the
following:
o If you buy a Class [ ]
Certificate and losses on the
mortgage loans exceed excess
interest and any
overcollateralization that has
been created, the principal
amount of your certificate will
be reduced proportionately with
the principal amounts of the
other Class [ ] Certificates by
the amount of that excess;
o If, after overcollateralization
is created in the required
amount, the mortgage loans
generate interest in excess of
the amount needed to pay
interest and principal on the
certificates and fees and
expenses of the trust fund, the
excess interest will be used to
pay you and other holders of
Class [ ] Certificates the
amount of any reduction in the
principal balances of the Class
[ ] Certificates caused by
application of losses.
o We cannot assure you, however,
that any excess interest will be
generated and, in any event, no
interest will be paid to you on
the amount by which your
principal balance was reduced
because of the application of
losses.
SEE "DESCRIPTION OF THE CERTIFICATES --
CREDIT ENHANCEMENT -- SUBORDINATION" AND
"-- ALLOCATION OF LOSSES" IN THIS
PROSPECTUS SUPPLEMENT.]
[EFFECT OF LACK OF PRIMARY MORTGAGE Approximately [ ]% of the mortgage loans
INSURANCE ON THE CLASS [ ] have loan-to-value ratios greater than
CERTIFICATES 80%. None of the mortgage loans are
covered by a primary mortgage insurance
policy. If borrowers default on their
mortgage loans, there is a greater
likelihood of losses than if the loans
were insured. We cannot assure you that
the applicable credit enhancement will
be adequate to cover those losses.
SEE "DESCRIPTION OF THE CERTIFICATES --
CREDIT ENHANCEMENT -- SUBORDINATION" AND
"-- ALLOCATION OF LOSSES" IN THIS
PROSPECTUS SUPPLEMENT.]
UNPREDICTABILITY AND EFFECT OF Borrowers may prepay their mortgage
PREPAYMENTS loans in whole or in part at any time;
[however, approximately [ ]% of the
mortgage loans require the payment of a
prepayment penalty in connection with
some voluntary prepayments, which may
discourage these borrowers from
prepaying their mortgage loans].
Prepayments of principal may also be
caused by liquidations of or insurance
payments on the mortgage loans. A
prepayment of a mortgage loan will
usually result in a prepayment on the
certificates.
The prepayment experience on the
mortgage loans may affect the average
life of the certificates. The rate of
principal payments on the mortgage loans
is from time to time influenced by a
variety of economic, demographic,
geographic, social, tax, legal and other
factors. There can be no assurance as to
the rate of prepayment on the mortgage
loans or that the rate of payments will
conform to the model described in this
prospectus supplement.
If prevailing interest rates fall
significantly below the interest rates
on the mortgage loans, principal
prepayments are likely to be higher than
if prevailing rates remain at or above
the interest rates on the mortgage
loans. As a result, the actual maturity
of the certificates could occur
significantly earlier than expected.
Conversely, if prevailing interest rates
rise significantly above the interest
rates on the mortgage loans, principal
prepayments are likely to be lower than
if prevailing rates remain at or below
the interest rates on the mortgage loans
and the maturity of the certificates
could occur significantly later than
expected. In addition, some prepayments
may result in the collection of less
interest than would otherwise be the
case in the month of prepayment.
o If you purchase your
certificates at a discount and
principal is repaid more slowly
than you anticipate, then your
yield may be lower than you
anticipate.
o If you purchase your
certificates at a premium and
principal is repaid faster than
you anticipate, then your yield
may be lower than you
anticipate.
SEE "YIELD CONSIDERATIONS" IN THIS
PROSPECTUS SUPPLEMENT FOR A DESCRIPTION
OF FACTORS THAT MAY INFLUENCE THE RATE
AND TIMING OF PREPAYMENTS ON THE
MORTGAGE LOANS.
GEOGRAPHIC CONCENTRATION OF Approximately [ ]% of the mortgage loans
MORTGAGE LOANS expected to be in the pool on the
closing date are secured by properties
in [California]. Delinquencies, defaults
and losses on the mortgage loans may be
higher than if fewer of the mortgage
loans were concentrated in one state
because the following conditions in
[California] will have a
disproportionate impact on the mortgage
loans in general:
o Declines in the [California]
residential real estate market
may reduce the values of
properties located in that
state, which would result in an
increase in the loan-to-value
ratios.
o Properties in [California] may
be more susceptible than homes
located in other parts of the
country to some types of
uninsured hazards, such as
earthquakes, as well as floods,
wildfires, mudslides and other
natural disasters.
Natural disasters affect regions of the
United States from time to time, and may
result in increased losses on mortgage
loans in those regions, or in insurance
payments that will constitute
prepayments of those mortgage loans.
FOR ADDITIONAL INFORMATION REGARDING THE
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGE
LOANS IN EACH POOL, SEE THE APPLICABLE
TABLE UNDER "DESCRIPTION OF THE MORTGAGE
POOLS" IN THIS PROSPECTUS SUPPLEMENT.
REAL ESTATE MARKET MAY AFFECT A decline in the real estate values or
PERFORMANCE OF MORTGAGE LOANS in economic conditions generally could
increase the rates of delinquencies,
foreclosures and losses on the mortgage
loans to a level that is significantly
higher than those experienced currently;
and no assurance can be given that
values of the properties securing the
mortgage loans will not decline since
the date of origination of the mortgage
loan. If the credit enhancement
described in this prospectus supplement
is not enough to protect your
certificates from these losses, the
yield on your certificates may be
reduced.
[EARLY PRINCIPAL PAYMENT FROM CASH If the cash in the pre-funding account
REMAINING IN PRE-FUNDING ACCOUNT on the closing date is not used to
acquire additional mortgage loans by
[ ], then that cash will be [paid to you
on a proportionate basis with the other
certificateholders in reduction of the
principal balance of your certificates.]
If the amount of that cash is
substantial, you will receive a
significant unexpected early payment of
principal in (or before) [ ]. We cannot
assure you that you will be able to
reinvest that money in another
investment with a comparable yield.]
YOU WILL NOT RECEIVE PHYSICAL Unless you are the purchaser of the
CERTIFICATES,WHICH CAN CAUSE DELAYS residual certificates, your ownership of
IN DISTRIBUTIONS AND HAMPER YOUR the certificates will be registered
ABILITY TO PLEDGE OR RESELL YOUR electronically with DTC. The lack of
CERTIFICATES physical certificates could:
o result in payment delays on the
certificates because the trustee
will be sending distributions on
the certificates to DTC instead
of directly to you;
o make it difficult for you to
pledge your certificates if
physical certificates are
required by the party demanding
the pledge; and
o could hinder your ability to
resell the certificates because
some investors may be unwilling
to buy certificates that are not
in physical form.
SEE "DESCRIPTION OF THE CERTIFICATES --
BOOK-ENTRY REGISTRATION" IN THIS
PROSPECTUS SUPPLEMENT.
LIMITED ABILITY TO RESELL The underwriter is not required to
CERTIFICATES assist in resales of the certificates,
although it may do so. A secondary
market for any class of certificates may
not develop. If a secondary market does
develop, it might not continue or it
might not be sufficiently liquid to
allow you to resell any of your
certificates. The certificates will not
be listed on any securities exchange.
[Additional risk factors to be provided as applicable.]
DESCRIPTION OF THE CERTIFICATES
GENERAL
The [ ] Pass-Through Certificates will consist of the following
Classes: [ ] (together, the "Certificates").
The [ ] Certificates are referred to in this prospectus supplement as
the "Senior Certificates." Only the Class [ ] Certificates (the "Offered
Certificates") are offered by this prospectus supplement. The Class [ ]
Certificates are referred to in this prospectus supplement as the "LIBOR
Certificates." The Class [ ] Certificates are referred to in this prospectus
supplement as the "Subordinate Certificates." The Class R Certificate is also
referred to as the "Residual Certificate."
The Class [ ] Certificate will be issued as a single Certificate in
fully registered, certificated form.
The Certificates represent beneficial ownership interests in a trust
fund (the "Trust Fund"), the assets of which consist primarily of (1) [describe
mortgage loans] mortgage loans (the "Mortgage Loans"), (2) the assets that from
time to time are identified as deposited in respect of the Mortgage Loans in the
Collection Account and the Certificate Account (each as defined in this
prospectus supplement), (3) property acquired by foreclosure of Mortgage Loans
or deed in lieu of foreclosure, (4) any applicable insurance policies and all
proceeds of these insurance policies, and (5) [describe other assets, as
applicable].
Each Class of Offered Certificates will be issued in the respective
approximate initial total principal amount set forth or described on the cover
page of this prospectus supplement. The total principal amount of each Class of
Offered Certificates is referred to in this prospectus supplement as the "Class
Principal Amount" for that Class. The Class [ ] Certificate will be issued
without a principal amount or interest rate, and will be entitled only to the
amounts that are described in this prospectus supplement. The total Certificate
Principal Amount (as defined in this prospectus supplement) of the Certificates
and the initial Class Principal Amount of each Class of Offered Certificates may
be increased or decreased by up to 5% to the extent that the Cut-off Date
Balance (as defined in this prospectus supplement) of the Mortgage Loans is
increased or decreased as described under "Description of the Mortgage Pools" in
this prospectus supplement.
Distributions on the Certificates will be made on the [25th] day of
each month or, if the [25th] day is not a Business Day, on the next succeeding
Business Day, commencing in [ ] (each, a "Distribution Date"), to
Certificateholders of record on the applicable Record Date. The "Record Date"
for each Distribution Date will be the close of business on the last Business
Day of the calendar month immediately preceding the month in which that
Distribution Date occurs.
o A "Business Day" is generally any day other than a Saturday or
Sunday or a day on which banks in New York or [California] are
closed.
Distributions on the Offered Certificates will be made to each
registered holder entitled to the distributions, either (1) by check mailed to
the Certificateholder's address as it appears on the books of the Trustee (as
defined in this prospectus supplement), or (2) at the request, submitted to the
Trustee in writing at least five Business Days prior to the related Record Date,
of any holder of an Offered Certificate (at the holder's expense) in immediately
available funds; provided, that the final distribution in respect of any
Certificate will be made only upon presentation and surrender of the Certificate
at the Corporate Trust Office (as defined in this prospectus supplement) of the
Trustee. See "-- The Trustee" in this prospectus supplement.
[PRE-FUNDING ACCOUNT
On the Closing Date approximately $[ ] (the "Pre-Funded Amount") will
be deposited in an account (the "Pre-Funding Account") maintained by [ ], which
account shall be part of the trust fund. During the period (the "Pre-Funding
Period") from [ ] until [ ], the Pre-Funding Amount will be maintained in the
Pre-Funding Account. The Pre-Funded Amount will be reduced during the
Pre-Funding Period by the amount of Subsequent Mortgage Loans (as defined in
this prospectus supplement) deposited in the trust fund in accordance with the
Pooling and Servicing Agreement. During the Pre-Funding Period, the Pre-Funded
Amount will be used only to purchase Subsequent Mortgage Loans. Immediately
following the Pre-Funding Period, any Pre-Funded Amount remaining will be
distributed to [to be provided as applicable].
Amounts on deposit in the Pre-Funding Account will be invested in [to
be provided as applicable] and all investment earnings on amounts on deposit in
the Pre-Funding Account will be distributed to [to be provided as applicable]
following the Pre-Funding Period.]
BOOK-ENTRY REGISTRATION
GENERAL. The Offered Certificates (the "Book-Entry Certificates") will
be issued, maintained and transferred on the book-entry records of The
Depository Trust Company ("DTC") in the United States [, or through Clearstream
Luxembourg, societe anonyme ("Clearstream Luxembourg") or the Euroclear System
("Euroclear") in Europe] and through [its/their] participating organizations
(each, a "Participant"). The Book-Entry Certificates will be issued in minimum
denominations in principal amount of $25,000 and integral multiples of $1 in
excess of $25,000.
Each Class of Book-Entry Certificates will be represented by one or
more certificates registered in the name of the nominee of DTC. ACE Securities
Corp. (the "Depositor") has been informed by DTC that DTC's nominee will be Cede
& Co. [Clearstream Luxembourg and Euroclear will hold omnibus positions on
behalf of their Participants through customers' securities accounts in
Clearstream Luxembourg's and Euroclear's names on the books of their respective
depositaries, which in turn will hold positions in customers' securities
accounts in the depositaries' names on the books of DTC.] No person acquiring an
interest in a Book-Entry Certificate (each, a "Beneficial Owner") will be
entitled to receive a certificate representing an interest (a "Definitive
Certificate"), except as set forth below under "-- Definitive Certificates" and
in the Prospectus under "Description of the Securities -- Book-Entry
Registration and Definitive Securities -- Definitive Securities."
Unless and until Definitive Certificates are issued, it is anticipated
that:
o the only "Certificateholder" of the Offered Certificates will be
Cede & Co., as nominee of DTC, and Beneficial Owners will not be
Certificateholders as that term is used in the Pooling and
Servicing Agreement (as defined in this prospectus supplement).
o Beneficial Owners will receive all distributions of principal of,
and interest on, the Offered Certificates from the Trustee
through DTC [, Clearstream Luxembourg or Euroclear, as
applicable,] and [its/their] Participants.
o while the Offered Certificates are outstanding, under the rules,
regulations and procedures creating and affecting DTC
[Clearstream Luxembourg and Euroclear] and [its/their]
operations, DTC [Clearstream Luxembourg and Euroclear] [is/are]
required to make book-entry transfers among Participants on whose
behalf it acts with respect to the Offered Certificates and is
required to receive and transmit distributions of principal of,
and interest on, the Offered Certificates. Participants and
indirect participants with whom Beneficial Owners have accounts
with respect to Offered Certificates are similarly required to
make book-entry transfers and receive and transmit distributions
on behalf of their respective Beneficial Owners. Accordingly,
although Beneficial Owners will not possess certificates, DTC
[Clearstream Luxembourg and Euroclear] [has/have] in place a
mechanism by which Beneficial Owners will receive distributions
and will be able to transfer their interest.
None of the Depositor, [ ], the Servicer or the Trustee [or additional
parties] (as those terms are defined in this prospectus supplement) will have
any responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the Book-Entry Certificates held by
Cede & Co., as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to those beneficial ownership interests.
For a more complete description of book-entry registration and
clearance and the rules and regulations governing DTC [,Clearstream Luxembourg
and Euroclear], see "Description of the Securities -- Book-Entry Registration
and Definitive Securities" in the Prospectus [and "Global Clearance, Settlement
and Tax Documentation Procedures" in Annex I to this Prospectus Supplement].
DEFINITIVE CERTIFICATES. Definitive Certificates will be issued to
Beneficial Owners or their nominees, respectively, rather than to DTC or its
nominee, only under the limited conditions set forth in the Prospectus under "
Description of the Securities -- Book-Entry Registration and Definitive
Securities -- Definitive Securities." Upon the occurrence of an event described
in that section, the Trustee is required to direct DTC to notify Participants
who have ownership of Book-Entry Certificates as indicated on the records of DTC
of the availability of Definitive Certificates for their Book-Entry
Certificates. Upon surrender by DTC of the Definitive Certificates representing
the Book-Entry Certificates and upon receipt of instructions from DTC for
re-registration, the Trustee will re-issue the Book-Entry Certificates as
Definitive Certificates in the respective principal amounts owned by individual
Beneficial Owners, and thereafter the Trustee will recognize the holders of the
Definitive Certificates as Certificateholders under the Pooling and Servicing
Agreement.
DISTRIBUTIONS OF INTEREST
The amount of interest distributable on each Distribution Date in
respect of each Class of Certificates (other than the Class [ ] Certificate)
will equal the sum of [to be provided as applicable]. Interest will accrue on
the Offered Certificates on the basis of a 360-day year and the actual number of
days in each Accrual Period.
o The "Interest Rate" for each Class of Certificates will be the
applicable annual rate described below.
[If [ ] does not exercise its option to purchase the Mortgage Loans
when it is first entitled to do so, as described under "-- Optional Purchase of
Mortgage Loans; Termination of the Trust Fund" in this prospectus supplement,
then with respect to each succeeding Distribution Date, the [ ] will be
increased to %]. Subject to the preceding proviso, the Interest Rates for the
Class [ ] Certificates will be the applicable annual rate determined as follows:
o [To be provided as applicable].
o The "Net Mortgage Rate" for any Mortgage Loan equals the Mortgage
Rate of the Mortgage Loan MINUS the Total Expense Rate (as
defined in this prospectus supplement).
o The "Total Expense Rate" for each Distribution Date is the sum of
[the Servicing Fee Rate and the Trustee Fee Rate (each as defined
in this prospectus supplement)].
The "Certificate Principal Amount" of any Offered Certificate for any
date of determination will equal that Certificate Principal Amount on [ ] (the
"Closing Date") as reduced by all amounts previously distributed on that
Certificate in respect of principal and, in the case of a Class [ ] Certificate,
any Applied Loss Amount (as defined in this prospectus supplement) previously
allocated to that Certificate.
For each Distribution Date, the "Accrual Period" applicable to each
Class of Offered Certificates will be the period beginning on the immediately
preceding Distribution Date (or on the Closing Date, in the case of the first
Accrual Period) and ending on the day immediately preceding the related
Distribution Date.
o The "Interest Remittance Amount" for any Distribution Date will
equal the sum of [to be provided as applicable].
On each Distribution Date, the Interest Remittance Amount will be
distributed in the following order of priority:
[To be provided as applicable.]
When a principal prepayment in full is made on a Mortgage Loan, the
borrower is charged interest only to the date of the prepayment, instead of for
a full month, with a resulting reduction in interest payable for the month
during which the prepayment is made. Prepayments in part will be applied as of
the date of receipt. Full or partial prepayments (or proceeds of other
liquidations) received in any Prepayment Period will be distributed to holders
of Offered Certificates on the Distribution Date following that Prepayment
Period. To the extent that, as a result of a full or partial prepayment, a
borrower is not required to pay a full month's interest on the amount prepaid, a
shortfall (a "Prepayment Interest Shortfall") in the amount available to make
distributions of interest on the Certificates could result. A Prepayment
Interest Shortfall will result from a prepayment in full only if that prepayment
is received on or after the [16th] day of a calendar month. If a prepayment in
full is received on or prior to the [15th] day of a calendar month, there will
be an excess of interest over one month's interest for that Mortgage Loan
("Prepayment Interest Excess") available for distribution to Certificateholders
on the related Distribution Date. The Servicer is obligated to fund Prepayment
Interest Shortfalls that exceed Prepayment Interest Excess, but only in an
amount up to the total of the Servicing Fees for the applicable Distribution
Date. See "The Pooling and Servicing Agreement -- Prepayment Interest
Shortfalls" in this prospectus supplement. Any of these payments by the Servicer
is referred to in this prospectus supplement as "Compensating Interest." Any
Prepayment Interest Shortfalls not funded by the Servicer ("Net Prepayment
Interest Shortfalls") will reduce the Interest Remittance Amount available for
distribution on the related Distribution Date.
[DETERMINATION OF INDEX
On the second Business Day preceding the beginning of each Accrual
Period (each date, an "Index Determination Date"), the Trustee will determine
the Index for that Accrual Period.
On each Index Determination Date, the Index for the next succeeding
Accrual Period will be established by the Trustee as follows:
[To be provided as applicable.]]
DISTRIBUTIONS OF PRINCIPAL
Distributions of principal on the Class [ ] Certificates will be made
primarily from [to be provided as applicable.]
o The "Principal Distribution Amount" for [each Mortgage Pool for]
any Distribution Date will be equal to the sum of [to be provided
as applicable].
o The "Principal Remittance Amount" for [each Mortgage Pool for]
any Distribution Date will be equal to the sum of [to be provided
as applicable.]
o The "Due Period" for any Distribution Date is the one-month
period beginning on [the second day of the calendar month
immediately preceding the month in which that Distribution Date
occurs and ending on the first day of the month in which that
Distribution Date occurs.]
o The "Prepayment Period" for each Distribution Date is the
one-month period beginning on the Cut-off Date, in the case of
[the first Distribution Date, and on the day immediately
following the close of the immediately preceding Prepayment
Period, in the case of each subsequent Distribution Date, and
ending on the [ ]th day (or if that day is not a Business Day,
the immediately preceding Business Day) of the month in which
that Distribution Date occurs].
On each Distribution Date, the Principal Distribution Amount will be
distributed in the following order of priority:
[To be provided as applicable].
CREDIT ENHANCEMENT
Credit enhancement for the Offered Certificates consists of [the
Insurance Policy, the subordination of the Subordinate Certificates, the
priority of application of Realized Losses (as defined in this prospectus
supplement) and overcollateralization], in each case as described in this
prospectus supplement. [The Insurance Policy is described under "The Insurance
Policy" below.]
[SUBORDINATION. The rights of holders of the Class [ ] Certificates to
receive distributions with respect to the Mortgage Loans will be subordinated,
to the extent described in this prospectus supplement, to the rights of holders
of the Senior Certificates, as described under "-- Distributions of Interest"
and "-- Distributions of Principal." This subordination is intended to enhance
the likelihood of regular receipt by holders of Senior Certificates of the full
amount of interest and principal distributable on the Senior Certificates, and
to afford holders of Senior Certificates limited protection against Realized
Losses incurred on the Mortgage Loans.
No amounts will be distributed to the holder of the Class [ ]
Certificate until all amounts due to the holders of the Class [ ] Certificates
have been distributed.
The limited protection afforded to holders of Class [ ] Certificates
by means of the subordination of Subordinate Certificates having a lower
priority of distribution will be accomplished by the preferential right of
holders of Offered Certificates to receive, prior to any distribution in respect
of interest or principal, respectively, being made on any Distribution Date in
respect of Certificates having a lower priority of distribution, the amounts of
interest due them and principal available for distribution, respectively, on
that Distribution Date.]
[ALLOCATION OF LOSSES. If a Mortgage Loan becomes a Liquidated
Mortgage Loan during any Prepayment Period, the related Net Liquidation
Proceeds, to the extent allocable to principal, may be less than the outstanding
principal balance of the Mortgage Loan. The amount of that insufficiency is a
"Realized Loss." Realized Losses on Mortgage Loans will have the effect of
reducing amounts distributable in respect of, first, the Class [ ] Certificate
(both through the application of Monthly Excess Interest to fund the deficiency
and through a reduction in the Overcollateralization Amount for the related
Distribution Date), and second, the Class [ ] Certificates, before reducing
amounts distributable in respect of the Senior Certificates.
o A "Liquidated Mortgage Loan" is, in general, a defaulted Mortgage
Loan as to which the Servicer has determined that all amounts
that it expects to recover in respect of that Mortgage Loan have
been recovered (exclusive of any possibility of a deficiency
judgment).
To the extent that Realized Losses occur, those Realized Losses will
reduce the Total Loan Balance, and thus may reduce the Overcollateralization
Amount. As described in this prospectus supplement, the Overcollateralization
Amount is created, increased and maintained by application of Monthly Excess
Cashflow to make distributions of principal on the Offered Certificates.
If on any Distribution Date after giving effect to all Realized Losses
incurred during the related Due Period and distributions of principal on that
Distribution Date, the total Certificate Principal Amount of the Certificates
exceeds the Total Loan Balance for that Distribution Date (this excess, an
"Applied Loss Amount"), the Class Principal Amount of the Class [ ] Certificates
will be reduced by that amount, until the Class Principal Amount of the Class [
] Certificates has been reduced to zero. The Class Principal Amounts of the
Senior Certificates will not be reduced by allocation of Applied Loss Amounts.
Holders of Class [ ] Certificates will not receive any distributions
in respect of Applied Loss Amounts, except to the extent of available Monthly
Excess Cashflow as described below.]
[OVERCOLLATERALIZATION. The weighted average Net Mortgage Rate of the
Mortgage Loans is generally expected to be higher than the weighted average of
the interest rates of the Certificates, thus generating excess interest
collections. To the extent described in this prospectus supplement, Monthly
Excess Interest will be applied on any Distribution Date in reduction of the
Certificate Principal Amounts of the Offered Certificates. This application of
interest collections as distributions of principal will cause the total
Certificate Principal Amount of the Certificates to amortize more rapidly than
the Total Loan Balance, creating, increasing and maintaining
overcollateralization. However, Realized Losses will reduce
overcollateralization, and could result in an Overcollateralization Deficiency.
For each Distribution Date, the Monthly Excess Interest and any Excess
Principal will be the "Monthly Excess Cashflow," which will be in the following
order of priority:
[To be provided as applicable.]]
[THE RESERVE FUND
The Reserve Fund will be an asset of the Trust Fund but not of the
REMIC. The holder of the Residual Certificate will be the owner of the Reserve
Fund, and amounts on deposit in the Reserve Fund will be invested at the
direction of the holder of the Residual Certificate as provided in the Pooling
and Servicing Agreement. The Reserve Fund will consist of [to be provided as
applicable].
Withdrawals will be made from the Reserve Fund for the benefit of the
Offered Certificates as described under "-- Overcollateralization" above.
The only asset of the Reserve Fund on the Closing Date will be [to be
provided as applicable.]
If on any Distribution Date the sum of the amount on deposit in the
Reserve Fund and the Overcollateralization Amount exceeds the Targeted
Overcollateralization Amount, the excess will be released to the Residual
Certificateholder, provided that the amount remaining in the Reserve Fund equals
or exceeds the reserve fund requirement specified in the Pooling and Servicing
Agreement.]
FINAL SCHEDULED DISTRIBUTION DATE
It is expected that scheduled distributions on the Mortgage Loans,
assuming no defaults or losses that are not covered by the limited credit
support described in this prospectus supplement, will be sufficient to make
timely distributions of interest on the Offered Certificates and to reduce the
Class Principal Amount of each Class of the Senior Certificates to zero not
later than [ ] and of the Class [ ] Certificates not later than [ ]. As to each
Class, the actual final Distribution Date may be earlier or later, and could be
substantially earlier, than the applicable Final Scheduled Distribution Date.
REPORTS TO CERTIFICATEHOLDERS
On each Distribution Date the Trustee will make available to each
Certificateholder a statement containing the following information:
o the amount of principal distributed on that date to holders of
each Class of Offered Certificates;
o the amount of interest distributed on that date to holders of
each Class of Offered Certificates;
o the Interest Rate applicable to each Class of Offered
Certificates;
o the Class Principal Amount of each Class of Offered Certificates
after distributions on that date;
o the amount of the Servicing Fees and Trustee Fee paid with
respect to that date;
o the Total Loan Balance as of the related Distribution Date;
o the amount of any Realized Losses on the Mortgage Loans during
the immediately preceding calendar month and total Realized
Losses since the Cut-off Date;
o the number and aggregate Principal Balance of Mortgage Loans (1)
remaining outstanding, (2) delinquent by one, two, three or four
or more monthly payments, (3) in foreclosure, and (4) with
respect to REO Property;
o any amount distributed to the holder of the Residual Certificate;
and
o other information to the extent provided in the Pooling and
Servicing Agreement.
OPTIONAL PURCHASE OF MORTGAGE LOANS; TERMINATION OF THE TRUST FUND
On any Distribution Date after the date on which the Total Loan
Balance is less than [ ]% of the Cut-off Date Balance, the holder of the [ ]
will (subject to the terms of the Pooling and Servicing Agreement) have the
option to purchase the Mortgage Loans, any REO Property and any other related
property for a price equal to the sum of (1) 100% of the total outstanding
principal balance of the Mortgage Loans plus accrued interest on the Mortgage
Loans at the applicable Mortgage Rate, (2) the fair market value of all other
property being purchased, (3) any unpaid Servicing Fees and other amounts
payable to the Servicer and the Trustee and (4) [ ]; provided, that the purchase
price will not be less than the total Certificate Principal Amount of the
Offered Certificates, plus accrued interest on the Offered Certificates. If the
holder of the [ ] does not exercise that option, the [ ] will then have the same
purchase option. If either purchase option is exercised, the Trust Fund will be
terminated (this event, an "Optional Termination").
If the [ ] does not exercise its option as described above when it is
first entitled to do so, [to be provided as applicable].
THE TRUSTEE
[ ], a [ ] banking corporation, will be the Trustee under the Pooling
and Servicing Agreement (the "Trustee"). The Trustee will be paid a monthly fee
(the "Trustee Fee") calculated as a fixed percentage equal to [ ]% annually (the
"Trustee Fee Rate") on the Total Loan Balance. As additional compensation, the
Trustee will be entitled to [to be provided as applicable]. The Trustee's
"Corporate Trust Office" for purposes of presentment and surrender of the
Offered Certificates for the final distribution on the Offered Certificates and
for all other purposes is located at [ ], or any address as the Trustee may
designate from time to time by notice to the Certificateholders, the Depositor
and the Servicer.
[THE INSURANCE POLICY
The following information has been supplied by [ ] (the "Insurer") for
inclusion in this Prospectus Supplement. Accordingly, the Depositor, the
Servicer and the Underwriter do not make any representation as to the accuracy
and completeness of this information.
The Insurer does not accept any responsibility for the accuracy or
completeness of this Prospectus Supplement or any information or disclosure
contained in this prospectus supplement, or omitted from this prospectus
supplement, other than with respect to the accuracy of the information regarding
the Certificate Guaranty Insurance Policy (the "Insurance Policy") and the
Insurer set forth below under this heading "The Insurance Policy." Additionally,
the Insurer makes no representation regarding the Certificates or the
advisability of investing in the Certificates.
THE INSURER
[To be provided as applicable.]
INSURER FINANCIAL INFORMATION
[To be provided as applicable.]
WHERE YOU CAN OBTAIN ADDITIONAL INFORMATION ABOUT THE INSURER
[To be provided as applicable.]
FINANCIAL STRENGTH RATINGS OF THE INSURER
[To be provided as applicable.]
THE INSURANCE POLICY
[To be provided as applicable.]]
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
The Mortgage Pool will consist of approximately [ ] [description of
Mortgage Loans] Mortgage Loans with original terms to maturity from the first
due date of the scheduled monthly payment (a "Monthly Payment") of not more than
[30] years, having a total Principal Balance as of the Cut-off Date (after
giving effect to Monthly Payments due on that date) of approximately $[ ] (the
"Cut-off Date Balance"). The Mortgage Loans were originated or acquired by the
originators described in this prospectus supplement generally in accordance with
the underwriting guidelines described in this prospectus supplement.
Wherever reference is made in this prospectus supplement to a
percentage of some or all of the Mortgage Loans, the percentage is determined
(unless otherwise specified) on the basis of the total Principal Balance of the
related Mortgage Loans as of the Cut-off Date.
All of the Mortgage Loans are secured by mortgages or deeds of trust
or other similar security instruments creating [to be provided as applicable.]
The Mortgage Loans to be included in the Mortgage Pool will be acquired by the
Depositor from [ ] ("[ ]"), which acquired the Mortgage Loans from [ ]. See
"[Originator/Servicer]" and "The Pooling and Servicing Agreement -- Assignment
of Mortgage Loans" in this prospectus supplement.
Pursuant to its terms, each Mortgage Loan, other than a loan secured
by a condominium unit, is required to be covered by a standard hazard insurance
policy in an amount generally equal to the lower of the unpaid principal amount
of the Mortgage Loan or the replacement value of the improvements on the
Mortgaged Property. Generally, a condominium association is responsible for
maintaining hazard insurance covering the entire building. See "Description of
Mortgage and Other Insurance Hazard -- Insurance on the Loans -- Standard Hazard
Insurance Policies" in the Prospectus.
[Approximately [ ]% of the Mortgage Loans have Loan-to-Value Ratios in
excess of 80%. None of those Mortgage Loans or any other Mortgage Loans are
covered by primary mortgage insurance policies. The "Loan-to-Value Ratio" of a
Mortgage Loan at any time is the ratio of the principal balance of the Mortgage
Loan at the date of determination to (a) in the case of a purchase, the lesser
of the sale price of the Mortgaged Property and its appraised value at the time
of sale, or (b) in the case of a refinance or modification, the appraised value
of the Mortgaged Property at the time of refinance or modification.]
[Approximately [ ]% of the Mortgage Loans are fully amortizing.
Approximately [ ]% of the Mortgage Loans will have original terms to maturity
that are shorter than their amortization schedules, leaving final payments
("Balloon Payments") due on their maturity dates that are significantly larger
than other monthly payments (these loans, "Balloon Loans"). The Balloon Loans
are generally expected to have original terms to maturity of [15] years. The
ability of the borrower to repay a Balloon Loan at maturity frequently will
depend on the borrower's ability to refinance the loan. Any loss on a Balloon
Loan as a result of the borrower's inability to refinance the loan will be borne
by Certificateholders, to the extent not covered by the applicable credit
enhancement. Neither the Servicer nor the Trustee will make any Advances with
respect to delinquent Balloon Payments.]
ADJUSTABLE RATE MORTGAGE LOANS
[Describe adjustment of adjustable rate Mortgage Loans, as
applicable.]
[THE INDEX
The Index applicable to the determination of the Mortgage Rates for
the Adjustable Rate Mortgage Loans will be [described as applicable].]
THE MORTGAGE LOANS
The Mortgage Loans are expected to have the following approximate
total characteristics as of the Cut-off Date. Prior to the issuance of the
Certificates, the Mortgage Loans may be removed from the Trust Fund as a result
of incomplete documentation or otherwise, if the Depositor deems removal
necessary or appropriate. In addition, a limited number of other mortgage loans
may be included in the Trust Fund prior to the issuance of the Offered
Certificates.
Number of Mortgage Loans...................................
Initial Pool Balance....................................... $
Mortgage Rates: %
Weighted Average......................................
Range................................................. % to %
Weighted Average Remaining Term to Maturity (in months)....
The Principal Balances of the Mortgage Loans range from approximately
$[ ] to approximately $[ ]. The Mortgage Loans have an average Principal Balance
of approximately $[ ].
The weighted average Loan-to-Value Ratio at origination of the
Mortgage Loans is approximately [ ]%.
No more than approximately [ ]% of the Mortgage Loans are secured by
Mortgaged Properties located in any one zip code area.
The following tables set forth as of the Cut-off Date the number,
total Principal Balance and percentage of the Mortgage Loans having the stated
characteristics shown in the tables in each range. (The sum of the amounts of
the percentages in the following tables may not equal the totals due to
rounding.)
CUT-OFF DATE PRINCIPAL BALANCES
PERCENTAGE OF
MORTGAGE LOANS
RANGE OF NUMBER OF TOTAL BY TOTAL
PRINCIPAL BALANCES ($) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------------- -------------- ----------------- -----------------
$ %
Total....... ----- -------------- -----
$ 100.00%
The average Cut-off Date Principal Balance is approximately $ .
LOAN-TO-VALUE RATIOS
PERCENTAGE OF
MORTGAGE LOANS
RANGE OF ORIGINAL NUMBER OF TOTAL BY TOTAL
LOAN-TO-VALUE RATIOS (%) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------------- -------------- ----------------- -----------------
$ %
Total....... ----- -------------- -----
$ 100.00%
The weighted average original Loan-to-Value Ratio is approximately %.
MORTGAGE RATES
PERCENTAGE OF
MORTGAGE LOANS
RANGE OF NUMBER OF TOTAL BY TOTAL
MORTGAGE RATES (%) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------- -------------- ----------------- -----------------
$ %
Total....... ----- -------------- -----
$ 100.00%
- ------------
* Reflects current Mortgage Rates of Adjustable Rate Mortgage Loans.
The weighted average Mortgage Rate is approximately % per annum.
LOAN TYPES
PERCENTAGE OF
MORTGAGE LOANS
NUMBER OF TOTAL BY TOTAL
LOAN TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------- -------------- ----------------- -----------------
$ %
Total....... ----- -------------- -----
$ 100.00%
ORIGINAL TERMS TO MATURITY
PERCENTAGE OF
MORTGAGE LOANS
RANGE OF NUMBER OF TOTAL BY TOTAL
MATURITIES (months) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------- -------------- ----------------- -----------------
$ %
Total....... ----- -------------- -----
$ 100.00%
The weighted average original term to maturity is approximately months.
REMAINING TERMS TO MATURITY
PERCENTAGE OF
MORTGAGE LOANS
REMAINING TERM TO NUMBER OF TOTAL BY TOTAL
MATURITY (months) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------- -------------- ----------------- -----------------
$ %
Total....... ----- -------------- -----
$ 100.00%
The weighted average remaining term to maturity of the fully amortizing
Mortgage Loans is approximately months.
GEOGRAPHIC DISTRIBUTION
PERCENTAGE OF
MORTGAGE LOANS
NUMBER OF TOTAL BY TOTAL
STATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----- -------------- ----------------- -----------------
$ %
Total....... ----- -------------- -----
$ 100.00%
PROPERTY TYPES
PERCENTAGE OF
MORTGAGE LOANS
NUMBER OF TOTAL BY TOTAL
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------- -------------- ----------------- -----------------
$ %
Total....... ----- -------------- -----
$ 100.00%
LOAN PURPOSES
PERCENTAGE OF
MORTGAGE LOANS
NUMBER OF TOTAL BY TOTAL
LOAN PURPOSE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------ -------------- ----------------- -----------------
$ %
Total....... ----- -------------- -----
$ 100.00%
OCCUPANCY STATUS
PERCENTAGE OF
MORTGAGE LOANS
NUMBER OF TOTAL BY TOTAL
OCCUPANCY STATUS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------- -------------- ----------------- -----------------
$ %
Total....... ----- -------------- -----
$ 100.00%
DOCUMENTATION TYPES
PERCENTAGE OF
MORTGAGE LOANS
NUMBER OF TOTAL BY TOTAL
DOCUMENTATION TYPES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------- -------------- ----------------- -----------------
$ %
Total....... ----- -------------- -----
$ 100.00%
CREDIT GRADES
PERCENTAGE OF
MORTGAGE LOANS
NUMBER OF TOTAL BY TOTAL
CREDIT GRADE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------- -------------- ----------------- -----------------
$ %
Total....... ----- -------------- -----
$ 100.00%
PREPAYMENT PENALTIES
PERCENTAGE OF
MORTGAGE LOANS
NUMBER OF TOTAL BY TOTAL
PREPAYMENT PENALTIES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------- -------------- ----------------- -----------------
$ %
Total....... ----- -------------- -----
$ 100.00%
MAXIMUM RATES OF THE ADJUSTABLE RATE MORTGAGE LOANS
PERCENTAGE OF
MORTGAGE LOANS
NUMBER OF TOTAL BY TOTAL
MAXIMUM RATES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------- -------------- ----------------- -----------------
$ %
Total....... ----- -------------- -----
$ 100.00%
The weighted average Maximum Rate of the Adjustable Rate Mortgage Loans
is approximately % per annum.
MINIMUM RATES OF THE ADJUSTABLE RATE MORTGAGE LOANS
PERCENTAGE OF
MORTGAGE LOANS
RANGE OF NUMBER OF TOTAL BY TOTAL
MINIMUM RATES (%) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------- -------------- ----------------- -----------------
$ %
Total....... ----- -------------- -----
$ 100.00%
The weighted average Minimum Rate of the Adjustable Rate Mortgage Loans
is approximately % per annum.
GROSS MARGINS OF THE ADJUSTABLE RATE MORTGAGE LOANS
PERCENTAGE OF
MORTGAGE LOANS
RANGE OF NUMBER OF TOTAL BY TOTAL
GROSS MARGINS (%) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------- -------------- ----------------- -----------------
$ %
Total....... ----- -------------- -----
$ 100.00%
The weighted average Gross Margin of the Adjustable Rate Mortgage Loans
is approximately % per annum.
NEXT ADJUSTMENT DATE OF THE ADJUSTABLE RATE MORTGAGE LOANS
PERCENTAGE OF
MORTGAGE LOANS
NUMBER OF TOTAL BY TOTAL
NEXT ADJUSTMENT DATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------- -------------- ----------------- -----------------
$ %
Total....... ----- -------------- -----
$ 100.00%
INITIAL FIXED TERM/SUBSEQUENT ADJUSTABLE RATE TERM
OF THE ADJUSTABLE RATE MORTGAGE LOANS
PERCENTAGE OF
INITIAL FIXED MORTGAGE LOANS
TERM/SUBSEQUENT NUMBER OF TOTAL BY TOTAL
ADJUSTABLE RATE TERM MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------- -------------- ----------------- -----------------
$ %
Total....... ----- -------------- -----
$ 100.00%
PERIODIC CAPS OF THE ADJUSTABLE RATE MORTGAGE LOANS
PERCENTAGE OF
MORTGAGE LOANS
NUMBER OF TOTAL BY TOTAL
PERIODIC CAP (%) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------- -------------- ----------------- -----------------
$ %
Total....... ----- -------------- -----
$ 100.00%
INITIAL CAPS OF THE ADJUSTABLE RATE MORTGAGE LOANS
PERCENTAGE OF
MORTGAGE LOANS
NUMBER OF TOTAL BY TOTAL
INITIAL CAP (%) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------- -------------- ----------------- -----------------
$ %
Total....... ----- -------------- -----
$ 100.00%
[SUBSEQUENT MORTGAGE LOANS
The obligation of the Trust Fund to purchase additional Mortgage Loans
(the "Subsequent Mortgage Loans") on [any] date, as specified in the Pooling and
Servicing Agreement (each, a "Subsequent Transfer Date") will be subject to the
Subsequent Mortgage Loans meeting the following criteria: [to be provided as
applicable]. These criteria will be based on the characteristics of the
Subsequent Mortgage Loans on the related Subsequent Transfer Date.
The characteristics of Subsequent Mortgage Loans may vary
significantly from time to time subject to the requirements described above, and
may bear no particular relationship to the characteristics of the initial
Mortgage Loans at any time. It is expected that a substantial portion of the
Subsequent Mortgage Loans will be [to be provided as applicable.]]
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Mortgage Pool and
the Mortgaged Properties is based upon the Mortgage Pool as constituted at the
close of business on the Cut-off Date, as adjusted for Monthly Payments due on
or before that date. A Current Report on Form 8-K will be available to
purchasers of the Offered Certificates and will be filed, together with the
Pooling and Servicing Agreement, with the Securities and Exchange Commission
within fifteen days after the initial issuance of the Offered Certificates. In
the event that Mortgage Loans are removed from or added to the Mortgage Pool as
set forth in this prospectus supplement under "Description of the Mortgage
Pool," the removal or addition, to the extent material, will be noted in the
Current Report on Form 8-K.
[ORIGINATOR/SERVICER
The information in this section has been provided by [servicer]. None
of the Depositor, [ ], the Trustee, the Insurer, the Underwriter or any of their
respective affiliates has made or will make any representation as to the
accuracy or completeness of this information.
GENERAL
[Description of the Originator/Servicer.]
LENDING ACTIVITIES AND LOAN SALES
[ ] originates real estate loans through its network of offices and
loan origination centers. [ ] also participates in secondary market activities
by originating and selling mortgage loans while continuing to service the
majority of the loans sold. In other cases [ ]'s whole loan sale agreements
provide for the transfer of servicing rights.
[ ]'s primary lending activity is funding loans to enable borrowers to
purchase or refinance residential real property, which loans are secured by
first or second liens on the related real property. [ ]'s single-family real
estate loans are predominantly "conventional" mortgage loans, meaning that they
are not insured by the Federal Housing Administration or partially guaranteed by
the U.S. Department of Veterans Affairs.
The following table summarizes [ ]'s one- to four-family residential
mortgage loan origination and sales activity for the periods shown below. Sales
activity may include sales of mortgage loans purchased by [ ] from other loan
originators.
YEAR ENDED DECEMBER 31 THREE MONTHS ENDED MARCH 31,
---------------------- ----------------------------
----- ----- ----- ----- ----- ----- -----
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
---------------------------------- ----------------------
Originated and $ $ $ $ $ $ $
purchased.....
Sales......... $ $ $ $ $ $ $
- -------------------------------------------------------------------------------
LOAN SERVICING
The Servicer services all of the mortgage loans it originates that are
retained in its portfolio and continues to service at least a majority of the
loans that have been sold to investors. Servicing includes collecting and
remitting loan payments, accounting for principal and interest, contacting
delinquent borrowers, and supervising foreclosure in the event of unremedied
defaults. The Servicer's servicing activities are audited periodically by
applicable regulatory authorities. Some financial records of the Servicer
relating to its loan servicing activities are reviewed annually as part of the
audit of the Servicer's financial statements conducted by its independent
accountants.
UNDERWRITING GUIDELINES
The Mortgage Loans were originated generally in accordance with
guidelines (the "Underwriting Guidelines") established by [ ]. The Underwriting
Guidelines are primarily intended to evaluate the value and adequacy of the
mortgaged property as collateral and are also intended to consider the
borrower's credit standing and repayment ability. On a case-by-case basis and
only with the approval of two or more senior lending officers, [ ] may determine
that, based upon compensating factors, a prospective borrower not strictly
qualifying under the underwriting risk category guidelines described below
warrants an underwriting exception. Compensating factors may include, but are
not limited to, low loan-to-value ratio, low debt-to-income ratio, good credit
history, stable employment and time in residence at the applicant's current
address. It is expected that a substantial number of the Mortgage Loans will
have been originated under underwriting exceptions.
[Describe originator's underwriting guidelines.]
SERVICING PRACTICES AND EXPERIENCE
In general, when a borrower fails to make a required payment on a
residential mortgage loan, [ ] attempts to cause the deficiency to be cured by
corresponding with the borrower. In most cases deficiencies are cured promptly.
Pursuant to [ ]'s customary procedures for residential mortgage loans serviced
by it for its own account, [ ] generally mails a notice of intent to foreclose
to the borrower after the loan has become 31 days past due (two payments due but
not received) and, within one month thereafter, if the loan remains delinquent,
typically institutes appropriate legal action to foreclose on the property
securing the loan. If foreclosed, the property is sold at public or private sale
and may be purchased by [ ]. In California, real estate lenders are generally
unable as a practical matter to obtain a deficiency judgment against the
borrower on a loan secured by single-family real estate.
The following table sets forth the delinquency and loss experience at
the dates indicated for residential (one- to four-family and multifamily) first
lien mortgage loans serviced by the Servicer that were originated or purchased
by the Servicer:
[To be provided as applicable.]
There can be no assurance that the delinquency and loss experience of
the Mortgage Loans will correspond to the loss experience of the Servicer's
mortgage portfolio set forth in the table above. The statistics shown above
represent the delinquency and loss experience for the Servicer's total servicing
portfolio only for the periods presented, whereas the total delinquency and loss
experience on the Mortgage Loans will depend on the results over the life of the
Trust Fund. The Servicer's portfolio includes mortgage loans with payment and
other characteristics that are not representative of the payment and other
characteristics of the Mortgage Loans. A substantial number of the Mortgage
Loans may also have been originated based on Underwriting Guidelines that are
less stringent than those generally applicable to the servicing portfolio
reflected in the table. If the residential real estate market experiences an
overall decline in property values, the actual rates of delinquencies,
foreclosures and losses could be higher than those previously experienced by the
Servicer. In addition, adverse economic conditions (which may or may not affect
real property values) may affect the timely payment by borrowers of scheduled
payments of principal and interest on the Mortgage Loans and, accordingly, the
actual rates of delinquencies, foreclosures and losses on to the Mortgage
Loans.]
THE POOLING AND SERVICING AGREEMENT
GENERAL
The Certificates will be issued pursuant to a Pooling and Servicing
Agreement (the "Pooling and Servicing Agreement") dated as of [ ] among the
Depositor, the Servicer and the Trustee. Reference is made to the Prospectus for
important information in addition to that set forth in this Prospectus
Supplement regarding the terms and conditions of the Pooling and Servicing
Agreement and the Offered Certificates. Offered Certificates in certificated
form will be transferable and exchangeable at the Corporate Trust Office of the
Trustee. [ ] serve as Certificate Registrar and Paying Agent.
ASSIGNMENT OF MORTGAGE LOANS
The Depositor will assign the Mortgage Loans to the Trustee, together
with all principal and interest received with respect to the Mortgage Loans on
and after the Cut-off Date, other than Monthly Payments due on or before that
date. Each Mortgage Loan will be identified in a schedule appearing as an
exhibit to the Pooling and Servicing Agreement that will specify with respect to
each Mortgage Loan, among other things, the original principal balance and the
Principal Balance as of the close of business on the Cut-off Date, the Mortgage
Rate, the Monthly Payment and the maturity date.
The Trustee will, concurrently with the assignment to it of the
property constituting the Trust Fund, authenticate and deliver the Certificates.
[As to each Mortgage Loan, the following documents are generally
required to be delivered to the Trustee or its custodian (the "Custodian") in
accordance with the Pooling and Servicing Agreement:
o the related original Mortgage Note endorsed without recourse to
the Trustee or in blank;
o the original Mortgage with evidence of recording indicated on the
original Mortgage (or, if the original recorded Mortgage has not
yet been returned by the recording office, a copy certified to be
a true and complete copy of the Mortgage sent for recording), the
original security agreement and related documents;
o an original assignment of the Mortgage to the Trustee or in blank
in recordable form and originals of all intervening assignments,
if any, showing a complete chain of title from origination to the
Trustee;
o the policies of title insurance issued with respect to each
Mortgage Loan; and
o the originals of any assumption, modification, extension or
guaranty agreements.
Where necessary to protect the interest of the Trustee in the Mortgage Loans,
the assignments of each Mortgage to the Trustee are required to be submitted for
recording promptly after the Closing Date.]
Under the terms of the agreements (the "Mortgage Loan Purchase
Agreements") pursuant to which [ ] purchased the Mortgage Loans from [the
Originator] and the Depositor purchased the Mortgage Loans from [ ], the
Custodian [has conducted an initial review of the mortgage loan documents and
has notified] the Depositor, [ ] and [the Originator] as to each mortgage loan
document that either has not yet been delivered to the Depositor as required or
appears to be not properly executed, not in conformity with the description of
the Mortgage Loan on the Mortgage Loan schedule or otherwise defective. If any
Mortgage Loan document is not delivered or any material defect in a document is
not cured within the time period specified in the Mortgage Loan Purchase
Agreements, [the Originator] will be required to repurchase the affected
Mortgage Loan for a price equal to the unpaid principal balance of the Mortgage
Loan plus accrued interest on the Mortgage Loan (the "Repurchase Price") or, in
some circumstances, to substitute another mortgage loan.
[[The Originator] has made to [ ] and the Depositor under the Mortgage
Loan Purchase Agreements representations and warranties that include
representations and warranties similar to those summarized in the Prospectus
under the heading "Description of the Agreements -- Material Terms of the
Pooling and Servicing Agreements and Underlying Servicing Agreements --
Representations and Warranties; Repurchases." [ ]'s and the Depositor's rights
under these representations and warranties will be assigned to the Trustee for
the benefit of Certificateholders. In the event of a breach of any of these
representations or warranties that materially and adversely affects the value of
any Mortgage Loan or the interests of Certificateholders or the Insurer, [the
Originator] will be obligated, within 60 days following its discovery of a
breach or receipt of notice of a breach to cure the breach or purchase the
affected Mortgage Loan from the Trust Fund for the Repurchase Price or, in some
circumstances, to substitute another mortgage loan.]
To the extent that any Mortgage Loan as to which a representation or
warranty has been breached is not repurchased by [the Originator] and a Realized
Loss occurs on the Mortgage Loan, holders of Offered Certificates, in particular
the Class [ ]Certificates, may incur a loss if the applicable credit enhancement
is not sufficient to cover that loss.
VOTING RIGHTS
Voting rights of Certificateholders under the Pooling and Servicing
Agreement will be allocated among the Classes of Certificates and among the
Certificates of each Class as provided in the Pooling and Servicing Agreement.
GENERAL SERVICING PROVISIONS
The Mortgage Loans will be serviced by the Servicer in accordance with
the provisions of the Pooling and Servicing Agreement.
[The Servicer will be required to use reasonable efforts to collect
all amounts due under each Mortgage Loan and to administer the Mortgage Loans in
accordance with generally accepted servicing practices. See
"[Originator/Servicer] -- Servicing Practices and Experience." The Servicer will
be required to deposit all amounts collected and recovered with respect to the
Mortgage Loans within three Business Days of receipt of those amounts in a
separate account in the name of the Trustee (the "Collection Account"); on the [
] day of each month, or if that date is not a Business Day, on the immediately
following Business Day, the Servicer will be required to transfer the Interest
Remittance Amount and the Principal Remittance Amount to a separate account
maintained by the Trustee for the benefit of the Certificateholders (the
"Certificate Account").
The Servicer will be prohibited under the Pooling and Servicing
Agreement from making any material modification to the terms of a Mortgage Loan,
including a change in the Mortgage Rate other than as provided in the Mortgage
Note, deferral or forgiveness of a Monthly Payment or extension of the maturity
date, unless the Mortgage Loan is in default or default is, in the judgment of
the Servicer, reasonably foreseeable.
The Servicer will also be prohibited from waiving any prepayment
premium except in the case of a default or imminent default, and then may waive
the prepayment premium only if the waiver would maximize amounts collected under
the Mortgage Loan.]
PREPAYMENT INTEREST SHORTFALLS
When a borrower prepays a Mortgage Loan in full or in part between
Monthly Payment dates, the borrower pays interest on the amount prepaid only
from the last Monthly Payment date to the date of prepayment, with a resulting
reduction in interest payable for the month during which the prepayment is made.
[Any Prepayment Interest Shortfall resulting from a prepayment in full or in
part is required to be paid by the Servicer, but only to the extent that the
shortfall does not exceed the total of the Servicing Fees for the applicable
Distribution Date.]
ADVANCES
[The Servicer will be obligated to make advances ("Advances") with
respect to delinquent payments of principal of and interest on the Mortgage
Loans (other than Balloon Payments), adjusted to the related Mortgage Rate less
the Servicing Fee Rate, to the extent that those Advances, in its judgment, are
recoverable from future payments and collections, insurance payments or proceeds
of liquidation of a Mortgage Loan. The Trustee will be obligated to make any
required Advance if the Servicer fails in its obligation to do so, to the extent
provided in the Pooling and Servicing Agreement. The Servicer or the Trustee, as
applicable, will be entitled to recover any Advances made by it with respect to
a Mortgage Loan out of late payments on the Mortgage Loan or out of related
liquidation proceeds and insurance proceeds or, if the Servicer determines that
those Advances are not recoverable from those sources, then from collections on
other Mortgage Loans. These reimbursements may result in Realized Losses.
The purpose of making Advances is to maintain a regular cash flow to
Certificateholders, rather than to guarantee or insure against losses. No party
will be required to make any Advances with respect to reductions in the amount
of the Monthly Payments on Mortgage Loans due to reductions made by a bankruptcy
court in the amount of a Monthly Payment owed by a borrower or a reduction of
the applicable Mortgage Rate by application of the Relief Act.]
SERVICING ADVANCES
The Servicer will be required to advance its own funds for particular
purposes, including preserving and restoring Mortgaged Properties, payment of
delinquent taxes and insurance premiums, managing and disposing of REO
Properties, and legal proceedings. Advances for these and similar purposes are
referred to as "Servicing Advances." The Servicer will be reimbursed for
Servicing Advances made with respect to a Mortgage Loan out of late payments on
the Mortgage Loan, to the extent provided in the Pooling and Servicing
Agreement, or out of related liquidation proceeds and insurance proceeds, if the
Servicer determines that Servicing Advances are not recoverable from those
sources, then from collections and other recoveries on other Mortgage Loans. The
Pooling and Servicing Agreement will require that the Servicer not make a
Servicing Advance that is not expected to be recoverable from proceeds of the
related Mortgage Loan unless, in the Servicer's judgment, making that Servicing
Advance is in the best interests of the Certificateholders.
COLLECTION OF TAXES AND INSURANCE PREMIUMS
The Servicer will, to the extent required by the related loan
documents, maintain escrow accounts for the collection of hazard insurance
premiums as well as real estate taxes and similar items with respect to the
Mortgage Loans, and will make Servicing Advances with respect to delinquencies
in required escrow payments by the related borrowers.
INSURANCE COVERAGE
The Servicer is required to obtain and thereafter maintain in effect a
bond or similar form of insurance coverage (which may provide blanket coverage)
insuring against loss occasioned by the errors and omissions of their respective
officers and employees.
PURCHASES OF DEFAULTED MORTGAGE LOANS
The Servicer may, but will not be obligated to, purchase any Mortgage
Loan that becomes three months or more delinquent in payment or as to which the
Servicer has started foreclosure proceedings, for a price equal to the unpaid
principal balance plus interest accrued and unpaid.
EVIDENCE AS TO COMPLIANCE
The Pooling and Servicing Agreement will provide that each year a firm
of independent accountants will furnish a statement to the Trustee to the effect
that the firm has examined the necessary documents and records relating to the
servicing of mortgage loans by the Servicer and that, on the basis of that
examination, the firm is of the opinion that the servicing has been conducted in
accordance with applicable accounting standards, except for those exceptions as
the firm believes to be immaterial and those exceptions set forth in the
statement.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Servicer will be paid a monthly fee (the "Servicing Fee") with
respect to each Mortgage Loan calculated as [ ]% annually (the "Servicing Fee
Rate") on the outstanding principal balance of each Mortgage Loan. The Servicer
will also be entitled to receive, to the extent provided in the Pooling and
Servicing Agreement, additional compensation, in the form of any interest or
other income earned on funds it has deposited in the Collection Account pending
remittance to the Trustee, as well as customary fees and charges paid by
borrowers (other than prepayment premiums).
[The Servicing Fee is subject to reduction as described above under
"-- Prepayment Interest Shortfalls."]
SUBSERVICING
The Servicer will be prohibited from assigning the responsibility for
servicing the Mortgage Loans, except as permitted by the Pooling and Servicing
Agreement, but it may employ one or more subservicers. If the Servicer chooses
to employ subservicers, the Servicer will remain liable for fulfillment of its
obligations under the Pooling and Servicing Agreement, and will be considered to
have itself received any payment received by a subservicer whether or not the
subservicer actually remits that payment.
RESIGNATION OR REMOVAL OF THE SERVICER
The Servicer will agree in the Pooling and Servicing Agreement not to
resign except with the consent of the Trustee, unless the Servicer delivers to
the Trustee an opinion of legal counsel to the effect that the Servicer is no
longer permitted under applicable law to perform the duties of the Servicer
under the Pooling and Servicing Agreement.
If the Servicer is in default under the Pooling and Servicing
Agreement, or the Trustee or Certificateholders having a majority of Voting
Rights may remove the Servicer. [Events of default include:
o failure by the Servicer to remit any required payment, including
any Advance, to the Trustee for one Business Day after receipt of
written notice that the payment has not been made;
o failure by the Servicer to make a required Servicing Advance for
60 days after receipt of written notice that the Servicing
Advance has not been made;
o failure by the Servicer to fulfill any other material requirement
under the Pooling and Servicing Agreement within the applicable
time period;
o failure by the Servicer to be qualified to service mortgage loans
for either Fannie Mae or Freddie Mac;
o insolvency of the Servicer; and
o other events specified in the Pooling and Servicing Agreement.]
[If the Servicer is removed, the Trustee will immediately assume the
role of Servicer under the Pooling and Servicing Agreement unless another
Servicer is appointed pursuant to the Pooling and Servicing Agreement. The
Trustee will solicit bids from prospective successor Servicers as provided in
the Pooling and Servicing Agreement. If a qualifying bid is not received, the
Trustee will continue to service the Mortgage Loans if it is legally qualified
to do so until the Trustee appoints a successor Servicer as provided in the
Pooling and Servicing Agreement. If the servicing rights are sold, any proceeds
of the sale after deduction of expenses will be paid to the predecessor
Servicer.]
YIELD CONSIDERATIONS
GENERAL
The yields to maturity (or to early termination) on the Offered
Certificates will be affected by the rate of principal payments on the Mortgage
Loans (including prepayments, which may include amounts received by virtue of
purchase, condemnation, insurance or foreclosure) on the Mortgage Loans. Yields
will also be affected by the extent to which Mortgage Loans bearing higher
Mortgage Rates prepay at a more rapid rate than Mortgage Loans with lower
Mortgage Rates, the amount and timing of borrower delinquencies and defaults
resulting in Realized Losses, the application of Monthly Excess Cashflow, the
purchase price paid for the Offered Certificates and other factors.
Principal prepayments may be influenced by a variety of economic,
geographic, demographic, social, tax, legal and other factors. In general, if
prevailing interest rates fall below the interest rates on the Mortgage Loans,
the Mortgage Loans are likely to be subject to higher prepayments than if
prevailing rates remain at or above the interest rates on the Mortgage Loans.
Conversely, if prevailing interest rates rise above the interest rates on the
Mortgage Loans, the rate of prepayment would be expected to decrease. Other
factors affecting prepayment of the Mortgage Loans include factors such as
changes in borrowers' housing needs, job transfers, unemployment, borrowers' net
equity in the mortgaged properties, changes in the value of the mortgaged
properties, mortgage market interest rates and servicing decisions. The Mortgage
Loans generally have due-on-sale clauses.
[Approximately [ ]% of the Mortgage Loans are subject to prepayment
premiums during intervals ranging from one to five years following origination,
as described under "Description of the Mortgage Pools" in this prospectus
supplement. The prepayment premiums may have the effect of reducing the amount
or the likelihood of prepayment of these Mortgage Loans during intervals when a
prepayment premium would be payable.]
The rate of principal payments on the Mortgage Loans will also be
affected by the amortization schedules of the Mortgage Loans, the rate and
timing of prepayments by the borrowers, liquidations of defaulted Mortgage
Loans, repurchases of Mortgage Loans due to breaches of representations and
warranties or defective documentation and exercise by the holder of the Residual
Certificate of its right to purchase all of the Mortgage Loans as described in
this prospectus supplement. The timing of changes in the rate of prepayments,
liquidations and purchases of the related Mortgage Loans may significantly
affect the yield to an investor, even if the average rate of principal payments
experienced over time is consistent with an investor's expectation. Because the
rate and timing of principal payments on the Mortgage Loans will depend on
future events and on a variety of factors (as described more fully in this
prospectus supplement and in the Prospectus under "Yield Considerations") no
assurance can be given as to the rate or the timing of principal payments on the
Offered Certificates. In general, the earlier a prepayment of principal of the
related Mortgage Loans, the greater the effect on an investor's yield. The
effect on an investor's yield of principal payments occurring at a rate higher
(or lower) than the rate anticipated by the investor during the period
immediately following the issuance of the Certificates may not be offset by a
subsequent like decrease (or increase) in the rate of principal payments.
From time to time, areas of the United States may be affected by
flooding, severe storms, landslides, wildfires or other natural disasters. [The
Originator] will represent and warrant that as of the Closing Date each
Mortgaged Property was free of material damage. In the event of an uncured
breach of this representation and warranty that materially and adversely affects
the value of a Mortgage Loan, [the Originator] will be required to repurchase
the affected Mortgage Loan or, under some circumstances, substitute another
mortgage loan. If any damage caused by earthquakes, flooding, storms, wildfires,
or landslides (or other cause) occurs after the Closing Date, [the Originator]
will not have any repurchase obligation. In addition, the standard hazard
policies covering the Mortgaged Properties generally do not cover damage caused
by earthquakes, flooding and landslides, and earthquake, flood or landslide
insurance may not have been obtained with respect to the affected Mortgaged
Properties. As a consequence, Realized Losses could result. To the extent that
the insurance proceeds received with respect to any damaged Mortgage Properties
are not applied to the restoration of those Mortgage Properties, the proceeds
will be used to prepay the related Mortgage Loans in whole or in part. Any
repurchases or repayments of the Mortgage Loans may reduce the weighted average
lives of the Offered Certificates and will reduce the yields on the Offered
Certificates to the extent they are purchased at a premium.
Prepayments, liquidations and purchases of the Mortgage Loans will
result in distributions to holders of the related Certificates of principal
amounts that would otherwise be distributed over the remaining terms of those
Mortgage Loans. The rate of defaults on the Mortgage Loans will also affect the
rate and timing of principal payments on the Mortgage Loans. In general,
defaults on mortgage loans are expected to occur with greater frequency in their
early years.
The yields on the Class [ ] Certificates may be adversely affected by
Net Prepayment Interest Shortfalls on the Mortgage Loans.
The yields to investors in the Offered Certificates may be affected by
the purchase of defaulted Mortgage Loans by the Servicer and by the exercise by
[ ] of its right to purchase the Mortgage Loans, as described under "Description
of the Certificates -- Optional Purchase of Mortgage Loans; Termination of the
Trust Fund" in this prospectus supplement, or the failure of [ ] to exercise
that right.
If the purchaser of an Offered Certificate offered at a discount from
its initial principal amount calculates its anticipated yield to maturity (or
early termination) based on an assumed rate of payment of principal that is
faster than that actually experienced on the related Mortgage Loans, the actual
yield may be lower than that so calculated. Conversely, if the purchaser of a
Certificate offered at a premium calculates its anticipated yield based on an
assumed rate of payment of principal that is slower than that actually
experienced on the related Mortgage Loans, the actual yield may be lower than
that so calculated.
[The Interest Rates applicable to the Offered Certificates will be
affected by the level of [ ] from time to time, and by the Mortgage Rates of the
Mortgage Loans from time to time as described under "Risk Factors -- Mortgage
Loan Interest Rates May Limit Interest Rates on the Certificates."]
OVERCOLLATERALIZATION
[Describe as applicable.]
[SUBORDINATION OF THE CLASS [ ] CERTIFICATES
As described in this prospectus supplement, the Senior Certificates
are senior to the Class [ ]Certificates, and the Senior Certificates will have a
preferential right to receive amounts in respect of interest to the extent of
the Interest Remittance Amount and amounts in respect of principal to the extent
of the Principal Distribution Amount for the related Mortgage Pool. As a result,
the yield on the Class [ ]Certificates will be particularly sensitive to
delinquencies and losses on the Mortgage Loans.]
WEIGHTED AVERAGE LIFE
Weighted average life refers to the average amount of time that will
elapse from the date of issuance of a security to the date of distribution to
the investor of each dollar distributed in net reduction of principal of the
security (assuming no losses). The weighted average lives of the Offered
Certificates will be influenced by, among other things, the rate at which
principal of the related Mortgage Loans is paid, which may be in the form of
scheduled amortization, prepayments or liquidations.
Prepayments on mortgage loans are commonly measured relative to a [ ]
prepayment standard or model. The model used in this Prospectus Supplement
represents [ ]. [ ] does not purport to be either a historical description of
the prepayment experience of any pool of mortgage loans or a prediction of the
anticipated rate of prepayment of any mortgage loans, including the Mortgage
Loans to be included in the Trust Fund.
[The following tables were prepared based on the following
assumptions, among other things (collectively, the "Modeling Assumptions"):
o the initial Class Principal Amounts are as set forth on the cover
of this Prospectus Supplement, and the Interest Rates are as
described in this prospectus supplement;
o each Monthly Payment of principal and interest is timely received
on the first day of each month starting in [ ];
o principal prepayments are received in full on the first day of
each month starting in [ ] and there are no Net Prepayment
Interest Shortfalls;
o prepayments are received on the Mortgage Loans at the [ ] rate;
o there are no defaults or delinquencies on the Mortgage Loans;
o Distribution Dates occur on the [ ]th day of each month, starting
in [ ];
o there are no re-purchases or substitutions of the Mortgage Loans;
o [the Mortgage Rates of the Adjustable Rate Mortgage Loans adjust
semi-annually;]
o [the value of the Index is [ ]%;]
o [the value of LIBOR is %;]
o the Certificates are issued on [ ];
o the sum of the Trustee Fee Rate and the Servicing Fee Rate is
[ ]%; and
o the Mortgage Loans were aggregated into assumed mortgage loans
having the following characteristics:]
ASSUMED MORTGAGE LOAN CHARACTERISTICS
GROSS ORIGINAL REMAINING
COUPON TERM TO TERM TO
PRINCIPAL RATE(%) MATURITY MATURITY LOAN AGE GROSS
LOAN TYPE BALANCE($) (MONTHS) (MONTHS) (MONTHS) (MONTHS) MARGIN(%)
- --------- ---------- -------- -------- --------- -------- -----
The actual characteristics of the Mortgage Loans may, and the
performance of the Mortgage Loans will, differ from the assumptions used in
constructing the tables set forth below, which are hypothetical in nature and
are provided only to give a general sense of how the principal cash flows might
behave under varying prepayment scenarios. For example, it is not expected that
the Mortgage Loans will prepay at a constant rate until maturity, that all of
the Mortgage Loans will prepay at the same rate or that there will be no
defaults or delinquencies on the Mortgage Loans. Moreover, the diverse remaining
terms to maturity of the Mortgage Loans could produce slower or faster principal
distributions than indicated, even if the weighted average remaining term to
maturity of the Mortgage Loans is as assumed. Any difference between those
assumptions and the actual characteristics and performance of the Mortgage Loans
or actual prepayment or loss experience will cause the percentages of initial
Class Principal Amounts outstanding over time and the weighted average lives of
the Offered Certificates to differ (which difference could be material) from the
corresponding [assumed prepayment rates].
Subject to the foregoing discussion and assumptions, the following
tables indicate the weighted average lives of the Offered Certificates and set
forth the percentages of the initial Class Principal Amounts of the Offered
Certificates that would be outstanding after each of the Distribution Dates
shown at the indicated [assumed prepayment rates].
The weighted average life of an Offered Certificate is determined by
(1) multiplying the net reduction, if any, of the applicable Class Principal
Amount by the number of years from the date of issuance of the Offered
Certificate to the related Distribution Date, (2) adding the results and (3)
dividing the sum by the total of the net reductions of Class Principal Amount
described in (1) above.
PERCENTAGE OF INITIAL CLASS PRINCIPAL AMOUNT OF THE
CLASS [ ] CERTIFICATES OUTSTANDING UNDER THE FOLLOWING [PREPAYMENT RATES]
DISTRIBUTION DATE [ ] [ ] [ ] [ ] [ ] [ ]
- ----------------- --- --- --- --- --- ---
Initial Percentage........ 100 100 100 100 100 100
Weighted Average
Life in Years
With Optional Termination...................
Without Optional Termination................
- ---------
* Based upon the assumption that [ ] exercises its option to repurchase the
Mortgage Loans as described under "Description of the Certificates --
Optional Purchase of Mortgage Loans; Termination of the Trust Fund" in this
prospectus supplement, except in the case of the "Weighted Average Life
With Optional Termination."
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
For federal income tax purposes, one or more elections will be made to
treat certain assets of the Trust Fund as a REMIC. Upon the issuance of the
Offered Certificates, Stroock & Stroock & Lavan LLP ("Tax Counsel") will deliver
its opinion to the effect that, assuming compliance with the Pooling and
Servicing Agreement, for federal income tax purposes, each segregate pool of
assets for which a REMIC election is made will qualify as a REMIC within the
meaning of Section 860D of the Internal Revenue Code of 1986, as amended (the
"Code"), and that the Offered Certificates will represent the ownership of
regular interests in the REMIC. The Class [R] Certificates will represent the
residual interest in each REMIC. All prospectus purchasers of Offered
Certificates should see "Material Federal Income Tax Considerations--REMICs" in
the accompanying prospectus.
Because the Offered Certificates are considered REMIC regular
interests, they generally are taxable as debt obligations under the Code, and
interest paid or accrued on such certificates, including original issue discount
with respect to any such certificate issued with original issue discount, will
be taxable to holders of Offered Certificates in accordance with the accrual
method of accounting. See "Material Federal Income Tax
Considerations--REMICs--Taxation of Owners of Regular Securities" in the
accompanying prospectus.
The prepayment assumption that is used in determining the rate of
accrual of original issue discount with respect to the Offered Certificates is
[100% Prepayment Assumption], as defined below. However, this rate does not
represent the rate at which prepayments have actually occurred and no
representation is made as to the rate at which prepayments actually will occur
in the future.
The ["100% Prepayment Assumption] assumes a constant prepayment rate
of ...]
[Alternatively, grantor trust, partnership or FASIT status to be described as
applicable.]
STATE AND LOCAL INCOME TAX CONSIDERATIONS
In addition to the federal income tax matters described under "Material
Federal Income Tax Considerations" above, prospective investors should consider
the state and local income tax consequences of the acquisition, ownership and
disposition of the Offered Certificates. State and local income tax law may
differ substantially from the corresponding federal tax law, and this discussion
does not purport to describe any aspect of the income tax laws of any state or
locality. Therefore, prospective investors should consult their own tax advisors
with respect to the various tax consequences of investments in the Offered
Certificates.
LEGAL INVESTMENT CONSIDERATIONS
[The [Senior Certificates] will constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984, as amended ("SMMEA"), for so long as they are rated in one of the two
highest rating categories by one or more nationally recognized rating agencies,
and, as such, are legal investments for some entities to the extent provided in
SMMEA.] These investments, however, will be subject to general regulatory
considerations governing investment practices under state and federal laws.
Institutions whose investment activities are subject to review by
regulatory authorities may be or may become subject to restrictions, which may
be retroactively imposed by the regulatory authorities, on the investment by
those institutions in some mortgage related securities. In addition, several
states have adopted or may adopt regulations that prohibit some state-chartered
institutions from purchasing or holding similar types of securities.
Accordingly, investors should consult their own legal advisors to
determine whether and to what extent the Offered Certificates may be purchased
by them.
See "Legal Investment Considerations" in the Prospectus.
USE OF PROCEEDS
The net proceeds from the sale of the Certificates will be applied by
the Depositor, or an affiliate of the Depositor, toward the purchase of the
Mortgage Loans. The Mortgage Loans will be acquired by the Depositor from [ ] in
a privately negotiated transaction.
UNDERWRITING
[Subject to the terms and conditions provided in the underwriting
agreement and in a terms agreement (collectively, the "Underwriting Agreement")
among the Depositor, [ ] and the Underwriter, the Depositor and [ ] have agreed
to sell to the Underwriter, and the Underwriter has agreed to purchase from the
Depositor, all of the Offered Certificates.
The distribution of the Offered Certificates by the Underwriter will
be effected in each case from time to time in one or more negotiated
transactions, or otherwise, at varying prices to be determined, in each case, at
the time of sale. The Underwriter may effect these transactions by selling the
Certificates to or through dealers, and dealers may receive from the
Underwriter, for whom they act as agent, compensation in the form of
underwriting discounts, concessions or commissions. The Underwriter and any
dealers that participate with the Underwriter in the distribution of the
Certificates may be deemed to be an underwriter, and any discounts, commissions
or concessions received by them, and any profit on the resale of the
Certificates purchased by them, may be deemed to be underwriting discounts and
commissions under the Securities Act of 1933, as amended (the "Act"). The
Underwriting Agreement provides that the Depositor will indemnify the
Underwriter against some civil liabilities, including liabilities under the
Act.]
Expenses incurred by the Depositor in connection with this offering
are expected to be approximately $[ ].
The Underwriter is an affiliate of the Depositor and [ ].
ERISA CONSIDERATIONS
Employee benefit plans and other retirement arrangements that are
subject to the Employee Retirement Income Security Act of 1974, as amended
("ERISA") or Section 4975 of the Code ("Plans") and any person utilizing the
assets of a Plan, may be eligible to purchase the Offered Certificates, pursuant
to a prohibited transaction exemption which has been issued to the Underwriter
by the Department of Labor as described in "ERISA Considerations" in the
Prospectus, except that if the rating of the Offered Certificates is lower than
"BBB-" at the time of its acquisition by a Plan in the secondary market it may
only be acquired by an insurance company general account if the exemptive relief
granted by the Department of Labor for transactions involving insurance company
general accounts in Prohibited Transaction Exemption 95-60, is available with
respect to the investment. The Pooling and Servicing Agreement will include
restrictions on the transfer of the Offered Certificates. A fiduciary of a Plan
must determine that the purchase of a [Note] is consistent with its fiduciary
duties under ERISA and does not result in a nonexempt prohibited transaction as
defined in Section 406 of ERISA or Section 4975 of the Code.
See "ERISA Considerations" in the accompanying Prospectus.
EXPERTS
[Describe as applicable.]
LEGAL MATTERS
Certain legal matters with respect to the Certificates will be passed
upon for the Depositor and for the Underwriter by Stroock & Stroock & Lavan LLP.
RATINGS
It is a condition to the issuance of the [ ] Certificates that they be
rated "[ ]" by [Rating Agency] and "[ ]" by [Rating Agency] (the "Rating
Agencies "). It is a condition to the issuance of the Class [ ] Certificates
that they be rated "[ ]" by [Rating Agency] and "[ ]" by [Rating Agency].
A securities rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. A securities rating addresses the likelihood of
the receipt by holders of Offered Certificates of distributions in the amount of
scheduled payments on the Mortgage Loans. The rating takes into consideration
the characteristics of the Mortgage Loans and the structural, legal and tax
aspects associated with the Offered Certificates. The ratings on the Offered
Certificates do not represent any assessment of the likelihood or rate of
principal prepayments. The ratings do not address the possibility that holders
of Offered Certificates might suffer a lower than anticipated yield due to
prepayments.
The security ratings assigned to the Offered Certificates should be
evaluated independently from similar ratings on other types of securities. A
security rating is not a recommendation to buy, sell or hold securities and may
be subject to revision or withdrawal at any time by either Rating Agency.
The Depositor has not requested a rating of the Offered Certificates
by any rating agency other than the Rating Agencies; there can be no assurance,
however, as to whether any other rating agency will rate the Offered
Certificates or, if it does, what rating would be assigned by the other rating
agency. The rating assigned by the other rating agency to the Offered
Certificates could be lower than the ratings assigned by the Rating Agencies.
GLOSSARY OF DEFINED TERMS
[To be provided.]
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in some limited circumstances, the globally offered ACE
Securities Corp. [ ] Pass-Through Certificates (the "Global Securities") will be
available only in book-entry form. Investors in the Global Securities may hold
the Global Securities through any of DTC, Clearstream Luxembourg or Euroclear.
The Global Securities will be tradable as home market instruments in both the
European and U.S. domestic markets. Initial settlement and all secondary trades
will settle in same-day funds.
Secondary market trading between investors holding Global Securities
through Clearstream Luxembourg and Euroclear will be conducted in the ordinary
way in accordance with their normal rules and operating procedures and in
accordance with conventional eurobond practice (i.e., seven calendar day
settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations and prior mortgage loan asset backed
certificates issues.
Secondary cross-market trading between Clearstream Luxembourg or
Euroclear and DTC Participants holding Certificates will be effected on a
delivery-against-payment basis through the respective Depositaries of
Clearstream Luxembourg and Euroclear and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless those holders meet specific
requirements and deliver appropriate U.S. tax documents to the securities
clearing organizations or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the
name of Cede & Co. as nominee of DTC. Investors' interests in the Global
Securities will be represented through financial institutions acting on their
behalf as direct and indirect Participants in DTC. As a result, Clearstream
Luxembourg and Euroclear will hold positions on behalf of their participants
through their respective Depositaries, which in turn will hold the positions in
accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow the settlement practices applicable to prior mortgage loan asset backed
certificates issues. Investor securities custody accounts will be credited with
their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Clearstream
Luxembourg or Euroclear accounts will follow the settlement procedures
applicable to conventional eurobonds, except that there will be no temporary
global security and no "lock-up" or restricted period. Global Securities will be
credited to the securities custody accounts on the settlement date against
payment in same-day funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
TRADING BETWEEN DTC PARTICIPANTS. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior mortgage
loan asset backed certificates issues in same-day funds.
TRADING BETWEEN CLEARSTREAM LUXEMBOURG AND/OR EUROCLEAR PARTICIPANTS.
Secondary market trading between Clearstream Luxembourg Participants or
Euroclear Participants will be settled using the procedures applicable to
conventional eurobonds in same-day funds.
TRADING BETWEEN DTC SELLER AND CLEARSTREAM LUXEMBOURG OR EUROCLEAR
PURCHASER. When Global Securities are to be transferred from the account of a
DTC Participant to the account of a Clearstream Luxembourg Participant or a
Euroclear Participant, the purchaser will send instructions to Clearstream
Luxembourg or Euroclear through a Clearstream Luxembourg Participant or
Euroclear Participant at least one business day prior to settlement. Clearstream
Luxembourg or Euroclear will instruct the respective Depositary, as the case may
be, to receive the Global Securities against payment. Payment will include
interest accrued on the Global Securities from and including the last interest
payment date to and excluding the settlement date, on the basis of either the
actual number of days in the accrual period and a year assumed to consist of 360
days or a 360-day year of twelve 30-day months as applicable to the related
class of Global Securities. For transactions settling on the 31st of the month,
payment will include interest accrued to and excluding the first day of the
following month. Payment will then be made by the respective Depositary of the
DTC Participant's account against delivery of the Global Securities. After
settlement has been completed, the Global Securities will be credited to the
respective clearing system and by the clearing system, in accordance with its
usual procedures, to the Clearstream Luxembourg Participant's or Euroclear
Participant's account. The securities credit will appear the next day (European
time) and the cash debt will be back-valued to, and the interest on the Global
Securities will accrue from, the value date (that would be the preceding day
when settlement occurred in New York). If settlement is not completed on the
intended value date (i.e., the trade fails), the Clearstream Luxembourg or
Euroclear cash debt will be valued instead as of the actual settlement date.
Clearstream Luxembourg Participants and Euroclear Participants will
need to make available to the respective clearing systems the funds necessary to
process same-day funds settlement. The most direct means of doing so is to
preposition funds for settlement, either from cash on hand or existing lines of
credit, as they would for any settlement occurring within Clearstream Luxembourg
or Euroclear. Under this approach, they may take on credit exposure to
Clearstream Luxembourg or Euroclear until the Global Securities are credited to
their accounts one day later.
As an alternative, if Clearstream Luxembourg or Euroclear has extended
a line of credit to them, Clearstream Luxembourg Participants or Euroclear
Participants can elect not to preposition funds and allow that credit line to be
drawn upon the finance settlement. Under this procedure, Clearstream Luxembourg
Participants or Euroclear Participants purchasing Global Securities would incur
overdraft charges for one day, assuming they cleared the overdraft when the
Global Securities were credited to their accounts. However, interest on the
Global Securities would accrue from the value date. Therefore, in many cases the
investment income on the Global Securities earned during that one-day period may
substantially reduce or offset the amount of overdraft charges, although this
result will depend on each Clearstream Luxembourg Participant's or Euroclear
Participant's particular cost of funds.
Since the settlement is taking place during New York business hours,
DTC Participants can employ their usual procedures for sending Global Securities
to the respective European Depositary for the benefit of Clearstream Luxembourg
Participants or Euroclear Participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC Participants a
cross-market transaction will settle no differently than a trade between two DTC
Participants.
TRADING BETWEEN CLEARSTREAM LUXEMBOURG OR EUROCLEAR SELLER AND DTC
PURCHASER. Due to time zone differences in their favor, Clearstream Luxembourg
Participants and Euroclear Participants may employ their customary procedures
for transactions in which Global Securities are to be transferred by the
respective clearing system, through the respective Depositary, to a DTC
Participant. The seller will send instructions to Clearstream Luxembourg or
Euroclear through a Clearstream Luxembourg Participant or Euroclear Participant
at least one business day prior to settlement. In these cases Clearstream
Luxembourg or Euroclear will instruct the respective Depositary, as appropriate,
to deliver the Global Securities to the DTC Participant's account against
payment. Payment will include interest accrued on the Global Securities from and
including the last interest payment to and excluding the settlement date on the
basis of either the actual number of days in the accrual period and a year
assumed to consist of 360 days or a 360-day year of twelve 30-day months as
applicable to the related class of Global Securities. For transactions settling
on the 31st of the month, payment will include interest accrued to and excluding
the first day of the following month. The payment will then be reflected in the
account of the Clearstream Luxembourg Participant or Euroclear Participant the
following day, and receipt of the cash proceeds in the Clearstream Luxembourg
Participant's or Euroclear Participant's account would be back-valued to the
value date (which would be the preceding day, when settlement occurred in New
York). Should the Clearstream Luxembourg Participant or Euroclear Participant
have a line of credit with its respective clearing system and elect to be in
debt in anticipation of receipt of the sale proceeds in its account, the
back-valuation will extinguish any overdraft incurred over that one day period.
If settlement is not completed on the intended value date (that is, the trade
fails), receipt of the cash proceeds in the Clearstream Luxembourg Participant's
or Euroclear Participant's account would instead be valued as of the actual
settlement date.
Finally, day traders that use Clearstream Luxembourg or Euroclear and
that purchase Global Securities from DTC Participants for delivery to
Clearstream Luxembourg Participants or Euroclear Participants should note that
these trades would automatically fail on the sale side unless affirmative action
were taken. At least three techniques should be readily available to eliminate
this potential problem:
o borrowing through Clearstream Luxembourg or Euroclear for one day
(until the purchase side of the day trade is reflected in their
Clearstream Luxembourg or Euroclear accounts) in accordance with
the clearing system's customary procedures;
o borrowing the Global Securities in the U.S. from a DTC
Participant no later than one day prior to the settlement, which
would give the Global Securities sufficient time to be reflected
in their Clearstream Luxembourg or Euroclear account in order to
settle the sale side of the trade; or
o staggering the value dates for the buy and sell sides of the
trade so that the value date for the purchase from the DTC
Participant is at least one day prior to the value date for the
sale to the Clearstream Luxembourg or Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global securities holding securities through
Clearstream, Luxembourg or Euroclear, or through DTC will be subject to the 30%
U.S. withholding tax that generally applies to payments of interest, including
original issue discount, on registered debt issued by U.S. Persons or to 31%
backup withholding, unless (1) each clearing system, bank or other financial
institution that holds customers' securities in the ordinary course of its trade
or business in the chain of intermediaries between the beneficial owner and the
U.S. entity required to withhold tax complies with applicable certification
requirements and (2) the beneficial owner takes one of the following steps to
obtain an exemption or reduced tax rate:
EXEMPTION FOR NON-U.S. PERSONS (FORM W-8BEN). Beneficial owners of
securities that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8BEN (Certificate of Foreign Status of
Beneficial Owner for United States Tax Withholding. If the information shown on
Form W-8 BEN changes, a new Form W-8 must be filed within 30 days of the change.
EXEMPTION FOR NON-U.S. PERSONS WITH EFFECTIVELY CONNECTED INCOME (FORM
W-8ECI). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form W-8ECI (Certificate of Foreign Person's Claim for
Exemption from Withholding on Income Effectively Connected with the Conduct of a
Trade or Business in the United States).
EXEMPTION OR REDUCED RATE FOR NON-U.S. PERSONS RESIDENT IN TREATY
COUNTRIES (FORM W-8BEN). Non-U.S. Persons that are beneficial owners of
securities residing in a country that has a tax treaty with the United States
can obtain an exemption or reduced tax rate, depending on the treaty terms, by
filing Form W-8BEN (including Part II thereof). If the treaty provides only for
a reduced rate, the beneficial owner may still be entitled to complete exemption
from withholding under item (1) above.
U.S. FEDERAL INCOME TAX REPORTING PROCEDURE. The beneficial owner of a
Global Security files by submitting the appropriate form to the person through
whom it holds, the clearing agency, in the case of persons holding directly on
the books of the clearing agency. Form W-8BEN and Form W-8ECI are generally
effective for three calendar years from the close of the calendar year in which
it is collected.
The term "U.S. Person" means (1) a citizen or resident of the United
States, (2) a corporation or partnership (or other entity properly classified as
a corporation or partnership for U.S. Federal income tax purposes) organized in
or under the laws of the United States or any state or the District of Columbia,
(3) an estate the income of which is includible in gross income for United
States tax purposes, regardless of its source, or (4) a trust if a court within
the United States is able to exercise primary supervision over the
administration of the trust and one or more United States persons have authority
to control all substantial decisions of the trust. Notwithstanding the preceding
sentence, to the extent provided in regulations, trusts in existence on August
20, 1996 and treated as United States persons prior to that date that elect to
continue to be so treated also will be considered U.S. Persons. Treasury
regulations provide certain presumptions regarding the entity classification and
foreign or U.S. status of a holder that a payor generally must apply in the
absence of appropriate documentation from the holder, and provide detailed
documentation and procedures for holders claiming withholding tax exemptions
through intermediaries. Prospective investors are urged to consult their tax
advisors regarding the effect of these regulations on their ability to claim and
the means for claiming exemptions from or reduced rates of U.S. withholding
taxes.
This summary does not deal with all aspects of U.S. Federal income tax
withholding that may be relevant to foreign holders of the Global securities.
Investors are advised to consult their own tax advisers for specific tax advice
concerning their holding and disposing of the Global securities.
$[ ]
(APPROXIMATE)
ACE SECURITIES CORP.
[ ] TRUST
[ ] PASS-THROUGH CERTIFICATES,
[ ,]
ORIGINATOR AND SERVICER
-------------------------
PROSPECTUS SUPPLEMENT
-------------------------
DEUTSCHE BANC ALEX. BROWN
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus supplement is
not an offer to sell these securities and it is not soliciting an offer to buy
these securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, [ ]
PROSPECTUS
ASSET BACKED CERTIFICATES
ASSET BACKED NOTES
(ISSUABLE IN SERIES)
ACE SECURITIES CORP.,
DEPOSITOR
THE TRUST FUNDS:
Each trust fund will be established to hold assets transferred to it
by Ace Securities Corp. The assets in each trust fund will generally consist of
one or more of the following:
o mortgage loans secured by one- to four-family residential
properties;
o mortgage pass-through notes or certificates issued or guaranteed
by Ginnie Mae, Fannie Mae, or Freddie Mac; or
o previously issued asset-backed or mortgage-backed notes or
certificates backed by mortgage loans secured by residential
properties or participations in those types of loans.
The assets in your trust fund are specified in the prospectus
supplement for that particular trust fund, while the types of assets that may be
included in a trust fund, whether or not in your trust fund, are described in
greater detail in this prospectus.
THE SECURITIES:
Ace Securities Corp. will sell the notes or certificates, as
applicable, pursuant to a prospectus supplement. The notes or certificates, as
applicable, will be grouped into one or more series, each having is own distinct
designation. Each series will be issued in one or more classes and will evidence
beneficial ownership of, or be secured by, the assets in the trust fund that the
series relates to. A prospectus supplement for a series will specify all of the
terms of the series and of each of the classes in the series.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED
UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this prospectus is [ ].
TABLE OF CONTENTS
PAGE
DESCRIPTION OF THE TRUST FUNDS................................................3
USE OF PROCEEDS..............................................................16
YIELD CONSIDERATIONS.........................................................16
THE DEPOSITOR................................................................22
DESCRIPTION OF THE SECURITIES................................................23
DESCRIPTION OF THE AGREEMENTS................................................40
DESCRIPTION OF CREDIT SUPPORT................................................64
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS......................................68
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS...................................83
STATE AND OTHER TAX CONSIDERATIONS..........................................132
ERISA CONSIDERATIONS........................................................132
LEGAL INVESTMENT............................................................138
METHODS OF DISTRIBUTION.....................................................140
ADDITIONAL INFORMATION......................................................141
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.............................142
LEGAL MATTERS...............................................................143
FINANCIAL INFORMATION.......................................................143
RATING......................................................................143
INDEX OF DEFINED TERMS......................................................143
DESCRIPTION OF THE TRUST FUNDS
ASSETS
The primary assets of each trust fund (the "Assets") will include some
or all of the following types of assets:
o single family mortgage loans, which may include Home Equity Loans
and Land Sale Contracts (each as defined in this prospectus);
o any combination of "fully modified pass-through" mortgage-backed
certificates guaranteed by the Government National Mortgage
Association ("Ginnie Mae"), guaranteed mortgage pass-through
securities issued by Fannie Mae ("Fannie Mae") and mortgage
participation certificates issued by the Federal Home Loan
Mortgage Corporation ("Freddie Mac") (collectively, "Agency
Securities");
o previously issued asset-backed certificates, collateralized
mortgage obligations or participation certificates (each, and
collectively, "Mortgage Securities") evidencing interests in, or
collateralized by, mortgage loans or Agency Securities; or
o a combination of mortgage loans, Agency Securities and/or
Mortgage Securities.
The mortgage loans will not be guaranteed or insured by ACE Securities
Corp. or any of its affiliates. The mortgage loans will be guaranteed or insured
by a governmental agency or instrumentality or other person only if and to the
extent expressly provided in the prospectus supplement. The depositor will
select each Asset to include in a trust fund from among those it has purchased,
either directly or indirectly, from a prior holder (an "Asset Seller"), which
may be an affiliate of the depositor and which prior holder may or may not be
the originator of that mortgage loan.
The Assets included in the trust fund for your series may be subject
to various types of payment provisions:
o "Level Payment Assets," which may provide for the payment of
interest, and full repayment of principal, in level monthly
payments with a fixed rate of interest computed on their
declining principal balances;
o "Adjustable Rate Assets," which may provide for periodic
adjustments to their rates of interest to equal the sum of a
fixed margin and an index;
o "Buy Down Assets," which are Assets for which funds have been
provided by someone other than the related borrowers to reduce
the borrowers' monthly payments during the early period after
origination of those Assets;
o "Increasing Payment Assets," as described below;
o "Interest Reduction Assets," which provide for the one-time
reduction of the interest rate payable on these Assets;
o "GEM Assets," which provide for (1) monthly payments during the
first year after origination that are at least sufficient to pay
interest due on these Assets, and (2) an increase in those
monthly payments in later years at a predetermined rate resulting
in full repayment over a shorter term than the initial
amortization terms of those Assets;
o "GPM Assets," which allow for payments during a portion of their
terms which are or may be less than the amount of interest due on
their unpaid principal balances, and this unpaid interest will be
added to the principal balances of those Assets and will be paid,
together with interest on the unpaid interest, in later years;
o "Step-up Rate Assets" which provide for interest rates that
increase over time;
o "Balloon Payment Assets;"
o "Convertible Assets" which are Adjustable Rate Assets subject to
provisions pursuant to which, subject to limitations, the related
borrowers may exercise an option to convert the adjustable
interest rate to a fixed interest rate; and
o "Bi-weekly Assets," which provide for payments to be made by
borrowers on a bi-weekly basis.
An "Increasing Payment Asset" is an Asset that provides for monthly
payments that are fixed for an initial period to be specified in the prospectus
supplement and which increase thereafter (at a predetermined rate expressed as a
percentage of the monthly payment during the preceding payment period, subject
to any caps on the amount of any single monthly payment increase) for a period
to be specified in the prospectus supplement from the date of origination, after
which the monthly payment is fixed at a level-payment amount so as to fully
amortize the Asset over its remaining term to maturity. The scheduled monthly
payment for an Increasing Payment Asset is the total amount required to be paid
each month in accordance with its terms and equals the sum of (1) the borrower's
monthly payments referred to in the preceding sentence and (2) payments made by
the respective servicers pursuant to buy-down or subsidy agreements. The
borrower's initial monthly payments for each Increasing Payment Asset are set at
the level-payment amount that would apply to an otherwise identical Level
Payment Asset having an interest rate some number of percentage points below the
Asset Rate of that Increasing Payment Asset. The borrower's monthly payments on
each Increasing Payment Asset, together with any payments made on the Increasing
Payment Asset by the related servicers pursuant to buy-down or subsidy
agreements, will in all cases be sufficient to allow payment of accrued interest
on the Increasing Payment Asset at the related interest rate, without negative
amortization. A borrower's monthly payments on an Increasing Payment Asset may,
however, not be sufficient to result in any reduction of the principal balance
of that Asset until after the period when those payments may be increased.
The Notes or Certificates, as applicable (as defined in this
prospectus) will be entitled to payment only from the assets of the related
trust fund and will not be entitled to payments from the assets of any other
trust fund established by the depositor. The assets of a trust fund may consist
of certificates representing beneficial ownership interests in, or indebtedness
of, another trust fund that contains the Assets, if specified in the prospectus
supplement.
MORTGAGE LOANS
GENERAL
Each mortgage loan will generally be secured by a lien on a one- to
four-family residential property (including a manufactured home) or a security
interest in shares issued by a cooperative housing corporation (a "Single Family
Property"). Single Family Properties are sometimes referred to in this
prospectus as "Mortgaged Properties." The mortgage loans will be secured by
first and/or junior mortgages or deeds of trust or other similar security
instruments creating a first or junior lien on Mortgaged Property.
The Mortgaged Properties may also include:
o Apartments owned by cooperative housing corporations
("Cooperatives"); and
o Leasehold interests in properties, the title to which is held by
third party lessors. The term of these leaseholds will exceed the
term of the related mortgage note by at least five years or some
other time period specified in the prospectus supplement.
The mortgage loans may include:
o Closed-end and/or revolving home equity loans or balances of
these home equity loans ("Home Equity Loans"); and
o Mortgage loans evidenced by contracts ("Land Sale Contracts") for
the sale of properties pursuant to which the borrower promises to
pay the amount due on the mortgage loans to the holder of the
Land Sale Contract with fee title to the related property held by
that holder until the borrower has made all of the payments
required pursuant to that Land Sale Contract, at which time fee
title is conveyed to the borrower.
The originator of each mortgage loan will have been a person other
than the depositor. The prospectus supplement will indicate if any originator is
an affiliate of the depositor. The mortgage loans will be evidenced by mortgage
notes secured by mortgages, deeds of trust or other security instruments (the
"Mortgages") creating a lien on the Mortgaged Properties. The Mortgaged
Properties will be located in any one of the fifty states, the District of
Columbia, Guam, Puerto Rico or any other territory of the United States. If
provided in the prospectus supplement, the mortgage loans may include loans
insured by the Federal Housing Administration (the "FHA") or partially
guaranteed by the Veteran's Administration (the "VA"). See "--FHA Loans and VA
Loans" below.
LOAN-TO-VALUE RATIO
The "Loan-to-Value Ratio" of a mortgage loan at any particular time is
the ratio (expressed as a percentage) of the then outstanding principal balance
of the mortgage loan to the Value of the related Mortgaged Property. The "Value"
of a Mortgaged Property, other than for Refinance Loans, is generally the lesser
of (a) the appraised value determined in an appraisal obtained by the originator
at origination of that loan and (b) the sales price for that property.
"Refinance Loans" are loans made to refinance existing loans. Unless otherwise
specified in the prospectus supplement, the Value of the Mortgaged Property
securing a Refinance Loan is the appraised value of the Mortgaged Property
determined in an appraisal obtained at the time of origination of the Refinance
Loan. The value of a Mortgaged Property as of the date of initial issuance of
the related series may be less than the Value at origination and will fluctuate
from time to time based upon changes in economic conditions and the real estate
market.
MORTGAGE LOAN INFORMATION IN THE PROSPECTUS SUPPLEMENTS
Your prospectus supplement will contain information, as of the dates
specified in that prospectus supplement and to the extent then applicable and
specifically known to the depositor, with respect to the mortgage loans,
including:
o the total outstanding principal balance and the largest, smallest
and average outstanding principal balance of the mortgage loans
as of, unless otherwise specified in that prospectus supplement,
the close of business on the first day of the month of formation
of the related trust fund (the "Cut-off Date");
o the type of property securing the mortgage loans;
o the weighted average (by principal balance) of the original and
remaining terms to maturity of the mortgage loans;
o the range of maturity dates of the mortgage loans;
o the range of the Loan-to-Value Ratios at origination of the
mortgage loans;
o the mortgage rates or range of mortgage rates and the weighted
average mortgage rate borne by the mortgage loans;
o the state or states in which most of the Mortgaged Properties are
located;
o information regarding the prepayment provisions, if any, of the
mortgage loans;
o for mortgage loans with adjustable mortgage rates ("ARM Loans"),
the index, the frequency of the adjustment dates, the range of
margins added to the index, and the maximum mortgage rate or
monthly payment variation at the time of any adjustment of and
over the life of the ARM Loan;
o information regarding the payment characteristics of the mortgage
loans, including balloon payment and other amortization
provisions;
o the number of mortgage loans that are delinquent and the number
of days or ranges of the number of days those mortgage loans are
delinquent; and
o the material underwriting standards used for the mortgage loans.
If specific information respecting the mortgage loans is unknown to
the depositor at the time the Notes or Certificates, as applicable, are
initially offered, more general information of the nature described above will
be provided in the prospectus supplement, and specific information will be set
forth in a report that will be available to purchasers of the related Notes or
Certificates, as applicable, at or before the initial issuance of that Security
and will be filed as part of a Current Report on Form 8-K with the Securities
and Exchange Commission (the "Commission") within fifteen days after that
initial issuance. The characteristics of the mortgage loans included in a trust
fund will not vary by more than five percent (by total principal balance as of
the Cut-off Date) from the characteristics of the mortgage loans that are
described in the prospectus supplement.
The prospectus supplement will specify whether the mortgage loans
include Home Equity Loans, which may be secured by Mortgages that are junior to
other liens on the related Mortgaged Property. In addition, the prospectus
supplement will specify whether the mortgage loans contain some mortgage loans
evidenced by Land Sale Contracts.
PAYMENT PROVISIONS OF THE MORTGAGE LOANS
All of the mortgage loans will provide for payments of principal,
interest or both, on due dates that occur monthly, quarterly or semi-annually or
at some other interval as is specified in the prospectus supplement or for
payments in another manner described in the prospectus supplement. Each mortgage
loan may provide for no accrual of interest or for accrual of interest on the
mortgage loan at a mortgage rate that is fixed over its term or that adjusts
from time to time, or that may be converted from an adjustable to a fixed
mortgage rate or a different adjustable mortgage rate, or from a fixed to an
adjustable mortgage rate, from time to time pursuant to an election or as
otherwise specified in the related mortgage note, in each case as described in
the prospectus supplement. Each mortgage loan may provide for scheduled payments
to maturity or payments that adjust from time to time to accommodate changes in
the mortgage rate or to reflect the occurrence of particular events or that
adjust on the basis of other methodologies, and may provide for negative
amortization or accelerated amortization, in each case as described in the
prospectus supplement. Each mortgage loan may be fully amortizing or require a
balloon payment due on its stated maturity date, in each case as described in
the prospectus supplement. Each mortgage loan may contain prohibitions on
prepayment (a "Lock-out Period" and, the date of expiration thereof, a "Lock-out
Date") or require payment of a premium or a yield maintenance penalty (a
"Prepayment Premium") in connection with a prepayment, in each case as described
in the prospectus supplement. If the holders of any class or classes of Offered
Notes or Offered Certificates, as applicable, are entitled to all or a portion
of any Prepayment Premiums collected from the mortgage loans, the prospectus
supplement will specify the method or methods by which any of these amounts will
be allocated. See "--Assets" above.
REVOLVING CREDIT LINE LOANS
As more fully described in the prospectus supplement, the mortgage
loans may consist, in whole or in part, of revolving Home Equity Loans or
balances of these Home Equity Loans ("Revolving Credit Line Loans"). Interest on
each Revolving Credit Line Loan, excluding introductory rates offered from time
to time during promotional periods, may be computed and payable monthly on the
average daily outstanding principal balance of that loan. From time to time
before the expiration of the related draw period specified in a Revolving Credit
Line Loan, principal amounts on that Revolving Credit Line Loan may be drawn
down (up to a maximum amount as set forth in the prospectus supplement) or
repaid. If specified in the prospectus supplement, new draws by borrowers under
the Revolving Credit Line Loans will automatically become part of the trust fund
described in the prospectus supplement. As a result, the total balance of the
Revolving Credit Line Loans will fluctuate from day to day as new draws by
borrowers are added to the trust fund and principal payments are applied to
those balances and those amounts will usually differ each day, as more
specifically described in the prospectus supplement. Under some circumstances,
under a Revolving Credit Line Loan, a borrower may, during the related draw
period, choose an interest only payment option, during which the borrower is
obligated to pay only the amount of interest that accrues on the loan during the
billing cycle, and may also elect to pay all or a portion of the principal. An
interest only payment option may terminate at the end of the related draw
period, after which the borrower must begin paying at least a minimum monthly
portion of the average outstanding principal balance of the loan.
AGENCY SECURITIES
The Agency Securities will consist of any combination of Ginnie Mae
certificates, Fannie Mae certificates and Freddie Mac certificates, which may
include Stripped Agency Securities, as described below.
GINNIE MAE
Ginnie Mae is a wholly-owned corporate instrumentality of the United
States within the Department of Housing and Urban Development. Section 306(g) of
Title III of the Housing Act authorizes Ginnie Mae to guarantee the timely
payment of the principal of and interest on certificates that are based on and
backed by a pool of FHA loans, VA loans or by pools of other eligible
residential loans.
Section 306(g) of the Housing Act provides that "the full faith and
credit of the United States is pledged to the payment of all amounts that may be
required to be paid under any guaranty under this subsection." To meet its
obligations under that guaranty, Ginnie Mae is authorized, under Section 306(d)
of the National Housing Act of 1934 (the "Housing Act"), to borrow from the
United States Treasury with no limitations as to amount, to perform its
obligations under its guarantee.
GINNIE MAE CERTIFICATES
Each Ginnie Mae certificate will be a "fully modified pass-through"
mortgage-backed certificate issued and serviced by an issuer approved by Ginnie
Mae or Fannie Mae as a seller-servicer of FHA loans or VA loans, except as
described below regarding Stripped Agency Securities (as defined below). The
loans underlying Ginnie Mae certificates may consist of FHA loans, VA loans and
other loans eligible for inclusion in loan pools underlying Ginnie Mae
certificates. Ginnie Mae certificates may be issued under either or both of the
Ginnie Mae I program and the Ginnie Mae II program, as described in the
prospectus supplement. If the trust fund includes Ginnie Mae certificates, your
prospectus supplement will include any material additional information regarding
the Ginnie Mae guaranty program, the characteristics of the pool underlying
those Ginnie Mae certificates, the servicing of the related pool, the payment of
principal and interest on Ginnie Mae certificates and other relevant matters
regarding the Ginnie Mae certificates.
Except as otherwise specified in the prospectus supplement or as
described below with respect to Stripped Agency Securities, each Ginnie Mae
certificate will provide for the payment, by or on behalf of the issuer, to the
registered holder of that Ginnie Mae certificate of monthly payments of
principal and interest equal to the holder's proportionate interest in the total
amount of the monthly principal and interest payments on each related FHA loan
or VA loan, minus servicing and guaranty fees totaling the excess of the
interest on that FHA loan or VA loan over the Ginnie Mae certificates' interest
rate. In addition, each payment to a holder of a Ginnie Mae certificate will
include proportionate pass-through payments to that holder of any prepayments of
principal of the FHA loans or VA loans underlying the Ginnie Mae certificate and
the holder's proportionate interest in the remaining principal balance in the
event of a foreclosure or other disposition of any related FHA loan or VA loan.
The Ginnie Mae certificates do not constitute a liability of, or
evidence any recourse against, the issuer of the Ginnie Mae certificates, the
depositor or any affiliates of the depositor, and the only recourse of a
registered holder (for example, the trustee) is to enforce the guaranty of
Ginnie Mae.
Ginnie Mae will have approved the issuance of each of the Ginnie Mae
certificates included in a trust fund in accordance with a guaranty agreement or
contract between Ginnie Mae and the issuer of the Ginnie Mae certificates.
Pursuant to that agreement, that issuer, in its capacity as servicer, is
required to perform customary functions of a servicer of FHA loans and VA loans,
including collecting payments from borrowers and remitting those collections to
the registered holder, maintaining escrow and impoundment accounts of borrowers
for payments of taxes, insurance and other items required to be paid by the
borrower, maintaining primary hazard insurance, and advancing from its own funds
to make timely payments of all amounts due on the Ginnie Mae certificate, even
if the payments received by that issuer on the loans backing the Ginnie Mae
certificate are less than the amounts due. If the issuer is unable to make
payments on a Ginnie Mae certificate as they become due, it must promptly notify
Ginnie Mae and request Ginnie Mae to make that payment. Upon that notification
and request, Ginnie Mae will make those payments directly to the registered
holder of the Ginnie Mae certificate. In the event no payment is made by the
issuer and the issuer fails to notify and request Ginnie Mae to make that
payment, the registered holder of the Ginnie Mae certificate has recourse
against only Ginnie Mae to obtain that payment. The trustee or its nominee, as
registered holder of the Ginnie Mae certificates included in a trust fund, is
entitled to proceed directly against Ginnie Mae under the terms of the guaranty
agreement or contract relating to the Ginnie Mae certificates for any amounts
that are unpaid when due under each Ginnie Mae certificate.
The Ginnie Mae certificates included in a trust fund may have other
characteristics and terms, different from those described above so long as the
Ginnie Mae certificates and underlying residential loans meet the criteria of
the rating agency or agencies. The Ginnie Mae certificates and underlying
residential loans will be described in the prospectus supplement.
FANNIE MAE
Fannie Mae is a federally chartered and stockholder-owned corporation
organized and existing under the Federal National Mortgage Association Charter
Act, as amended (the "Charter Act"). Fannie Mae was originally established in
1938 as a United States government agency to provide supplemental liquidity to
the mortgage market and was transformed into a stockholder-owned and privately
managed corporation by legislation enacted in 1968.
Fannie Mae provides funds to the mortgage market by purchasing
mortgage loans from lenders. Fannie Mae acquires funds to purchase loans from
many capital market investors, thus expanding the total amount of funds
available for housing. Operating nationwide, Fannie Mae helps to redistribute
mortgage funds from capital-surplus to capital-short areas. In addition, Fannie
Mae issues mortgage-backed securities primarily in exchange for pools of
mortgage loans from lenders. Fannie Mae receives fees for its guaranty of timely
payment of principal and interest on its mortgage-backed securities.
FANNIE MAE CERTIFICATES
Fannie Mae certificates are Guaranteed Mortgage Pass-Through
Certificates typically issued pursuant to a prospectus that is periodically
revised by Fannie Mae. Fannie Mae certificates represent fractional undivided
interests in a pool of mortgage loans formed by Fannie Mae. Each mortgage loan
must meet the applicable standards of the Fannie Mae purchase program. Mortgage
loans comprising a pool are either provided by Fannie Mae from its own portfolio
or purchased pursuant to the criteria of the Fannie Mae purchase program.
Mortgage loans underlying Fannie Mae certificates included in a trust fund will
consist of conventional mortgage loans, FHA loans or VA loans. If the trust fund
includes Fannie Mae certificates, your prospectus supplement will include any
material additional information regarding the Fannie Mae program, the
characteristics of the pool underlying the Fannie Mae certificates, the
servicing of the related pool, payment of principal and interest on the Fannie
Mae certificates and other relevant matters about the Fannie Mae certificates.
Except as described below with respect to Stripped Agency Securities,
Fannie Mae guarantees to each registered holder of a Fannie Mae certificate that
it will distribute amounts representing that holder's proportionate share of
scheduled principal and interest at the applicable interest rate provided for by
that Fannie Mae certificate on the underlying mortgage loans, whether or not
received, and that holder's proportionate share of the full principal amount of
any prepayment or foreclosed or other finally liquidated mortgage loan, whether
or not the related principal amount is actually recovered.
The obligations of Fannie Mae under its guarantees are obligations
solely of Fannie Mae and are not backed by, nor entitled to, the full faith and
credit of the United States. If Fannie Mae were unable to satisfy those
obligations, distributions to the holders of Fannie Mae certificates would
consist solely of payments and other recoveries on the underlying loans and,
accordingly, monthly distributions to the holders of Fannie Mae certificates
would be affected by delinquent payments and defaults on those loans.
Fannie Mae certificates evidencing interests in pools of mortgage
loans formed on or after May 1, 1985 (other than Fannie Mae certificates backed
by pools containing graduated payment mortgage loans or multifamily loans) are
available in book-entry form only. For a Fannie Mae certificate issued in
book-entry form, distributions on the Fannie Mae certificate will be made by
wire, and for a fully registered Fannie Mae certificate, distributions will be
made by check.
The Fannie Mae certificates included in a trust fund may have other
characteristics and terms, different from those described above, as long as the
Fannie Mae certificates and underlying mortgage loans meet the criteria of the
rating agency or agencies rating the Certificates. The Fannie Mae certificates
and underlying mortgage loans will be described in the prospectus supplement.
FREDDIE MAC
Freddie Mac is a corporate instrumentality of the United States
created pursuant to Title III of the Emergency Home Finance Act of 1970, as
amended (the "Freddie Mac Act"). Freddie Mac was established primarily for the
purpose of increasing the availability of mortgage credit for the financing of
needed housing. It seeks to provide an enhanced degree of liquidity for
residential mortgage investments primarily by assisting in the development of
secondary markets for conventional mortgages. The principal activity of Freddie
Mac currently consists of the purchase of first lien, conventional residential
mortgage loans or participation interests in those mortgage loans and the resale
of the mortgage loans so purchased in the form of mortgage securities, primarily
Freddie Mac certificates. Freddie Mac is confined to purchasing, so far as
practicable, mortgage loans and participation interests in mortgage loans which
it deems to be of the quality, type and class as to meet generally the purchase
standards imposed by private institutional mortgage investors.
FREDDIE MAC CERTIFICATES
Each Freddie Mac certificate represents an undivided interest in a
pool of residential loans that may consist of first lien conventional
residential loans, FHA loans or VA loans (the "Freddie Mac Certificate Group").
Each of these mortgage loans must meet the applicable standards set forth in the
Freddie Mac Act. A Freddie Mac Certificate Group may include whole loans,
participation interests in whole loans and undivided interests in whole loans
and/or participations comprising another Freddie Mac Certificate Group. If the
trust fund includes Freddie Mac certificates, your prospectus supplement will
include any material additional information regarding the Freddie Mac guaranty
program, the characteristics of the pool underlying that Freddie Mac
certificate, the servicing of the related pool, payment of principal and
interest on the Freddie Mac certificate and any other relevant matters about the
Freddie Mac certificates.
Except as described below with respect to Stripped Agency Securities,
Freddie Mac guarantees to each registered holder of a Freddie Mac certificate
the timely payment of interest on the underlying mortgage loans to the extent of
the applicable interest rate on the registered holder's pro rata share of the
unpaid principal balance outstanding on the underlying mortgage loans in the
Freddie Mac Certificate Group represented by that Freddie Mac certificate,
whether or not received. Freddie Mac also guarantees to each registered holder
of a Freddie Mac certificate collection by that holder of all principal on the
underlying mortgage loans, without any offset or deduction, to the extent of
that holder's pro rata share of the principal, but does not, except if and to
the extent specified in the prospectus supplement, guarantee the timely payment
of scheduled principal. Pursuant to its guarantees, Freddie Mac also guarantees
ultimate collection of scheduled principal payments, prepayments of principal
and the remaining principal balance in the event of a foreclosure or other
disposition of a mortgage loan. Freddie Mac may remit the amount due on account
of its guarantee of collection of principal at any time after default on an
underlying mortgage loan, but not later than 30 days following the latest of
(1) foreclosure sale;
(2) payment of the claim by any mortgage insurer; and
(3) the expiration of any right of redemption, but in any event
no later than one year after demand has been made upon the borrower
for accelerated payment of principal.
In taking actions regarding the collection of principal after default
on the mortgage loans underlying Freddie Mac certificates, including the timing
of demand for acceleration, Freddie Mac reserves the right to exercise its
servicing judgment for the mortgage loans in the same manner as for mortgage
loans that it has purchased but not sold. The length of time necessary for
Freddie Mac to determine that a mortgage loan should be accelerated varies with
the particular circumstances of each borrower, and Freddie Mac has not adopted
servicing standards that require that the demand be made within any specified
period.
Freddie Mac certificates are not guaranteed by the United States or by
any Federal Home Loan Bank and do not constitute debts or obligations of the
United States or any Federal Home Loan Bank. The obligations of Freddie Mac
under its guarantee are obligations solely of Freddie Mac and are not backed by,
nor entitled to, the full faith and credit of the United States. If Freddie Mac
were unable to satisfy those obligations, distributions to holders of Freddie
Mac certificates would consist solely of payments and other recoveries on the
underlying mortgage loans and, accordingly, monthly distributions to holders of
Freddie Mac certificates would be affected by delinquent payments and defaults
on those mortgage loans.
The Freddie Mac certificates included in a trust fund may have other
characteristics and terms, different from those described above, so long as the
Freddie Mac certificates and underlying mortgage loans meet the criteria of the
rating agency or agencies rating the Securities. The Freddie Mac certificates
and underlying mortgage loans will be described in the prospectus supplement.
STRIPPED AGENCY SECURITIES
The Ginnie Mae certificates, Fannie Mae certificates or Freddie Mac
certificates may be issued in the form of certificates ("Stripped Agency
Securities") that represent an undivided interest in all or part of either the
principal distributions (but not the interest distributions) or the interest
distributions (but not the principal distributions), or in some specified
portion of the principal or interest distributions (but not all of those
distributions), on an underlying pool of mortgage loans or other Ginnie Mae
certificates, Fannie Mae certificates or Freddie Mac certificates. Ginnie Mae,
Fannie Mae or Freddie Mac, as applicable, will guarantee each Stripped Agency
Security to the same extent as that entity guarantees the underlying securities
backing the Stripped Agency Securities or to the extent described above for a
Stripped Agency Security backed by a pool of mortgage loans, unless otherwise
specified in the prospectus supplement. If the trust fund includes Stripped
Agency Securities, your prospectus supplement will include any material
additional information regarding the characteristics of the assets underlying
the Stripped Agency Securities, the payments of principal and interest on the
Stripped Agency Securities and other relevant matters about the Stripped Agency
Securities.
MORTGAGE SECURITIES
The Mortgage Securities will represent beneficial interests in loans
of the type that would otherwise be eligible to be mortgage loans or Agency
Securities, or collateralized obligations secured by mortgage loans or Agency
Securities. The Mortgage Securities will have been
(1) issued by an entity other than the depositor or its
affiliates;
(2) acquired in bona fide secondary market transactions from
persons other than the issuer of the Mortgage Securities or its
affiliates; and
(3) (a) offered and distributed to the public pursuant to an
effective registration statement or (b) purchased in a transaction not
involving any public offering from a person who is not an affiliate of
the issuer of those securities at the time of sale (nor an affiliate
of the issuer at any time during the preceding three months); provided
a period of two years elapsed since the later of the date the
securities were acquired from the issuer.
Although individual Underlying Loans may be insured or guaranteed by
the United States or an agency or instrumentality of the United States, they
need not be, and Mortgage Securities themselves will not be so insured or
guaranteed. Except as otherwise set forth in the prospectus supplement, Mortgage
Securities will generally be similar to Notes or Certificates, as applicable,
offered under this prospectus.
The prospectus supplement for Notes or Certificates, as applicable, of
each series evidencing interests in a trust fund including Mortgage Securities
will include a description of the Mortgage Securities and any related credit
enhancement, and the related mortgage loans or Agency Securities will be
described together with any other mortgage loans or Agency Securities included
in the trust fund of that series. As used in this prospectus, the terms
"mortgage loans" include the mortgage loans underlying the Mortgage Securities
in your trust fund. References in this prospectus to advances to be made and
other actions to be taken by the master servicer in connection with the Assets
may include any advances made and other actions taken pursuant to the terms of
the applicable Mortgage Securities.
FHA LOANS AND VA LOANS
FHA loans will be insured by the FHA as authorized under the Housing
Act, and the United States Housing Act of 1937, as amended. One- to four-family
FHA loans will be insured under various FHA programs including the standard FHA
203-b programs to finance the acquisition of one- to four-family housing units
and the FHA 245 graduated payment mortgage program. The FHA loans generally
require a minimum down payment of approximately 5% of the original principal
amount of the FHA loan. No FHA loan may have an interest rate or original
principal balance exceeding the applicable FHA limits at the time of origination
of that FHA loan.
Mortgage loans that are FHA loans are insured by the FHA (as described
in the prospectus supplement, up to an amount equal to 90% of the sum of the
unpaid principal of the FHA loan, a portion of the unpaid interest and other
liquidation costs) pursuant to Title I of the Housing Act.
VA loans will be partially guaranteed by the VA under the Servicemen's
Readjustment Act of 1944, as amended (the "Servicemen's Readjustment Act"). The
Servicemen's Readjustment Act permits a veteran (or in some instances the spouse
of a veteran) to obtain a mortgage loan guarantee by the VA covering mortgage
financing of the purchase of a one- to four-family dwelling unit at interest
rates permitted by the VA. The program has no mortgage loan limits, requires no
down payment from the purchasers and permits the guarantee of mortgage loans of
up to 30 years' duration. However, no VA loan will have an original principal
amount greater than five times the partial VA guarantee for that VA loan. The
maximum guarantee that may be issued by the VA under this program will be set
forth in the prospectus supplement.
PRE-FUNDING ACCOUNTS
To the extent provided in a prospectus supplement, a portion of the
proceeds of the issuance of Notes or Certificates, as applicable, may be
deposited into an account maintained with the trustee (a "Pre-Funding Account").
In that case, the depositor will be obligated to sell at a predetermined price -
and the trust fund for the related series of Notes or Certificates, as
applicable, will be obligated to purchase - additional Assets (the "Subsequent
Assets") from time to time, and as frequently as daily, within the period (not
to exceed three months) specified in the prospectus supplement (the "Pre-Funding
Period") after the issuance of the Notes or Certificates, as applicable, having
a total principal balance approximately equal to the amount on deposit in the
Pre-Funding Account (the "Pre-Funded Amount") for that series on the date of its
issuance. The Pre-Funded Amount for a series will be specified in the prospectus
supplement, and will not in any case exceed 50% of the total initial Security
Balance of the related Notes or Certificates, as applicable. Any Subsequent
Assets will be required to satisfy specific eligibility criteria more fully set
forth in the prospectus supplement, which criteria will be consistent with the
eligibility criteria of the Assets initially included in the trust fund, subject
to those exceptions that are expressly stated in the prospectus supplement. In
addition, specific conditions must be satisfied before the Subsequent Assets are
transferred into the trust fund, for example, the delivery to the rating
agencies and to the trustee of any required opinions of counsel. See "ERISA
Considerations--Pre-Funding Accounts" for additional information regarding
Pre-Funding Accounts.
Except as set forth in the following sentence, the Pre-Funded Amount
will be used only to purchase Subsequent Assets. Any portion of the Pre-Funded
Amount remaining in the Pre-Funding Account at the end of the Pre-Funding Period
will be used to prepay one or more classes of Notes or Certificates, as
applicable, in the amounts and in the manner specified in the prospectus
supplement. In addition, if specified in the prospectus supplement, the
depositor may be required to deposit cash into an account maintained by the
trustee (the "Capitalized Interest Account") for the purpose of assuring the
availability of funds to pay interest on the Notes or Certificates, as
applicable, during the Pre-Funding Period. Any amount remaining in the
Capitalized Interest Account at the end of the Pre-Funding Period will be
remitted as specified in the prospectus supplement.
Amounts deposited in the Pre-Funding and Capitalized Interest Accounts
will be permitted to be invested, pending application, only in eligible
investments authorized by each applicable rating agency.
ACCOUNTS
Each trust fund will include one or more accounts, established and
maintained on behalf of the securityholders into which the person or persons
designated in the prospectus supplement will, to the extent described in this
prospectus and in the prospectus supplement deposit all payments and collections
received or advanced with respect to the Assets and other assets in the trust
fund. This type of account may be maintained as an interest bearing or a
non-interest bearing account, and funds held in that account may be held as cash
or invested in some short-term, investment grade obligations, in each case as
described in the prospectus supplement. See "Description of the
Agreements--Material Terms of the Pooling and Servicing Agreements and
Underlying Servicing Agreements--Collection Account and Related Accounts."
CREDIT SUPPORT
If so provided in the prospectus supplement, partial or full
protection against some defaults and losses on the Assets in the related trust
fund may be provided to one or more classes of Notes or Certificates, as
applicable, in the related series in the form of subordination of one or more
other classes of Notes or Certificates, as applicable, in that series or by one
or more other types of credit support, for example, a letter of credit,
insurance policy, guarantee, reserve fund or another type of credit support, or
a combination of these (any of these types of coverage for the Notes or
Certificates, as applicable, of any series, is referred to generally as "credit
support"). The amount and types of coverage, the identification of the entity
providing the coverage (if applicable) and related information for each type of
credit support, if any, will be described in the prospectus supplement for a
series of Notes or Certificates, as applicable. See "Description of Credit
Support."
CASH FLOW AGREEMENTS
If so provided in the prospectus supplement, the trust fund may
include guaranteed investment contracts pursuant to which moneys held in the
funds and accounts established for the related series will be invested at a
specified rate. The trust fund may also include other agreements, for example,
interest rate swap agreements, interest rate cap or floor agreements, currency
swap agreements or similar agreements provided to reduce the effects of interest
rate or currency exchange rate fluctuations on the Assets or on one or more
classes of Notes or Certificates, as applicable. (Currency swap agreements might
be included in the trust fund if some or all of the Assets were denominated in a
non-United States currency.) The principal terms of any related guaranteed
investment contract or other agreement (any of these types of agreement, a "Cash
Flow Agreement"), including provisions relating to the timing, manner and amount
of payments under these documents and provisions relating to the termination of
these documents, will be described in the prospectus supplement for the related
series. In addition, the prospectus supplement will provide information with
respect to the borrower under any Cash Flow Agreement.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Notes or
Certificates, as applicable, will be applied by the depositor to the purchase of
Assets, or the repayment of the financing incurred in that purchase, and to pay
for some of the expenses incurred in connection with that purchase of Assets and
sale of Notes or Certificates, as applicable. The depositor expects to sell the
Notes or Certificates, as applicable, from time to time, but the timing and
amount of offerings of Notes or Certificates, as applicable, will depend on a
number of factors, including the volume of Assets acquired by the depositor,
prevailing interest rates, availability of funds and general market conditions.
YIELD CONSIDERATIONS
GENERAL
The yield on any Offered Security will depend on the price paid by the
securityholder, the Interest Rate of the Security, the receipt and timing of
receipt of distributions on the Security and the weighted average life of the
Assets in the related trust fund (which may be affected by prepayments,
defaults, liquidations or repurchases).
INTEREST RATE
Notes or Certificates, as applicable, of any class within a series may
have fixed, variable or adjustable Interest Rates, which may or may not be based
upon the interest rates borne by the Assets in the related trust fund. The
prospectus supplement for any series will specify the Interest Rate for each
class of Notes or Certificates, as applicable, or, in the case of a variable or
adjustable Interest Rate, the method of determining the Interest Rate; the
effect, if any, of the prepayment of any Asset on the Interest Rate of one or
more classes of Notes or Certificates, as applicable,; and whether the
distributions of interest on the Notes or Certificates, as applicable, of any
class will be dependent, in whole or in part, on the performance of any borrower
under a Cash Flow Agreement.
If specified in the prospectus supplement, the effective yield to
maturity to each holder of Notes or Certificates, as applicable, entitled to
payments of interest will be below that otherwise produced by the applicable
Interest Rate and purchase price of that Security because, while interest may
accrue on each Asset during a period (each, an "Accrual Period"), the
distribution of that interest will be made on a day that may be several days,
weeks or months following the period of accrual.
TIMING OF PAYMENT OF INTEREST
Each payment of interest on the Notes or Certificates, as applicable,
entitled to distributions of interest (or addition to the Security Balance of a
class of Accrual Securities) will be made by or on behalf of the trustee each
month on the date specified in the related prospectus supplement (each date, a
"Distribution Date"), and will include interest accrued during the Accrual
Period for that Distribution Date. As indicated above under "--Interest Rate,"
if the Accrual Period ends on a date other than the day before a Distribution
Date for the related series, the yield realized by the holders of those Notes or
Certificates, as applicable, may be lower than the yield that would result if
the Accrual Period ended on the day before the Distribution Date.
PAYMENTS OF PRINCIPAL; PREPAYMENTS
The yield to maturity on the Notes or Certificates, as applicable,
will be affected by the rate of principal payments on the Assets (or, in the
case of Mortgage Securities and Agency Securities, the underlying assets related
to the Mortgage Securities and Agency Securities), including principal
prepayments resulting from both voluntary prepayments by the borrowers and
involuntary liquidations. The rate at which principal prepayments occur will be
affected by a variety of factors, including the terms of the Assets (or, in the
case of Mortgage Securities and Agency Securities, the underlying assets related
to the Mortgage Securities and Agency Securities), the level of prevailing
interest rates, the availability of mortgage credit and economic, demographic,
geographic, tax, legal and other factors.
In general, however, if prevailing interest rates fall significantly
below the interest rates on the Assets in a particular trust fund (or, in the
case of Mortgage Securities and Agency Securities, the underlying assets related
to the Mortgage Securities and Agency Securities), those assets are likely to be
the subject of higher principal prepayments than if prevailing rates remain at
or above the rates borne by those assets. However, you should note that some
Assets (or, in the case of Mortgage Securities and Agency Securities, the
underlying assets related to the Mortgage Securities and Agency Securities) may
consist of loans with different interest rates. The rate of principal payment on
Mortgage Securities will also be affected by the allocation of principal
payments on the underlying assets among the Mortgage Securities or Agency
Securities and other Mortgage Securities or Agency Securities of the same
series. The rate of principal payments on the Assets in the related trust fund
(or, in the case of Mortgage Securities and Agency Securities, the underlying
assets related to the Mortgage Securities and Agency Securities) is likely to be
affected by the existence of any Lock-out Periods and Prepayment Premium
provisions of the mortgage loans underlying or comprising those Assets, and by
the extent to which the servicer of any of these mortgage loans is able to
enforce these provisions. Mortgage loans with a Lock-out Period or a Prepayment
Premium provision, to the extent enforceable, generally would be expected to
experience a lower rate of principal prepayments than otherwise identical
mortgage loans without those provisions, with shorter Lock-out Periods or with
lower Prepayment Premiums.
If the purchaser of a Security offered at a discount calculates its
anticipated yield to maturity based on an assumed rate of distributions of
principal that is faster than that actually experienced on the Assets (or, in
the case of Mortgage Securities and Agency Securities, the underlying assets
related to the Mortgage Securities and Agency Securities), the actual yield to
maturity will be lower than that so calculated. Conversely, if the purchaser of
a Security offered at a premium calculates its anticipated yield to maturity
based on an assumed rate of distributions of principal that is slower than that
actually experienced on the Assets (or, in the case of Mortgage Securities and
Agency Securities, the underlying assets related to the Mortgage Securities and
Agency Securities), the actual yield to maturity will be lower than that so
calculated. In either case, if so provided in the prospectus supplement for a
series of Notes or Certificates, as applicable, the effect on yield on one or
more classes of the Notes or Certificates, as applicable, of that series of
prepayments of the Assets in the related trust fund may be mitigated or
exacerbated by any provisions for sequential or selective distribution of
principal to those classes.
When a full prepayment is made on a mortgage loan, the borrower is
charged interest on the principal amount of the mortgage loan so prepaid for the
number of days in the month actually elapsed up to the date of the prepayment or
some other period specified in the prospectus supplement. Generally, the effect
of prepayments in full will be to reduce the amount of interest paid in the
following month to holders of Notes or Certificates, as applicable, entitled to
payments of interest because interest on the principal amount of any mortgage
loan so prepaid will be paid only to the date of prepayment rather than for a
full month. A partial prepayment of principal is applied so as to reduce the
outstanding principal balance of the related mortgage loan as of its due date in
the month in which the partial prepayment is received or some other date as is
specified in the prospectus supplement.
The timing of changes in the rate of principal payments on the Assets
(or, in the case of Mortgage Securities and Agency Securities, the underlying
assets related to the Mortgage Securities and Agency Securities) may
significantly affect an investor's actual yield to maturity, even if the average
rate of distributions of principal is consistent with an investor's expectation.
In general, the earlier a principal payment is received on the mortgage loans
and distributed on a Security, the greater the effect on that investor's yield
to maturity. The effect on an investor's yield of principal payments occurring
at a rate higher (or lower) than the rate anticipated by the investor during a
particular period may not be offset by a similar decrease (or increase) in the
rate of principal payments at a later time.
The securityholder will bear the risk of not being able to reinvest
principal received from a Security at a yield at least equal to the yield on
that Security.
PREPAYMENTS--MATURITY AND WEIGHTED AVERAGE LIFE
The rates at which principal payments are received on the Assets
included in or comprising a trust fund and the rate at which payments are made
from any credit support or Cash Flow Agreement for the related series of Notes
or Certificates, as applicable, may affect the ultimate maturity and the
weighted average life of each class of that series. Prepayments on the mortgage
loans comprising or underlying the Assets in a particular trust fund will
generally accelerate the rate at which principal is paid on some or all of the
classes of the Notes or Certificates, as applicable, of the related series.
If so provided in the prospectus supplement for a series of Notes or
Certificates, as applicable, one or more classes of Notes or Certificates, as
applicable, may have a final scheduled Distribution Date, which is the date on
or before which the Security Balance of the class of Notes or Certificates, as
applicable, is scheduled to be reduced to zero, calculated on the basis of the
assumptions applicable to that series. Weighted average life refers to the
average amount of time that will elapse from the date of issue of a security
until each dollar of principal of that security will be repaid to the investor.
The weighted average life of a class of Notes or Certificates, as applicable, of
a series will be influenced by the rate at which principal on the Assets is paid
to that class, which may be in the form of scheduled amortization or prepayments
(for this purpose, the term "prepayment" includes prepayments, in whole or in
part, and liquidations due to default).
In addition, the weighted average life of the Notes or Certificates,
as applicable, may be affected by the varying maturities of the Assets in a
trust fund. If any Assets in a particular trust fund have actual terms to
maturity less than those assumed in calculating final scheduled Distribution
Dates for the classes of Notes or Certificates, as applicable, of the related
series, one or more classes of these Notes or Certificates, as applicable, may
be fully paid before their respective final scheduled Distribution Dates, even
in the absence of prepayments. Accordingly, the prepayment experience of the
Assets will, to some extent, be a function of the mix of mortgage rates or
Contract Rates and maturities of the mortgage loans comprising or underlying
those Assets. See "Description of the Trust Funds."
Prepayments on loans are also commonly measured relative to a
prepayment standard or model, such as the Constant Prepayment Rate ("CPR")
prepayment model or the Standard Prepayment Assumption ("SPA") prepayment model.
CPR represents a constant assumed rate of prepayment each month relative to the
then outstanding principal balance of a pool of loans for the life of those
loans. SPA represents an assumed rate of prepayment each month relative to the
then outstanding principal balance of a pool of loans. A prepayment assumption
of 100% of SPA assumes prepayment rates of 0.2% per annum of the then
outstanding principal balance of those loans in the first month of the life of
the loans and an additional 0.2% per annum in each month thereafter until the
thirtieth month. Starting in the thirtieth month and in each month thereafter
during the life of the loans, 100% of SPA assumes a constant prepayment rate of
6% per annum each month.
Neither CPR nor SPA nor any other prepayment model or assumption
purports to be a historical description of prepayment experience or a prediction
of the anticipated rate of prepayment of any pool of loans, including the
mortgage loans underlying or comprising the Assets.
The prospectus supplement for each series of Notes or Certificates, as
applicable, may contain tables, if applicable, setting forth the projected
weighted average life of each class of Offered Notes or Certificates, as
applicable, of that series and the percentage of the initial Security Balance of
each class that would be outstanding on specified Distribution Dates based on
the assumptions stated in the prospectus supplement, including assumptions that
prepayments on the mortgage loans comprising or underlying the related Assets
are made at rates corresponding to various percentages of CPR, SPA or some other
standard specified in the prospectus supplement. These tables and assumptions
are intended to illustrate the sensitivity of the weighted average life of the
Notes or Certificates, as applicable, to various prepayment rates and will not
be intended to predict or to provide information that will enable investors to
predict the actual weighted average life of the Notes or Certificates, as
applicable. It is unlikely that prepayment of any mortgage loans comprising or
underlying the Assets for any series will conform to any particular level of
CPR, SPA or any other rate specified in the prospectus supplement.
OTHER FACTORS AFFECTING WEIGHTED AVERAGE LIFE
TYPE OF ASSET
If specified in the prospectus supplement, a number of mortgage loans
may have balloon payments due at maturity (which, based on the amortization
schedule of those mortgage loans, may be a substantial amount), and because the
ability of a borrower to make a balloon payment typically will depend on its
ability either to refinance the loan or to sell the related Mortgaged Property,
there is a risk that a number of Balloon Payment Assets may default at maturity.
The ability to obtain refinancing will depend on a number of factors prevailing
at the time refinancing or sale is required, including real estate values, the
borrower's financial situation, prevailing mortgage loan interest rates, the
borrower's equity in the related Mortgaged Property, tax laws and prevailing
general economic conditions. Neither the depositor, the servicer, the master
servicer, nor any of their affiliates will be obligated to refinance or
repurchase any mortgage loan or to sell the Mortgaged Property except to the
extent provided in the prospectus supplement. In the case of defaults, recovery
of proceeds may be delayed by, among other things, bankruptcy of the borrower or
adverse conditions in the market where the property is located. To minimize
losses on defaulted mortgage loans, the servicer may modify mortgage loans that
are in default or as to which a payment default is reasonably foreseeable. Any
defaulted balloon payment or modification that extends the maturity of a
mortgage loan will tend to extend the weighted average life of the Notes or
Certificates, as applicable, and may thus lengthen the period of time elapsed
from the date of issuance of a Security until it is retired.
For some mortgage loans, including ARM Loans, the mortgage rate at
origination may be below the rate that would result if the index and margin
relating to the mortgage loan were applied at origination. Under the applicable
underwriting standards, the borrower under each mortgage loan generally will be
qualified on the basis of the mortgage rate in effect at origination. The
repayment of any of these mortgage loans may therefore be dependent on the
ability of the borrower to make larger level monthly payments following the
adjustment of the mortgage rate. In addition, some mortgage loans may be subject
to temporary buydown plans ("Buydown Mortgage Loans") pursuant to which the
monthly payments made by the borrower during the early years of the mortgage
loan will be less than the scheduled monthly payments on the mortgage loan (the
"Buydown Period"). The periodic increase in the amount paid by the borrower of a
Buydown Mortgage Loan during or at the end of the applicable Buydown Period may
create a greater financial burden for the borrower, who might not have otherwise
qualified for a mortgage, and may accordingly increase the risk of default for
the related mortgage loan.
The mortgage rates on some ARM Loans subject to negative amortization
generally adjust monthly and their amortization schedules adjust less
frequently. During a period of rising interest rates as well as immediately
after origination (initial mortgage rates are generally lower than the sum of
the applicable index at origination and the related margin over that index at
which interest accrues), the amount of interest accruing on the principal
balance of those mortgage loans may exceed the amount of the minimum scheduled
monthly payment on the mortgage loans. As a result, a portion of the accrued
interest on negatively amortizing mortgage loans may be added to the principal
balance of those mortgage loans and will bear interest at the applicable
mortgage rate. The addition of any deferred interest to the principal balance of
any related class or classes of Notes or Certificates, as applicable, will
lengthen the weighted average life of those Notes or Certificates, as
applicable, and may adversely affect yield to holders of those Notes or
Certificates, as applicable, depending on the price at which those Notes or
Certificates, as applicable, were purchased. In addition, for some ARM Loans
subject to negative amortization, during a period of declining interest rates,
it might be expected that each minimum scheduled monthly payment on this type of
mortgage loan would exceed the amount of scheduled principal and accrued
interest on the principal balance of that mortgage loan, and since that excess
will be applied to reduce the principal balance of the related class or classes
of Notes or Certificates, as applicable, the weighted average life of those
Notes or Certificates, as applicable, will be reduced and may adversely affect
yield to holders of those Notes or Certificates, as applicable, depending on the
price at which those Notes or Certificates, as applicable, were purchased.
As may be described in the prospectus supplement, the related
Agreement may provide that all or a portion of the principal collected on or
with respect to the related mortgage loans may be applied by the related trustee
to the acquisition of additional revolving credit line loans during a specified
period (rather than used to fund payments of principal to securityholders during
that period) with the result that the related Notes or Certificates, as
applicable, possess an interest-only period, also commonly referred to as a
revolving period, which will be followed by an amortization period. Any of these
interest-only or revolving periods may, upon the occurrence of particular events
to be described in the prospectus supplement, terminate before the end of the
specified period and result in the earlier than expected amortization of the
related Notes or Certificates, as applicable.
In addition, and as may be described in the prospectus supplement, the
related Agreement may provide that all or some of this collected principal may
be retained by the trustee (and held in specific temporary investments,
including mortgage loans) for a specified period before being used to fund
payments of principal to securityholders.
The result of the retention and temporary investment by the trustee of
this principal would be to slow the amortization rate of the related Notes or
Certificates, as applicable, relative to the amortization rate of the related
mortgage loans, or to attempt to match the amortization rate of the related
Notes or Certificates, as applicable, to an amortization schedule established at
the time the Notes or Certificates, as applicable, are issued. Any similar
feature applicable to any Notes or Certificates, as applicable, may end on the
occurrence of events to be described in the prospectus supplement, resulting in
the current funding of principal payments to the related securityholders and an
acceleration of the amortization of these Notes or Certificates, as applicable.
TERMINATION
If specified in the prospectus supplement, a series of Notes or
Certificates, as applicable, may be subject to optional early termination
through the repurchase of the Assets in the related trust fund by the party
specified in the prospectus supplement, on any date on which the total Security
Balance of the Notes or Certificates, as applicable, of that series declines to
a percentage specified in the prospectus supplement (generally not to exceed
10%) of the Initial Security Balance, under the circumstances and in the manner
set forth therein. In addition, if so provided in the prospectus supplement,
some classes of Notes or Certificates, as applicable, may be purchased or
redeemed in the manner set forth therein. See "Description of the
Securities--Termination."
DEFAULTS
The rate of defaults on the Assets will also affect the rate, timing
and amount of principal payments on the Assets and thus the yield on the Notes
or Certificates, as applicable. In general, defaults on mortgage loans are
expected to occur with greater frequency in their early years. The rate of
default on mortgage loans that are refinance or limited documentation mortgage
loans, and on mortgage loans with high Loan-to-Value Ratios, may be higher than
for other types of mortgage loans. Furthermore, the rate and timing of
prepayments, defaults and liquidations on the mortgage loans will be affected by
the general economic condition of the region of the country in which the related
Mortgage Properties are located. The risk of delinquencies and loss is greater
and prepayments are less likely in regions where a weak or deteriorating economy
exists, as may be evidenced by, among other factors, increasing unemployment or
falling property values.
FORECLOSURES
The number of foreclosures or repossessions and the principal amount
of the mortgage loans comprising or underlying the Assets that are foreclosed or
repossessed in relation to the number and principal amount of mortgage loans
that are repaid in accordance with their terms will affect the weighted average
life of the mortgage loans comprising or underlying the Assets and that of the
related series of Notes or Certificates, as applicable.
REFINANCING
At the request of a borrower, the servicer may allow the refinancing
of a mortgage loan in any trust fund by accepting prepayments on the mortgage
loan and permitting a new loan secured by a mortgage on the same property. In
the event of that refinancing, the new loan would not be included in the related
trust fund and, therefore, that refinancing would have the same effect as a
prepayment in full of the related mortgage loan. A servicer may, from time to
time, implement programs designed to encourage refinancing. These programs may
include modifications of existing loans, general or targeted solicitations, the
offering of pre-approved applications, reduced origination fees or closing
costs, or other financial incentives. In addition, servicers may encourage the
refinancing of mortgage loans, including defaulted mortgage loans, that would
permit creditworthy borrowers to assume the outstanding indebtedness of those
mortgage loans.
DUE-ON-SALE CLAUSES
Acceleration of mortgage payments as a result of transfers of
underlying Mortgaged Property is another factor affecting prepayment rates that
may not be reflected in the prepayment standards or models used in the relevant
prospectus supplement. A number of the mortgage loans comprising or underlying
the Assets, other than FHA loans and VA loans, may include "due-on-sale clauses"
that allow the holder of the mortgage loans to demand payment in full of the
remaining principal balance of the mortgage loans upon sale, transfer or
conveyance of the related Mortgaged Property.
For any mortgage loans, except as set forth in the prospectus
supplement, the servicer will generally enforce any due-on-sale clause to the
extent it has knowledge of the conveyance or proposed conveyance of the
underlying Mortgaged Property and it is entitled to do so under applicable law;
provided, however, that the servicer will not take any action in relation to the
enforcement of any due-on-sale provision that would adversely affect or
jeopardize coverage under any applicable insurance policy. See "Certain Legal
Aspects of Mortgage Loans--Due-on-Sale Clauses" and "Description of the
Agreements--Material Terms of the Pooling and Servicing Agreements and
Underlying Servicing Agreements--Due-on-Sale Provisions."
THE DEPOSITOR
ACE Securities Corp., the depositor, is a special purpose corporation
incorporated in the State of Delaware on June 3, 1998. The principal executive
offices of the depositor are located at 6525 Morrison Boulevard, Suite 318,
Charlotte, North Carolina 28211. Its telephone number is (704) 365-0569. The
depositor does not have, nor is it expected in the future to have, any
significant assets.
The limited purposes of the depositor are, in general, to acquire, own
and sell mortgage loans and financial assets; to issue, acquire, own, hold and
sell securities and notes secured by or representing ownership interests in
mortgage loans and other financial assets, collections on the mortgage loans and
related assets; and to engage in any acts that are incidental to, or necessary,
suitable or convenient to accomplish, these purposes.
All of the shares of capital stock of the depositor are held by
Altamont Holdings Corp., a Delaware corporation.
DESCRIPTION OF THE SECURITIES
GENERAL
The Securities issued in each series will include either asset-backed
certificates (the "Certificates") or asset-backed notes (the "Notes", and
together with the Certificates, the "Securities"). The Certificates of each
series (including any class of Certificates not offered by this prospectus) will
represent the entire beneficial ownership interest in the trust fund created
pursuant to the related Agreement. The Notes of each series will represent
indebtedness of the related trust fund and will be issued and secured pursuant
to an indenture. Each series of Notes or Certificates, as applicable, will
consist of one or more classes of Notes or Certificates, as applicable, that
may:
o provide for the accrual of interest on the series of Notes or
Certificates, as applicable, based on fixed, variable or
adjustable rates;
o be senior (collectively, "Senior Notes" or "Senior Certificates")
or subordinate (collectively, "Subordinate Notes" or "Subordinate
Certificates") to one or more other classes of Notes or
Certificates, as applicable, in respect of distributions on the
Notes or Certificates, as applicable,;
o be entitled either to (A) principal distributions, with
disproportionately low, nominal or no interest distributions or
(B) interest distributions, with disproportionately low, nominal
or no principal distributions (collectively, "Strip Securities");
o provide for distributions of accrued interest on the series of
Notes or Certificates, as applicable, which begin only following
the occurrence of specific events, that as the retirement of one
or more other classes of Notes or Certificates, as applicable, of
that series (collectively, "Accrual Securities");
o provide for payments of principal as described in the prospectus
supplement, from all or only a portion of the Assets in that
trust fund, to the extent of available funds, in each case as
described in the prospectus supplement; and/or
o provide for distributions based on a combination of two or more
components of the Notes or Certificates, as applicable, with one
or more of the characteristics described in this paragraph
including a Strip Security component.
If specified in the prospectus supplement, distributions on one or
more classes of a series of Notes or Certificates, as applicable, may be limited
to collections from a designated portion of the Assets in the related trust fund
(each portion of the Assets, an "Asset Group"). Any of these classes may include
classes of Offered Notes or Offered Certificates, as applicable.
Each class of Notes or Certificates, as applicable, offered by this
prospectus and the related prospectus supplement (the "Offered Notes" or
"Offered Certificates") will be issued in minimum denominations corresponding to
the Security Balances or, in the case of some classes of Strip Securities,
notional amounts or percentage interests specified in the prospectus supplement.
The transfer of any Offered Notes or Offered Certificates, as applicable, may be
registered and those Notes or Certificates, as applicable, may be exchanged
without the payment of any service charge payable in connection with that
registration of transfer or exchange, but the depositor or the trustee or any
agent of the depositor or the trustee may require payment of a sum sufficient to
cover any tax or other governmental charge. One or more classes of Notes or
Certificates, as applicable, of a series may be issued in fully registered,
certificated form ("Definitive Notes" or "Definitive Certificates") or in
book-entry form ("Book-Entry Notes" or "Book-Entry Certificates"), as provided
in the prospectus supplement. See "Description of the Securities--Book-Entry
Registration and Definitive Securities." Definitive Notes or Definitive
Certificates, as applicable, will be exchangeable for other Notes or
Certificates, as applicable, of the same class and series of a similar total
Security Balance, notional amount or percentage interest but of different
authorized denominations.
DISTRIBUTIONS
Distributions on the Notes or Certificates, as applicable, of each
series will be made by or on behalf of the trustee on each Distribution Date as
specified in the prospectus supplement from the Available Distribution Amount
for that series and that Distribution Date. Distributions (other than the final
distribution) will be made to the persons in whose names the Notes or
Certificates, as applicable, are registered at the close of business on, unless
a different date is specified in the prospectus supplement, the last business
day of the month preceding the month in which the Distribution Date occurs (the
"Record Date"), and the amount of each distribution will be determined as of the
close of business on the date specified in the prospectus supplement (the
"Determination Date"). All distributions for each class of Notes or
Certificates, as applicable, on each Distribution Date will be allocated pro
rata among the outstanding securityholders in that class or by random selection
or as described in the prospectus supplement. Payments will be made either by
wire transfer in immediately available funds to the account of a securityholder
at a bank or other entity having appropriate facilities for these payments, if
that securityholder has so notified the trustee or other person required to make
those payments no later than the date specified in the prospectus supplement
(and, if so provided in the prospectus supplement, holds Notes or Certificates,
as applicable, in the requisite amount specified in the prospectus supplement),
or by check mailed to the address of the person entitled to the payment as it
appears on the Security Register; provided, however, that the final distribution
in retirement of the Notes or Certificates, as applicable, will be made only
upon presentation and surrender of the Notes or Certificates, as applicable, at
the location specified in the notice to securityholders of that final
distribution.
AVAILABLE DISTRIBUTION AMOUNT
All distributions on the Notes or Certificates, as applicable, of each
series on each Distribution Date will be made from the Available Distribution
Amount described below, subject to the terms described in the prospectus
supplement. Generally, the "Available Distribution Amount" for each Distribution
Date equals the sum of the following amounts:
(1) the total amount of all cash on deposit in the related
Collection Account as of the corresponding Determination Date,
exclusive, unless otherwise specified in the prospectus supplement,
of:
(a) all scheduled payments of principal and interest
collected but due on a date after the related Due Period (unless
a different period is specified in the prospectus supplement, a
"Due Period " for any Distribution Date will begin on the second
day of the month in which the immediately preceding Distribution
Date occurs, or the Cut-off Date in the case of the first Due
Period, and will end on the first day of the month of the related
Distribution Date),
(b) all prepayments, together with related payments of the
interest thereon and related Prepayment Premiums, all proceeds of
any FHA insurance, VA Guaranty Policy or insurance policies to be
maintained for each Asset (to the extent that proceeds are not
applied to the restoration of the Asset or released in accordance
with the normal servicing procedures of a servicer, subject to
the terms and conditions applicable to the related Asset)
(collectively, "Insurance Proceeds"), all other amounts received
and retained in connection with the liquidation of Assets in
default in the trust fund ("Liquidation Proceeds"), and other
unscheduled recoveries received after the related Due Period, or
other period specified in the prospectus supplement,
(c) all amounts in the Collection Account that are due or
reimbursable to the depositor, the trustee, an Asset Seller, a
servicer, the master servicer or any other entity as specified in
the prospectus supplement or that are payable in respect of
particular expenses of the related trust fund, and
(d) all amounts received for a repurchase of an Asset from
the trust fund for defective documentation or a breach of
representation or warranty received after the related Due Period,
or other period specified in the prospectus supplement;
(2) if the prospectus supplement so provides, interest or
investment income on amounts on deposit in the Collection Account,
including any net amounts paid under any Cash Flow Agreements;
(3) all advances made by a servicer or the master servicer or any
other entity as specified in the prospectus supplement for that
Distribution Date;
(4) if and to the extent the prospectus supplement so provides,
amounts paid by a servicer or any other entity as specified in the
prospectus supplement with respect to interest shortfalls resulting
from prepayments during the related Prepayment Period; and
(5) to the extent not on deposit in the related Collection
Account as of the corresponding Determination Date, any amounts
collected under, from or in respect of any credit support for that
Distribution Date.
As described below, unless otherwise specified in the prospectus
supplement, the entire Available Distribution Amount will be distributed among
the related Notes or Certificates, as applicable (including any Notes or
Certificates, as applicable, not offered by this prospectus) on each
Distribution Date, and accordingly will be released from the trust fund and will
not be available for any future distributions.
The prospectus supplement for a series of Notes or Certificates, as
applicable, will describe any variation in the calculation or distribution of
the Available Distribution Amount for that series.
DISTRIBUTIONS OF INTEREST ON THE SECURITIES
Each class of Notes or Certificates, as applicable (other than classes
of Strip Securities which have no Interest Rate) may have a different Interest
Rate, which will be a fixed, variable or adjustable rate at which interest will
accrue on that class or a component of that class (the "Interest Rate" in the
case of Certificates). The prospectus supplement will specify the Interest Rate
for each class or component or, in the case of a variable or adjustable Interest
Rate, the method for determining the Interest Rate. Interest on the Notes or
Certificates, as applicable, will be calculated on the basis of a 360-day year
consisting of twelve 30-day months unless the prospectus supplement specifies a
different basis.
Distributions of interest on the Notes or Certificates, as applicable,
of any class will be made on each Distribution Date (other than any class of
Accrual Securities, which will be entitled to distributions of accrued interest
starting only on the Distribution Date, or under the circumstances, specified in
the prospectus supplement, and any class of Strip Securities that are not
entitled to any distributions of interest) based on the Accrued Security
Interest for that class and that Distribution Date, subject to the sufficiency
of the portion of the Available Distribution Amount allocable to that class on
that Distribution Date. Before any interest is distributed on any class of
Accrual Securities, the amount of Accrued Security Interest otherwise
distributable on that class will instead be added to the Security Balance of
that class on each Distribution Date.
For each class of Notes or Certificates, as applicable, and each
Distribution Date (other than some classes of Strip Securities), "Accrued
Security Interest" will be equal to interest accrued during the related Accrual
Period on the outstanding Security Balance of the class of Notes or
Certificates, as applicable, immediately before the Distribution Date, at the
applicable Interest Rate, reduced as described below. Accrued Security Interest
on some classes of Strip Securities will be equal to interest accrued during the
related Accrual Period on the outstanding notional amount of the Strip Security
immediately before each Distribution Date, at the applicable Interest Rate,
reduced as described below, or interest accrual in the manner described in the
prospectus supplement. The method of determining the notional amount for a
particular class of Strip Securities will be described in the prospectus
supplement. Reference to notional amount is solely for convenience in some of
the calculations and does not represent the right to receive any distributions
of principal. Unless otherwise provided in the prospectus supplement, the
Accrued Security Interest on a series of Notes or Certificates, as applicable,
will be reduced in the event of prepayment interest shortfalls, which are
shortfalls in collections of interest for a full accrual period resulting from
prepayments before the due date in that accrual period on the mortgage loans
comprising or underlying the Assets in the trust fund for that series. The
particular manner in which these shortfalls are to be allocated among some or
all of the classes of Notes or Certificates, as applicable, of that series will
be specified in the prospectus supplement. The prospectus supplement will also
describe the extent to which the amount of Accrued Security Interest that is
otherwise distributable on (or, in the case of Accrual Securities, that may
otherwise be added to the Security Balance of) a class of Offered Notes or
Offered Certificates, as applicable, may be reduced as a result of any other
contingencies, including delinquencies, losses and deferred interest on the
mortgage loans comprising or underlying the Assets in the related trust fund.
Unless otherwise provided in the prospectus supplement, any reduction in the
amount of Accrued Security Interest otherwise distributable on a class of Notes
or Certificates, as applicable, by reason of the allocation to that class of a
portion of any deferred interest on the mortgage loans comprising or underlying
the Assets in the related trust fund will result in a corresponding increase in
the Security Balance of that class. See "Yield Considerations."
DISTRIBUTIONS OF PRINCIPAL OF THE SECURITIES
The Notes or Certificates, as applicable, of each series, other than
some classes of Strip Securities, will have a "Security Balance" which, at any
time, will equal the then maximum amount that the holder will be entitled to
receive on principal out of the future cash flow on the Assets and other assets
included in the related trust fund. The outstanding Security Balance of a
Security will be reduced:
o to the extent of distributions of principal on that Security from
time to time and
o if and to the extent provided in the prospectus supplement, by
the amount of losses incurred on the related Assets.
The outstanding Security Balance of a Security:
o may be increased in respect of deferred interest on the related
mortgage loans, to the extent provided in the prospectus
supplement and
o in the case of Accrual Securities, will be increased by any
related Accrued Security Interest up until the Distribution Date
on which distributions of interest are required to begin.
If specified in the prospectus supplement, the initial total Security
Balance of all classes of Notes or Certificates, as applicable, of a series will
be greater than the outstanding total principal balance of the related Assets as
of the applicable Cut-off Date. The initial total Security Balance of a series
and each class of the series will be specified in the prospectus supplement.
Distributions of principal will be made on each Distribution Date to the class
or classes of Notes or Certificates, as applicable, in the amounts and in
accordance with the priorities specified in the prospectus supplement. Some
classes of Strip Securities with no Security Balance are not entitled to any
distributions of principal.
If specified in the related prospectus supplement, the trust fund may
issue securities from time to time and use the proceeds of this issuance to make
principal payments with respect to a series.
REVOLVING PERIOD
The applicable prospectus supplement may provide that all or a portion
of the principal collections may be applied by the trustee to the acquisition of
subsequent revolving credit line loans or asset-backed or mortgage backed
securities during a specified period rather than used to distribute payments of
principal to noteholders or certificateholders, as applicable, during that
period. These notes or certificates, as applicable, would then possess an
interest only period, also commonly referred to as a "Revolving Period", which
will be followed by an "Amortization Period", during which principal will be
paid. Any interest only or revolving period may terminate prior to the end of
the specified period and result in the earlier than expected principal repayment
of the notes or certificates, as applicable.
COMPONENTS
To the extent specified in the prospectus supplement, distribution on
a class of Notes or Certificates, as applicable, may be based on a combination
of two or more different components as described under "--General" above. To
that extent, the descriptions set forth under "--Distributions of Interest on
the Securities" and "--Distributions of Principal of the Securities" above also
relate to components of the component class of Notes or Certificates, as
applicable. References in those sections to Security Balance may refer to the
principal balance, if any, of these components and reference to the Interest
Rate may refer to the Interest Rate, if any, on these components.
DISTRIBUTIONS ON THE SECURITIES OF PREPAYMENT PREMIUMS
If so provided in the prospectus supplement, Prepayment Premiums that
are collected on the mortgage loans in the related trust fund will be
distributed on each Distribution Date to the class or classes of Notes or
Certificates, as applicable, entitled to the distribution as described in the
prospectus supplement.
ALLOCATION OF LOSSES AND SHORTFALLS
If so provided in the prospectus supplement for a series of Notes or
Certificates, as applicable, consisting of one or more classes of Subordinate
Notes or Subordinate Certificates, as applicable, on any Distribution Date in
respect of which losses or shortfalls in collections on the Assets have been
incurred, the amount of those losses or shortfalls will be borne first by a
class of Subordinate Notes or Subordinate Certificates, as applicable, in the
priority and manner and subject to the limitations specified in the prospectus
supplement. See "Description of Credit Support" for a description of the types
of protection that may be included in a trust fund against losses and shortfalls
on Assets comprising that trust fund. The prospectus supplement for a series of
Notes or Certificates, as applicable, will describe the entitlement, if any, of
a class of Notes or Certificates, as applicable, whose Security Balance has been
reduced to zero as a result of distributions or the allocation of losses on the
related Assets to recover any losses previously allocated to that class from
amounts received on the Assets. However, if the Security Balance of a class of
Notes or Certificates, as applicable, has been reduced to zero as the result of
principal distributions, the allocation of losses on the Assets, an optional
termination or an optional purchase or redemption, that class will no longer be
entitled to receive principal distributions from amounts received on the assets
of the related trust fund, including distributions in respect of principal
losses previously allocated to that class.
ADVANCES IN RESPECT OF DELINQUENCIES
If so provided in the prospectus supplement, the servicer or another
entity described in the prospectus supplement will be required as part of its
servicing responsibilities to advance on or before each Distribution Date its
own funds or funds held in the related Collection Account that are not included
in the Available Distribution Amount for that Distribution Date, in an amount
equal to the total of payments of (1) principal (other than any balloon
payments) and (2) interest (net of related servicing fees and Retained Interest)
that were due on the Assets in that trust fund during the related Due Period and
were delinquent on the related Determination Date, subject to a good faith
determination that the advances will be reimbursable from Related Proceeds (as
defined below). In the case of a series of Notes or Certificates, as applicable,
that includes one or more classes of Subordinate Notes or Subordinate
Certificates, as applicable, and if so provided in the prospectus supplement,
the servicer's (or another entity's) advance obligation may be limited only to
the portion of those delinquencies necessary to make the required distributions
on one or more classes of Senior Notes or Senior Certificates, as applicable,
and/or may be subject to a good faith determination that advances will be
reimbursable not only from Related Proceeds but also from collections on other
Assets otherwise distributable on one or more classes of those Subordinate Notes
or Subordinate Certificates, as applicable. See "Description of Credit Support."
Advances are intended to maintain a regular flow of scheduled interest
and principal payments to holders of the class or classes of Notes or
Certificates, as applicable, entitled to the payments, rather than to guarantee
or insure against losses. Advances of the servicer's (or another entity's) funds
will be reimbursable only out of related recoveries on the Assets (including
amounts received under any form of credit support) respecting which those
advances were made (as to any Assets, "Related Proceeds") and from any other
amounts specified in the prospectus supplement, including out of any amounts
otherwise distributable on one or more classes of Subordinate Notes or
Subordinate Certificates, as applicable of that series; provided, however, that
any advance will be reimbursable from any amounts in the related Collection
Account before any distributions being made on the Notes or Certificates, as
applicable, to the extent that the servicer (or some other entity) determines in
good faith that that advance (a "Nonrecoverable Advance") is not ultimately
recoverable from Related Proceeds or, if applicable, from collections on other
Assets otherwise distributable on the Subordinate Notes or Subordinate
Certificates, as applicable. If advances have been made by the servicer from
excess funds in the related Collection Account, the servicer is required to
replace these funds in that Collection Account on any future Distribution Date
to the extent that funds in that Collection Account on that Distribution Date
are less than payments required to be made to securityholders on that date. If
specified in the prospectus supplement, the obligations of the servicer (or
another entity) to make advances may be secured by a cash advance reserve fund,
a surety bond, a letter of credit or another form of limited guaranty. If
applicable, information regarding the characteristics of and the identity of any
borrower on any surety bond will be set forth in the prospectus supplement.
If and to the extent so provided in the prospectus supplement, the
servicer (or another entity) will be entitled to receive interest at the rate
specified in the prospectus supplement on its outstanding advances and will be
entitled to pay itself this interest periodically from general collections on
the Assets before any payment to securityholders or as otherwise provided in the
related Agreement and described in the prospectus supplement.
If specified in the prospectus supplement, the master servicer or the
trustee will be required to make advances, subject to specific conditions
described in the prospectus supplement, in the event of a servicer default.
REPORTS TO SECURITYHOLDERS
With each distribution to holders of any class of Notes or
Certificates, as applicable, of a series, the servicer, the master servicer or
the trustee, as provided in the prospectus supplement, will forward or cause to
be forwarded to each holder, to the depositor and to any other parties as may be
specified in the related Agreement, a statement containing the information
specified in the prospectus supplement, or if no information is specified in the
prospectus supplement, generally setting forth, in each case to the extent
applicable and available:
(1) the amount of that distribution to holders of Notes or
Certificates, as applicable, of that class applied to reduce the
Security Balance of the Notes or Certificates, as applicable,;
(2) the amount of that distribution to holders of Notes or
Certificates, as applicable, of that class allocable to Accrued
Security Interest;
(3) the amount of that distribution allocable to Prepayment
Premiums;
(4) the amount of related servicing compensation and any other
customary information as is required to enable securityholders to
prepare their tax returns;
(5) the total amount of advances included in that distribution,
and the total amount of unreimbursed advances at the close of business
on that Distribution Date;
(6) the total principal balance of the Assets at the close of
business on that Distribution Date;
(7) the number and total principal balance of mortgage loans in
respect of which
(a) one scheduled payment is delinquent, (b) two scheduled
payments are delinquent,
(c) three or more scheduled payments are delinquent and
(d) foreclosure proceedings have begun;
(8) for any mortgage loan liquidated during the related Due
Period, (a) the portion of the related liquidation proceeds payable or
reimbursable to a servicer (or any other entity) in respect of that
mortgage loan and (b) the amount of any loss to securityholders;
(9) with respect to collateral acquired by the trust fund through
foreclosure or otherwise (an "REO Property") relating to a mortgage
loan and included in the trust fund as of the end of the related Due
Period, the date of acquisition;
(10) for each REO Property relating to a mortgage loan and
included in the trust fund as of the end of the related Due Period,
(a) the book value,
(b) the principal balance of the related mortgage loan
immediately following that Distribution Date
(calculated as if that mortgage loan were still
outstanding taking into account limited modifications
to the terms of the mortgage loan specified in the
Agreement),
(c) the total amount of unreimbursed servicing expenses and
unreimbursed advances in respect of the REO Property
and
(d) if applicable, the total amount of interest accrued and
payable on related servicing expenses and related
advances;
(11) for any REO Property sold during the related Due Period
(a) the total amount of sale proceeds,
(b) the portion of those sales proceeds payable or
reimbursable to the master servicer in respect of that
REO Property or the related mortgage loan and
(c) the amount of any loss to securityholders in respect of
the related mortgage loan;
(12) the total Security Balance or notional amount, as the case
may be, of each class of Notes or Certificates, as applicable
(including any class of Notes or Certificates, as applicable, not
offered by this prospectus) at the close of business on that
Distribution Date, separately identifying any reduction in that
Security Balance due to the allocation of any loss and increase in the
Security Balance of a class of Accrual Notes or Certificates, as
applicable, if any Accrued Security Interest has been added to that
balance;
(13) the total amount of principal prepayments made during the
related Due Period;
(14) the amount deposited in the reserve fund, if any, on that
Distribution Date;
(15) the amount remaining in the reserve fund, if any, as of the
close of business on that Distribution Date;
(16) the total unpaid Accrued Security Interest, if any, on each
class of Notes or Certificates, as applicable, at the close of
business on that Distribution Date;
(17) in the case of Notes or Certificates, as applicable, with a
variable Interest Rate, the Interest Rate applicable to that
Distribution Date, and, if available, the immediately succeeding
Distribution Date, as calculated in accordance with the method
specified in the prospectus supplement;
(18) in the case of Notes or Certificates, as applicable, with an
adjustable Interest Rate, for statements to be distributed in any
month in which an adjustment date occurs, the adjustable Interest Rate
applicable to that Distribution Date, if available, and the
immediately succeeding Distribution Date as calculated in accordance
with the method specified in the prospectus supplement;
(19) as to any series that includes credit support, the amount of
coverage of each instrument of credit support included as of the close
of business on that Distribution Date;
(20) during the Pre-Funding Period, the remaining Pre-Funded
Amount and the portion of the Pre-Funding Amount used to acquire
Subsequent Assets since the preceding Distribution Date;
(21) during the Pre-Funding Period, the amount remaining in the
Capitalized Interest Account; and
(22) the total amount of payments by the borrowers of
(a) default interest,
(b) late charges and
(c) assumption and modification fees collected during the
related Due Period.
Within a reasonable period of time after the end of each calendar
year, the servicer, the master servicer or the trustee, as provided in the
prospectus supplement, will furnish to each securityholder of record at any time
during the calendar year the information required by the Code and applicable
regulations under the Code to enable securityholders to prepare their tax
returns. See "Description of the Securities--Book-Entry Registration and
Definitive Securities."
TERMINATION
The obligations created by the related Agreement for each series of
Notes or Certificates, as applicable, will terminate upon the payment to
securityholders of that series of all amounts held in the Collection Accounts or
by a servicer, the master servicer, if any, or the trustee and required to be
paid to them pursuant to that Agreement following the earlier of (1) the final
payment or other liquidation of the last Asset subject to the related Agreement
or the disposition of all property acquired upon foreclosure of any mortgage
loan subject to the Agreement and (2) the purchase of all of the assets of the
trust fund by the party entitled to effect that termination, under the
circumstances and in the manner set forth in the prospectus supplement. In no
event, however, will the trust fund continue beyond the date specified in the
prospectus supplement. Written notice of termination of the Agreement will be
given to each securityholder, and the final distribution will be made only upon
presentation and surrender of the Notes or Certificates, as applicable, at the
location to be specified in the notice of termination.
If specified in the prospectus supplement, a series of Notes or
Certificates, as applicable, may be subject to optional early termination
through the purchase of the Assets in the related trust fund by the party
specified in the prospectus supplement, under the circumstances and in the
manner set forth in the prospectus supplement. If so provided in the prospectus
supplement, upon the reduction of the Security Balance of a specified class or
classes of Notes or Certificates, as applicable, by a specified percentage, the
party specified in the prospectus supplement will solicit bids for the purchase
of all assets of the trust fund, or of a sufficient portion of those assets to
retire that class or classes or purchase that class or classes at a price set
forth in the prospectus supplement, in each case, under the circumstances and in
the manner set forth in the prospectus supplement. That price will at least
equal the outstanding Security Balances and any accrued and unpaid interest on
the Security Balances (including any unpaid interest shortfalls for prior
Distribution Dates). Any sale of the Assets of the trust fund will be without
recourse to the trust fund or the securityholders. Any purchase or solicitation
of bids may be made only when the total Security Balance of that class or
classes declines to a percentage of the Initial Security Balance of those Notes
or Certificates, as applicable (not to exceed 10%) specified in the prospectus
supplement. In addition, if so provided in the prospectus supplement, some
classes of Notes or Certificates, as applicable, may be purchased or redeemed in
the manner set forth in the prospectus supplement at a price at least equal to
the outstanding Security Balance of each class so purchased or redeemed and any
accrued and unpaid interest on the Security Balance (including any unpaid
interest shortfalls for prior Distribution Dates).
OPTIONAL PURCHASES
Subject to the provisions of the applicable Agreement, the depositor,
the servicer or any other party specified in the prospectus supplement may, at
that party's option, repurchase any mortgage loan that is in default or as to
which default is reasonably foreseeable if, in the depositor's, the servicer's
or any other party's judgment, the related default is not likely to be cured by
the borrower or default is not likely to be averted, at a price equal to the
unpaid principal balance of the mortgage loan plus accrued interest on the
mortgage loan and under the conditions set forth in the prospectus supplement.
BOOK-ENTRY REGISTRATION AND DEFINITIVE SECURITIES
GENERAL
If provided for in the prospectus supplement, one or more classes of
the Offered Notes or Offered Certificates, as applicable, of any series will be
issued as Book-Entry Notes or Book-Entry Certificates, as applicable, and each
of these classes will be represented by one or more single Notes or
Certificates, as applicable, registered in the name of a nominee for the
depository, The Depository Trust Company ("DTC") and, if provided in the
prospectus supplement, additionally through Clearstream Luxembourg, societe
anonyme ("Clearstream Luxembourg") or the Euroclear System ("Euroclear"). Each
class of Book-Entry Notes or Book-Entry Certificates, as applicable, will be
issued in one or more certificates or notes, as the case may be, that equal the
initial principal amount of the related class of Offered Notes or Offered
Certificates, as applicable, and will initially be registered in the name of
Cede & Co.
No person acquiring an interest in a Book-Entry Note or Book-Entry
Certificate, as applicable (each, a "Beneficial Owner") will be entitled to
receive a Definitive Note or Definitive Certificate, as applicable, except as
set forth below under "--Definitive Securities." Unless and until Definitive
Notes or Definitive Certificates, as applicable, are issued for the Book-Entry
Notes or Book-Entry Certificates, as applicable, under the limited circumstances
described in the applicable prospectus supplement or this prospectus, all
references to actions by securityholders with respect to the Book-Entry Notes or
Book-Entry Certificates, as applicable, will refer to actions taken by DTC,
Clearstream Luxembourg or Euroclear upon instructions from their Participants
(as defined below), and all references in this prospectus to distributions,
notices, reports and statements to securityholders with respect to the
Book-Entry Notes or Book-Entry Certificates, as applicable, will refer to
distributions, notices, reports and statements to DTC, Clearstream Luxembourg or
Euroclear, as applicable, for distribution to Beneficial Owners by DTC in
accordance with the procedures of DTC and if applicable, Clearstream Luxembourg
and Euroclear.
Beneficial Owners will hold their Book-Entry Notes or Book-Entry
Certificates, as applicable, through DTC in the United States, or, if the
Offered Notes or Offered Certificates, as applicable, are offered for sale
globally, through Clearstream Luxembourg or Euroclear in Europe if they are
participating organizations ("Participants") of those systems. Participants
include securities brokers and dealers, banks, trust companies and clearing
corporations and may include some other organizations. Indirect access to the
DTC, Clearstream Luxembourg and Euroclear systems also is available to others,
such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a Participant, either directly or
indirectly ("Indirect Participants").
DTC
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the Uniform Commercial Code ("UCC") and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). DTC was
created to hold securities for its Participants, some of which (and/or their
representatives) own DTC, and facilitate the clearance and settlement of
securities transactions between its Participants through electronic book-entry
changes in their accounts, thus eliminating the need for physical movement of
securities. In accordance with its normal procedures, DTC is expected to record
the positions held by each of its Participants in the Book-Entry Notes or
Book-Entry Certificates, as applicable, whether held for its own account or as a
nominee for another person. In general, beneficial ownership of Book-Entry Notes
or Book-Entry Certificates, as applicable, will be subject to the rules,
regulations and procedures governing DTC and its Participants as in effect from
time to time.
CLEARSTREAM LUXEMBOURG
Clearstream Banking, societe anonyme, 67 Bd Grande-Duchesse Charlotte,
L-2967 Luxembourg ("Clearstream, Luxembourg"), was incorporated in 1970 as
"Cedel S.A.", a company with limited liability under Luxembourg law (a societe
anonyme). Cedel S.A. subsequently changed its name to Cedelbank. On January 10,
2000, Cedelbank's parent company, Cedel International, societe anonyme ("CI")
merged its clearing, settlement and custody business with that of Deutsche Borse
Clearing AG ("DBC"). The merger involved the transfer by CI of substantially all
of its assets and liabilities (including its shares in CB) to a new Luxembourg
company, New Cedel International, societe anonyme ("New CI"), which is 50% owned
by CI and 50% owned by DBC's parent company Deutsche Borse AG. The shareholders
of these two entities are banks, securities dealers and financial institutions.
Cedel International currently has 92 shareholders, including U.S. financial
institutions or their subsidiaries. No single entity may own more than 5 percent
of Cedel International's stock.
Further to the merger, the Board of Directors of New Cedel
International decided to rename the companies in the group in order to give them
a cohesive brand name. The new brand name that was chosen is "Clearstream". With
effect from January 14, 2000 New CI has been renamed "Clearstream International,
societe anonyme". On January 18, 2000, Cedelbank was renamed "Clearstream
Banking, societe anonyme", and Cedel Global Services was renamed "Clearstream
Services, societe anonyme".
On January 17, 2000 DBC was renamed "Clearstream Banking AG". This
means that there are now two entities in the corporate group headed by
Clearstream International which share the name "Clearstream Banking", the entity
previously named "Cedelbank" and the entity previously named "Deutsche Brse
Clearing AG".
Clearstream, Luxembourg holds securities for its customers
("Clearstream, Luxembourg Participants") and facilitates the clearance and
settlement of securities transactions between Clearstream, Luxembourg customers
through electronic book-entry changes in accounts of Clearstream, Luxembourg
customers, thereby eliminating the need for physical movement of certificates.
Transactions may be settled by Clearstream, Luxembourg in any of 36 currencies,
including United States Dollars. Clearstream, Luxembourg provides to its
customers, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Clearstream, Luxembourg also deals with domestic
securities markets in over 30 countries through established depository and
custodial relationships. Clearstream, Luxembourg is registered as a bank in
Luxembourg, and as such is subject to regulation by the Commission de
Surveillance du Secteur Financier, "CSSF", which supervises Luxembourg banks.
Clearstream, Luxembourg's customers are world-wide financial institutions
including underwriters, securities brokers and dealers, banks, trust companies
and clearing corporations. Clearstream, Luxembourg's U.S. customers are limited
to securities brokers and dealers, and banks. Currently, Clearstream, Luxembourg
has approximately 2,000 customers located in over 80 countries, including all
major European countries, Canada, and the United States. Indirect access to
Clearstream, Luxembourg is available to other institutions that clear through or
maintain a custodial relationship with an account holder of Clearstream,
Luxembourg. Clearstream, Luxembourg has established an electronic bridge with
Morgan Guaranty Trust Company of New York as the Operator of the Euroclear
System (MGT/EOC) in Brussels to facilitate settlement of trades between
Clearstream, Luxembourg and MGT/EOC.
EUROCLEAR
Euroclear was created in 1968 to hold securities for its Participants
and to clear and settle transactions between its Participants through
simultaneous electronic book-entry delivery against payment, thus eliminating
the need for physical movement of securities and any risk from lack of
simultaneous transfers of securities and cash. Transactions may be settled in
any of 32 currencies, including United States dollars. Euroclear includes
various other services, including securities lending and borrowing, and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described above. Euroclear is
operated by the Brussels, Belgium office of Morgan Guaranty Trust Company of New
York (the "Euroclear Operator"), under contract with Euroclear Clearance Systems
S.C., a Belgian cooperative corporation (the "Cooperative Corporation"). All
operations are conducted by the Euroclear Operator, and all Euroclear securities
clearance accounts and Euroclear cash accounts are accounts with the Euroclear
Operator, not the Cooperative Corporation. The Cooperative Corporation
establishes policy for Euroclear on behalf of its Participants. Euroclear
Participants include banks (including central banks), securities brokers and
dealers and other professional financial intermediaries. Indirect access to
Euroclear is also available to other firms that clear through or maintain a
custodial relationship with a Participant of Euroclear, either directly or
indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation that is a member bank of the Federal Reserve System, and is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific securities to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of its
Participants, and has no record of or relationship with persons holding through
Participants of Euroclear.
Clearstream Luxembourg and Euroclear will hold omnibus positions on
behalf of their Participants through customers' securities accounts in
Clearstream Luxembourg's and Euroclear's names on the books of their respective
depositaries which in turn will hold positions in customers' securities accounts
in the depositaries names on the books of DTC. Citibank will act as depositary
for Clearstream Luxembourg and The Chase Manhattan Bank will act as depositary
for Euroclear (individually the "Relevant Depositary" and collectively, the
"European Depositaries").
BENEFICIAL OWNERSHIP OF BOOK-ENTRY SECURITIES
Except as described below, no Beneficial Owner will be entitled to
receive a physical certificate representing a Certificate, or note representing
a Note. Unless and until Definitive Notes or Definitive Certificates, as
applicable, are issued, it is anticipated that the only "securityholder" of the
Offered Notes or Offered Certificates, as applicable, will be Cede & Co., as
nominee of DTC. Beneficial Owners will not be "Certificateholders" as that term
is used in any Agreement, nor "Noteholders" as that term is used in any
indenture. Beneficial Owners are only permitted to exercise their rights
indirectly through Participants, DTC, Clearstream Luxembourg or Euroclear, as
applicable.
The Beneficial Owner's ownership of a Book-Entry Note or Book-Entry
Certificate, as applicable, will be recorded on the records of the brokerage
firm, bank, thrift institution or other financial intermediary (each, a
"Financial Intermediary") that maintains the Beneficial Owner's account for that
purpose. In turn, the Financial Intermediary's ownership of a Book-Entry Note or
Book-Entry Certificate, as applicable, will be recorded on the records of DTC
(or of a Participant that acts as agent for the Financial Intermediary, whose
interest will in turn be recorded on the records of DTC, if the Beneficial
Owner's Financial Intermediary is not a Participant of DTC and on the records of
Clearstream Luxembourg or Euroclear, as appropriate).
Beneficial Owners will receive all distributions of principal of, and
interest on, the Offered Notes or Offered Certificates, as applicable, from the
trustee through DTC and its Participants. While the Offered Notes or Offered
Certificates, as applicable, are outstanding (except under the circumstances
described below), under the rules, regulations and procedures creating and
affecting DTC and its operations (the "Rules"), DTC is required to make
book-entry transfers among Participants on whose behalf it acts with respect to
the Offered Notes and Offered Certificates, as applicable, and is required to
receive and transmit distributions of principal of, and interest on, the Offered
Notes and Offered Certificates, as applicable. Participants and Indirect
Participants with whom Beneficial Owners have accounts with respect to Offered
Notes or Offered Certificates, as applicable, are similarly required to make
book-entry transfers and receive and transmit distributions on behalf of their
respective Beneficial Owners. Accordingly, although Beneficial Owners will not
possess certificates or notes, the Rules provide a mechanism by which Beneficial
Owners will receive distributions and will be able to transfer their interest.
Beneficial Owners will not receive or be entitled to receive
certificates or notes representing their respective interests in the Offered
Notes or Offered Certificates, as applicable, except under the limited
circumstances described below. Unless and until Definitive Notes or Definitive
Certificates, as applicable, are issued, Beneficial Owners who are not
Participants may transfer ownership of Offered Notes or Offered Certificates, as
applicable, only through Participants and Indirect Participants by instructing
the Participants and Indirect Participants to transfer Offered Notes or Offered
Certificates, as applicable, by book-entry transfer, through DTC for the account
of the purchasers of the Offered Notes or Offered Certificates, as applicable,
which account is maintained with their respective Participants. Under the Rules
and in accordance with DTC's normal procedures, transfer of ownership of
Book-Entry Notes or Book-Entry Certificates, as applicable, will be executed
through DTC and the accounts of the respective Participants at DTC will be
debited and credited. Similarly, the Participants and Indirect Participants will
make debits or credits, as the case may be, on their records on behalf of the
selling and purchasing Beneficial Owners.
Because of time zone differences, any credits of securities received
in Clearstream Luxembourg or Euroclear as a result of a transaction with a
Participant will be made during subsequent securities settlement processing and
dated the business day following the DTC settlement date. These credits or any
transactions in securities settled during this processing will be reported to
the relevant Participants of Clearstream Luxembourg or Euroclear on that
business day. Cash received in Clearstream Luxembourg or Euroclear as a result
of sales of securities by or through a Participant of Clearstream Luxembourg or
Euroclear to a Participant of DTC will be received with value on the DTC
settlement date but will be available in the relevant Clearstream Luxembourg or
Euroclear cash account only as of the business day following settlement in DTC.
For information with respect to tax documentation procedures relating to the
Notes or Certificates, as applicable, see "Material Federal Income Tax
Considerations" in this prospectus and, if the Book-Entry Notes or Book-Entry
Certificates, as applicable, are globally offered and the prospectus supplement
so provides, see "Global Clearance, Settlement and Tax Documentation Procedures
- -- Certain U.S. Federal Income Tax Documentation Requirements" in Annex I to the
Note prospectus supplement.
Transfers between Participants of DTC will occur in accordance with
DTC Rules. Transfers between Participants of Clearstream Luxembourg or Euroclear
will occur in accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Participants of
Clearstream Luxembourg or Euroclear, on the other, will be effected in DTC in
accordance with the DTC Rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, cross-market transactions
will require delivery of instructions to the relevant European international
clearing system by the counterparty in that system in accordance with its rules
and procedures and within its established deadlines (European time). The
relevant European international clearing system will, if the transaction meets
its settlement requirements, deliver instructions to the Relevant Depositary to
take action to effect final settlement on its behalf by delivering or receiving
securities in DTC, and making or receiving payment in accordance with normal
procedures for same day funds settlement applicable to DTC. Participants of
Clearstream Luxembourg or Euroclear may not deliver instructions directly to the
European Depositaries.
Distributions on the Book-Entry Notes or Book-Entry Certificates, as
applicable, will be made on each Distribution Date by the Trustee to DTC. DTC
will be responsible for crediting the amount of each distribution to the
accounts of the applicable Participants of DTC in accordance with DTC's normal
procedures. Each Participant of DTC will be responsible for disbursing the
distribution to the Beneficial Owners of the Book-Entry Notes or Book-Entry
Certificates, as applicable, that it represents and to each Financial
Intermediary for which it acts as agent. Each Financial Intermediary will be
responsible for disbursing funds to the Beneficial Owners of the Book-Entry
Notes or Book-Entry Certificates, as applicable, that it represents.
Under a book-entry format, Beneficial Owners of the Book-Entry Notes
or Book-Entry Certificates, as applicable may experience some delay in their
receipt of payments, because the distributions will be forwarded by the Trustee
to Cede & Co. Any distributions on Notes or Certificates, as applicable, held
through Clearstream Luxembourg or Euroclear will be credited to the cash
accounts of Participants of Clearstream Luxembourg or Euroclear in accordance
with the relevant system's rules and procedures, to the extent received by the
Relevant Depositary. These distributions will be subject to tax reporting in
accordance with relevant United States tax laws and regulations. See "Material
Federal Income Tax Considerations -- REMICs -- Taxation of Certain Foreign
Investors" in this prospectus. Because DTC can only act on behalf of Financial
Intermediaries, the ability of a Beneficial Owner to pledge Book-Entry Notes or
Book-Entry Certificates, as applicable, to persons or entities that do not
participate in the depository system, or otherwise take actions in respect of
Book-Entry Notes or Book-Entry Certificates, as applicable, may be limited due
to the lack of physical securities for the Book-Entry Notes or Book-Entry
Certificates, as applicable. In addition, issuance of the Book-Entry Notes or
Book-Entry Certificates, as applicable, in book-entry form may reduce the
liquidity of the securities in the secondary market since potential investors
may be unwilling to purchase Notes or Certificates, as applicable, for which
they cannot obtain physical securities.
Monthly and annual reports will be provided to Cede & Co., as nominee
of DTC, and may be made available by Cede & Co. to Beneficial Owners upon
request, in accordance with the rules, regulations and procedures creating and
affecting the depository, and to the Financial Intermediaries to whose DTC
accounts the Book-Entry Notes or Book-Entry Certificates, as applicable, of
Beneficial Owners are credited.
Generally, DTC will advise the applicable trustee that unless and
until Definitive Notes or Definitive Certificates, as applicable, are issued,
DTC will take any action permitted to be taken by the holders of the Book-Entry
Notes or Book-Entry Certificates, as applicable, under the Agreement or
indenture, as applicable, only at the direction of one or more Financial
Intermediaries to whose DTC accounts the Book-Entry Notes or Book-Entry
Certificates, as applicable, are credited, to the extent that actions are taken
on behalf of Financial Intermediaries whose holdings include the Book-Entry
Notes or Book-Entry Certificates, as applicable. If the Book-Entry Notes or
Book-Entry Certificates, as applicable, are globally offered, Clearstream
Luxembourg or the Euroclear Operator, as the case may be, will take any other
action permitted to be taken by a securityholder under the Agreement or
indenture, as applicable, on behalf of a Participant of Clearstream Luxembourg
or Euroclear only in accordance with its relevant rules and procedures and
subject to the ability of the Relevant Depositary to effect those actions on its
behalf through DTC. DTC may take actions, at the direction of the related
Participants, with respect to some Offered Notes or Offered Certificates, as
applicable, that conflict with actions taken with respect to other Offered Notes
or Offered Certificates, as applicable.
Although DTC, Clearstream Luxembourg and Euroclear have agreed to the
foregoing procedures in order to facilitate transfers of Book-Entry Notes or
Book-Entry Certificates, as applicable, among Participants of DTC, Clearstream
Luxembourg and Euroclear, they are under no obligation to perform or continue to
perform these procedures and the procedures may be discontinued at any time.
None of the depositor, any master servicer, any servicer, the trustee,
any securities registrar or paying agent or any of their affiliates will have
any responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the Book-Entry Notes or Book-Entry
Certificates, as applicable, or for maintaining, supervising or reviewing any
records relating to those beneficial ownership interests.
DEFINITIVE SECURITIES
Notes or Certificates, as applicable, initially issued in book-entry
form will be issued as Definitive Notes or Definitive Certificates, as
applicable, to Beneficial Owners or their nominees, rather than to DTC or its
nominee only
(1) if the depositor advises the trustee in writing that DTC is no
longer willing or able to properly discharge its responsibilities
as depository for the Notes or Certificates, as applicable, and
the depositor is unable to locate a qualified successor,
(2) if the depositor, at its option, elects to end the book-entry
system through DTC or
(3) in accordance with any other provisions described in the
prospectus supplement.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, DTC is required to notify all Participants of the
availability through DTC of Definitive Notes or Definitive Certificates, as
applicable, for the Beneficial Owners. Upon surrender by DTC of the security or
securities representing the Book-Entry Notes or Book-Entry Certificates, as
applicable, together with instructions for registration, the trustee will issue
(or cause to be issued) to the Beneficial Owners identified in those
instructions the Definitive Notes or Definitive Certificates, as applicable, to
which they are entitled, and thereafter the trustee will recognize the holders
of those Definitive Notes or Definitive Certificates, as applicable, as
securityholders under the Agreement.
DESCRIPTION OF THE AGREEMENTS
AGREEMENTS APPLICABLE TO A SERIES
REMIC SECURITIES, FASIT SECURITIES, GRANTOR TRUST SECURITIES
Securities representing interests in a trust fund, or a portion of a
trust fund, that the trustee will elect to have treated as a real estate
mortgage investment conduit under Sections 860A through 860G of the Code ("REMIC
Securities"), FASIT Securities (as defined in this prospectus), or Grantor Trust
Securities (as defined in this prospectus) will be issued, and the related trust
fund will be created, pursuant to a pooling and servicing agreement or trust
agreement (in either case, generally referred to in this prospectus as the
"pooling and servicing agreement") among the depositor, the trustee and the sole
servicer or master servicer, as applicable. The Assets of that trust fund will
be transferred to the trust fund and thereafter serviced in accordance with the
terms of the pooling and servicing agreement. In the event there are multiple
servicers of the Assets of that trust fund, or in the event the Securities
consist of Notes, each servicer will perform its servicing functions pursuant to
a related underlying servicing agreement.
SECURITIES THAT ARE PARTNERSHIP INTERESTS FOR TAX PURPOSES AND NOTES
Certificates, as applicable, that are intended to be treated as
partnership interests for tax purposes will be issued, and the related trust
fund will be created, pursuant to the pooling and servicing agreement or trust
agreement.
A series of Notes issued by a trust fund that is intended to be
treated as a partnership or disregarded entity for tax purposes will be issued
pursuant to an indenture between the related trust fund and an indenture trustee
named in the prospectus supplement. The trust fund will be established either as
a statutory business trust under the law of the State of Delaware or as a common
law trust under the law of the State of New York pursuant to a trust agreement
between the depositor and an owner trustee specified in the prospectus
supplement relating to that series of Notes. The Assets securing payment on the
Notes will be serviced in accordance with a sale and servicing agreement or
servicing agreement.
MATERIAL TERMS OF THE POOLING AND SERVICING AGREEMENTS AND UNDERLYING SERVICING
AGREEMENTS
GENERAL
The following summaries describe the material provisions that may
appear in each pooling and servicing agreement, sale and servicing agreement or
servicing agreement (each an "Agreement"). The prospectus supplement for a
series of Notes or Certificates, as applicable, will describe any provision of
the Agreement relating to that series that materially differs from the
description of those provisions contained in this prospectus. The summaries do
not purport to be complete and are subject to, and are qualified by reference
to, all of the provisions of the Agreement for each trust fund and the
description of those provisions in the prospectus supplement. The provisions of
each Agreement will vary depending on the nature of the Notes or Certificates,
as applicable, to be issued under the Agreement and the nature of the related
trust fund. As used in this prospectus for any series, the term "Security"
refers to all of the Notes or Certificates, as applicable, of that series,
whether or not offered by this prospectus and by the prospectus supplement,
unless the context otherwise requires. A form of a pooling and servicing
agreement has been filed as an exhibit to the Registration Statement of which
this prospectus is a part. The depositor will provide a copy of the pooling and
servicing agreement (without exhibits) relating to any series of Notes or
Certificates, as applicable, without charge upon written request of a
securityholder of that series addressed to ACE Securities Corp., 6525 Morrison
Boulevard, Suite 318, Charlotte, North Carolina 28211, Attention: Elizabeth S.
Eldridge.
The servicer or master servicer and the trustee for any series of
Notes or Certificates, as applicable, will be named in the prospectus
supplement. In the event there are multiple servicers for the Assets in a trust
fund, a master servicer will perform some of the administration, calculation and
reporting functions for that trust fund and will supervise the related servicers
pursuant to a pooling and servicing agreement. For a series involving a master
servicer, references in this prospectus to the servicer will apply to the master
servicer where non-servicing obligations are described. If specified in the
prospectus supplement, a manager or administrator may be appointed pursuant to
the pooling and servicing agreement for any trust fund to administer that trust
fund.
ASSIGNMENT OF ASSETS; REPURCHASES
At the time of issuance of any series of Notes or Certificates, as
applicable, the depositor will assign (or cause to be assigned) to the
designated trustee the Assets to be included in the related trust fund, together
with all principal and interest to be received on or with respect to those
Assets after the Cut-off Date, other than principal and interest due on or
before the Cut-off Date and other than any Retained Interest. The trustee will,
concurrently with that assignment, deliver the Notes or Certificates, as
applicable, to the depositor in exchange for the Assets and the other assets
comprising the trust fund for that series. Each Asset will be identified in a
schedule appearing as an exhibit to the related Agreement. That schedule will
include detailed information to the extent available and relevant
(1) in respect of each mortgage loan included in the related
trust fund, including the city and state of the related Mortgaged
Property and type of that property, the mortgage rate and, if
applicable, the applicable index, margin, adjustment date and any rate
cap information, the original and remaining term to maturity, the
original and outstanding principal balance and balloon payment, if
any, the Loan-to-Value Ratio as of the date indicated and payment and
prepayment provisions, if applicable, and
(2) in respect of each Mortgage Security and Agency Security, the
original and outstanding principal amount, if any, and the interest
rate on the Mortgage Security or Agency Security.
For each mortgage loan, except as otherwise specified in the
prospectus supplement, the depositor will deliver or cause to be delivered to
the trustee (or to the custodian hereinafter referred to) particular loan
documents, which will generally include the original mortgage note endorsed,
without recourse, in blank or to the order of the trustee, the original Mortgage
(or a certified copy of the original Mortgage) with evidence of recording
indicated on the original Mortgage and an assignment of the Mortgage to the
trustee in recordable form. However, a trust fund may include mortgage loans
where the original mortgage note is not delivered to the trustee if the
depositor delivers to the trustee or the custodian a copy or a duplicate
original of the mortgage note, together with an affidavit certifying that the
original of the mortgage note has been lost or destroyed. For those mortgage
loans, the trustee (or its nominee) may not be able to enforce the mortgage note
against the related borrower. The Asset Seller or other entity specified in the
prospectus supplement will be required to agree to repurchase, or substitute
for, each of these mortgage loans that is subsequently in default if the
enforcement thereof or of the related Mortgage is materially adversely affected
by the absence of the original mortgage note. The related Agreement will
generally require the depositor or another party specified in the prospectus
supplement to promptly cause each of these assignments of Mortgage to be
recorded in the appropriate public office for real property records, except in
the State of California or in other states where, in the opinion of counsel
acceptable to the trustee, recording is not required to protect the trustee's
interest in the related mortgage loan against the claim of any subsequent
transferee or any successor to or creditor of the depositor, the servicer, the
relevant Asset Seller or any other prior holder of the mortgage loan.
The trustee (or a custodian) will review the mortgage loan documents
within a specified period of days after receipt of the mortgage loan documents,
and the trustee (or a custodian) will hold those documents in trust for the
benefit of the securityholders. If any of these documents are found to be
missing or defective in any material respect, the trustee (or that custodian)
will immediately notify the servicer and the depositor, and the servicer will
immediately notify the relevant Asset Seller or other entity specified in the
prospectus supplement. If the Asset Seller cannot cure the omission or defect
within a specified number of days after receipt of that notice, then the Asset
Seller or other entity specified in the prospectus supplement will be obligated,
within a specified number of days of receipt of that notice, to either (1)
repurchase the related mortgage loan from the trustee at a price equal to the
sum of the unpaid principal balance of the mortgage loan, plus unpaid accrued
interest at the interest rate for that Asset from the date as to which interest
was last paid to the due date in the Due Period in which the relevant purchase
is to occur, plus servicing expenses that are payable to the servicer, or
another price as specified in the prospectus supplement (the "Purchase Price")
or (2) substitute a new mortgage loan. There can be no assurance that an Asset
Seller or other named entity will fulfill this repurchase or substitution
obligation, and neither the servicer nor the depositor will be obligated to
repurchase or substitute for that mortgage loan if the Asset Seller or other
named entity defaults on its obligation.
This repurchase or substitution obligation constitutes the sole remedy
available to the securityholders or the trustee for omission of, or a material
defect in, a constituent document. To the extent specified in the prospectus
supplement, in lieu of curing any omission or defect in the Asset or
repurchasing or substituting for that Asset, the Asset Seller or other named
entity may agree to cover any losses suffered by the trust fund as a result of
that breach or defect.
Notwithstanding the preceding three paragraphs, the documents for Home
Equity Loans will be delivered to the trustee (or a custodian) only to the
extent specified in the prospectus supplement. Generally these documents will be
retained by the servicer, which may also be the Asset Seller. In addition,
assignments of the related Mortgages to the trustee will be recorded only to the
extent specified in the prospectus supplement.
Mortgage Securities and Agency Securities will be registered in the
name of the trustee or its nominee on the books of the issuer or guarantor or
its agent or, in the case of Mortgage Securities and Agency Securities issued
only in book-entry form, through the depository with respect to the Mortgage
Securities and Agency Securities, in accordance with the procedures established
by the issuer or guarantor for registration of those certificates, and
distributions on those securities to which the trust fund is entitled will be
made directly to the trustee.
REPRESENTATIONS AND WARRANTIES; REPURCHASES
To the extent provided in the prospectus supplement the depositor
will, for each Asset, assign representations and warranties, as of a specified
date (the person making those representations and warranties, the "Warranting
Party") covering, by way of example, the following types of matters:
o the accuracy of the information set forth for that Asset on the
schedule of Assets appearing as an exhibit to the related
Agreement;
o in the case of a mortgage loan, the existence of title insurance
insuring the lien priority of the mortgage loan;
o the authority of the Warranting Party to sell the Asset;
o the payment status of the Asset;
o in the case of a mortgage loan, the existence of customary
provisions in the related mortgage note and Mortgage to permit
realization against the Mortgaged Property of the benefit of the
security of the Mortgage; and
o the existence of hazard and extended perils insurance coverage on
the Mortgaged Property.
Any Warranting Party shall be an Asset Seller or an affiliate of the
Asset Seller or any other person acceptable to the depositor and will be
identified in the prospectus supplement.
Representations and warranties made in respect of an Asset may have
been made as of a date before the applicable Cut-off Date. A substantial period
of time may have elapsed between that date and the date of initial issuance of
the related series of Notes or Certificates, as applicable, evidencing an
interest in that Asset. In the event of a breach of any of these representations
or warranties, the Warranting Party will be obligated to reimburse the trust
fund for losses caused by that breach or either cure that breach or repurchase
or replace the affected Asset as described below. Since the representations and
warranties may not address events that may occur following the date as of which
they were made, the Warranting Party will have a reimbursement, cure, repurchase
or substitution obligation in connection with a breach of that representation
and warranty only if the relevant event that causes that breach occurs before
that date. That party would have no obligations if the relevant event that
causes that breach occurs after that date.
Each Agreement will provide that the servicer and/or trustee or
another entity identified in the prospectus supplement will be required to
notify promptly the relevant Warranting Party of any breach of any
representation or warranty made by it in respect of an Asset that materially and
adversely affects the value of that Asset or the interests in the prospectus
supplement of the securityholders. If the Warranting Party cannot cure that
breach within a specified period following the date on which that party was
notified of that breach, then the Warranting Party will be obligated to
repurchase that Asset from the trustee within a specified period from the date
on which the Warranting Party was notified of that breach, at the Purchase Price
therefor. If so provided in the prospectus supplement for a series, a Warranting
Party, rather than repurchase an Asset as to which a breach has occurred, will
have the option, within a specified period after initial issuance of that series
of Notes or Certificates, as applicable, to cause the removal of that Asset from
the trust fund and substitute in its place one or more other Assets, as
applicable, in accordance with the standards described in the prospectus
supplement. If so provided in the prospectus supplement for a series, a
Warranting Party, rather than repurchase or substitute an Asset as to which a
breach has occurred, will have the option to reimburse the trust fund or the
securityholders for any losses caused by that breach. This reimbursement,
repurchase or substitution obligation will constitute the sole remedy available
to securityholders or the trustee for a breach of representation by a Warranting
Party.
Neither the depositor (except to the extent that it is the Warranting
Party) nor the servicer will be obligated to purchase or substitute for an Asset
if a Warranting Party defaults on its obligation to do so, and no assurance can
be given that the Warranting Parties will carry out those obligations with
respect to the Assets.
A servicer will make representations and warranties regarding its
authority to enter into, and its ability to perform its obligations under, the
related Agreement. A breach of any representation of the servicer that
materially and adversely affects the interests of the securityholders and which
continues unremedied for the number of days specified in the Agreement after the
discovery of the breach by the servicer or the receipt of written notice of that
breach by the servicer from the trustee, the depositor or the holders of Notes
or Certificates, as applicable, evidencing not less than 25% of the voting
rights or other percentage specified in the related Agreement, will constitute
an Event of Default under that Agreement. See "--Events of Default under the
Agreement" and "--Rights Upon Event of Default under the Agreements."
COLLECTION ACCOUNT AND RELATED ACCOUNTS
GENERAL. The servicer and/or the trustee will, as to each trust fund,
establish and maintain or cause to be established and maintained one or more
separate accounts for the collection of payments on the related Assets
(collectively, the "Collection Account"), which must be an account or accounts
that either:
o are insured by the Bank Insurance Fund or the Savings Association
Insurance Fund of the Federal Deposit Insurance Corporation
("FDIC") (to the limits established by the FDIC) and the
uninsured deposits in which are otherwise secured so that the
securityholders have a claim with respect to the funds in the
Collection Account or a perfected first priority security
interest against any collateral securing those funds that is
superior to the claims of any other depositors or general
creditors of the institution with which the Collection Account is
maintained, or
o are maintained with a bank or trust company, and in a manner
satisfactory to the rating agency or agencies rating any class of
Notes or Certificates, as applicable, of that series.
Investment of amounts in the Collection Account is limited to United
States government securities and other investment grade obligations specified in
the Agreement ("Permitted Investments"). A Collection Account may be maintained
as an interest bearing or a non-interest bearing account and the funds held in
the Collection Account may be invested pending each succeeding Distribution Date
in short-term Permitted Investments. Any interest or other income earned on
funds in the Collection Account will, unless otherwise specified in the
prospectus supplement, be paid to the servicer or its designee as additional
servicing compensation. The Collection Account may be maintained with an
institution that is an affiliate of the servicer, if applicable, provided that
that institution meets the standards imposed by the rating agency or agencies.
If permitted by the rating agency or agencies, a Collection Account may contain
funds relating to more than one series of mortgage pass-through certificates and
may contain other funds respecting payments on mortgage loans belonging to the
servicer or serviced or master serviced by it on behalf of others.
DEPOSITS. A servicer or the trustee will deposit or cause to be
deposited in the Collection Account for one or more trust funds on a daily
basis, or any other period provided in the related Agreement, the following
payments and collections received, or advances made, by the servicer or the
trustee or on its behalf after the Cut-off Date (other than payments due on or
before the Cut-off Date, and exclusive of any amounts representing a Retained
Interest), except as otherwise provided in the Agreement:
(1) all payments on account of principal, including principal
prepayments, on the Assets;
(2) all payments on account of interest on the Assets, including
any default interest collected, in each case net of any portion
retained by a servicer as its servicing compensation and net of any
Retained Interest;
(3) Liquidation Proceeds and Insurance Proceeds, together with
the net proceeds on a monthly basis with respect to any Assets
acquired for the benefit of securityholders;
(4) any amounts paid under any instrument or drawn from any fund
that constitutes credit support for the related series of Notes or
Certificates, as applicable, as described under "Description of Credit
Support;"
(5) any advances made as described under "Description of the
Securities--Advances in Respect of Delinquencies;"
(6) any amounts paid under any Cash Flow Agreement, as described
under "Description of the Trust Funds--Cash Flow Agreements;"
(7) all proceeds of any Asset or, with respect to a mortgage
loan, property acquired in respect of the mortgage loan purchased by
the depositor, any Asset Seller or any other specified person as
described above under "--Assignment of Assets; Repurchases" and
"--Representations and Warranties; Repurchases," all proceeds of any
defaulted mortgage loan purchased as described below under
"--Realization Upon Defaulted Assets," and all proceeds of any Asset
purchased as described under "Description of the
Securities--Termination;"
(8) any amounts paid by a servicer to cover interest shortfalls
arising out of the prepayment of Assets in the trust fund as described
below under "--Retained Interest; Servicing Compensation and Payment
of Expenses;"
(9) to the extent that any of these items do not constitute
additional servicing compensation to a servicer, any payments on
account of modification or assumption fees, late payment charges or
Prepayment Premiums on the Assets;
(10) all payments required to be deposited in the Collection
Account with respect to any deductible clause in any blanket insurance
policy described below under "--Hazard Insurance Policies;"
(11) any amount required to be deposited by a servicer or the
trustee in connection with losses realized on investments for the
benefit of the servicer or the trustee, as the case may be, of funds
held in the Collection Account; and
(12) any other amounts required to be deposited in the Collection
Account as provided in the related Agreement and described in the
prospectus supplement.
WITHDRAWALS. A servicer or the trustee may, from time to time as
provided in the related Agreement, make withdrawals from the Collection Account
for each trust fund for any of the following purposes, except as otherwise
provided in the Agreement:
(1) to make distributions to the securityholders on each
Distribution Date;
(2) to reimburse a servicer for unreimbursed amounts advanced as
described under "Description of the Securities--Advances in Respect of
Delinquencies," which reimbursement is to be made out of amounts
received that were identified and applied by the servicer as late
collections of interest (net of related servicing fees and Retained
Interest) on and principal of the particular Assets for which the
advances were made or out of amounts drawn under any form of credit
support with respect to those Assets;
(3) to reimburse a servicer for unpaid servicing fees earned and
unreimbursed servicing expenses incurred with respect to Assets and
properties acquired in respect of the Assets, which reimbursement is
to be made out of amounts that represent Liquidation Proceeds and
Insurance Proceeds collected on the particular Assets and properties,
and net income collected on the particular properties, which fees were
earned or expenses were incurred or out of amounts drawn under any
form of credit support for those Assets and properties;
(4) to reimburse a servicer for any advances described in clause
(2) above and any servicing expenses described in clause (3) above
which, in the servicer's good faith judgment, will not be recoverable
from the amounts described in those clauses, which reimbursement is to
be made from amounts collected on other Assets or, if and to the
extent so provided by the related Agreement and described in the
prospectus supplement, just from that portion of amounts collected on
other Assets that is otherwise distributable on one or more classes of
Subordinate Notes or Subordinate Certificates, as applicable, if any,
remain outstanding, and otherwise any outstanding class of Notes or
Certificates, as applicable, of the related series;
(5) if and to the extent described in the prospectus supplement,
to pay a servicer interest accrued on the advances described in clause
(2) above and the servicing expenses described in clause (3) above
while those advances and servicing expenses remain outstanding and
unreimbursed;
(6) to reimburse a servicer, the depositor, or any of their
respective directors, officers, employees and agents, as the case may
be, for expenses, costs and liabilities incurred by these parties, as
and to the extent described below under "--Certain Matters Regarding
Servicers, the Master Servicer and the Depositor;"
(7) if and to the extent described in the prospectus supplement,
to pay (or to transfer to a separate account for purposes of escrowing
for the payment of) the trustee's fees;
(8) to reimburse the trustee or any of its directors, officers,
employees and agents, as the case may be, for expenses, costs and
liabilities incurred by these parties, as and to the extent described
below under "--Certain Matters Regarding the Trustee;"
(9) to pay a servicer, as additional servicing compensation,
interest and investment income earned in respect of amounts held in
the Collection Account;
(10) to pay the person so entitled any amounts deposited in the
Collection Account that were identified and applied by the servicer as
recoveries of Retained Interest;
(11) to pay for costs reasonably incurred in connection with the
proper management and maintenance of any Mortgaged Property acquired
for the benefit of securityholders by foreclosure or by deed in lieu
of foreclosure or otherwise, which payments are to be made out of
income received on that property;
(12) if one or more elections have been made to treat the
trust fund or designated portions of the trust fund as a REMIC, to pay
any federal, state or local taxes imposed on the trust fund or its
assets or transactions, as and to the extent described under "Material
Federal Income Tax Considerations--REMICs--Taxes That May Be Imposed on
the REMIC Pool" or in the prospectus supplement, respectively;
(13) to pay for the cost of an independent appraiser or other
expert in real estate matters retained to determine a fair sale price
for a defaulted mortgage loan or a property acquired in respect of a
mortgage loan in connection with the liquidation of that mortgage loan
or property;
(14) to pay for the cost of various opinions of counsel obtained
pursuant to the related Agreement for the benefit of securityholders;
(15) to pay for the costs of recording the related Agreement if
that recordation materially and beneficially affects the interests of
securityholders, provided that the payment shall not constitute a
waiver with respect to the obligation of the Warranting Party to
remedy any breach of representation or warranty under the Agreement;
(16) to pay the person so entitled any amounts deposited in the
Collection Account in error, including amounts received on any Asset
after its removal from the trust fund whether by reason of purchase or
substitution as contemplated above under "--Assignment of Assets;
Repurchase" and "--Representations and Warranties; Repurchases" or
otherwise;
(17) to make any other withdrawals permitted by the related
Agreement; and
(18) to clear and terminate the Collection Account at the
termination of the trust fund.
OTHER COLLECTION ACCOUNTS. If specified in the prospectus supplement,
the Agreement for any series of Notes or Certificates, as applicable, may
provide for the establishment and maintenance of a separate collection account
into which the servicer will deposit on a daily basis, or any other period as
provided in the related Agreement, the amounts described under "--Deposits"
above for one or more series of Notes or Certificates, as applicable. Any
amounts on deposit in any of these collection accounts will be withdrawn from
these collection accounts and deposited into the appropriate Collection Account
by a time specified in the prospectus supplement. To the extent specified in the
prospectus supplement, any amounts that could be withdrawn from the Collection
Account as described under "--Withdrawals" above may also be withdrawn from any
of these collection accounts. The prospectus supplement will set forth any
restrictions for any of these collection accounts, including investment
restrictions and any restrictions for financial institutions with which any of
these collection accounts may be maintained.
The servicer will establish and maintain with the indenture trustee an
account, in the name of the indenture trustee on behalf of the holders of Notes,
into which amounts released from the Collection Account for distribution to the
holders of Notes will be deposited and from which all distributions to the
holders of Notes will be made.
COLLECTION AND OTHER SERVICING PROCEDURES. The servicer is required to
make reasonable efforts to collect all scheduled payments under the Assets and
will follow or cause to be followed those collection procedures that it would
follow with respect to assets that are comparable to the Assets and held for its
own account, provided that those procedures are consistent with
(1) the terms of the related Agreement and any related hazard
insurance policy or instrument of credit support, if any,
included in the related trust fund described in this prospectus
or under "Description of Credit Support,"
(2) applicable law and
(3) the general servicing standard specified in the prospectus
supplement or, if no standard is so specified, its normal
servicing practices (in either case, the "Servicing Standard").
In connection, the servicer will be permitted in its discretion to
waive any late payment charge or penalty interest in respect of a late payment
on an Asset.
Each servicer will also be required to perform other customary
functions of a servicer of comparable assets, including maintaining hazard
insurance policies as described in this prospectus and in any prospectus
supplement, and filing and settling claims under these policies; maintaining, to
the extent required by the Agreement, escrow or impoundment accounts of
borrowers for payment of taxes, insurance and other items required to be paid by
any borrower pursuant to the terms of the Assets; processing assumptions or
substitutions in those cases where the servicer has determined not to enforce
any applicable due-on-sale clause; attempting to cure delinquencies; supervising
foreclosures or repossessions; inspecting and managing Mortgaged Properties
under some circumstances; and maintaining accounting records relating to the
Assets. The servicer or any other entity specified in the prospectus supplement
will be responsible for filing and settling claims in respect of particular
Assets under any applicable instrument of credit support. See "Description of
Credit Support."
The servicer may agree to modify, waive or amend any term of any Asset
in a manner consistent with the Servicing Standard so long as the modification,
waiver or amendment will not (1) affect the amount or timing of any scheduled
payments of principal or interest on the Asset or (2) in its judgment,
materially impair the security for the Asset or reduce the likelihood of timely
payment of amounts due on the Asset. The servicer also may agree to any
modification, waiver or amendment that would so affect or impair the payments
on, or the security for, an Asset if (1) in its judgment, a material default on
the Asset has occurred or a payment default is reasonably foreseeable and (2) in
its judgment, that modification, waiver or amendment is reasonably likely to
produce a greater recovery with respect to the Asset on a present value basis
than would liquidation. In the event of any modification, waiver or amendment of
any Asset, the servicer will furnish a copy of that modification, waiver or
amendment to the trustee (or its custodian).
REALIZATION UPON DEFAULTED ASSETS
Generally, the servicer is required to monitor any Asset that is in
default, initiate corrective action in cooperation with the borrower if cure is
likely, inspect the Asset and take any other actions as are consistent with the
Servicing Standard. A significant period of time may elapse before the servicer
is able to assess the success of that corrective action or the need for
additional initiatives.
Any Agreement relating to a trust fund that includes mortgage loans
may grant to the servicer and/or the holder or holders of some classes of Notes
or Certificates, as applicable, a right of first refusal to purchase from the
trust fund at a predetermined purchase price any mortgage loan as to which a
specified number of scheduled payments under the Agreement are delinquent. Any
right of first refusal granted to the holder of an Offered Security will be
described in the prospectus supplement. The prospectus supplement will also
describe any similar right granted to any person if the predetermined purchase
price is less than the Purchase Price described above under "--Representations
and Warranties; Repurchases."
If specified in the prospectus supplement, the servicer may offer to
sell any defaulted mortgage loan described in the preceding paragraph and not
otherwise purchased by any person having a right of first refusal with respect
to that defaulted mortgage loan, if and when the servicer determines, consistent
with the Servicing Standard, so that a sale would produce a greater recovery on
a present value basis than would liquidation through foreclosure, repossession
or similar proceedings. The related Agreement will provide that any offering be
made in a commercially reasonable manner for a specified period and that the
servicer accept the highest cash bid received from any person (including itself,
an affiliate of the servicer or any securityholder) that constitutes a fair
price for that defaulted mortgage loan. If there is no bid that is determined to
be fair, the servicer will proceed with respect to that defaulted mortgage loan
as described below. Any bid in an amount at least equal to the Purchase Price
described above under "--Representations and Warranties; Repurchases" will in
all cases be deemed fair.
The servicer, on behalf of the trustee, may at any time institute
foreclosure proceedings, exercise any power of sale contained in any mortgage,
obtain a deed in lieu of foreclosure, or otherwise acquire title to a Mortgaged
Property securing a mortgage loan by operation of law or otherwise, if that
action is consistent with the Servicing Standard and a default on that mortgage
loan has occurred or, in the servicer's judgment, is imminent.
If title to any Mortgaged Property is acquired by a trust fund as to
which a REMIC election has been made, the servicer, on behalf of the trust fund,
will be required to sell the Mortgaged Property within three years from the
close of the calendar year of acquisition, unless (1) the Internal Revenue
Service grants an extension of time to sell that property or (2) the trustee
receives an opinion of independent counsel to the effect that the holding of the
property by the trust fund longer than three years after the close of the
taxable year of its acquisition will not result in the imposition of a tax on
the trust fund or cause the trust fund to fail to qualify as a REMIC under the
Code at any time that any Notes or Certificates, as applicable, are outstanding.
Subject to the foregoing, the servicer will be required to (A) solicit bids for
any Mortgaged Property so acquired in that manner as will be reasonably likely
to realize a fair price for that property and (B) accept the first (and, if
multiple bids are contemporaneously received, the highest) cash bid received
from any person that constitutes a fair price.
The limitations imposed by the related Agreement and the REMIC
provisions of the Code (if a REMIC election has been made for the related trust
fund) on the ownership and management of any Mortgaged Property acquired on
behalf of the trust fund may result in the recovery of an amount less than the
amount that would otherwise be recovered. See "Certain Legal Aspects of Mortgage
Loans--Foreclosure."
If recovery on a defaulted Asset under any related instrument of
credit support is not available, the servicer nevertheless will be obligated to
follow or cause to be followed those normal practices and procedures as it deems
necessary or advisable to realize upon the defaulted Asset. If the proceeds of
any liquidation of the property securing the defaulted Asset are less than the
outstanding principal balance of the defaulted Asset plus interest accrued on
the defaulted Asset at the applicable interest rate, plus the total amount of
expenses incurred by the servicer in connection with those proceedings and which
are reimbursable under the Agreement, the trust fund will realize a loss in the
amount of that difference. The servicer will be entitled to withdraw or cause to
be withdrawn from the Collection Account out of the Liquidation Proceeds
recovered on any defaulted Asset, before the distribution of those Liquidation
Proceeds to securityholders, amounts representing its normal servicing
compensation on the Security, unreimbursed servicing expenses incurred with
respect to the Asset and any unreimbursed advances of delinquent payments made
with respect to the Asset.
If any property securing a defaulted Asset is damaged the servicer is
not required to expend its own funds to restore the damaged property unless it
determines (1) that restoration will increase the proceeds to securityholders on
liquidation of the Asset after reimbursement of the servicer for its expenses
and (2) that its expenses will be recoverable by it from related Insurance
Proceeds or Liquidation Proceeds.
The pooling and servicing agreement will require the trustee, if it
has not received a distribution for any Mortgage Security or Agency Security by
the fifth business day after the date on which that distribution was due and
payable pursuant to the terms of that Agency Security, to request the issuer or
guarantor, if any, of that Mortgage Security or Agency Security to make that
payment as promptly as possible and legally permitted to take legal action
against that issuer or guarantor as the trustee deems appropriate under the
circumstances, including the prosecution of any claims in connection therewith.
The reasonable legal fees and expenses incurred by the trustee in connection
with the prosecution of this legal action will be reimbursable to the trustee
out of the proceeds of that action and will be retained by the trustee before
the deposit of any remaining proceeds in the Collection Account pending
distribution of the Collection Account to securityholders of the related series.
If the proceeds of any legal action are insufficient to reimburse the trustee
for its legal fees and expenses, the trustee will be entitled to withdraw from
the Collection Account an amount equal to its expenses, and the trust fund may
realize a loss in that amount.
As servicer of the Assets, a servicer, on behalf of itself, the
trustee and the securityholders, will present claims to the borrower under each
instrument of credit support, and will take those reasonable steps as are
necessary to receive payment or to permit recovery under these instruments for
defaulted Assets.
If a servicer or its designee recovers payments under any instrument of
credit support for any defaulted Assets, the servicer will be entitled to
withdraw or cause to be withdrawn from the Collection Account out of those
proceeds, before distribution of the Collection Account to securityholders,
amounts representing its normal servicing compensation on that Asset,
unreimbursed servicing expenses incurred for the Asset and any unreimbursed
advances of delinquent payments made with respect to the Asset. See "--Hazard
Insurance Policies" and "Description of Credit Support."
HAZARD INSURANCE POLICIES
MORTGAGE LOANS. Generally, each Agreement for a trust fund composed of
mortgage loans will require the servicer to cause the borrower on each mortgage
loan to maintain a hazard insurance policy (including flood insurance coverage,
if obtainable, to the extent the property is located in a federally designated
flood area, in an amount as is required under applicable guidelines) providing
for the level of coverage that is required under the related Mortgage or, if any
Mortgage permits its holder to dictate to the borrower the insurance coverage to
be maintained on the related Mortgaged Property, then the level of coverage that
is consistent with the Servicing Standard. That coverage will be in general in
an amount equal to the lesser of the principal balance owing on that mortgage
loan (but not less than the amount necessary to avoid the application of any
co-insurance clause contained in the hazard insurance policy) and the amount
necessary to fully compensate for any damage or loss to the improvements on the
Mortgaged Property on a replacement cost basis or any other amount specified in
the prospectus supplement. The ability of the servicer to assure that hazard
insurance proceeds are appropriately applied may be dependent upon its being
named as an additional insured under any hazard insurance policy and under any
other insurance policy referred to below, or upon the extent to which
information in this regard is furnished by borrowers. All amounts collected by
the servicer under any of these policies (except for amounts to be applied to
the restoration or repair of the Mortgaged Property or released to the borrower
in accordance with the servicer's normal servicing procedures, subject to the
terms and conditions of the related Mortgage and mortgage note) will be
deposited in the Collection Account in accordance with the related Agreement.
The Agreement may provide that the servicer may satisfy its obligation
to cause each borrower to maintain a hazard insurance policy by the servicer's
maintaining a blanket policy insuring against hazard losses on the mortgage
loans. If the blanket policy contains a deductible clause, the servicer will be
required to deposit in the Collection Account from its own funds all sums that
would have been deposited in the Collection Account but for that clause.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements of the property by
fire, lightning, explosion, smoke, windstorm and hail, and riot, strike and
civil commotion, subject to the conditions and exclusions specified in each
policy. Although the policies relating to the mortgage loans will be
underwritten by different insurers under different state laws in accordance with
different applicable state forms, and therefore will not contain identical terms
and conditions, the basic terms of the policies are dictated by respective state
laws, and most of these policies typically do not cover any physical damage
resulting from war, revolution, governmental actions, floods and other
water-related causes, earth movement (including earthquakes, landslides and
mudflows), wet or dry rot, vermin, domestic animals and other kinds of uninsured
risks.
The hazard insurance policies covering the Mortgaged Properties
securing the mortgage loans will typically contain a coinsurance clause that in
effect requires the insured at all times to carry insurance of a specified
percentage (generally 80% to 90%) of the full replacement value of the
improvements on the property to recover the full amount of any partial loss. If
the insured's coverage falls below this specified percentage, the coinsurance
clause generally provides that the insurer's liability in the event of partial
loss does not exceed the lesser of (1) the replacement cost of the improvements
less physical depreciation and (2) that proportion of the loss as the amount of
insurance carried bears to the specified percentage of the full replacement cost
of those improvements.
Each Agreement for a trust fund composed of mortgage loans will
require the servicer to cause the borrower on each mortgage loan to maintain all
other insurance coverage for the related Mortgaged Property as is consistent
with the terms of the related Mortgage and the Servicing Standard, which
insurance may typically include flood insurance (if the related Mortgaged
Property was located at the time of origination in a federally designated flood
area).
Any cost incurred by the servicer in maintaining any insurance policy
will be added to the amount owing under the mortgage loan where the terms of the
mortgage loan so permit; provided, however, that the addition of that cost will
not be taken into account for purposes of calculating the distribution to be
made to securityholders. Those costs may be recovered by the servicer from the
Collection Account, with interest, as provided by the Agreement.
Under the terms of the mortgage loans, borrowers will generally be
required to present claims to insurers under hazard insurance policies
maintained on the related Mortgaged Properties. The servicer, on behalf of the
trustee and securityholders, is obligated to present or cause to be presented
claims under any blanket insurance policy insuring against hazard losses on
Mortgaged Properties securing the mortgage loans. However, the ability of the
servicer to present or cause to be presented those claims is dependent upon the
extent to which information in this regard is furnished to the servicer by
borrowers.
FHA INSURANCE AND VA GUARANTEES
FHA loans will be insured by the FHA as authorized under the Housing
Act. Some FHA loans will be insured under various FHA programs including the
standard FHA 203(b) program to finance the acquisition of one- to four-family
housing units, the FHA 245 graduated payment mortgage program and the FHA Title
I Program. These programs generally limit the principal amount and interest
rates of the mortgage loans insured. The prospectus supplement for Notes or
Certificates, as applicable, of each series evidencing interests in a trust fund
including FHA loans will set forth additional information regarding the
regulations governing the applicable FHA insurance programs. Except as otherwise
specified in the prospectus supplement, the following describes FHA insurance
programs and regulations as generally in effect for FHA loans.
The insurance premiums for FHA loans are collected by lenders approved
by the Department of Housing and Urban Development ("HUD") or by the servicer
and are paid to the FHA. The regulations governing FHA single-family mortgage
insurance programs provide that insurance benefits are payable either upon
foreclosure (or other acquisition of possession) and conveyance of the mortgaged
premises to the United States of America or upon assignment of the defaulted
loan to the United States of America. For a defaulted FHA loan, the servicer is
limited in its ability to initiate foreclosure proceedings. When it is
determined, either by the servicer or HUD, that default was caused by
circumstances beyond the borrower's control, the servicer is expected to make an
effort to avoid foreclosure by entering, if feasible, into one of a number of
available forms of forbearance plans with the borrower. Those plans may involve
the reduction or suspension of regular mortgage payments for a specified period,
with those payments to be made on or before the maturity date of the mortgage,
or the recasting of payments due under the mortgage up to or, other than FHA
loans originated under the FHA Title I Program, beyond the maturity date. In
addition, when a default caused by those circumstances is accompanied by other
criteria, HUD may provide relief by making payments to the servicer in partial
or full satisfaction of amounts due under the FHA loan (which payments are to be
repaid by the borrower to HUD) or by accepting assignment of the loan from the
servicer. With some exceptions, at least three full monthly installments must be
due and unpaid under the FHA loan, and HUD must have rejected any request for
relief from the borrower before the servicer may initiate foreclosure
proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or
in debentures issued by HUD. Currently, claims are being paid in cash, and
claims have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debentures interest rate. To the extent specified in the prospectus supplement,
the servicer of each single family FHA loan will be obligated to purchase any
debenture issued in satisfaction of that FHA loan upon default for an amount
equal to the principal amount of that debenture.
Other than in relation to the FHA Title I Program, the amount of
insurance benefits generally paid by the FHA is equal to the entire unpaid
principal amount of the defaulted FHA loan adjusted to reimburse the servicer
for some of its costs and expenses and to deduct amounts received or retained by
the servicer after default. When entitlement to insurance benefits results from
foreclosure (or other acquisition of possession) and conveyance to HUD, the
servicer is compensated for no more than two-thirds of its foreclosure costs,
and is compensated for interest accrued and unpaid before that date but in
general only to the extent it was allowed pursuant to a forbearance plan
approved by HUD. When entitlement to insurance benefits results from assignment
of the FHA loan to HUD, the insurance payment includes full compensation for
interest accrued and unpaid to the assignment date. The insurance payment
itself, upon foreclosure of an FHA loan, bears interest from a date 30 days
after the borrower's first uncorrected failure to perform any obligation to make
any payment due under the mortgage and, upon assignment, from the date of
assignment to the date of payment of the claim, in each case at the same
interest rate as the applicable HUD debenture interest rate as described above.
VA loans will be partially guaranteed by the VA under the Serviceman's
Readjustment Act (a "VA Guaranty Policy"). For a defaulted VA loan, the servicer
is, absent exceptional circumstances, authorized to announce its intention to
foreclose only when the default has continued for three months. Generally, a
claim for the guarantee is submitted after liquidation of the Mortgaged
Property.
The amount payable under the guarantee will be the percentage of the
VA loan originally guaranteed applied to indebtedness outstanding as of the
applicable date of computation specified in the VA regulations. Payments under
the guarantee will be equal to the unpaid principal amount of that VA loan,
interest accrued on the unpaid balance of that VA loan to the appropriate date
of computation and limited expenses of the mortgagee, but in each case only to
the extent that those amounts have not been recovered through liquidation of the
Mortgaged Property. The amount payable under the guarantee may in no event
exceed the amount of the original guarantee.
FIDELITY BONDS AND ERRORS AND OMISSIONS INSURANCE
Each Agreement will require that the servicer obtain and maintain in
effect a fidelity bond or similar form of insurance coverage (which may provide
blanket coverage) or any combination of these insuring against loss occasioned
by fraud, theft or other intentional misconduct of the officers, employees and
agents of the servicer. The related Agreement will allow the servicer to
self-insure against loss occasioned by the errors and omissions of the officers,
employees and agents of the servicer so long as the criteria set forth in the
Agreement are met.
DUE-ON-SALE CLAUSES
The mortgage loans may contain clauses requiring the consent of the
mortgagee to any sale or other transfer of the related Mortgaged Property, or
due-on-sale clauses entitling the mortgagee to accelerate payment of the
mortgage loan upon any sale, transfer or conveyance of the related Mortgaged
Property. The servicer will generally enforce any due-on-sale clause to the
extent it has knowledge of the conveyance or proposed conveyance of the
underlying Mortgaged Property and it is entitled to do so under applicable law;
provided, however, that the servicer will not take any action in relation to the
enforcement of any due-on-sale clause that would:
o adversely affect or jeopardize coverage under any applicable
insurance policy or
o materially increase the risk of default or delinquency on, or
materially impair the security for, that mortgage loan.
Any fee collected by or on behalf of the servicer for entering into an
assumption agreement will be retained by or on behalf of the servicer as
additional servicing compensation. See "Certain Legal Aspects of Mortgage
Loans--Due-on-Sale Clauses."
The servicer will generally permit that transfer so long as the
transferee satisfies the servicer's then applicable underwriting standards. The
purpose of those transfers is often to avoid a default by the transferring
borrower.
RETAINED INTEREST; SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The prospectus supplement for a series of Notes or Certificates, as
applicable, will specify whether there will be any Retained Interest in the
Assets, and, if so, the initial owner of this Retained Interest. If so, the
Retained Interest will be established on a loan-by-loan basis and will be
specified on an exhibit to the related Agreement. A "Retained Interest" in an
Asset represents a specified portion of the interest payable on the Asset. The
Retained Interest will be deducted from borrower payments as received and will
not be part of the related trust fund.
The servicer's primary servicing compensation for a series of Notes or
Certificates, as applicable, will come from the periodic payment to it of a
portion of the interest payment on each Asset or any other amount specified in
the prospectus supplement. Since any Retained Interest and a servicer's primary
compensation are percentages of the principal balance of each Asset, those
amounts will decrease in accordance with the amortization of the Assets. The
prospectus supplement for a series of Notes or Certificates, as applicable,
evidencing interests in a trust fund that includes mortgage loans may provide
that, as additional compensation, the servicer may retain all or a portion of
assumption fees, modification fees, late payment charges or Prepayment Premiums
collected from borrowers and any interest or other income that may be earned on
funds held in the Collection Account or any account established by a servicer
pursuant to the Agreement.
The servicer may, to the extent provided in the prospectus supplement,
pay from its servicing compensation expenses incurred in connection with its
servicing and managing of the Assets, including payment of the fees and
disbursements of the trustee and independent accountants, payment of expenses
incurred in connection with distributions and reports to securityholders, and
payment of any other expenses described in the prospectus supplement. Some other
expenses, including expenses relating to defaults and liquidations on the Assets
and, to the extent so provided in the prospectus supplement, interest on these
expenses at the rate specified in the prospectus supplement may be borne by the
trust fund.
If and to the extent provided in the prospectus supplement, the
servicer may be required to apply a portion of the servicing compensation
otherwise payable to it in respect of any Due Period to interest shortfalls
resulting from the voluntary prepayment of any Assets in the related trust fund
during that period before their due dates.
EVIDENCE AS TO COMPLIANCE
Each Agreement relating to Assets that include mortgage loans, unless
otherwise provided in the prospectus supplement, will provide that on or before
a specified date in each year, beginning with the first of these dates at least
six months after the related Cut-off Date, a firm of independent public
accountants will furnish a statement to the trustee to the effect that, on the
basis of the examination by that firm conducted substantially in compliance with
either the Uniform Single Attestation Program for Mortgage Bankers, the Audit
Program for Mortgages serviced for Freddie Mac or any other program used by the
servicer, the servicing by or on behalf of the servicer of mortgage loans under
agreements substantially similar to each other (including the related Agreement)
was conducted in compliance with the terms of those agreements or that program
except for any significant exceptions or errors in records that, in the opinion
of the firm, either the Audit Program for Mortgages serviced for Freddie Mac, or
paragraph 4 of the Uniform Single Attestation Program for Mortgage Bankers, or
any other program, requires it to report.
Each Agreement will also provide for delivery to the trustee, on or
before a specified date in each year, of an officer's certificate of the
servicer to the effect that the servicer has fulfilled its obligations under the
Agreement throughout the preceding calendar year or other specified twelve-month
period.
CERTAIN MATTERS REGARDING SERVICERS, THE MASTER SERVICER AND THE
DEPOSITOR
The servicer or master servicer under each Agreement will be named in
the prospectus supplement. The entities serving as servicer or master servicer
may be affiliates of the depositor and may have other normal business
relationships with the depositor or the depositor's affiliates. If applicable,
reference in this prospectus to the servicer will also be deemed to be to the
master servicer. Each Agreement will provide, in general, that:
o The servicer may resign from its obligations and duties under the
Agreement only upon a determination that its duties under the
Agreement are no longer permissible under applicable law or are
in material conflict by reason of applicable law with any other
activities carried on by it, the other activities of the servicer
so causing that conflict being of a type and nature carried on by
the servicer at the date of the Agreement. No resignation will
become effective until the trustee or a successor servicer has
assumed the servicer's obligations and duties under the
Agreement.
o Neither any servicer, the depositor nor any director, officer,
employee, or agent of a servicer or the depositor will be under
any liability to the related trust fund or securityholders for
any action taken, or for refraining from the taking of any
action, in good faith pursuant to the Agreement; provided,
however, that neither a servicer, the depositor nor any other
person will be protected against any breach of a representation,
warranty or covenant made in the related Agreement, or against
any liability specifically imposed by the Agreement, or against
any liability that would otherwise be imposed by reason of
willful misfeasance, bad faith or gross negligence in the
performance of obligations or duties under the Agreement or by
reason of reckless disregard of obligations and duties under the
Agreement.
o Any servicer, the depositor and any director, officer, employee
or agent of a servicer or the depositor will be entitled to
indemnification by the related trust fund and will be held
harmless against any loss, liability or expense incurred in
connection with any legal action relating to the Agreement or the
Notes or Certificates, as applicable,; provided, however, that
that indemnification will not extend to any loss, liability or
expense
(1) specifically imposed by that Agreement or otherwise
incidental to the performance of obligations and duties
under the Agreement, including, in the case of a servicer,
the prosecution of an enforcement action in respect of any
specific mortgage loan or mortgage loans (except as any
loss, liability or expense will be otherwise reimbursable
pursuant to that Agreement);
(2) incurred in connection with any breach of a representation,
warranty or covenant made in that Agreement;
(3) incurred by reason of misfeasance, bad faith or gross
negligence in the performance of obligations or duties under
the Agreement, or by reason of reckless disregard of those
obligations or duties;
(4) incurred in connection with any violation of any state or
federal securities law; or
(5) imposed by any taxing authority if that loss, liability or
expense is not specifically reimbursable pursuant to the
terms of the related Agreement.
o Neither any servicer nor the depositor will be under any
obligation to appear in, prosecute or defend any legal action
that is not incidental to its respective responsibilities under
the Agreement and which in its opinion may involve it in any
expense or liability. Any servicer or the depositor may, however,
in its discretion undertake any action which it may deem
necessary or desirable with respect to the Agreement and the
rights and duties of the parties to the Agreement and the
interests of the securityholders under the Agreement. In that
event, the legal expenses and costs of that action and any
liability resulting will be expenses, costs and liabilities of
the securityholders, and the servicer or the depositor, as the
case may be, will be entitled to be reimbursed therefor and to
charge the Collection Account.
Any person into which the servicer or the depositor may be merged or
consolidated, or any person resulting from any merger or consolidation to which
the servicer or the depositor is a party, or any person succeeding to the
business of the servicer or the depositor, may be the successor of the servicer
or the depositor, as the case may be, under the terms of the related Agreement.
SPECIAL SERVICERS
If and to the extent specified in the prospectus supplement, a special
servicer (a "Special servicer") may be a party to the related Agreement or may
be appointed by the servicer or another specified party to perform specified
duties in respect of servicing the related mortgage loans that would otherwise
be performed by the servicer (for example, the workout and/or foreclosure of
defaulted mortgage loans). The rights and obligations of any Special servicer
will be specified in the prospectus supplement, and the servicer will be liable
for the performance of a Special servicer only if, and to the extent, set forth
in the prospectus supplement.
EVENTS OF DEFAULT UNDER THE AGREEMENT
Events of default under the related Agreement will generally include:
o any failure by the servicer to distribute or cause to be
distributed to securityholders, or to remit to the trustee for
distribution to securityholders, any required payment that
continues after a grace period, if any;
o any failure by the servicer duly to observe or perform in any
material respect any of its other covenants or obligations under
the Agreement that continues unremedied for 30 days after written
notice of that failure has been given to the servicer by the
trustee or the depositor, or to the servicer, the depositor and
the trustee by securityholders evidencing not less than 25% of
the voting rights for that series;
o any breach of a representation or warranty made by the servicer
under the Agreement that materially and adversely affects the
interests of securityholders and which continues unremedied for
30 days after written notice of that breach has been given to the
servicer by the trustee or the depositor, or to the servicer, the
depositor and the trustee by the holders of Notes or
Certificates, as applicable, evidencing not less than 25% of the
voting rights for that series; and
o some events of insolvency, readjustment of debt, marshaling of
assets and liabilities or similar proceedings and actions by or
on behalf of the servicer indicating its insolvency or inability
to pay its obligations.
Material variations to the foregoing events of default (other than to
shorten cure periods or eliminate notice requirements) will be specified in the
prospectus supplement. The trustee will, not later than the later of 60 days or
any other period specified in the prospectus supplement after the occurrence of
any event that constitutes or, with notice or lapse of time or both, would
constitute an event of default and five days after specific officers of the
trustee become aware of the occurrence of that event, transmit by mail to the
depositor and all securityholders of the applicable series notice of that
occurrence, unless that default has been cured or waived.
RIGHTS UPON EVENT OF DEFAULT UNDER THE AGREEMENTS
So long as an event of default under an Agreement remains unremedied,
the depositor or the trustee may, and at the direction of holders of Notes or
Certificates, as applicable, evidencing not less than 51% (or any other
percentage specified in the Agreement) of the voting rights for that series, the
trustee will terminate all of the rights and obligations of the servicer under
the Agreement and in and to the mortgage loans (other than as a securityholder
or as the owner of any Retained Interest), whereupon the trustee will succeed to
all of the responsibilities, duties and liabilities of the servicer under the
Agreement (except that if the trustee is prohibited by law from obligating
itself to make advances regarding delinquent Assets, or if the prospectus
supplement so specifies, then the trustee will not be obligated to make those
advances) and will be entitled to similar compensation arrangements. If the
trustee is unwilling or unable so to act, it may or, at the written request of
the holders of Notes or Certificates, as applicable, entitled to at least 51%
(or any other percentage specified in the Agreement) of the voting rights for
that series, it must appoint, or petition a court of competent jurisdiction for
the appointment of, a loan servicing institution acceptable to the rating agency
with a net worth at the time of that appointment of at least $15,000,000 (or any
other amount specified in the Agreement) to act as successor to the servicer
under the Agreement. Pending that appointment, the trustee is obligated to act
in that capacity. The trustee and any successor servicer may agree upon the
servicing compensation to be paid, which in no event may be greater than the
compensation payable to the servicer under the Agreement.
The holders of Notes or Certificates, as applicable, representing at
least 66 2/3% (or any other percentage specified in the Agreement) of the voting
rights allocated to the respective classes of Notes or Certificates, as
applicable, affected by any event of default will be entitled to waive that
event of default; provided, however, that an Event of Default involving a
failure to distribute a required payment to securityholders described in clause
(1) under "--Events of Default under the Agreements" may be waived only by all
of the securityholders. Upon any waiver of an event of default, that event of
default will cease to exist and will be deemed to have been remedied for every
purpose under the Agreement.
No securityholders will have the right under any Agreement to
institute any proceeding with respect to the Agreement unless that holder
previously has given to the trustee written notice of default and unless the
holders of Notes or Certificates, as applicable, evidencing not less than 25%
(or any other percentage specified in the Agreement) of the voting rights have
made written request upon the trustee to institute that proceeding in its own
name as trustee under the Agreement and have offered to the trustee reasonable
indemnity, and the trustee for 60 days (or any other number of days specified in
the Agreement) has neglected or refused to institute any proceeding. The
trustee, however, is under no obligation to exercise any of the trusts or powers
vested in it by any Agreement or to make any investigation of matters arising
under the Agreement or to institute, conduct or defend any litigation under the
Agreement or in relation to the Agreement at the request, order or direction of
any of the securityholders covered by that Agreement, unless those
securityholders have offered to the trustee reasonable security or indemnity
against the costs, expenses and liabilities that may be incurred.
The manner of determining the voting rights of a Security or class or
classes of Notes or Certificates, as applicable, will be specified in the
Agreement.
AMENDMENT
In general, each Agreement may be amended by the parties to it,
without the consent of any securityholders covered by the Agreement, to
(1) cure any ambiguity or mistake;
(2) correct, modify or supplement any provision in the Agreement
that may be inconsistent with any other provision in the Agreement or
with the prospectus supplement;
(3) make any other provisions with respect to matters or
questions arising under the Agreement that are not materially
inconsistent with the provisions of the Agreement; or
(4) comply with any requirements imposed by the Code; provided
that, in the case of clause (3), that amendment will not adversely
affect in any material respect the interests of any securityholders
covered by the Agreement as evidenced either by an opinion of counsel
to that effect or the delivery to the trustee of written notification
from each rating agency that provides, at the request of the
depositor, a rating for the Offered Notes or Offered Certificate, as
applicable, of the related series to the effect that that amendment or
supplement will not cause that rating agency to lower or withdraw the
then current rating assigned to those Notes or Certificates, as
applicable.
In general, each Agreement may also be amended by the depositor, the
servicer, if any, and the trustee, with the consent of the securityholders
affected by the amendment evidencing not less than 51% (or any other percentage
specified in the Agreement) of the voting rights, for any purpose; provided,
however, no amendment may (1) reduce in any manner the amount of, or delay the
timing of, payments received or advanced on Assets that are required to be
distributed on any Security without the consent of the securityholder or (2)
reduce the consent percentages described in this paragraph without the consent
of all the securityholders covered by the Agreement then outstanding. However,
for any series of Notes or Certificates, as applicable, as to which a REMIC
election is to be made, the trustee will not consent to any amendment of the
Agreement unless it has first have received an opinion of counsel to the effect
that that amendment will not result in the imposition of a tax on the related
trust fund or, if applicable, cause the related trust fund to fail to qualify as
a REMIC, at any time that the related Notes or Certificates, as applicable, are
outstanding.
THE TRUSTEE
The trustee under each Agreement will be named in the prospectus
supplement. The commercial bank, national banking association, banking
corporation or trust company serving as trustee may have a banking relationship
with the depositor and its affiliates, with any servicer and its affiliates and
with any master servicer and its affiliates. To the extent consistent with its
fiduciary obligations as trustee, the trustee may delegate its duties to one or
more agents as provided in the Agreement.
DUTIES OF THE TRUSTEE
The trustee will make no representations as to the validity or
sufficiency of any Agreement, the Notes or Certificates, as applicable, or any
Asset or related document and is not accountable for the use or application by
or on behalf of any servicer of any funds paid to the master servicer or its
designee in respect of the Notes or Certificates, as applicable, or the Assets,
or deposited into or withdrawn from the Collection Account or any other account
by or on behalf of the servicer. If no Event of Default has occurred and is
continuing, the trustee is required to perform only those duties specifically
required under the related Agreement, as applicable. However, upon receipt of
the various certificates, reports or other instruments required to be furnished
to it, the trustee is required to examine those documents and to determine
whether they conform to the requirements of the Agreement.
CERTAIN MATTERS REGARDING THE TRUSTEE
The trustee and any director, officer, employee or agent of the
trustee will be entitled to indemnification out of the Collection Account for
any loss, liability or expense (including costs and expenses of litigation, and
of investigation, counsel fees, damages, judgments and amounts paid in
settlement) incurred in connection with the trustee's
(1) enforcing its rights and remedies and protecting the interests of
the securityholders during the continuance of an Event of
Default,
(2) defending or prosecuting any legal action in respect of the
related Agreement or series of Notes or
Certificates, as applicable,
(3) being the mortgagee of record for the mortgage loans in a trust
fund and the owner of record for any Mortgaged Property acquired
in respect thereof for the benefit of securityholders, or
(4) acting or refraining from acting in good faith at the direction
of the holders of the related series of Notes or Certificates, as
applicable, entitled to not less than 25% (or any other
percentage as is specified in the related Agreement for any
particular matter) of the voting rights for that series;
provided, however, that this indemnification will not extend to any loss,
liability or expense that constitutes a specific liability of the trustee
pursuant to the related Agreement, or to any loss, liability or expense incurred
by reason of willful misfeasance, bad faith or negligence on the part of the
trustee in the performance of its obligations and duties under the Agreement, or
by reason of its reckless disregard of those obligations or duties, or as may
arise from a breach of any representation, warranty or covenant of the trustee
made in the Agreement.
RESIGNATION AND REMOVAL OF THE TRUSTEE
The trustee may at any time resign from its obligations and duties
under an Agreement by giving written notice of its resignation to the depositor,
the servicer, if any, each rating agency, and all securityholders. Upon
receiving that notice of resignation, the depositor is required promptly to
appoint a successor trustee acceptable to the servicer, if any. If no successor
trustee has been so appointed and has accepted appointment within 30 days after
the giving of that notice of resignation, the resigning trustee may petition any
court of competent jurisdiction for the appointment of a successor trustee.
If at any time the trustee ceases to be eligible to continue as a
trustee under the related Agreement, or if at any time the trustee becomes
incapable of acting, or is adjudged bankrupt or insolvent, or a receiver of the
trustee or of its property is appointed, or any public officer takes charge or
control of the trustee or of its property or affairs for the purpose of
rehabilitation, conservation or liquidation, or if a change in the financial
condition of the trustee has adversely affected or will adversely affect the
rating on any class of the Notes or Certificates, as applicable, then the
depositor and/or a party specified in the related Agreement may remove the
trustee and appoint a successor trustee acceptable to the master servicer, if
any, according to the terms of the related Agreement. Securityholders of any
series entitled to at least 51% (or any other percentage specified in the
prospectus supplement) of the voting rights for that series may at any time
remove the trustee without cause and appoint a successor trustee.
Any resignation or removal of the trustee and appointment of a
successor trustee will not become effective until acceptance of appointment by
the successor trustee.
MATERIAL TERMS OF THE INDENTURE
GENERAl
The following summary describes the material provisions that may
appear in each indenture. The prospectus supplement for a series of Notes will
describe any provision of the indenture relating to that series that materially
differs from the description of that provision contained in this prospectus. The
summaries do not purport to be complete and are subject to, and are qualified by
reference to, all of the provisions of the indenture for a series of Notes. A
form of an indenture has been filed as an exhibit to the Registration Statement
of which this prospectus is a part. The depositor will provide a copy of the
indenture (without exhibits) relating to any series of Notes without charge upon
written request of a securityholder of that series addressed to ACE Securities
Corp., 6525 Morrison Boulevard, Suite 318, Charlotte, North Carolina 28211,
Attention: Elizabeth S. Eldridge.
EVENTS OF DEFAULT
Events of default under the indenture for each series of Notes will
generally include:
o a default for thirty days (or any other number of days specified
in the prospectus supplement) or more in the payment of any
principal of or interest on a Note of that series, to the extent
specified in the prospectus supplement;
o failure to perform any other covenant of the depositor or the
trust fund in the indenture that continues for a period of sixty
days (or any other number of days specified in the prospectus
supplement or the indenture) after notice of the failure is given
in accordance with the procedures described in the prospectus
supplement;
o any representation or warranty made by the depositor or the trust
fund in the indenture or in any certificate or other writing
delivered pursuant to the indenture or in connection with the
indenture with respect to or affecting that series having been
incorrect in a material respect as of the time made, and that
breach is not cured within sixty days (or any other number of
days specified in the prospectus supplement) after notice of the
breach is given in accordance with the procedures described in
the prospectus supplement;
o specified events of bankruptcy, insolvency, receivership or
liquidation of the trust fund; or
o any other event of default provided with respect to Notes of that
series.
If an event of default with respect to the Notes of any series at the
time outstanding occurs and is continuing, subject to and in accordance with the
terms of the indenture, either the indenture trustee or the holders of a
majority of the then total outstanding amount of the Notes of that series may
declare the principal amount (or, if the Notes of that series are Accrual
Securities, that portion of the principal amount as may be specified in the
terms of that series, as provided in the indenture) of all the Notes of that
series to be due and payable immediately. That declaration may, under some
circumstances, be rescinded and annulled by the securityholders of a majority in
total outstanding amount of the Notes of that series.
If, following an event of default with respect to any series of Notes,
the Notes of that series have been declared to be due and payable, the indenture
trustee may, in its discretion, notwithstanding that acceleration, elect to
maintain possession of the collateral securing the Notes of that series and to
continue to apply distributions on that collateral as if there had been no
declaration of acceleration if that collateral continues to provide sufficient
funds for the payment of principal of and interest on the Notes of that series
as they would have become due if there had not been that declaration. In
addition, the indenture trustee may not sell or otherwise liquidate the
collateral securing the Notes of a series following an event of default, other
than a default in the payment of any principal or interest on any Note of that
series for thirty days or more, unless
(1) the holders of 100% (or any other percentage specified in the
indenture) of the then total outstanding amount of the Notes of that
series consent to that sale;
(2) the proceeds of that sale or liquidation are sufficient to
pay in full the principal of and accrued interest, due and unpaid, on
the outstanding Notes of that series at the date of that sale; or
(3) the indenture trustee determines that that collateral would
not be sufficient on an ongoing basis to make all payments on the
Notes as those payments would have become due if the Notes had not
been declared due and payable, and the indenture trustee obtains the
consent of the holders of 66 2/3% (or any other percentage specified
in the indenture) of the then total outstanding amount of the Notes of
that series.
If so specified in the prospectus supplement, only holders of
particular classes of Notes will have the right to declare the Notes of that
series to be immediately due and payable in the event of a payment default, as
described above, and to exercise the remedies described above.
If the indenture trustee liquidates the collateral in connection with
an event of default involving a default for thirty days (or any other number of
days specified in the indenture) or more in the payment of principal of or
interest on the Notes of a series, the indenture provides that the indenture
trustee will have a prior lien on the proceeds of any liquidation for unpaid
fees and expenses. As a result, upon the occurrence of that event of default,
the amount available for distribution to the securityholders would be less than
would otherwise be the case. However, the indenture trustee may not institute a
proceeding for the enforcement of its lien except in connection with a
proceeding for the enforcement of the lien of the indenture for the benefit of
the securityholders after the occurrence of that event of default.
To the extent provided in the prospectus supplement, in the event the
principal of the Notes of a series is declared due and payable, as described
above, the holders of any Notes issued at a discount from par may be entitled to
receive no more than an amount equal to the unpaid principal amount of the Notes
less the amount of the discount that is unamortized.
Subject to the provisions of the indenture relating to the duties of
the indenture trustee, in case an event of default occurs and continues for a
series of Notes, the indenture trustee will be under no obligation to exercise
any of the rights or powers under the indenture at the request or direction of
any of the securityholders of that series, unless those holders offer to the
indenture trustee security or indemnity satisfactory to it against the costs,
expenses and liabilities that might be incurred by it in complying with that
request or direction. Subject to those provisions for indemnification and some
limitations contained in the indenture, the holders of a majority of the then
total outstanding amount of the Notes of that series 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 any trust or power conferred on
the indenture trustee with respect to the Notes of that series, and the holders
of a majority of the then total outstanding amount of the Notes of that series
may, in some cases, waive any default with respect to the Notes, except a
default in the payment of principal or interest or a default in respect of a
covenant or provision of the indenture that cannot be modified without the
waiver or consent of all the holders of the outstanding Notes of that series
affected.
DISCHARGE OF INDENTURE
The indenture will be discharged, subject to the provisions of the
indenture, for a series of Notes (except for continuing rights specified in the
indenture) upon the delivery to the indenture trustee for cancellation of all
the Notes of that series or, with some limitations, upon deposit with the
indenture trustee of funds sufficient for the payment in full of all of the
Notes of that series.
With some limitations, the indenture will provide that, if specified
for the Notes of any series, the related trust fund will be discharged from any
and all obligations in respect of the Notes of that series (except for
obligations specified in the indenture including obligations relating to
temporary Notes and exchange of Notes, to register the transfer of or exchange
Notes of that series, to replace stolen, lost or mutilated Notes of that series,
to maintain paying agencies and to hold monies for payment in trust) upon the
deposit with the indenture trustee, in trust, of money and/or direct obligations
of or obligations guaranteed by the United States of America which through the
payment of interest and principal in respect of the Notes in accordance with
their terms will provide money in an amount sufficient to pay the principal of
and each installment of interest on the Notes of that series on the maturity
date for those Notes and any installment of interest on those Notes in
accordance with the terms of the indenture and the Notes of that series. In the
event of any defeasance and discharge of Notes of that series, holders of Notes
of that series would be able to look only to that money and/or those direct
obligations for payment of principal and interest, if any, on their Notes until
maturity.
INDENTURE TRUSTEE'S ANNUAL REPORT
The indenture trustee for each series of Notes will be required to
mail each year to all related securityholders a brief report, as provided in the
indenture, relating to its eligibility and qualification to continue as
indenture trustee under the related indenture, any amounts advanced by it under
the indenture, the amount, interest rate and maturity date of indebtedness owing
by that Trust to the applicable indenture trustee in its individual capacity,
the property and funds physically held by the indenture trustee in its capacity
as indenture trustee and any action taken by it that materially affects the
Notes and that has not been previously reported.
THE INDENTURE TRUSTEE
The indenture trustee for a series of Notes will be specified in the
prospectus supplement. The indenture trustee for any series may resign at any
time in accordance with the terms of the indenture, in which event the depositor
or the appropriate party designated in the indenture will be obligated to
appoint a successor trustee for that series. The depositor or the appropriate
party designated in the indenture may also remove any indenture trustee if that
indenture trustee ceases to be eligible to continue as the indenture trustee
under the related indenture, if that indenture trustee becomes insolvent or for
any other grounds specified in the indenture. In those circumstances the
depositor or the appropriate party designated in the indenture will be obligated
to appoint a successor trustee for the applicable series of Notes. Any
resignation or removal of the indenture trustee and appointment of a successor
trustee for any series of Notes does not become effective until acceptance of
the appointment by the successor trustee for that series.
The bank or trust company serving as indenture trustee may have a
banking relationship with the depositor or any of its affiliates, a servicer or
any of its affiliates or the master servicer or any of its affiliates. To the
extent consistent with its fiduciary obligations as indenture trustee, the
indenture trustee may delegate its duties to one or more agents as provided in
the indenture and the Agreement.
DESCRIPTION OF CREDIT SUPPORT
GENERAL
For any series of Notes or Certificates, as applicable, credit support
may be provided for one or more classes of the series or the related Assets.
Credit support may be in the form of:
o the subordination of one or more classes of Notes or
Certificates, as applicable;
o letters of credit;
o insurance policies;
o guarantees;
o the establishment of one or more reserve funds; or
o any other method of credit support described in the prospectus
supplement, or any combination of the foregoing.
Any form of credit support may be structured so as to be drawn upon by
more than one series to the extent described in the prospectus supplement.
The coverage provided by any credit support will be described in the
prospectus supplement. Generally, that coverage will not provide protection
against all risks of loss and will not guarantee repayment of the entire
Security Balance of the Notes or Certificates, as applicable, and interest on
the Security Balance. If losses or shortfalls occur that exceed the amount
covered by credit support or that are not covered by credit support,
securityholders will bear their allocable share of deficiencies. Moreover, if a
form of credit support covers more than one series of Notes or Certificates, as
applicable (each, a "Covered Trust"), securityholders evidencing interests in
any of those Covered Trusts will be subject to the risk that the credit support
will be exhausted by the claims of other Covered Trusts before that Covered
Trust receiving any of its intended share of that coverage.
If credit support is provided for one or more classes of Notes or
Certificates, as applicable, of a series, or the related Assets, the prospectus
supplement will include a description of
(a) the nature and amount of coverage under that credit support,
(b) any conditions to payment under the prospectus supplement not
otherwise described in this prospectus,
(c) the conditions (if any) under which the amount of coverage under
that credit support may be reduced and under which that credit
support may be terminated or replaced
and
(d) the material provisions relating to that credit support.
Additionally, the prospectus supplement will set forth information with respect
to the obligor under any financial guaranty insurance policy, letter of credit,
guarantee or similar instrument of credit support, including (
(1) a brief description of its principal business activities,
(2) its principal place of business, place of incorporation and the
jurisdiction under which it is chartered or licensed to do
business,
(3) if applicable, the identity of regulatory agencies that exercise
primary jurisdiction over the conduct of its business and
(4) its total assets, and its stockholders' or policyholders'
surplus, if applicable, as of the date specified in the
prospectus supplement.
SUBORDINATE SECURITIES
One or more classes of Notes or Certificates, as applicable, of a
series may be Subordinate Notes or Subordinate Certificates, as applicable, if
specified in the prospectus supplement. The rights of the holders of Subordinate
Notes or Subordinate Certificates, as applicable, to receive distributions of
principal and interest from the Collection Account on any Distribution Date will
be subordinated to those rights of the holders of Senior Notes or Senior
Certificates, as applicable. The subordination of a class may apply only in the
event of (or may be limited to) particular types of losses or shortfalls. The
prospectus supplement will set forth information concerning the amount of
subordination of a class or classes of Subordinate Notes or Subordinate
Certificates, as applicable, in a series, the circumstances in which that
subordination will be applicable and the manner, if any, in which the amount of
subordination will be effected.
CROSS-SUPPORT PROVISIONS
If the Assets for a series are divided into separate groups, each
supporting a separate class or classes of Notes or Certificates, as applicable,
of a series, credit support may be provided by cross-support provisions
requiring that distributions be made on Senior Notes or Senior Certificates, as
applicable, evidencing interests in one group of mortgage loans before
distributions on Subordinate Notes or Subordinate Certificates, as applicable,
evidencing interests in a different group of mortgage loans within the trust
fund. The prospectus supplement for a series that includes a cross-support
provision will describe the manner and conditions for applying those provisions.
LIMITED GUARANTEE
If specified in the prospectus supplement for a series of Notes or
Certificates, as applicable, credit enhancement may be provided in the form of a
limited guarantee issued by a guarantor named in the prospectus supplement.
FINANCIAL GUARANTY INSURANCE POLICY OR SURETY BOND
Credit enhancement may be provided in the form of a financial guaranty
insurance policy or a surety bond issued by an insurer named in the policy or
surety bond, if specified in the prospectus supplement.
LETTER OF CREDIT
Alternative credit support for a series of Notes or Certificates, as
applicable, may be provided by the issuance of a letter of credit by the bank or
financial institution specified in the prospectus supplement. The coverage,
amount and frequency of any reduction in coverage provided by a letter of credit
issued for a series of Notes or Certificates, as applicable, will be set forth
in the prospectus supplement relating to that series.
POOL INSURANCE POLICIES
If specified in the prospectus supplement relating to a series of
Notes or Certificates, as applicable, a pool insurance policy for the mortgage
loans in the related trust fund will be obtained. The pool insurance policy will
cover any loss (subject to the limitations described in the prospectus
supplement) by reason of default to the extent a related mortgage loan is not
covered by any primary mortgage insurance policy. The amount and principal terms
of any pool insurance coverage will be set forth in the prospectus supplement.
SPECIAL HAZARD INSURANCE POLICIES
A special hazard insurance policy may also be obtained for the related
trust fund, if specified in the prospectus supplement, in the amount set forth
in the prospectus supplement. The special hazard insurance policy will, subject
to the limitations described in the prospectus supplement, protect against loss
by reason of damage to Mortgaged Properties caused by hazards not insured
against under the standard form of hazard insurance policy for the respective
states, in which the Mortgaged Properties are located. The amount and principal
terms of any special hazard insurance coverage will be set forth in the
prospectus supplement.
BORROWER BANKRUPTCY BOND
Losses resulting from a bankruptcy proceeding relating to a borrower
affecting the mortgage loans in a trust fund for a series of Notes or
Certificates, as applicable, will, if specified in the prospectus supplement, be
covered under a borrower bankruptcy bond (or any other instrument that will not
result in a downgrading of the rating of the Notes or Certificates, as
applicable, of a series by the rating agency or agencies that rate that series).
Any borrower bankruptcy bond or any other instrument will provide for coverage
in an amount meeting the criteria of the rating agency or agencies rating the
Notes or Certificates, as applicable, of the related series, which amount will
be set forth in the prospectus supplement. The amount and principal terms of any
borrower bankruptcy coverage will be set forth in the prospectus supplement.
RESERVE FUNDS
If so provided in the prospectus supplement for a series of Notes or
Certificates, as applicable, deficiencies in amounts otherwise payable on those
Notes or Certificates, as applicable, or specific classes of Notes or
Certificates, as applicable, will be covered by one or more reserve funds in
which cash, a letter of credit, Permitted Investments, a demand note or a
combination of these will be deposited, in the amounts so specified in the
prospectus supplement. The reserve funds for a series may also be funded over
time by depositing a specified amount of the distributions received on the
related Assets as specified in the prospectus supplement.
Amounts on deposit in any reserve fund for a series, together with the
reinvestment income on these amounts, if any, will be applied for the purposes,
in the manner, and to the extent specified in the prospectus supplement. A
reserve fund may be provided to increase the likelihood of timely distributions
of principal of and interest on the Notes or Certificates, as applicable. If
specified in the prospectus supplement, reserve funds may be established to
provide limited protection against only some types of losses and shortfalls.
Following each Distribution Date amounts in a reserve fund in excess of any
amount required to be maintained in the reserve fund may be released from the
reserve fund under the conditions and to the extent specified in the prospectus
supplement and will not be available for further application to the Notes or
Certificates, as applicable.
Money deposited in any reserve funds will be invested in Permitted
Investments, to the extent specified in the prospectus supplement. To the extent
specified in the prospectus supplement, any reinvestment income or other gain
from those investments will be credited to the related reserve fund for that
series, and any loss resulting from those investments will be charged to the
reserve fund. However, that income may be payable to any related servicer or
another service provider or other entity. To the extent specified in the
prospectus supplement, the reserve fund, if any, for a series will not be a part
of the trust fund.
Additional information concerning any reserve fund will be set forth
in the prospectus supplement, including the initial balance of the reserve fund,
the balance required to be maintained in the reserve fund, the manner in which
the required balance will decrease over time, the manner of funding the reserve
fund, the purposes for which funds in the reserve fund may be applied to make
distributions to securityholders and use of investment earnings from the reserve
fund, if any.
OVERCOLLATERALIZATION
If specified in the prospectus supplement, subordination provisions of
a trust fund may be used to accelerate to a limited extent the amortization of
one or more classes of Notes or Certificates, as applicable, relative to the
amortization of the related Assets. The accelerated amortization is achieved by
the application of excess interest to the payment of principal of one or more
classes of Notes or Certificates, as applicable. This acceleration feature
creates, for the Assets or groups of Assets, overcollateralization, which is the
excess of the total principal balance of the related Assets, or a group of
related Assets, over the principal balance of the related class or classes of
Notes or Certificates, as applicable. This acceleration may continue for the
life of the related Security, or may be limited. In the case of limited
acceleration, once the required level of overcollateralization is reached, and
subject to the provisions specified in the prospectus supplement, the limited
acceleration feature may cease, unless necessary to maintain the required level
of overcollateralization.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains summaries, which are general in
nature, of legal aspects of loans secured by single-family residential
properties. Because these legal aspects are governed primarily by applicable
state law (which laws may differ substantially), the summaries do not purport to
be complete nor to reflect the laws of any particular state, nor to encompass
the laws of all states in which the security for the mortgage loans is situated.
The summaries are qualified in their entirety by reference to the applicable
federal and state laws governing the mortgage loans. In this regard, the
following discussion does not fully reflect federal regulations for FHA loans
and VA loans. See "Description of The Trust Funds--FHA Loans and VA Loans,"
"Description of the Agreements--Material Terms of the Pooling and Servicing
Agreements and Underlying Servicing Agreements--FHA Insurance and VA Guarantees"
and "Description of the Trust Funds--Assets."
GENERAL
All of the mortgage loans are evidenced by a note or bond and secured
by instruments granting a security interest in real property which may be
mortgages, deeds of trust, security deeds or deeds to secure debt, depending on
the prevailing practice and law in the state in which the Mortgaged Property is
located. Mortgages, deeds of trust and deeds to secure debt are in this
prospectus collectively referred to as "mortgages." Any of the foregoing types
of mortgages will create a lien upon, or grant a title interest in, the subject
property, the priority of which will depend on the terms of the particular
security instrument, as well as separate, recorded, contractual arrangements
with others holding interests in the mortgaged property, the knowledge of the
parties to that instrument as well as the order of recordation of the instrument
in the appropriate public recording office. However, recording does not
generally establish priority over governmental claims for real estate taxes and
assessments and other charges imposed under governmental police powers.
TYPES OF MORTGAGE INSTRUMENTS
A mortgage either creates a lien against or constitutes a conveyance
of real property between two parties--a borrower (usually the owner of the
subject property) and a mortgagee (the lender). In contrast, a deed of trust is
a three-party instrument, among a trustor (the equivalent of a borrower), a
trustee to whom the mortgaged property is conveyed, and a beneficiary (the
lender) for whose benefit the conveyance is made. As used in this prospectus,
unless the context otherwise requires, "borrower" includes the trustor under a
deed of trust and a grantor under a security deed or a deed to secure debt.
Under a deed of trust, the borrower grants the property, irrevocably
until the debt is paid, in trust, generally with a power of sale as security for
the indebtedness evidenced by the related note. A deed to secure debt typically
has two parties. By executing a deed to secure debt, the grantor conveys title
to, as opposed to merely creating a lien upon, the subject property to the
grantee until the underlying debt is repaid, generally with a power of sale as
security for the indebtedness evidenced by the related mortgage note.
In case the borrower under a mortgage is a land trust, there would be
an additional party because legal title to the property is held by a land
trustee under a land trust agreement for the benefit of the borrower. At
origination of a mortgage loan involving a land trust, the borrower executes a
separate undertaking to make payments on the mortgage note. The mortgagee's
authority under a mortgage, the trustee's authority under a deed of trust and
the grantee's authority under a deed to secure debt are governed by the express
provisions of the mortgage, the law of the state in which the real property is
located, some federal laws (including the Soldiers' and Sailors' Civil Relief
Act of 1940) and, in some cases, in deed of trust transactions, the directions
of the beneficiary.
INTEREST IN REAL PROPERTY
The real property covered by a mortgage, deed of trust, security deed
or deed to secure debt is most often the fee estate in land and improvements.
However, that instrument may encumber other interests in real property such as a
tenant's interest in a lease of land or improvements, or both, and the leasehold
estate created by that lease. An instrument covering an interest in real
property other than the fee estate requires special provisions in the instrument
creating that interest or in the mortgage, deed of trust, security deed or deed
to secure debt, to protect the mortgagee against termination of that interest
before the mortgage, deed of trust, security deed or deed to secure debt is
paid. The depositor, the Asset Seller or other entity specified in the
prospectus supplement will make representations and warranties in the Agreement
or representations and warranties will be assigned to the trustee for any
mortgage loans secured by an interest in a leasehold estate. Those
representation and warranties, if applicable, will be set forth in the
prospectus supplement.
COOPERATIVE LOANS
If specified in the prospectus supplement, the mortgage loans may also
consist of cooperative apartment loans ("Cooperative Loans") secured by security
interests in shares issued by a cooperative housing corporation (a
"Cooperative") and in the related proprietary leases or occupancy agreements
granting exclusive rights to occupy specific dwelling units in the cooperatives'
buildings. The security agreement will create a lien upon, or grant a title
interest in, the property that it covers, the priority of which will depend on
the terms of the particular security agreement as well as the order of
recordation of the agreement in the appropriate recording office. That lien or
title interest is not prior to the lien for real estate taxes and assessments
and other charges imposed under governmental police powers.
Each Cooperative owns in fee or has a leasehold interest in all the
real property and owns in fee or leases the building and all separate dwelling
units in the building. The Cooperative is directly responsible for property
management and, in most cases, payment of real estate taxes, other governmental
impositions and hazard and liability insurance. If there is a blanket mortgage
or mortgages on the cooperative apartment building or underlying land, as is
generally the case, or an underlying lease of the land, as is the case in some
instances, the Cooperative, as property borrower, or lessee, as the case may be,
is also responsible for meeting these mortgage or rental obligations. A blanket
mortgage is ordinarily incurred by the cooperative in connection with either the
construction or purchase of the Cooperative's apartment building or obtaining of
capital by the Cooperative. The interest of the occupant under proprietary
leases or occupancy agreements as to which that Cooperative is the landlord are
generally subordinate to the interest of the holder of a blanket mortgage and to
the interest of the holder of a land lease.
If the Cooperative is unable to meet the payment obligations (1)
arising under a blanket mortgage, the mortgagee holding a blanket mortgage could
foreclose on that mortgage and terminate all subordinate proprietary leases and
occupancy agreements or (2) arising under its land lease, the holder of the
landlord's interest under the land lease could terminate it and all subordinate
proprietary leases and occupancy agreements. Also, a blanket mortgage on a
cooperative may provide financing in the form of a mortgage that does not fully
amortize, with a significant portion of principal being due in one final payment
at maturity. The inability of the Cooperative to refinance a mortgage and its
consequent inability to make that final payment could lead to foreclosure by the
mortgagee. Similarly, a land lease has an expiration date and the inability of
the Cooperative to extend its term or, in the alternative, to purchase the land
could lead to termination of the Cooperative's interest in the property and
termination of all proprietary leases and occupancy agreement. In either event,
a foreclosure by the holder of a blanket mortgage or the termination of the
underlying lease could eliminate or significantly diminish the value of any
collateral held by the lender that financed the purchase by an individual tenant
stockholder of cooperative shares or, in the case of the mortgage loans, the
collateral securing the Cooperative Loans.
The Cooperative is owned by tenant-stockholders who, through ownership
of stock or shares in the corporation, receive proprietary lease or occupancy
agreements that confer exclusive rights to occupy specific units. Generally, a
tenant-stockholder of a Cooperative must make a monthly payment to the
Cooperative representing that tenant-stockholder's pro rata share of the
Cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a Cooperative and accompanying occupancy rights are financed through
a Cooperative Loan evidenced by a promissory note and secured by an assignment
of and a security interest in the occupancy agreement or proprietary lease and a
security interest in the related Cooperative shares. The lender generally takes
possession of the share certificate and a counterpart of the proprietary lease
or occupancy agreement and a financing statement covering the proprietary lease
or occupancy agreement and the cooperative shares is filed in the appropriate
state and local offices to perfect the lender's interest in its collateral.
Subject to the limitations discussed below, upon default of the
tenant-stockholder, the lender may sue for judgment on the promissory note,
dispose of the collateral at a public or private sale or otherwise proceed
against the collateral or tenant-stockholder as an individual as provided in the
security agreement covering the assignment of the proprietary lease or occupancy
agreement and the pledge of Cooperative shares. See "--Foreclosure--Cooperative
Loans" below.
LAND SALE CONTRACTS
Under an installment land sale contract for the sale of real estate (a
"land sale contract") the contract seller (hereinafter referred to as the
"contract lender") retains legal title to the property and enters into an
agreement with the contract purchaser (hereinafter referred to as the "contract
borrower") for the payment of the purchase price, plus interest, over the term
of the land sale contract. Only after full performance by the borrower of the
contract is the contract lender obligated to convey title to the real estate to
the purchaser. As with mortgage or deed of trust financing, during the effective
period of the land sale contract, the contract borrower is responsible for
maintaining the property in good condition and for paying real estate taxes,
assessments and hazard insurance premiums associated with the property.
The method of enforcing the rights of the contract lender under an
installment contract varies on a state-by-state basis depending on the extent to
which state courts are willing, or able pursuant to state statute, to enforce
the contract strictly according to its terms. The terms of land sale contracts
generally provide that upon default by the contract borrower, the borrower loses
his or her right to occupy the property, the entire indebtedness is accelerated,
and the buyer's equitable interest in the property is forfeited. The contract
lender in that situation does not have to foreclose to obtain title to the
property, although in some cases a quiet title action is in order if the
contract borrower has filed the land sale contract in local land records and an
ejectment action may be necessary to recover possession.
In a few states, particularly in cases of contract borrower default
during the early years of a land sale contract, the courts will permit ejectment
of the buyer and a forfeiture of his or her interest in the property. However,
most state legislatures have enacted provisions by analogy to mortgage law
protecting borrowers under land sale contracts from the harsh consequences of
forfeiture. Under those statues, a judicial contract may be reinstated upon full
payment of the default amount and the borrower may have a post-foreclosure
statutory redemption right. In other states, courts in equity may permit a
contract borrower with significant investment in the property under a land sale
contract for the sale of real estate to share the proceeds of sale of the
property after the indebtedness is repaid or may otherwise refuse to enforce the
forfeiture clause. Nevertheless, generally speaking, the contract lender's
procedures for obtaining possession and clear title under a land sale contract
for the sale of real estate in a particular state are simpler and less time
consuming and costly than are the procedures for foreclosing and obtaining clear
title to a mortgaged property.
FORECLOSURE
GENERAL
Foreclosure is a legal procedure that allows the mortgagee to recover
its mortgage debt by enforcing its rights and available legal remedies under the
mortgage. If the mortgagor defaults in payment or performance of its obligations
under the note or mortgage, the mortgagee has the right to institute foreclosure
proceedings to sell the mortgaged property at public auction to satisfy the
indebtedness.
Foreclosure procedures for the enforcement of a mortgage vary from
state to state. Two primary methods of foreclosing a mortgage are judicial
foreclosure and non-judicial foreclosure pursuant to a power of sale granted in
the mortgage instrument. There are several other foreclosure procedures
available in some states that are either infrequently used or available only in
some limited circumstances, such as strict foreclosure.
JUDICIAL FORECLOSURE
A judicial foreclosure proceeding is conducted in a court having
jurisdiction over the mortgaged property. Generally, the action is initiated by
the service of legal pleadings upon all parties having an interest of record in
the real property. Delays in completion of the foreclosure may occasionally
result from difficulties in locating defendants. When the lender's right to
foreclose is contested, the legal proceedings can be time-consuming. Upon
successful completion of a judicial foreclosure proceeding, the court generally
issues a judgment of foreclosure and appoints a referee or other officer to
conduct a public sale of the mortgaged property, the proceeds of which are used
to satisfy the judgment. Those sales are made in accordance with procedures that
vary from state to state.
EQUITABLE LIMITATIONS ON ENFORCEABILITY OF CERTAIN PROVISIONS
United States courts have traditionally imposed general equitable
principles to limit the remedies available to a mortgagee in connection with
foreclosure. These equitable principles are generally designed to relieve the
borrower from the legal effect of mortgage defaults, to the extent that the
effect is perceived as harsh or unfair. Relying on those principles, a court may
alter the specific terms of a loan to the extent it considers necessary to
prevent or remedy an injustice, undue oppression or overreaching, or may require
the lender to undertake affirmative and expensive actions to determine the cause
of the borrower's default and the likelihood that the borrower will be able to
reinstate the loan.
In some cases, courts have substituted their judgment for the lender's
and have required that lenders reinstate loans or recast payment schedules to
accommodate borrowers who are suffering from a temporary financial disability.
In other cases, courts have limited the right of the lender to foreclose if the
default under the mortgage is not monetary, e.g., the borrower failed to
maintain the mortgaged property adequately or the borrower executed a junior
mortgage on the mortgaged property. The exercise by the court of its equity
powers will depend on the individual circumstances of each case presented to it.
Finally, some courts have been faced with the issue of whether federal or state
constitutional provisions reflecting due process concerns for adequate notice
require that a borrower receive notice in addition to statutorily-prescribed
minimum notice. For the most part, these cases have upheld the reasonableness of
the notice provisions or have found that a public sale under a mortgage
providing for a power of sale does not involve sufficient state action to afford
constitutional protections to the borrower.
NON-JUDICIAL FORECLOSURE/POWER OF SALE
Foreclosure of a deed of trust is generally accomplished by a
non-judicial trustee's sale pursuant to the power of sale granted in the deed of
trust. A power of sale is typically granted in a deed of trust. It may also be
contained in any other type of mortgage instrument. A power of sale allows a
non-judicial public sale to be conducted generally following a request from the
beneficiary/lender to the trustee to sell the property upon any default by the
borrower under the terms of the mortgage note or the mortgage instrument and
after notice of sale is given in accordance with the terms of the mortgage
instrument, as well as applicable state law.
In some states, before the sale, the trustee under a deed of trust
must record a notice of default and notice of sale and send a copy to the
borrower and to any other party who has recorded a request for a copy of a
notice of default and notice of sale. In addition, in some states the trustee
must provide notice to any other party having an interest of record in the real
property, including junior lienholders. A notice of sale must be posted in a
public place and, in most states, published for a specified period of time in
one or more newspapers. The borrower or junior lienholder may then have the
right, during a reinstatement period required in some states, to cure the
default by paying the entire actual amount in arrears (without acceleration)
plus the expenses incurred in enforcing the obligation. In other states, the
borrower or the junior lienholder is not provided a period to reinstate the
loan, but has only the right to pay off the entire debt to prevent the
foreclosure sale. Generally, the procedure for public sale, the parties entitled
to notice, the method of giving notice and the applicable time periods are
governed by state law and vary among the states. Foreclosure of a deed to secure
debt is also generally accomplished by a non-judicial sale similar to that
required by a deed of trust, except that the lender or its agent, rather than a
trustee, is typically empowered to perform the sale in accordance with the terms
of the deed to secure debt and applicable law.
PUBLIC SALE
A third party may be unwilling to purchase a mortgaged property at a
public sale because of the difficulty in determining the value of that property
at the time of sale, due to, among other things, redemption rights that may
exist and the possibility of physical deterioration of the property during the
foreclosure proceedings. For these reasons, it is common for the lender to
purchase the mortgaged property for an amount equal to or less than the
underlying debt and accrued and unpaid interest plus the expenses of
foreclosure. Generally, state law controls the amount of foreclosure costs and
expenses that may be recovered by a lender. Thereafter, subject to the
borrower's right in some states to remain in possession during a redemption
period, if applicable, the lender will become the owner of the property and have
both the benefits and burdens of ownership of the mortgaged property. For
example, the lender will become obligated to pay taxes, obtain casualty
insurance and to make those repairs at its own expense as are necessary to
render the property suitable for sale. The lender will commonly obtain the
services of a real estate broker and pay the broker's commission in connection
with the sale of the property. Depending on market conditions, the ultimate
proceeds of the sale of the property may not equal the lender's investment in
the property. Moreover, a lender commonly incurs substantial legal fees and
court costs in acquiring a mortgaged property through contested foreclosure
and/or bankruptcy proceedings. Generally, state law controls the amount of
foreclosure expenses and costs, including attorneys' fees, that may be recovered
by a lender.
A junior mortgagee may not foreclose on the property securing the
junior mortgage unless it forecloses subject to senior mortgages and any other
prior liens, in which case it may be obliged to make payments on the senior
mortgages to avoid their foreclosure. In addition, if the foreclosure of a
junior mortgage triggers the enforcement of a "due-on-sale" clause contained in
a senior mortgage, the junior mortgagee may be required to pay the full amount
of the senior mortgage to avoid its foreclosure. Accordingly, for those mortgage
loans, if any, that are junior mortgage loans, if the lender purchases the
property the lender's title will be subject to all senior mortgages, prior liens
and specific governmental liens.
The proceeds received by the referee or trustee from the sale are
applied first to the costs, fees and expenses of sale and then in satisfaction
of the indebtedness secured by the mortgage under which the sale was conducted.
Any proceeds remaining after satisfaction of senior mortgage debt are generally
payable to the holders of junior mortgages and other liens and claims in order
of their priority, whether or not the borrower is in default. Any additional
proceeds are generally payable to the borrower. The payment of the proceeds to
the holders of junior mortgages may occur in the foreclosure action of the
senior mortgage or a subsequent ancillary proceeding or may require the
institution of separate legal proceedings by those holders.
RIGHTS OF REDEMPTION
The purposes of a foreclosure action are to enable the mortgagee to
realize upon its security and to bar the borrower, and all persons who have an
interest in the property that is subordinate to the mortgage being foreclosed,
from exercise of their "equity of redemption." The doctrine of equity of
redemption provides that, until the property covered by a mortgage has been sold
in accordance with a properly conducted foreclosure and foreclosure sale, those
having an interest that is subordinate to that of the foreclosing mortgagee have
an equity of redemption and may redeem the property by paying the entire debt
with interest. In addition, in some states, when a foreclosure action has begun,
the redeeming party must pay some of the costs of that action. Those having an
equity of redemption must generally be made parties and joined in the
foreclosure proceeding in order for their equity of redemption to be cut off and
terminated.
The equity of redemption is a common-law (non-statutory) right that
exists before completion of the foreclosure, is not waivable by the borrower,
must be exercised before foreclosure sale and should be distinguished from the
post-sale statutory rights of redemption. In some states, after sale pursuant to
a deed of trust or foreclosure of a mortgage, the borrower and foreclosed junior
lienors are given a statutory period in which to redeem the property from the
foreclosure sale. In some states, statutory redemption may occur only upon
payment of the foreclosure sale price. In other states, redemption may be
authorized if the former borrower pays only a portion of the sums due. The
effect of a statutory right of redemption is to diminish the ability of the
lender to sell the foreclosed property. The exercise of a right of redemption
would defeat the title of any purchaser from a foreclosure sale or sale under a
deed of trust. Consequently, the practical effect of the redemption right is to
force the lender to maintain the property and pay the expenses of ownership
until the redemption period has expired. In some states, a post-sale statutory
right of redemption may exist following a judicial foreclosure, but not
following a trustee's sale under a deed of trust.
Under the REMIC Provisions currently in effect, property acquired by
foreclosure generally must not be held for more than three years from the close
of the calendar year of its acquisition. For a series of Notes or Certificates,
as applicable, for which an election is made to qualify the trust fund or a part
of the trust fund as a REMIC, the Agreement will permit foreclosed property to
be held for more than such three year period if the Internal Revenue Service
grants an extension of time within which to sell the property or independent
counsel renders an opinion to the effect that holding the property for that
additional period is permissible under the REMIC Provisions.
COOPERATIVE LOANS
The Cooperative shares owned by the tenant-stockholder and pledged to
the lender are, in almost all cases, subject to restrictions on transfer as set
forth in the Cooperative's certificate of incorporation and bylaws, as well as
the proprietary lease or occupancy agreement, and may be canceled by the
Cooperative for failure by the tenant-stockholder to pay rent or other
obligations or charges owed by that tenant-stockholder, including mechanics'
liens against the cooperative apartment building incurred by that
tenant-stockholder. The proprietary lease or occupancy agreement generally
permit the Cooperative to terminate the lease or agreement in the event a
borrower fails to make payments or defaults in the performance of covenants
required under the proprietary lease or occupancy agreeement. Typically, the
lender and the Cooperative enter into a recognition agreement that establishes
the rights and obligations of both parties in the event of a default by the
tenant-stockholder under the proprietary lease or occupancy agreement will
usually constitute a default under the security agreement between the lender and
the tenant-stockholder.
The recognition agreement generally provides that, if the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate that lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the Cooperative will recognize the
lender's lien against proceeds from the sale of the Cooperative apartment,
subject, however, to the Cooperative's right to sums due under that proprietary
lease or occupancy agreement. The total amount owed to the Cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the Cooperative Loan and accrued and unpaid interest on the
Cooperative Loan.
Recognition agreements also provide that in the event of a foreclosure
on a Cooperative Loan, the lender must obtain the approval or consent of the
Cooperative as required by the proprietary lease before transferring the
Cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited in any rights it may have to dispossess the tenant-stockholders.
In some states, foreclosure on the Cooperative shares is accomplished
by a sale in accordance with the provisions of Article 9 of the UCC and the
security agreement relating to those shares. Article 9 of the UCC requires that
a sale be conducted in a "commercially reasonable" manner. Whether a foreclosure
sale has been conducted in a "commercially reasonable" manner will depend on the
facts in each case. In determining commercial reasonableness, a court will look
to the notice given the debtor and the method, manner, time, place and terms of
the foreclosure. Generally, a sale conducted according to the usual practice of
banks selling similar collateral will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be
applied first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the Cooperatives to receive sums due under the
proprietary lease or occupancy agreement. If there are proceeds remaining, the
lender must account to the tenant-stockholder for the surplus. Conversely, if a
portion of the indebtedness remains unpaid, the tenant-stockholder is generally
responsible for the deficiency.
In the case of foreclosure on a building that was converted from a
rental building to a building owned by a Cooperative under a non-eviction plan,
some states require that a purchaser at a foreclosure sale take the property
subject to rent control and rent stabilization laws that apply to tenants who
elected to remain in a building so converted.
JUNIOR MORTGAGES
Some of the mortgage loans may be secured by junior mortgages or deeds
of trust, that are subordinate to first or other senior mortgages or deeds of
trust held by other lenders. The rights of the trust fund as the holder of a
junior deed of trust or a junior mortgage are subordinate in lien and in payment
to those of the holder of the senior mortgage or deed of trust, including the
prior rights of the senior mortgagee or beneficiary to receive and apply hazard
insurance and condemnation proceeds and, upon default of the borrower, to cause
a foreclosure on the property. Upon completion of the foreclosure proceedings by
the holder of the senior mortgage or the sale pursuant to the deed of trust, the
junior mortgagee's or junior beneficiary's lien will be extinguished unless the
junior lienholder satisfies the defaulted senior loan or asserts its subordinate
interest in a property in foreclosure proceedings. See "--Foreclosure" above.
Furthermore, because the terms of the junior mortgage or deed of trust
are subordinate to the terms of the first mortgage or deed of trust, in the
event of a conflict between the terms of the first mortgage or deed of trust and
the junior mortgage or deed of trust, the terms of the first mortgage or deed of
trust will generally govern. Upon a failure of the borrower or trustor to
perform any of its obligations, the senior mortgagee or beneficiary, subject to
the terms of the senior mortgage or deed of trust, may have the right to perform
the obligation itself. Generally, all sums so expended by the mortgagee or
beneficiary become part of the indebtedness secured by the mortgage or deed of
trust. To the extent a first mortgagee expends these sums, these sums will
generally have priority over all sums due under the junior mortgage.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Statutes in some states limit the right of a beneficiary under a deed
of trust or a mortgagee under a mortgage to obtain a deficiency judgment against
the borrower following foreclosure or sale under a deed of trust. A deficiency
judgment would be a personal judgment against the former borrower equal to the
difference between the net amount realized upon the public sale of the real
property and the amount due to the lender.
Some states require the lender to exhaust the security afforded under
a mortgage by foreclosure in an attempt to satisfy the full debt before bringing
a personal action against the borrower. In some other states, the lender has the
option of bringing a personal action against the borrower on the debt without
first exhausting that security; however, in some of these states, the lender,
following judgment on the personal action, may be deemed to have elected a
remedy and may be precluded from exercising remedies with respect to the
security. In some cases, a lender will be precluded from exercising any
additional rights under the note or mortgage if it has taken any prior
enforcement action. Consequently, the practical effect of the election
requirement, in those states permitting that election, is that lenders will
usually proceed against the security first rather than bringing a personal
action against the borrower. Finally, other statutory provisions limit any
deficiency judgment against the former borrower following a judicial sale to the
excess of the outstanding debt over the fair market value of the property at the
time of the public sale. The purpose of these statutes is generally to prevent a
lender from obtaining a large deficiency judgment against the former borrower as
a result of low or no bids at the judicial sale.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws
and state laws affording relief to debtors, may interfere with or affect the
ability of a secured mortgage lender to realize upon its security. For example,
numerous statutory provisions under the United States Bankruptcy Code, 11 U.S.C.
Sections 101 et seq. (the "Bankruptcy Code"), may interfere with or affect the
ability of the secured mortgage lender to obtain payment of a mortgage loan, to
realize upon collateral and/or enforce a deficiency judgment. Under federal
bankruptcy law, virtually all actions (including foreclosure actions and
deficiency judgment proceedings) are automatically stayed upon the filing of a
bankruptcy petition, and often no interest or principal payments are made during
the course of the bankruptcy proceeding. In a case under the Bankruptcy Code,
the secured party is precluded from foreclosing without authorization from the
bankruptcy court. In addition, a court with federal bankruptcy jurisdiction may
permit a debtor through his or her Chapter 11 or Chapter 13 plan to cure a
monetary default in respect of a mortgage loan by paying arrearages within a
reasonable time period and reinstating the original mortgage loan payment
schedule even though the lender accelerated the mortgage loan and final judgment
of foreclosure had been entered in state court (provided no foreclosure sale had
yet occurred) before the filing of the debtor's petition. Some courts with
federal bankruptcy jurisdiction have approved plans, based on the particular
facts of the case, that affected the curing of a mortgage loan default by paying
arrearages over a number of years.
If a mortgage loan is secured by property not consisting solely of the
debtor's principal residence, the Bankruptcy Code also permits that mortgage
loan to be modified. These modifications may include reducing the amount of each
monthly payment, changing the rate of interest, altering the repayment schedule,
and reducing the lender's security interest to the value of the property, thus
leaving the lender in the position of a general unsecured creditor for the
difference between the value of the property and the outstanding balance of the
mortgage loan. Some courts have permitted these modifications when the mortgage
loan is secured both by the debtor's principal residence and by personal
property.
Some tax liens arising under the Code may in some circumstances
provide priority over the lien of a mortgage or deed of trust. In addition,
substantive requirements are imposed upon mortgage lenders in connection with
the origination and the servicing of mortgage loans by numerous federal and some
state consumer protection laws. These laws include the federal Truth-in-Lending
Act, Real Estate Settlement Procedures Act, Equal Credit Opportunity Act, Fair
Credit Billing Act, Fair Credit Reporting Act and related statutes. These
federal laws impose specific statutory liabilities upon lenders who originate
mortgage loans and who fail to comply with the provisions of the law. In some
cases this liability may affect assignees of the mortgage loans.
Generally, Article 9 of the UCC governs foreclosure on Cooperative
shares and the related proprietary lease or occupancy agreement. Some courts
have interpreted Section 9-504 of the UCC to prohibit a deficiency award unless
the creditor establishes that the sale of the collateral (which, in the case of
a Cooperative Loan, would be the shares of the Cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner.
ENVIRONMENTAL CONSIDERATIONS
A lender may be subject to unforeseen environmental risks when taking
a security interest in real or personal property. Property subject to a security
interest may be subject to federal, state, and local laws and regulations
relating to environmental protection. These laws may regulate, among other
things: emissions of air pollutants; discharges of wastewater or storm water;
generation, transport, storage or disposal of hazardous waste or hazardous
substances; operation, closure and removal of underground storage tanks; removal
and disposal of asbestos-containing materials; and/or management of electrical
or other equipment containing polychlorinated biphenyls ("PCBs"). Failure to
comply with these laws and regulations may result in significant penalties,
including civil and criminal fines. Under the laws of some states, environmental
contamination on a property may give rise to a lien on the property to ensure
the availability and/or reimbursement of cleanup costs. Generally all subsequent
liens on that property are subordinated to the environmentally-related lien and,
in some states, even prior recorded liens are subordinated to these liens
("Superliens"). In the latter states, the security interest of the trustee in a
property that is subject to a Superlien could be adversely affected.
Under the federal Comprehensive Environmental Response, Compensation
and Liability Act, as amended ("CERCLA"), and under state law in some states, a
secured party that takes a deed in lieu of foreclosure, purchases a mortgaged
property at a foreclosure sale, operates a mortgaged property or undertakes
particular types of activities that may constitute management of the mortgaged
property may become liable in some circumstances for the cleanup costs of
remedial action if hazardous wastes or hazardous substances have been released
or disposed of on the property. These cleanup costs may be substantial. CERCLA
imposes strict, as well as joint and several, liability for environmental
remediation and/or damage costs on several classes of "potentially responsible
parties," including current "owners and/or operators" of property, irrespective
of whether those owners or operators caused or contributed to the contamination
on the property. In addition, owners and operators of properties that generate
hazardous substances that are disposed of at other "off-site" locations may be
held strictly, jointly and severally liable for environmental remediation and/or
damages at those off-site locations. Many states also have laws that are similar
to CERCLA. Liability under CERCLA or under similar state law could exceed the
value of the property itself as well as the total assets of the property owner.
Although some provisions of the Asset Conservation Act (as defined in
this prospectus) apply to trusts and fiduciaries, the law is somewhat unclear as
to whether and under what precise circumstances cleanup costs, or the obligation
to take remedial actions, could be imposed on a secured lender, such as the
trust fund. Under the laws of some states and under CERCLA, a lender may be
liable as an "owner or operator" for costs of addressing releases or threatened
releases of hazardous substances on a mortgaged property if that lender or its
agents or employees have "participated in the management" of the operations of
the borrower, even though the environmental damage or threat was caused by a
prior owner or current owner or operator or other third party. Excluded from
CERCLA's definition of "owner or operator" is a person "who without
participating in the management of . . . [the] facility, holds indicia of
ownership primarily to protect his security interest" (the "secured-creditor
exemption"). This exemption for holders of a security interest such as a secured
lender applies only to the extent that a lender seeks to protect its security
interest in the contaminated facility or property. Thus, if a lender's
activities begin to encroach on the actual management of that facility or
property, the lender faces potential liability as an "owner or operator" under
CERCLA. Similarly, when a lender forecloses and takes title to a contaminated
facility or property, the lender may incur potential CERCLA liability in various
circumstances, including among others, when it holds the facility or property as
an investment (including leasing the facility or property to a third party),
fails to market the property in a timely fashion or fails to properly address
environmental conditions at the property or facility.
The Resource Conservation and Recovery Act, as amended ("RCRA"),
contains a similar secured-creditor exemption for those lenders who hold a
security interest in a petroleum underground storage tank ("UST") or in real
estate containing a UST, or that acquire title to a petroleum UST or facility or
property on which a UST is located. As under CERCLA, a lender may lose its
secured-creditor exemption and be held liable under RCRA as a UST owner or
operator if that lender or its employees or agents participate in the management
of the UST. In addition, if the lender takes title to or possession of the UST
or the real estate containing the UST, under some circumstances the
secured-creditor exemption may be deemed to be unavailable.
A decision in May 1990 of the United States Court of Appeals for the
Eleventh Circuit in United States v. Fleet Factors Corp. very narrowly construed
CERCLA's secured-creditor exemption. The court's opinion suggested that a lender
need not have involved itself in the day-to-day operations of the facility or
participated in decisions relating to hazardous waste to be liable under CERCLA;
rather, liability could attach to a lender if its involvement with the
management of the facility were broad enough to support the inference that the
lender had the capacity to influence the borrower's treatment of hazardous
waste. The court added that a lender's capacity to influence these decisions
could be inferred from the extent of its involvement in the facility's financial
management. A subsequent decision by the United States Court of Appeals for the
Ninth Circuit in re Bergsoe Metal Corp., apparently disagreeing with, but not
expressly contradicting, the Fleet Factors court, held that a secured lender had
no liability absent "some actual management of the facility" on the part of the
lender.
Court decisions have taken varying views of the scope of the
secured-creditor exemption, leading to administrative and legislative efforts to
provide guidance to lenders on the scope of activities that would trigger CERCLA
and/or RCRA liability. Until recently, these efforts have failed to provide
substantial guidance.
On September 28, 1996, however, Congress enacted, and on September 30,
1996, the President signed into law the Asset Conservation Lender Liability and
Deposit Insurance Protection Act of 1996 (the "Asset Conservation Act"). The
Asset Conservation Act was intended to clarify the scope of the secured creditor
exemption under both CERCLA and RCRA. The Asset Conservation Act more explicitly
defined the kinds of "participation in management" that would trigger liability
under CERCLA and specified activities that would not constitute "participation
in management" or otherwise result in a forfeiture of the secured-creditor
exemption before foreclosure or during a workout period. The Asset Conservation
Act also clarified the extent of protection against liability under CERCLA in
the event of foreclosure and authorized specific regulatory clarifications of
the scope of the secured-creditor exemption for purposes of RCRA, similar to the
statutory protections under CERCLA. However, since the courts have not yet had
the opportunity to interpret the new statutory provisions, the scope of the
additional protections offered by the Asset Conservation Act is not fully
defined. It also is important to note that the Asset Conservation Act does not
offer complete protection to lenders and that the risk of liability remains.
If a secured lender does become liable, it may be entitled to bring an
action for contribution against the owner or operator who created the
environmental contamination or against some other liable party, but that person
or entity may be bankrupt or otherwise judgment-proof. It is therefore possible
that cleanup or other environmental liability costs could become a liability of
the trust fund and occasion a loss to the trust fund and to securityholders in
some circumstances. The new secured creditor amendments to CERCLA, also, would
not necessarily affect the potential for liability in actions by either a state
or a private party under other federal or state laws that may impose liability
on "owners or operators" but do not incorporate the secured-creditor exemption.
Traditionally, residential mortgage lenders have not taken steps to
evaluate whether hazardous wastes or hazardous substances are present with
respect to any mortgaged property before the origination of the mortgage loan or
before foreclosure or accepting a deed-in-lieu of foreclosure. Neither the
depositor nor any servicer makes any representations or warranties or assumes
any liability with respect to: environmental conditions of the Mortgaged
Property; the absence, presence or effect of hazardous wastes or hazardous
substances on, near or emanating from the Mortgaged Property; the impact on
securityholders of any environmental condition or presence of any substance on
or near the Mortgaged Property; or the compliance of any Mortgaged Property with
any environmental laws. In addition, no agent, person or entity otherwise
affiliated with the depositor is authorized or able to make any representation,
warranty or assumption of liability relative to any Mortgaged Property.
DUE-ON-SALE CLAUSES
The mortgage loans may contain due-on-sale clauses. These clauses
generally provide that the lender may accelerate the maturity of the loan if the
borrower sells, transfers or conveys the related Mortgaged Property. The
enforceability of due-on-sale clauses has been the subject of legislation or
litigation in many states and, in some cases, the enforceability of these
clauses was limited or denied. However, for some loans the Garn-St. Germain
Depository Institutions Act of 1982 (the "Garn-St. Germain Act") preempts state
constitutional, statutory and case law that prohibits the enforcement of
due-on-sale clauses and permits lenders to enforce these clauses in accordance
with their terms, subject to limited exceptions. Due-on-sale clauses contained
in mortgage loans originated by federal savings and loan associations of federal
savings banks are fully enforceable pursuant to regulations of the United States
Federal Home Loan Bank Board, as succeeded by the Office of Thrift Supervision,
which preempt state law restrictions on the enforcement of those clauses.
Similarly, "due-on-sale" clauses in mortgage loans made by national banks and
federal credit unions are now fully enforceable pursuant to preemptive
regulations of the Comptroller of the Currency and the National Credit Union
Administration, respectively.
The Garn-St. Germain Act also sets forth nine specific instances in
which a mortgage lender covered by the act (including federal savings and loan
associations and federal savings banks) may not exercise a "due-on-sale" clause,
notwithstanding the fact that a transfer of the property may have occurred.
These include intra-family transfers, some transfers by operation of law, leases
of fewer than three years and the creation of a junior encumbrance. Regulations
promulgated under the Garn-St. Germain Act also prohibit the imposition of a
prepayment penalty upon the acceleration of a loan pursuant to a due-on-sale
clause. The inability to enforce a "due-on-sale" clause may result in a mortgage
that bears an interest rate below the current market rate being assumed by a new
home buyer rather than being paid off, which may affect the average life of the
mortgage loans and the number of mortgage loans which may extend to maturity.
PREPAYMENT CHARGES
Under some state laws, prepayment charges may not be imposed after a
certain period of time following the origination of mortgage loans secured by
liens encumbering owner-occupied residential properties, if those loans are paid
before maturity. For Mortgaged Properties that are owner-occupied, it is
anticipated that prepayment charges may not be imposed for many of the mortgage
loans. The absence of a restraint on prepayment, particularly for fixed rate
mortgage loans having higher mortgage rates, may increase the likelihood of
refinancing or other early retirement of those loans.
SUBORDINATE FINANCING
Where a borrower encumbers mortgaged property with one or more junior
liens, the senior lender is subjected to additional risks, such as:
o The borrower may have difficulty repaying multiple loans. In
addition, if the junior loan permits recourse to the borrower (as
junior loans often do) and the senior loan does not, a borrower
may be more likely to repay sums due on the junior loan than
those on the senior loan.
o Acts of the senior lender that prejudice the junior lender or
impair the junior lender's security may create a superior equity
in favor of the junior lender. For example, if the borrower and
the senior lender agree to an increase in the principal amount of
or the interest rate payable on the senior loan, the senior
lender may lose its priority to the extent any existing junior
lender is harmed or the borrower is additionally burdened.
o If the borrower defaults on the senior loan and/or any junior
loan or loans, the existence of junior loans and actions taken by
junior lenders can impair the security available to the senior
lender and can interfere with or delay the taking of action by
the senior lender. Moreover, the bankruptcy of a junior lender
may operate to stay foreclosure or similar proceedings by the
senior lender.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, enacted in March 1980 ("Title V"), provides that state
usury limitations will not apply to some types of residential first mortgage
loans originated by lenders after March 31, 1980. A similar federal statute was
in effect for mortgage loans made during the first three months of 1980. The
Office of Thrift Supervision is authorized to issue rules and regulations and to
publish interpretations governing implementation of Title V. The statute
authorized any state to reimpose interest rate limits by adopting, before April
1, 1983, a law or constitutional provision that expressly rejects application of
the federal law. In addition, even where Title V is not so rejected, any state
is authorized by the law to adopt a provision limiting discount points or other
charges on mortgage loans covered by Title V. Some states have taken action to
reimpose interest rate limits and/or to limit discount points or other charges.
The depositor believes that a court interpreting Title V would hold
that residential first mortgage loans that are originated on or after January 1,
1980, are subject to federal preemption. Therefore, in a state that has not
taken the requisite action to reject application of Title V or to adopt a
provision limiting discount points or other charges before origination of those
mortgage loans, any limitation under that state's usury law would not apply to
those mortgage loans.
In any state in which application of Title V has been expressly
rejected or a provision limiting discount points or other charges is adopted, no
mortgage loan originated after the date of that state action will be eligible
for inclusion in a trust fund unless (1) the mortgage loan provides for the
interest rate, discount points and charges as are permitted in that state or (2)
the mortgage loan provides that its terms will be construed in accordance with
the laws of another state under which the interest rate, discount points and
charges would not be usurious and the borrower's counsel has rendered an opinion
that the choice of law provision would be given effect.
Statutes differ in their provisions as to the consequences of a
usurious loan. One group of statutes requires the lender to forfeit the interest
due above the applicable limit or impose a specified penalty. Under this
statutory scheme, the borrower may cancel the recorded mortgage or deed of trust
upon paying its debt with lawful interest, and the lender may foreclose, but
only for the debt plus lawful interest. A second group of statutes is more
severe. A violation of this type of usury law results in the invalidation of the
transaction, thus permitting the borrower to cancel the recorded mortgage or
deed of trust without any payment or prohibiting the lender from foreclosing.
ALTERNATIVE MORTGAGE INSTRUMENTS
Alternative mortgage instruments, including adjustable rate mortgage
loans and early ownership mortgage loans, originated by non-federally chartered
lenders have historically been subject to a variety of restrictions. Those
restrictions differed from state to state, resulting in difficulties in
determining whether a particular alternative mortgage instrument originated by a
state-chartered lender was in compliance with applicable law. These difficulties
were alleviated substantially as a result of the enactment of Title VIII of the
Garn-St. Germain Act ("Title VIII"). Title VIII provides that, notwithstanding
any state law to the contrary, state-chartered banks may originate alternative
mortgage instruments in accordance with regulations promulgated by the
Comptroller of the Currency with respect to origination of alternative mortgage
instruments by national banks; state-chartered credit unions may originate
alternative mortgage instruments in accordance with regulations promulgated by
the National Credit Union Administration with respect to origination of
alternative mortgage instruments by federal credit unions; and all other
non-federally chartered housing creditors, including state-chartered savings and
loan associations, state-chartered savings banks and mutual savings banks and
mortgage banking companies, may originate alternative mortgage instruments in
accordance with the regulations promulgated by the Federal Home Loan Bank Board,
predecessor to the Office of Thrift Supervision, with respect to origination of
alternative mortgage instruments by federal savings and loan associations. Title
VIII provides that any state may reject applicability of the provisions of Title
VIII by adopting, before October 15, 1985, a law or constitutional provision
expressly rejecting the applicability of those provisions. Some states have
taken that action.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of
1940, as amended (the "Relief Act"), a borrower who enters military service
after the origination of the borrower's mortgage loan (including a borrower who
was in reserve status and is called to active duty after origination of the
mortgage loan) may not be charged interest (including fees and charges) above an
annual rate of 6% during the period of the borrower's active duty status, unless
a court orders otherwise upon application of the lender. The Relief Act applies
to borrowers who are members of the Army, Navy, Air Force, Marines, National
Guard, Reserves, Coast Guard and officers of the U.S. Public Health Service
assigned to duty with the military. Because the Relief Act applies to borrowers
who enter military service (including reservists who are called to active duty)
after origination of the related mortgage loan, no information can be provided
as to the number of loans that may be affected by the Relief Act.
Application of the Relief Act would adversely affect, for an
indeterminate period of time, the ability of the servicer to collect full
amounts of interest on some of the mortgage loans. Any shortfalls in interest
collections resulting from the application of the Relief Act would result in a
reduction of the amounts distributable to the holders of the related series of
Securities, and would not be covered by advances. These shortfalls will be
covered by the credit support provided in connection with the Notes or
Certificates, as applicable, only to the extent provided in the prospectus
supplement. In addition, the Relief Act imposes limitations that would impair
the ability of the servicer to foreclose on an affected mortgage loan during the
borrower's period of active duty status, and, under some circumstances, during
an additional three month period thereafter. Thus, if an affected mortgage loan
goes into default, there may be delays and losses occasioned thereby.
FORFEITURES IN DRUG AND RICO PROCEEDINGS
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ("RICO") statute can be seized by the government if the
property was used in, or purchased with the proceeds of, those crimes. Under
procedures contained in the Comprehensive Crime Control Act of 1984 (the "Crime
Control Act"), the government may seize the property even before conviction. The
government must publish notice of the forfeiture proceeding and may give notice
to all parties "known to have an alleged interest in the property," including
the holders of mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (1) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (2) the lender was, at the
time of execution of the mortgage, "reasonably without cause to believe" that
the property was used in, or purchased with the proceeds of, illegal drug or
RICO activities.
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following discussion represents the opinion of Stroock & Stroock &
Lavan LLP as to the material federal income tax consequences of the purchase,
ownership and disposition of the Notes or Certificates, as applicable, offered
under this prospectus. This opinion assumes compliance with all provisions of
the Agreements pursuant to which the Notes or Certificates, as applicable, are
issued. This discussion is directed solely to securityholders that hold the
Notes or Certificates, as applicable, as capital assets within the meaning of
Section 1221 of the Internal Revenue Code of 1986, as amended (the "Code"), and
does not purport to discuss all federal income tax consequences that may be
applicable to particular categories of investors, some of which (such as banks,
insurance companies and foreign investors) may be subject to special rules.
Further, the authorities on which this discussion, and the opinions referred to
below, are based are subject to change or differing interpretations, which could
apply retroactively.
In addition to the federal income tax consequences described in this
prospectus, potential investors should consider the state and local tax
consequences, if any, of the purchase, ownership and disposition of the Notes or
Certificates, as applicable. See "State and Other Tax Considerations." The
depositor recommends that securityholders consult their own tax advisors
concerning the federal, state, local or other tax consequences to them of the
purchase, ownership and disposition of the Notes or Certificates, as applicable,
offered under this prospectus.
The following discussion addresses securities of five general types:
o securities ("REMIC Securities) representing interests in a trust
fund, or a portion of a trust fund, that the trustee will elect
to have treated as a real estate mortgage investment conduit
("REMIC") under Sections 860A through 860G (the "REMIC
Provisions") of the Code;
o securities ("FASIT Securities") representing interests in a trust
fund, or a portion of a trust fund, that the trustee will elect
to have treated as a financial asset securitization investment
trust ("FASIT") under Sections 860H through 860L (the "FASIT
Provisions") of the Code;
o securities ("Grantor Trust Securities") representing interests in
a trust fund (a "Grantor Trust Fund") as to which no election
will be made;
o securities ("Partnership Certificates ") representing equity
interests in a trust fund (a "Partnership Trust Fund") which is
treated as a partnership for federal income tax purposes; and
o securities ("Debt Securities") representing indebtedness of a
Partnership Trust Fund or a trust fund which is disregarded as a
separate entity for federal income tax purposes.
The prospectus supplement for each series of Notes or Certificates, as
applicable, will indicate which of the foregoing treatments will apply to that
series and, if a REMIC election (or elections) will be made for the related
trust fund, will identify all "regular interests" and "residual interests" in
the REMIC or, if a FASIT election will be made for the related trust fund, will
identify all "regular interests" and "ownership interests" in the FASIT. For
purposes of this tax discussion,
(1) references to a "securityholder" or a "holder" are to the
beneficial owner of a Security,
(2) references to "REMIC Pool" are to an entity or portion thereof as
to which a REMIC election will be made and
(3) to the extent specified in the prospectus supplement, references
to "mortgage loans" include Contracts. Except to the extent
specified in the prospectus supplement, no REMIC election will be
made for Unsecured Home Improvement Loans.
The following discussion is based in part upon the rules governing
original issue discount that are set forth in Sections 1271 through 1275 of the
Code and in the Treasury regulations promulgated thereunder (the "OID
Regulations"), in part upon the REMIC Provisions and the Treasury regulations
promulgated thereunder (the "REMIC Regulations"), and in part upon the FASIT
Provisions. Although the FASIT Provisions of the Code became effective on
September 1, 1997, the Treasury regulations issued with respect to those
provisions are still in proposed form only. Accordingly, the discussion herein
does not address the proposed FASIT regulations (which will be discussed in the
related prospectus supplement if and to the extent they are relevant) and
definitive guidance cannot be provided with respect to many aspects of the tax
treatment of the holders of FASIT Securities. In addition, the OID Regulations
do not adequately address some issues relevant to, and in some instances provide
that they are not applicable to, securities such as the Notes or Certificates,
as applicable.
TAXABLE MORTGAGE POOLS
Corporate income tax can be imposed on the net income of some entities
issuing non-REMIC and non-FASIT debt obligations secured by real estate
mortgages ("Taxable Mortgage Pools"). Any entity other than a REMIC or a FASIT
(as defined in this prospectus) will be considered a Taxable Mortgage Pool if
(1) substantially all of the assets of the entity consist of debt
obligations and more than 50% of those obligations consist of
"real estate mortgages,"
(2) that entity is the borrower under debt obligations with two or
more maturities, and
(3) under the terms of the debt obligations on which the entity is
the borrower, payments on those obligations bear a relationship
to payments on the obligations held by the entity.
Furthermore, a group of assets held by an entity can be treated as a
separate Taxable Mortgage Pool if the assets are expected to produce significant
cash flow that will support one or more of the entity's issues of debt
obligations. The depositor generally will structure offerings of non-REMIC and
non-FASIT Securities to avoid the application of the Taxable Mortgage Pool
rules.
REMICS
CLASSIFICATION OF REMICS
For each series of REMIC Securities, assuming compliance with all
provisions of the related pooling and servicing agreement, in the opinion of
Stroock & Stroock & Lavan LLP, the related trust fund (or each applicable
portion of the trust fund) will qualify as a REMIC and the REMIC Securities
offered with respect thereto will be considered to evidence ownership of
"regular interests" ("Regular Securities") or "residual interests" ("Residual
Securities") in the REMIC within the meaning of the REMIC Provisions.
In order for the REMIC Pool to qualify as a REMIC, there must be
ongoing compliance on the part of the REMIC Pool with the requirements set forth
in the Code. The REMIC Pool must fulfill an asset test, which requires that no
more than a de minimis portion of the assets of the REMIC Pool, as of the close
of the third calendar month beginning after the "Startup Day" (which for
purposes of this discussion is the date of issuance of the REMIC Securities) and
at all times thereafter, may consist of assets other than "qualified mortgages"
and "permitted investments." The REMIC Regulations provide a safe harbor
pursuant to which the de minimis requirement will be met if at all times the
total adjusted basis of the nonqualified assets is less than 1% of the total
adjusted basis of all the REMIC Pool's assets. An entity that fails to meet the
safe harbor may nevertheless demonstrate that it holds no more than a de minimis
amount of nonqualified assets. A REMIC Pool also must provide "reasonable
arrangements" to prevent its residual interests from being held by "disqualified
organizations" or agents of "disqualified organizations" and must furnish
applicable tax information to transferors or agents that violate this
requirement. The pooling and servicing agreement for each series of REMIC
Securities will contain provisions meeting these requirements. See "--Taxation
of Owners of Residual Securities--Tax-Related Restrictions on Transfer of
Residual Securities--Disqualified Organizations" below.
A qualified mortgage is any obligation that is principally secured by
an interest in real property and that is either transferred to the REMIC Pool on
the Startup Day or is purchased by the REMIC Pool within a three-month period
thereafter pursuant to a fixed price contract in effect on the Startup Day.
Qualified mortgages include whole mortgage loans and, generally, certificates of
beneficial interest in a grantor trust that holds mortgage loans and regular
interests in another REMIC, such as lower-tier regular interests in a tiered
REMIC. The REMIC Regulations specify that loans secured by timeshare interests,
shares held by a tenant stockholder in a cooperative housing corporation, and
manufactured housing that qualifies as a "single family residence" under Code
Section 25(e)(10) can be qualified mortgages. A qualified mortgage includes a
qualified replacement mortgage, which is any property that would have been
treated as a qualified mortgage if it were transferred to the REMIC Pool on the
Startup Day and that is received either:
(1) in exchange for any qualified mortgage within a three-month
period from the Startup Day; or
(2) in exchange for a "defective obligation" within a two-year
period from the Startup Day.
A "defective obligation" includes:
(1) a mortgage in default or as to which default is reasonably
foreseeable;
(2) a mortgage as to which a customary representation or warranty
made at the time of transfer to the REMIC Pool has been breached;
(3) a mortgage that was fraudulently procured by the borrower;
and
(4) a mortgage that was not in fact principally secured by real
property (but only if the mortgage is disposed of within 90 days of
discovery).
A mortgage loan that is "defective" as described in clause (4) above that is not
sold or, if within two years of the Startup Day, exchanged, within 90 days of
discovery, ceases to be a qualified mortgage after that 90-day period.
Permitted investments include cash flow investments, qualified reserve
assets, and foreclosure property. A cash flow investment is an investment,
earning a return in the nature of interest, of amounts received on or with
respect to qualified mortgages for a temporary period, not exceeding 13 months,
until the next scheduled distribution to holders of interests in the REMIC Pool.
A qualified reserve asset is any intangible property held for investment that is
part of any reasonably required reserve maintained by the REMIC Pool to provide
for payments of expenses of the REMIC Pool or amounts due on the regular or
residual interests in the event of defaults (including delinquencies) on the
qualified mortgages, lower than expected reinvestment returns, prepayment
interest shortfalls and other contingencies. The reserve fund will be
disqualified if more than 30% of the gross income from the assets in that fund
for the year is derived from the sale or other disposition of property held for
less than three months, unless required to prevent a default on the regular
interests caused by a default on one or more qualified mortgages. A reserve fund
must be reduced "promptly and appropriately" as payments on the mortgage loans
are received. Foreclosure property is real property acquired by the REMIC Pool
in connection with the default or imminent default of a qualified mortgage and
generally may not be held for more than three taxable years after the taxable
year of acquisition unless extensions are granted by the Secretary of the
Treasury.
In addition to the foregoing requirements, the various interests in a
REMIC Pool also must meet specific requirements. All of the interests in a REMIC
Pool must be either of the following: (1) one or more classes of regular
interests or (2) a single class of residual interests on which distributions, if
any, are made pro rata.
o A regular interest is an interest in a REMIC Pool that is issued
on the Startup Day with fixed terms, is designated as a regular
interest, and unconditionally entitles the holder to receive a
specified principal amount (or other similar amount), and
provides that interest payments (or other similar amounts), if
any, at or before maturity either are payable based on a fixed
rate or a qualified variable rate, or consist of a specified,
nonvarying portion of the interest payments on qualified
mortgages. That specified portion may consist of a fixed number
of basis points, a fixed percentage of the total interest, or a
qualified variable rate, inverse variable rate or difference
between two fixed or qualified variable rates on some or all of
the qualified mortgages. The specified principal amount of a
regular interest that provides for interest payments consisting
of a specified, nonvarying portion of interest payments on
qualified mortgages may be zero.
o A residual interest is an interest in a REMIC Pool other than a
regular interest that is issued on the Startup Day and that is
designated as a residual interest.
An interest in a REMIC Pool may be treated as a regular interest even
if payments of principal for that interest are subordinated to payments on other
regular interests or the residual interest in the REMIC Pool, and are dependent
on the absence of defaults or delinquencies on qualified mortgages or permitted
investments, lower than reasonably expected returns on permitted investments,
unanticipated expenses incurred by the REMIC Pool or prepayment interest
shortfalls. Accordingly, in the opinion of Stroock & Stroock & Lavan LLP, the
Regular Securities of a series will constitute one or more classes of regular
interests, and the Residual Securities for that series will constitute a single
class of residual interests for each REMIC Pool.
If an entity electing to be treated as a REMIC fails to comply with
one or more of the ongoing requirements of the Code for that status during any
taxable year, the Code provides that the entity will not be treated as a REMIC
for that year and thereafter. In that event, that entity may be taxable as a
corporation under Treasury regulations, and the related REMIC Securities may not
be accorded the status or given the tax treatment described below. Although the
Code authorizes the Treasury Department to issue regulations providing relief in
the event of an inadvertent termination of REMIC status, none of these
regulations have been issued. Any relief provided, moreover, may be accompanied
by sanctions, such as the imposition of a corporate tax on all or a portion of
the trust fund's income for the period in which the requirements for that status
are not satisfied. The pooling and servicing agreement for each REMIC Pool will
include provisions designed to maintain the trust fund's status as a REMIC under
the REMIC Provisions. It is not anticipated that the status of any trust fund as
a REMIC will be terminated.
CHARACTERIZATION OF INVESTMENTS IN REMIC SECURITIES
The REMIC Securities will be treated as "real estate assets" within
the meaning of Section 856(c)(4)(A) of the Code and assets described in Section
7701(a)(19)(C) of the Code in the same proportion that the assets of the REMIC
Pool underlying these Notes or Certificates, as applicable, would be so treated.
Moreover, if 95% or more of the assets of the REMIC Pool qualify for either of
the foregoing treatments at all times during a calendar year, the REMIC
Securities will qualify for the corresponding status in their entirety for that
calendar year.
If the assets of the REMIC Pool include Buydown Mortgage Loans, it is
possible that the percentage of those assets constituting "loans . . . secured
by an interest in real property which is . . . residential real property" for
purposes of Code Section 7701(a)(19)(C)(v) may be required to be reduced by the
amount of the related funds paid thereon (the "Buydown Funds"). No opinion is
expressed as to the treatment of those Buydown Funds because the law is unclear
as to whether the Buydown Funds represent an account held by the lender that
reduces the lender's investment in the mortgage loan. This reduction of a
holder's investment may reduce the assets qualifying for the 60% of assets test
for meeting the definition of a "domestic building and loan association."
Interest (including original issue discount) on the Regular Securities and
income allocated to the class of Residual Securities will be interest described
in Section 856(c)(3)(B) of the Code to the extent that the Notes or
Certificates, as applicable, are treated as "real estate assets" within the
meaning of Section 856(c)(4)(A) of the Code. In addition, the Regular Securities
generally will be "qualified mortgages" within the meaning of Section 860G(a)(3)
of the Code if transferred to another REMIC on its Startup Day in exchange for
regular or residual interests in the REMIC.
The assets of the REMIC Pool will include, in addition to mortgage
loans, payments on mortgage loans held pending distribution on the REMIC
Securities and property acquired by foreclosure held pending sale, and may
include amounts in reserve accounts. It is unclear whether property acquired by
foreclosure held pending sale and amounts in reserve accounts would be
considered to be part of the mortgage loans, or whether those assets (to the
extent not invested in assets described in the foregoing sections) otherwise
would receive the same treatment as the mortgage loans for purposes of all of
the foregoing sections. The REMIC Regulations do provide, however, that payments
on mortgage loans held pending distribution are considered part of the mortgage
loans for purposes of Section 856(c)(4)(A) of the Code. Furthermore, foreclosure
property generally will qualify as "real estate assets" under Section
856(c)(4)(A) of the Code.
TIERED REMIC STRUCTURES
For some series of REMIC Securities, two or more separate elections
may be made to treat designated portions of the related trust fund as REMICs
("Tiered REMICs") for federal income tax purposes. Upon the issuance of any of
these series of REMIC Securities, Stroock & Stroock & Lavan LLP will deliver its
opinion that, assuming compliance with all provisions of the related pooling and
servicing agreement, the Tiered REMICs will each qualify as a REMIC and the
respective REMIC Securities issued by each Tiered REMIC will be considered to
evidence ownership of Regular Securities or Residual Securities in the related
REMIC within the meaning of the REMIC Provisions.
Solely for purposes of determining whether the REMIC Securities will
be "real estate assets" within the meaning of Section 856(c)(4)(A) of the Code
and "loans secured by an interest in real property" under Section 7701(a)(19)(C)
of the Code, and whether the income on those Notes or Certificates, as
applicable, is interest described in Section 856(c)(3)(B) of the Code, the
Tiered REMICs will be treated as one REMIC.
TAXATION OF OWNERS OF REGULAR SECURITIES
(1) General
Except as otherwise indicated herein, the Regular Securities will be
treated for federal income tax purposes as debt instruments that are issued by
the REMIC and not as beneficial interests in the REMIC or the REMIC's assets. In
general, interest, original issue discount, and market discount on a Regular
Security will be treated as ordinary income to a holder of the Regular Security
(the "Regular Securityholder"), and principal payments on a Regular Security
will be treated as a return of capital to the extent of the Regular
Securityholder's basis in the Regular Security allocable thereto. Regular
Securityholders must use the accrual method of accounting with regard to Regular
Securities, regardless of the method of accounting otherwise used by that
Regular Securityholder.
Payments of interest on Regular Securities may be based on a fixed
rate, a variable rate as permitted by the REMIC Regulations, or may consist of a
specified portion of the interest payments on qualified mortgages where such
portion does not vary during the period the Regular Security is outstanding. The
definition of a variable rate for purposes of the REMIC Regulations is based on
the definition of a qualified floating rate for purposes of the rules governing
original issue discount set forth in the OID Regulations, with certain
modifications and permissible variations. See "--Variable Rate Regular
Securities" below for a discussion of the definition of a qualified floating
rate for purposes of the OID Regulations. In contrast to the OID Regulations,
for purposes of the REMIC Regulations, a qualified floating rate does not
include any multiple of a qualified floating rate (also excluding multiples of
qualified floating rates that themselves would constitute qualified floating
rates under the OID Regulations), and the characterization of a variable rate
that is subject to a cap, floor or similar restriction as a qualified floating
rate for purposes of the REMIC Regulations will not depend upon the OID
Regulations relating to caps, floors, and similar restrictions. See "--Variable
Rate Regular Securities" below for discussion of the OID Regulations relating to
caps, floors and similar restrictions. A qualified floating rate, as defined
above for purposes of the REMIC Regulations (a "REMIC qualified floating rate"),
qualifies as a variable rate for purposes of the REMIC Regulations if such REMIC
qualified floating rate is set at a "current rate" as defined in the OID
Regulations. In addition, a rate equal to the highest, lowest or an average of
two or more REMIC qualified floating rates qualifies as a variable rate for
REMIC purposes. A Regular Security may also have a variable rate based on a
weighted average of the interest rates on some or all of the qualified mortgages
held by the REMIC where each qualified mortgage taken into account has a fixed
rate or a variable rate that is permissible under the REMIC Regulations.
Further, a Regular Security may have a rate that is the product of a REMIC
qualified floating rate or a weighted average rate and a fixed multiplier, is a
constant number of basis points more or less than a REMIC qualified floating
rate or a weighted average rate, or is the product, plus or minus a constant
number of basis points, of a REMIC qualified floating rate or a weighted average
rate and a fixed multiplier. An otherwise permissible variable rate for a
Regular Security, described above, will not lose its character as such because
it is subject to a floor or a cap, including a "funds available cap" as that
term is defined in the REMIC Regulations. Lastly, a Regular Security will be
considered as having a permissible variable rate if it has a fixed or otherwise
permissible variable rate during one or more payment or accrual periods and
different fixed or otherwise permissible variable rates during other payment or
accrual periods.
(2) Original Issue Discount
Accrual Securities will be, and other classes of Regular Securities
may be, issued with "original issue discount" within the meaning of Code Section
1273(a). Holders of any Class or Subclass of Regular Securities having original
issue discount generally must include original issue discount in ordinary income
for federal income tax purposes as it accrues, in accordance with a constant
yield method that takes into account the compounding of interest, in advance of
the receipt of the cash attributable to that income. The following discussion is
based in part on the "OID Regulations" and in part on the provisions of the Tax
Reform Act of 1986 (the "1986 Act"). Regular Securityholders should be aware,
however, that the OID Regulations do not adequately address some of the issues
relevant to prepayable securities, such as the Regular Securities. To the extent
that those issues are not addressed in the regulations, the Seller intends to
apply the methodology described in the Conference Committee Report to the 1986
Act. No assurance can be provided that the Internal Revenue Service will not
take a different position as to those matters not currently addressed by the OID
Regulations. Moreover, the OID Regulations include an anti-abuse rule allowing
the Internal Revenue Service to apply or depart from the OID Regulations where
necessary or appropriate to ensure a reasonable tax result because of the
applicable statutory provisions. A tax result will not be considered
unreasonable under the anti-abuse rule in the absence of a substantial effect on
the present value of a taxpayer's tax liability. Investors are advised to
consult their own tax advisors as to the discussion in the OID Regulations and
the appropriate method for reporting interest and original issue discount for
the Regular Securities.
Each Regular Security will be treated as a single installment
obligation for purposes of determining the original issue discount includible in
a Regular Securityholder's income. The total amount of original issue discount
on a Regular Security is the excess of the "stated redemption price at maturity"
of the Regular Security over its "issue price." The issue price of a Class of
Regular Securities offered pursuant to this prospectus generally is the first
price at which a substantial amount of that Class is sold to the public
(excluding bond houses, brokers and underwriters). Although unclear under the
OID Regulations, it is anticipated that the trustee will treat the issue price
of a Class as to which there is no substantial sale as of the issue date or that
is retained by the depositor as the fair market value of the Class as of the
issue date. The issue price of a Regular Security also includes any amount paid
by an initial Regular Securityholder for accrued interest that relates to a
period before the issue date of the Regular Security, unless the Regular
Securityholder elects on its federal income tax return to exclude that amount
from the issue price and to recover it on the first Distribution Date.
The stated redemption price at maturity of a Regular Security always
includes the original principal amount of the Regular Security, but generally
will not include distributions of interest if those distributions constitute
"qualified stated interest." Under the OID Regulations, qualified stated
interest generally means interest payable at a single fixed rate or a qualified
variable rate (as described below), provided that the interest payments are
unconditionally payable at intervals of one year or less during the entire term
of the Regular Security. Because there is no penalty or default remedy in the
case of nonpayment of interest for a Regular Security, it is possible that no
interest on any Class of Regular Securities will be treated as qualified stated
interest. However, except as provided in the following three sentences or in the
prospectus supplement, because the underlying mortgage loans provide for
remedies in the event of default, it is anticipated that the trustee will treat
interest for the Regular Securities as qualified stated interest. Distributions
of interest on an Accrual Security, or on other Regular Securities for which
deferred interest will accrue, will not constitute qualified stated interest, in
which case the stated redemption price at maturity of those Regular Securities
includes all distributions of interest as well as principal on the Regular
Securities. Likewise, it is anticipated that the trustee will treat an
interest-only Class or a Class on which interest is substantially
disproportionate to its principal amount (a so-called "super-premium" Class) as
having no qualified stated interest. Where the interval between the issue date
and the first Distribution Date on a Regular Security is shorter than the
interval between subsequent Distribution Dates, the interest attributable to the
additional days will be included in the stated redemption price at maturity.
Under a de minimis rule, original issue discount on a Regular Security
will be considered to be zero if the original issue discount is less than 0.25%
of the stated redemption price at maturity of the Regular Security multiplied by
the weighted average maturity of the Regular Security. For this purpose, the
weighted average maturity of the Regular Security is computed as the sum of the
amounts determined by multiplying the number of full years (i.e., rounding down
partial years) from the issue date until each distribution in reduction of
stated redemption price at maturity is scheduled to be made by a fraction, the
numerator of which is the amount of each distribution included in the stated
redemption price at maturity of the Regular Security and the denominator of
which is the stated redemption price at maturity of the Regular Security. The
Conference Committee Report to the 1986 Act provides that the schedule of those
distributions should be determined in accordance with the assumed rate of
prepayment of the mortgage loans (the "Prepayment Assumption") and the
anticipated reinvestment rate, if any, relating to the Regular Securities. The
Prepayment Assumption for a series of Regular Securities will be set forth in
the prospectus supplement. Holders generally must report de minimis original
issue discount pro rata as principal payments are received, and that income will
generally be capital gain if the Regular Security is held as a capital asset.
Under the OID Regulations, however, Regular Securityholders may elect to accrue
all de minimis original issue discount as well as market discount and market
premium, under the constant yield method. See "-Election to Treat All Interest
Under the Constant Yield Method" below.
A Regular Securityholder generally must include in gross income for
any taxable year the sum of the "daily portions," as defined below, of the
original issue discount on the Regular Security accrued during an accrual period
for each day on which it holds the Regular Security, including the date of
purchase but excluding the date of disposition. The trustee will treat the
monthly period ending on the day before each Distribution Date as the accrual
period. For each Regular Security, a calculation will be made of the original
issue discount that accrues during each successive full accrual period (or
shorter period from the date of original issue) that ends on the day before the
related Distribution Date on the Regular Security. The Conference Committee
Report to the 1986 Act states that the rate of accrual of original issue
discount is intended to be based on the Prepayment Assumption. The original
issue discount accruing in a full accrual period would be the excess, if any,
of:
(1) the sum of:
(a) the present value of all of the remaining distributions to be
made on the Regular Security as of the end of that accrual period and
(b) the distributions made on the Regular Security during the
accrual period that are included in the Regular Security's stated
redemption price at maturity, over
(2) the adjusted issue price of the Regular Security at the beginning
of the accrual period.
The present value of the remaining distributions referred to in the preceding
sentence is calculated based on:
(1) the yield to maturity of the Regular Security at the issue
date;
(2) the Prepayment Assumption.
For these purposes, the adjusted issue price of a Regular Security at the
beginning of any accrual period equals the issue price of the Regular Security,
increased by the total amount of original issue discount for the Regular
Security that accrued in all prior accrual periods and reduced by the amount of
distributions included in the Regular Security's stated redemption price at
maturity that were made on the Regular Security in those prior periods. The
original issue discount accruing during any accrual period (as determined in
this paragraph) will then be divided by the number of days in the period to
determine the daily portion of original issue discount for each day in the
period. For an initial accrual period shorter than a full accrual period, the
daily portions of original issue discount must be determined according to an
appropriate allocation under any reasonable method.
Under the method described above, the daily portions of original issue
discount required to be included in income by a Regular Securityholder generally
will increase to take into account prepayments on the Regular Securities as a
result of prepayments on the mortgage loans that exceed the Prepayment
Assumption, and generally will decrease (but not below zero for any period) if
the prepayments are slower than the Prepayment Assumption. An increase in
prepayments on the mortgage loans for a series of Regular Securities can result
in both a change in the priority of principal payments for some Classes of
Regular Securities and either an increase or decrease in the daily portions of
original issue discount for those Regular Securities.
In the case of a Non-Pro Rata Security, it is anticipated that the
trustee will determine the yield to maturity of that Security based upon the
anticipated payment characteristics of the Class as a whole under the Prepayment
Assumption. In general, the original issue discount accruing on each Non-Pro
Rata Security in a full accrual period would be its allocable share of the
original issue discount for the entire Class, as determined in accordance with
the preceding paragraph. However, in the case of a distribution in retirement of
the entire unpaid principal balance of any Non-Pro Rata Security (or portion of
the unpaid principal balance), (a) the remaining unaccrued original issue
discount allocable to the Security (or to that portion) will accrue at the time
of the distribution, and (b) the accrual of original issue discount allocable to
each remaining Security of that Class will be adjusted by reducing the present
value of the remaining payments on that Class and the adjusted issue price of
that Class to the extent attributable to the portion of the unpaid principal
balance that was distributed. The depositor believes that the foregoing
treatment is consistent with the "pro rata prepayment" rules of the OID
Regulations, but with the rate of accrual of original issue discount determined
based on the Prepayment Assumption for the Class as a whole. Investors are
advised to consult their tax advisors as to this treatment.
(3) Acquisition Premium
A purchaser of a Regular Security having original issue discount at a
price greater than its adjusted issue price but less than its stated redemption
price at maturity will be required to include in gross income the daily portions
of the original issue discount on the Regular Security reduced pro rata by a
fraction, the numerator of which is the excess of its purchase price over the
adjusted issue price and the denominator of which is the excess of the remaining
stated redemption price at maturity over the adjusted issue price.
Alternatively, a subsequent purchaser may elect to treat all that acquisition
premium under the constant yield method, as described below under the heading
"--Election to Treat All Interest Under the Constant Yield Method" below.
(4) Variable Rate Regular Securities
Regular Securities may provide for interest based on a variable rate.
Under the OID Regulations, interest is treated as payable at a variable rate if,
generally, (1) the issue price does not exceed the original principal balance by
more than a specified amount and (2) the interest compounds or is payable at
least annually at current values of
(a) one or more "qualified floating rates,"
(b) a single fixed rate and one or more qualified floating rates,
(c) a single "objective rate," or
(d) a single fixed rate and a single objective rate that is a
"qualified inverse floating rate."
A floating rate is a qualified floating rate if variations can reasonably be
expected to measure contemporaneous variations in the cost of newly borrowed
funds. A multiple of a qualified floating rate is considered a qualified
floating rate only if the rate is equal to either (a) the product of a qualified
floating rate and a fixed multiple that is greater than 0.65 but not more than
1.35 or (b) the product of a qualified floating rate and a fixed multiple that
is greater than 0.65 but not more than 1.35, increased or decreased by a fixed
rate. That rate may also be subject to a fixed cap or floor, or a cap or floor
that is not reasonably expected as of the issue date to affect the yield of the
instrument significantly. An objective rate is any rate (other than a qualified
floating rate) that is determined using a single fixed formula and that is based
on objective financial or economic information, provided that the information is
not (1) within the control of the issuer or a related party or (2) unique to the
circumstances of the issuer or a related party. However, an objective rate does
not include a rate if it is reasonably expected that the average value of such
rate during the first half of the Regular Security's term will be either
significantly less than or significantly greater than the average value of the
rate during the final half of the Regular Security's term. A qualified inverse
floating rate is a rate equal to a fixed rate minus a qualified floating rate
that inversely reflects contemporaneous variations in the qualified floating
rate; an inverse floating rate that is not a qualified inverse floating rate may
nevertheless be an objective rate. A Class of Regular Securities may be issued
under this prospectus that does not have a qualified variable rate under the
foregoing rules, for example, a Class that bears different rates at different
times during the period it is outstanding that it is considered significantly
"front-loaded" or "back-loaded" within the meaning of the OID Regulations. It is
possible that a Class may be considered to bear "contingent interest" within the
meaning of the OID Regulations. The OID Regulations, as they relate to the
treatment of contingent interest, are by their terms not applicable to Regular
Securities. However, if final regulations dealing with contingent interest for
Regular Securities apply the same principles as the OID Regulations, those
regulations may lead to different timing of income inclusion than would be the
case under the OID Regulations. Furthermore, application of those principles
could lead to the characterization of gain on the sale of contingent interest
Regular Securities as ordinary income. Investors should consult their tax
advisors regarding the appropriate treatment of any Regular Security that does
not pay interest at a fixed rate or qualified variable rate as described in this
paragraph.
The amount of original issue discount for a Regular Security bearing a
qualified variable rate of interest will accrue in the manner described above
under "--Original Issue Discount," with the yield to maturity and future
payments on that Regular Security generally to be determined by assuming that
interest will be payable for the life of the Regular Security based on the
initial rate (or, if different, the value of the applicable variable rate as of
the pricing date) for the relevant Class, if the Class bears interest at a
qualified floating rate or qualified inverse floating rate, or based on a fixed
rate which reflects the reasonably expected yield for the relevant Class, if the
Class bears interest at an objective rate (other than a qualified inverse
floating rate). Unless required otherwise by applicable final regulations, it is
anticipated that the trustee will treat interest, other than variable interest
on an interest-only or super-premium Class, as qualified stated interest at the
qualified variable rate. However, the qualified stated interest allocable to an
accrual period will be increased (or decreased) if the interest actually paid
during the accrual period exceed (or is less than) the interest assumed to be
paid under the rate just described.
(5) Market Discount
A subsequent purchaser of a Regular Security also may be subject to
the market discount rules of Code Sections 1276 through 1278. Under these
sections and the principles applied by the OID Regulations in the context of
original issue discount, "market discount" is the amount by which the
purchaser's original basis in the Regular Security (1) is exceeded by the
remaining outstanding principal payments and interest payments other than
qualified stated interest payments due on a Regular Security, or (2) in the case
of a Regular Security having original issue discount, is exceeded by the
adjusted issue price of that Regular Security at the time of purchase. The
purchaser generally will be required to recognize ordinary income to the extent
of accrued market discount on that Regular Security as distributions includible
in the stated redemption price at maturity of the Regular Security are received,
in an amount not exceeding that distribution. The market discount would accrue
in a manner to be provided in Treasury regulations and should take into account
the Prepayment Assumption. The Conference Committee Report to the 1986 Act
provides that until these regulations are issued, the market discount would
accrue either (1) on the basis of a constant interest rate, or (2) in the ratio
of stated interest allocable to the relevant period to the sum of the interest
for that period plus the remaining interest as of the end of that period, or in
the case of a Regular Security issued with original issue discount, in the ratio
of original issue discount accrued for the relevant period to the sum of the
original issue discount accrued for that period plus the remaining original
issue discount as of the end of that period. The purchaser also generally will
be required to treat a portion of any gain on a sale or exchange of the Regular
Security as ordinary income to the extent of the market discount accrued to the
date of disposition under one of the foregoing methods, less any accrued market
discount previously reported as ordinary income as partial distributions in
reduction of the stated redemption price at maturity were received. The
purchaser will be required to defer deduction of a portion of the excess of the
interest paid or accrued on indebtedness incurred to purchase or carry a Regular
Security over the interest distributable on the Regular Security. The deferred
portion of the interest expense in any taxable year generally will not exceed
the accrued market discount on the Regular Security for that year. Any deferred
interest expense is, in general, allowed as a deduction not later than the year
in which the related market discount income is recognized or the Regular
Security is disposed of.
As an alternative to the inclusion of market discount in income on the
foregoing basis, the Regular Securityholder may elect to include market discount
in income currently as it accrues on all market discount instruments acquired by
the Regular Securityholder in that taxable year or thereafter, in which case the
interest deferral rule will not apply. See "--Election to Treat All Interest
Under the Constant Yield Method" below regarding an alternative manner in which
that election may be deemed to be made. A person who purchases a Regular
Security at a price lower than the remaining amounts includible in the stated
redemption price at maturity of the security, but higher than its adjusted issue
price, does not acquire the Regular Security with market discount, but will be
required to report original issue discount, appropriately adjusted to reflect
the excess of the price paid over the adjusted issue price.
Market discount for a Regular Security will be considered to be zero
if the market discount is less than 0.25% of the remaining stated redemption
price at maturity of the Regular Security (or, in the case of a Regular Security
having original issue discount, the adjusted issue price of that Regular
Security) multiplied by the weighted average maturity of the Regular Security
(presumably determined as described above in the third paragraph under
"--Original Issue Discount" above) remaining after the date of purchase. It
appears that de minimis market discount would be reported in a manner similar to
de minimis original issue discount. See "--Original Issue Discount" above.
Treasury regulations implementing the market discount rules have not
yet been issued, and uncertainty exists with respect to many aspects of those
rules. Due to the substantial lack of regulatory guidance with respect to the
market discount rules, it is unclear how those rules will affect any secondary
market that develops for a particular Class of Regular Securities. Prospective
investors in Regular Securities should consult their own tax advisors regarding
the application of the market discount rules to the Regular Securities and the
elections to include market discount in income currently and to accrue market
discount on the basis of the constant yield method.
(6) Amortizable Premium
A Regular Security purchased at a cost greater than its remaining
stated redemption price at maturity generally is considered to be purchased at a
premium. If the Regular Securityholder holds that Regular Security as a "capital
asset" within the meaning of Code Section 1221, the Regular Securityholder may
elect under Code Section 171 to amortize the premium under a constant yield
method that reflects compounding based on the interval between payments on the
Regular Security. The election will apply to all taxable debt obligations
(including REMIC regular interests) acquired by the Regular Securityholder at a
premium held in that taxable year or thereafter, unless revoked with the
permission of the Internal Revenue Service. The Conference Committee Report to
the 1986 Act indicates a Congressional intent that the same rules that apply to
the accrual of market discount on installment obligations will also apply to
amortizing bond premium under Code Section 171 on installment obligations as the
Regular Securities, although it is unclear whether the alternatives to the
constant interest method described above under "Market Discount" are available.
Amortizable bond premium generally will be treated as an offset to interest
income on a Regular Security, rather than as a separate deductible item. See
"--Election to Treat All Interest Under the Constant Yield Method" below
regarding an alternative manner in which the Code Section 171 election may be
deemed to be made.
(7) Election to Treat All Interest Under the Constant Yield Method
A holder of a debt instrument such as a Regular Security may elect to
treat all interest that accrues on the instrument using the constant yield
method, with none of the interest being treated as qualified stated interest.
For purposes of applying the constant yield method to a debt instrument subject
to this election, (1) "interest" includes stated interest, original issue
discount, de minimis original issue discount, market discount and de minimis
market discount, as adjusted by any amortizable bond premium or acquisition
premium and (2) the debt instrument is treated as if the instrument were issued
on the holder's acquisition date in the amount of the holder's adjusted basis
immediately after acquisition. It is unclear whether, for this purpose, the
initial Prepayment Assumption would continue to apply or if a new prepayment
assumption as of the date of the holder's acquisition would apply. A holder
generally may make this election on an instrument by instrument basis or for a
class or group of debt instruments. However, if the holder makes this election
for a debt instrument with amortizable bond premium, the holder is deemed to
have made elections to amortize bond premium currently as it accrues under the
constant yield method for all premium bonds held by the holder in the same
taxable year or thereafter. Alternatively, if the holder makes this election for
a debt instrument with market discount, the holder is deemed to have made
elections to report market discount income currently as it accrues under the
constant yield method for all market discount bonds acquired by the holder in
the same taxable year or thereafter. The election is made on the holder's
federal income tax return for the year in which the debt instrument is acquired
and is irrevocable except with the approval of the Internal Revenue Service.
Investors should consult their own tax advisors regarding the advisability of
making this election.
(8) Treatment of Losses
Regular Securityholders will be required to report income for Regular
Securities on the accrual method of accounting, without giving effect to delays
or reductions in distributions attributable to defaults or delinquencies on the
mortgage loans, except to the extent it can be established that the losses are
uncollectible. Accordingly, the holder of a Regular Security, particularly a
Subordinate Security, may have income, or may incur a diminution in cash flow as
a result of a default or delinquency, but may not be able to take a deduction
(subject to the discussion below) for the corresponding loss until a subsequent
taxable year. In this regard, investors are cautioned that while they may
generally cease to accrue interest income if it reasonably appears that the
interest will be uncollectible, the Internal Revenue Service may take the
position that original issue discount must continue to be accrued in spite of
its uncollectibility until the debt instrument is disposed of in a taxable
transaction or becomes worthless in accordance with the rules of Code Section
166.
To the extent the rules of Code Section 166 regarding bad debts are
applicable, it appears that Regular Securityholders that are corporations or
that otherwise hold the Regular Securities in connection with a trade or
business should in general be allowed to deduct as an ordinary loss that loss
with respect to principal sustained during the taxable year on account of any
Regular Securities becoming wholly or partially worthless, and that, in general,
Regular Securityholders that are not corporations and do not hold the Regular
Securities in connection with a trade or business should be allowed to deduct as
a short-term capital loss any loss sustained during the taxable year on account
of a portion of any Regular Securities becoming wholly worthless. Although the
matter is not free from doubt, non-corporate Regular Securityholders should be
allowed a bad debt deduction at the time the principal balance of the Regular
Securities is reduced to reflect losses resulting from any liquidated mortgage
loans. The Internal Revenue Service, however, could take the position that
non-corporate holders will be allowed a bad debt deduction to reflect those
losses only after all the mortgage loans remaining in the trust fund have been
liquidated or the applicable Class of Regular Securities has been otherwise
retired. The Internal Revenue Service could also assert that losses on the
Regular Securities are deductible based on some other method that may defer
those deductions for all holders, such as reducing future cashflow for purposes
of computing original issue discount. This may have the effect of creating
"negative" original issue discount that may be deductible only against future
positive original issue discount or otherwise upon termination of the Class.
Regular Securityholders are urged to consult their own tax advisors
regarding the appropriate timing, amount and character of any loss sustained for
their Regular Securities. While losses attributable to interest previously
reported as income should be deductible as ordinary losses by both corporate and
non-corporate holders, the Internal Revenue Service may take the position that
losses attributable to accrued original issue discount may only be deducted as
capital losses in the case of non-corporate holders who do not hold the Regular
Securities in connection with a trade or business. Special loss rules may be
applicable to banks and thrift institutions. These taxpayers are advised to
consult their tax advisors regarding the treatment of losses on Regular
Securities.
(9) Sale or Exchange of Regular Securities
If a Regular Securityholder sells or exchanges a Regular Security, the
Regular Securityholder will recognize gain or loss equal to the difference, if
any, between the amount received and its adjusted basis in the Regular Security.
The adjusted basis of a Regular Security generally will equal the original cost
of the Regular Security to the seller, increased by any original issue discount
or market discount previously included in the seller's gross income for the
Regular Security and reduced by amounts included in the stated redemption price
at maturity of the Regular Security that were previously received by the seller,
by any amortized premium, and by any recognized losses.
Except as described above regarding market discount, and except as
provided in this paragraph, any gain or loss on the sale or exchange of a
Regular Security realized by an investor who holds the Regular Security as a
capital asset will be capital gain or loss and will be long-term or short-term
depending on whether the Regular Security has been held for the long-term
capital gain holding period (currently, more than one year). That gain will be
treated as ordinary income
(1) if a Regular Security is held as part of a "conversion
transaction" as defined in Code Section 1258(c), up to the amount of
interest that would have accrued on the Regular Securityholder's net
investment in the conversion transaction at 120% of the appropriate
applicable federal rate in effect at the time the taxpayer entered
into the transaction minus any amount previously treated as ordinary
income for any prior disposition of property that was held as part of
that transaction;
(2) in the case of a non-corporate taxpayer, to the extent that
the taxpayer has made an election under Code Section 163(d)(4) to have
net capital gains taxed as investment income at ordinary income rates;
or
(3) to the extent that the gain does not exceed the excess, if
any, of (a) the amount that would have been includible in the gross
income of the holder if its yield on that Regular Security were 110%
of the applicable federal rate as of the date of purchase, over (b)
the amount of income actually includible in the gross income of the
holder for that Regular Security (the "110% yield rule").
In addition, gain or loss recognized from the sale of a Regular
Security by some banks or thrift institutions will be treated as ordinary income
or loss pursuant to Code Section 582(c). Long-term capital gains of noncorporate
taxpayers generally are subject to a lower maximum tax rate than ordinary income
of those taxpayers for property held for more than one year, with further rate
reductions for property held for more than five years. Currently, the maximum
tax rate for corporations is the same for both ordinary income and capital
gains.
TAXATION OF OWNERS OF RESIDUAL SECURITIES
(1) Taxation of REMIC Income
Generally, the "daily portions" of REMIC taxable income or net loss
will be includible as ordinary income or loss in determining the federal taxable
income of holders of Residual Securities ("Residual Holders"), and will not be
taxed separately to the REMIC Pool. The daily portions of REMIC taxable income
or net loss of a Residual Holder are determined by allocating the REMIC Pool's
taxable income or net loss for each calendar quarter ratably to each day in that
quarter and by allocating that daily portion among the Residual Holders in
proportion to their respective holdings of Residual Securities in the REMIC Pool
on that day. REMIC taxable income is generally determined in the same manner as
the taxable income of an individual using the accrual method of accounting,
except that
(1) the limitations on deductibility of investment interest
expense and expenses for the production of income do not apply;
(2) all bad loans will be deductible as business bad debts; and
(3) the limitation on the deductibility of interest and expenses
related to tax-exempt income will apply.
The REMIC Pool's gross income includes interest, original issue discount income
and market discount income, if any, on the mortgage loans, reduced by
amortization of any premium on the mortgage loans, plus income from amortization
of issue premium, if any, on the Regular Securities, plus income on reinvestment
of cash flows and reserve assets, plus any cancellation of indebtedness income
upon allocation of realized losses to the Regular Securities. The REMIC Pool's
deductions include interest and original issue discount expense on the Regular
Securities, servicing fees on the mortgage loans, other administrative expenses
of the REMIC Pool and realized losses on the mortgage loans. The requirement
that Residual Holders report their pro rata share of taxable income or net loss
of the REMIC Pool will continue until there are no Notes or Certificates, as
applicable, of any class of the related series outstanding.
The taxable income recognized by a Residual Holder in any taxable year
will be affected by, among other factors, the relationship between the timing of
recognition of interest, original issue discount or market discount income or
amortization of premium for the mortgage loans, on the one hand, and the timing
of deductions for interest (including original issue discount) or income from
amortization of issue premium on the Regular Securities, on the other hand. If
an interest in the mortgage loans is acquired by the REMIC Pool at a discount,
and one or more of these mortgage loans is prepaid, the prepayment may be used
in whole or in part to make distributions in reduction of principal on the
Regular Securities, and the discount on the mortgage loans that is includible in
income may exceed the original issue discount deductions allowed with respect to
the Regular Securities. When there is more than one Class of Regular Securities
that distribute principal sequentially, this mismatching of income and
deductions is particularly likely to occur in the early years following issuance
of the Regular Securities when distributions in reduction of principal are being
made in respect of earlier Classes of Regular Securities to the extent that
those Classes are not issued with substantial discount or are issued at a
premium. If taxable income attributable to that mismatching is realized, in
general, losses would be allowed in later years as distributions on the later
maturing Classes of Regular Securities are made.
Taxable income may also be greater in earlier years than in later
years as a result of the fact that interest expense deductions, expressed as a
percentage of the outstanding principal amount of that series of Regular
Securities, may increase over time as distributions in reduction of principal
are made on the lower yielding Classes of Regular Securities, whereas, to the
extent the REMIC Pool consists of fixed rate mortgage loans, interest income for
any particular mortgage loan will remain constant over time as a percentage of
the outstanding principal amount of that loan. Consequently, Residual Holders
must have sufficient other sources of cash to pay any federal, state, or local
income taxes due as a result of that mismatching or unrelated deductions against
which to offset that income, subject to the discussion of "excess inclusions"
below under "--Limitations on Offset or Exemption of REMIC Income." The timing
of mismatching of income and deductions described in this paragraph, if present
for a series of Notes or Certificates, as applicable, may have a significant
adverse effect upon a Residual Holder's after-tax rate of return.
A portion of the income of a Residual Holder may be treated
unfavorably in three contexts:
(1) it may not be offset by current or net operating loss
deductions;
(2) it will be considered unrelated business taxable income to
tax-exempt entities; and
(3) it is ineligible for any statutory or treaty reduction in the
30% withholding tax otherwise available to a foreign Residual Holder.
See "--Limitations on Offset or Exemption of REMIC Income" below. In addition, a
Residual Holder's taxable income during some periods may exceed the income
reflected by those Residual Holders for those periods in accordance with
generally accepted accounting principles. Investors should consult their own
accountants concerning the accounting treatment of their investment in Residual
Securities.
(2) Basis and Losses
The amount of any net loss of the REMIC Pool that may be taken into
account by the Residual Holder is limited to the adjusted basis of the Residual
Security as of the close of the quarter (or time of disposition of the Residual
Security if earlier), determined without taking into account the net loss for
the quarter. The initial adjusted basis of a purchaser of a Residual Security is
the amount paid for that Residual Security. The adjusted basis will be increased
by the amount of taxable income of the REMIC Pool reportable by the Residual
Holder and will be decreased (but not below zero), first, by a cash distribution
from the REMIC Pool and, second, by the amount of loss of the REMIC Pool
reportable by the Residual Holder. Any loss that is disallowed on account of
this limitation may be carried over indefinitely with respect to the Residual
Holder as to whom the loss was disallowed and may be used by the Residual Holder
only to offset any income generated by the same REMIC Pool.
A Residual Holder will not be permitted to amortize directly the cost of its
Residual Security as an offset to its share of the taxable income of the related
REMIC Pool. However, if, in any year, cash distributions to a Residual Holder
exceed its share of the REMIC's taxable income, the excess will constitute a
return of capital to the extent of the holder's basis in its Residual Security.
A return of capital is not treated as income for federal income tax purposes,
but will reduce the tax basis of the Residual Holder (but not below zero). If a
Residual Security's basis is reduced to zero, any cash distributions with
respect to that Residual Security in any taxable year in excess of its share of
the REMIC's income would be taxable to the holder as gain on the sale or
exchange of its interest in the REMIC.
A Residual Security may have a negative value if the net present value
of anticipated tax liabilities exceeds the present value of anticipated cash
flows. The REMIC Regulations appear to treat the issue price of the residual
interest as zero rather than the negative amount for purposes of determining the
REMIC Pool's basis in its assets. The preamble to the REMIC Regulations states
that the Internal Revenue Service may provide future guidance on the proper tax
treatment of payments made by a transferor of the residual interest to induce
the transferee to acquire the interest, and Residual Holders should consult
their own tax advisors in this regard.
Further, to the extent that the initial adjusted basis of a Residual
Holder (other than an original holder) in the Residual Security is greater than
the corresponding portion of the REMIC Pool's basis in the mortgage loans, the
Residual Holder will not recover a portion of the basis until termination of the
REMIC Pool unless future Treasury regulations provide for periodic adjustments
to the REMIC income otherwise reportable by the holder. The REMIC Regulations
currently in effect do not so provide. See "--Treatment of Certain Items of
REMIC Income and Expense--Market Discount" below regarding the basis of mortgage
loans to the REMIC Pool and "--Sale or Exchange of a Residual Security" below
regarding possible treatment of a loss upon termination of the REMIC Pool as a
capital loss.
(3) Treatment of Certain Items of REMIC Income and Expense
Although it is anticipated that the trustee will compute REMIC income
and expense in accordance with the Code and applicable regulations, the
authorities regarding the determination of specific items of income and expense
are subject to differing interpretations. The depositor makes no representation
as to the specific method that will be used for reporting income with respect to
the mortgage loans and expenses for the Regular Securities, and different
methods could result in different timing or reporting of taxable income or net
loss to Residual Holders or differences in capital gain versus ordinary income.
ORIGINAL ISSUE DISCOUNT AND PREMIUM. Generally, the REMIC Pool's
deductions for original issue discount and income from amortization of premium
will be determined in the same manner as original issue discount income on
Regular Securities as described above under "--Taxation of Owners of Regular
Securities--Original Issue Discount" and "--Variable Rate Regular Securities,"
without regard to the de minimis rule described therein, and "--Amortizable
Premium."
MARKET DISCOUNT. The REMIC Pool will have market discount income in
respect of mortgage loans if, in general, the basis of the REMIC Pool in those
mortgage loans is exceeded by their unpaid principal balances. The REMIC Pool's
basis in those mortgage loans is generally the fair market value of the mortgage
loans immediately after the transfer of the mortgage loans to the REMIC Pool.
The REMIC Regulations provide that the basis is equal to the total of the issue
prices of all regular and residual interests in the REMIC Pool. The market
discount must be recognized currently as an item of ordinary income as it
accrues, rather than being included in income upon the sale of mortgage loans or
as principal on the mortgage loans is paid. Market discount income generally
should accrue in the manner described above under "--Taxation of Owners of
Regular Securities--Market Discount."
PREMIUM. Generally, if the basis of the REMIC Pool in the mortgage
loans exceeds the unpaid principal balances of the mortgage loans, the REMIC
Pool will be considered to have acquired those mortgage loans at a premium equal
to the amount of that excess. As stated above, the REMIC Pool's basis in
mortgage loans is generally the fair market value of the mortgage loans and is
based on the total of the issue prices of the regular and residual interests in
the REMIC Pool immediately after the transfer of the mortgage loans to the REMIC
Pool. In a manner analogous to the discussion above under "--Taxation of Owners
of Regular Securities--Amortizable Premium," a person that holds a mortgage loan
as a capital asset under Code Section 1221 may elect under Code Section 171 to
amortize premium on mortgage loans originated after September 27, 1985, under
the constant yield method. Amortizable bond premium will be treated as an offset
to interest income on the mortgage loans, rather than as a separate deduction
item. Because substantially all of the borrowers on the mortgage loans are
expected to be individuals, Code Section 171 will not be available for premium
on mortgage loans originated on or before September 27, 1985. Premium for those
mortgage loans may be deductible in accordance with a reasonable method
regularly employed by the holder of those mortgage loans. The allocation of that
premium pro rata among principal payments should be considered a reasonable
method; however, the Internal Revenue Service may argue that the premium should
be allocated in a different manner, such as allocating the premium entirely to
the final payment of principal.
(4) Limitations on Offset or Exemption of REMIC Income
A portion (or all) of the REMIC taxable income includible in
determining the federal income tax liability of a Residual Holder will be
subject to special treatment. That portion, referred to as the "excess
inclusion," is equal to the excess of REMIC taxable income for the calendar
quarter allocable to a Residual Security over the daily accruals for that
quarterly period of (1) 120% of the long-term applicable federal rate that would
have applied to the Residual Security (if it were a debt instrument) on the
Startup Day under Code Section 1274(d), multiplied by (2) the adjusted issue
price of the Residual Security at the beginning of the quarterly period. For
this purpose, the adjusted issue price of a Residual Security at the beginning
of a quarter is the issue price of the Residual Security, plus the amount of
those daily accruals of REMIC income described in this paragraph for all prior
quarters, decreased by any distributions made with respect to the Residual
Security before the beginning of that quarterly period.
The portion of a Residual Holder's REMIC taxable income consisting of
the excess inclusions generally may not be offset by other deductions, including
net operating loss carryforwards, on the Residual Holder's return. However, net
operating loss carryovers are determined without regard to excess inclusion
income. Further, if the Residual Holder is an organization subject to the tax on
unrelated business income imposed by Code Section 511, the Residual Holder's
excess inclusions will be treated as unrelated business taxable income of the
Residual Holder for purposes of Code Section 511. In addition, REMIC taxable
income is subject to 30% withholding tax for persons who are not U.S. Persons
(as defined below under "--Tax-Related Restrictions on Transfer of Residual
Securities--Foreign Investors"), and the portion thereof attributable to excess
inclusions is not eligible for any reduction in the rate of withholding tax (by
treaty or otherwise). See "--Taxation of Certain Foreign Investors--Residual
Securities" below. Finally, if a real estate investment trust or a regulated
investment company owns a Residual Security, a portion (allocated under Treasury
regulations yet to be issued) of dividends paid by the real estate investment
trust or regulated investment company could not be offset by net operating
losses of its shareholders, would constitute unrelated business taxable income
for tax-exempt shareholders, and would be ineligible for reduction of
withholding to persons who are not U.S. Persons.
Provisions governing the relationship between excess inclusions and
the alternative minimum tax provide that (i) alternative minimum taxable income
for a Residual Holder is determined without regard to the special rule,
discussed above, that taxable income cannot be less than excess inclusions, (ii)
a Residual Holder's alternative minimum taxable income for a taxable year cannot
be less than the excess inclusions for the year, and (iii) the amount of any
alternative minimum tax net operating loss deduction must be computed without
regard to any excess inclusions.
The Internal Revenue Service has authority to promulgate regulations
providing that if the aggregate value of the Residual Securities is not
considered to be "significant," then the entire share of REMIC taxable income of
a Residual Holder may be treated as excess inclusions subject to the foregoing
limitations. This authority has not been exercised to date.
(5) Tax-Related Restrictions on Transfer of Residual Securities
DISQUALIFIED ORGANIZATIONS. If any legal or beneficial interest in a
Residual Security is transferred to a Disqualified Organization (as defined
below), a tax would be imposed in an amount equal to the product of (1) the
present value of the total anticipated excess inclusions for that Residual
Security for periods after the transfer and (2) the highest marginal federal
income tax rate applicable to corporations. The REMIC Regulations provide that
the anticipated excess inclusions are based on actual prepayment experience to
the date of the transfer and projected payments based on the Prepayment
Assumption. The present value rate equals the applicable federal rate under Code
Section 1274(d) as of the date of the transfer for a term ending with the last
calendar quarter in which excess inclusions are expected to accrue. That rate is
applied to the anticipated excess inclusions from the end of the remaining
calendar quarters in which they arise to the date of the transfer. That tax
generally would be imposed on the transferor of the Residual Security, except
that where the transfer is through an agent (including a broker, nominee, or
other middleman) for a Disqualified Organization, the tax would instead be
imposed on the agent. However, a transferor of a Residual Security would in no
event be liable for the tax for a transfer if the transferee furnished to the
transferor an affidavit stating that the transferee is not a Disqualified
Organization and, as of the time of the transfer, the transferor does not have
actual knowledge that the affidavit is false. Under the REMIC Regulations, an
affidavit will be sufficient if the transferee furnishes (A) a social security
number, and states under penalties of perjury that the social security number is
that of the transferee, or (B) a statement under penalties of perjury that it is
not a disqualified organization.
"Disqualified Organization" means the United States, any state or
political subdivision of the United States, any foreign government, any
international organization, any agency or instrumentality of any of the
foregoing (provided, that the term does not include an instrumentality if all of
its activities are subject to tax and a majority of its board of directors in
not selected by any governmental entity), any cooperative organization
furnishing electric energy or providing telephone service to persons in rural
areas as described in Code Section 1381(a)(2)(C), and any organization (other
than a farmers' cooperative described in Code Section 531) that is exempt from
taxation under the Code unless the organization is subject to the tax on
unrelated business income imposed by Code Section 511.
In addition, if a "Pass-Through Entity" (as defined below) has excess
inclusion income for a Residual Security during a taxable year and a
Disqualified Organization is the record holder of an equity interest in that
entity, then a tax is imposed on the entity equal to the product of (1) the
amount of excess inclusions that are allocable to the interest in the
Pass-Through Entity during the period that interest is held by the Disqualified
Organization, and (2) the highest marginal federal corporate income tax rate.
That tax would be deductible from the ordinary gross income of the Pass-Through
Entity for the taxable year. The Pass-Through Entity would not be liable for the
tax if (1) it has received an affidavit from the record holder stating, under
penalties of perjury, that it is not a Disqualified Organization, or providing
the holder's taxpayer identification number and stating, under penalties of
perjury, that the social security number is that of the record owner, and (2)
during the period that person is the record holder of the Residual Security, the
Pass-Through Entity does not have actual knowledge that the affidavit is false.
"Pass-Through Entity" means any regulated investment company, real
estate investment trust, common trust fund, partnership, trust or estate and
corporations operating on a cooperative basis. Except as may be provided in
Treasury regulations, any person holding an interest in a Pass-Through Entity as
a nominee for another will, with respect to that interest, be treated as a
Pass-Through Entity.
If an "electing large partnership" holds a Residual Security, all
interests in the electing large partnership are treated as held by Disqualified
Organizations for purposes of the tax imposed upon a Pass-Through Entity by
Section 860E(c) of the Code. The exception to this tax, otherwise available to a
Pass-Through Entity that is furnished particular affidavits by record holders of
interests in the entity and that does not know those affidavits are false, is
not available to an electing large partnership.
The pooling and servicing agreement for a series will provide that no
legal or beneficial interest in a Residual Security may be transferred or
registered unless (1) the proposed transferee furnished to the transferor and
the trustee an affidavit providing its taxpayer identification number and
stating that the transferee is the beneficial owner of the Residual Security and
is not a Disqualified Organization and is not purchasing the Residual Security
on behalf of a Disqualified Organization (i.e., as a broker, nominee or
middleman) and (2) the transferor provides a statement in writing to the trustee
that it has no actual knowledge that the affidavit is false. Moreover, the
pooling and servicing agreement will provide that any attempted or purported
transfer in violation of these transfer restrictions will be null and void and
will vest no rights in any purported transferee. Each Residual Security for a
series will bear a legend referring to those restrictions on transfer, and each
Residual Holder will be deemed to have agreed, as a condition of ownership of
the Residual Security, to any amendments to the related pooling and servicing
agreement required under the Code or applicable Treasury regulations to
effectuate the foregoing restrictions. Information necessary to compute an
applicable excise tax must be furnished to the Internal Revenue Service and to
the requesting party within 60 days of the request, and the Seller or the
trustee may charge a fee for computing and providing that information.
NONECONOMIC RESIDUAL INTERESTS. The REMIC Regulations would disregard
some transfers of Residual Securities, in which case the transferor would
continue to be treated as the owner of the Residual Securities and thus would
continue to be subject to tax on its allocable portion of the net income of the
REMIC Pool. Under the REMIC Regulations, a transfer of a "noneconomic residual
interest" (as defined below) to a Residual Holder (other than a Residual Holder
who is not a U.S. Person as defined below under "--Foreign Investors") is
disregarded to all federal income tax purposes if a significant purpose of the
transfer is to impede the assessment or collection of tax. A residual interest
in a REMIC (including a residual interest with a positive value at issuance) is
a "noneconomic residual interest" unless, at the time of the transfer, (1) the
present value of the expected future distributions on the residual interest at
least equals the product of the present value of the anticipated excess
inclusions and the highest corporate income tax rate in effect for the year in
which the transfer occurs, and (2) the transferor reasonably expects that the
transferee will receive distributions from the REMIC at or after the time at
which taxes accrue on the anticipated excess inclusions in an amount sufficient
to satisfy the accrued taxes on each excess inclusion. The anticipated excess
inclusions and the present value rate are determined in the same manner as set
forth above under "--Disqualified Organizations." The REMIC Regulations explain
that a significant purpose to impede the assessment or collection of tax exists
if the transferor, at the time of the transfer, either knew or should have known
that the transferee would be unwilling or unable to pay taxes due on its share
of the taxable income of the REMIC. A safe harbor is provided if (1) the
transferor conducted, at the time of the transfer, a reasonable investigation of
the financial condition of the transferee and found that the transferee
historically had paid its debts as they came due and found no significant
evidence to indicate that the transferee would not continue to pay its debts as
they came due in the future, (2) the transferee represents to the transferor
that it understands that, as the holder of the non-economic residual interest,
the transferee may incur liabilities in excess of any cash flows generated by
the interest and that the transferee intends to pay taxes associated with
holding the residual interest as they become due, and (3) either the formula
test or the asset test (each as described below) is satisfied.
The formula test is satisfied if the present value of the anticipated
tax liabilities associated with holding the Residual Security does not exceed
the sum of the present values of (1) any consideration given to the transferee
to the acquire the Residual Security, (2) the expected future distributions on
the Residual Security, and (3) the anticipated tax savings associated with
holding the Residual Security as the REMIC generates losses. For purposes of
this calculation, the present values generally are calculated using a discount
rate equal to the applicable federal rate, and the transferee is assumed to pay
tax at the highest corporate rate of tax.
The asset test is satisfied if
1. at the time of the transfer of the Residual Security, and at the
close of each of the transferee's two fiscal years preceding the
year of transfer, the transferee's gross assets for financial
reporting purposes exceed $100 million and its net assets for
financial reporting purposes exceed $10 million,
2. the transferee is a taxable domestic C corporation, other than a
RIC, REIT, REMIC or Subchapter T cooperative (an "Eligible
Corporation"), that makes a written agreement that any subsequent
transfer of the Residual Security will be to another Eligible
Corporation in a transaction that satisfies the safe harbor
described above, and the transferor does not know, or have reason
to know, that the transferee will not honor such agreement, and
3. the facts and circumstances known to the transferor on or before
the date of transfer do not reasonably indicate that the taxes
associated with the Residual Security will not be paid.
For purposes of requirement (1), the gross and net assets of a transferee do not
include any obligations of a person related to the transferee or any other asset
if a principal purpose for holding or acquiring the asset is to permit the
transferee to satisfy the asset test. Further, requirement (2) will not be
treated as satisfied in the case of any transfer or assignment of the Residual
Security to a foreign branch of an Eligible Corporation or any other arrangement
by which the Residual Security is at any time subject to net tax by a foreign
country or possession of the United States.
FOREIGN INVESTORS. The REMIC Regulations provide that the transfer of
a Residual Security that has "tax avoidance potential" to a "foreign person"
will be disregarded for all federal tax purposes. This rule appears intended to
apply to a transferee who is not a "U.S. Person" (as defined below), unless the
transferee's income is effectively connected with the conduct of a trade or
business within the United States. A Residual Security is deemed to have tax
avoidance potential unless, at the time of the transfer, the transferor
reasonably expects that (1) the future distributions on the Residual Security
will equal at least 30% of the anticipated excess inclusions after the transfer,
and (2) such amounts will be distributed at or after the time at which the
excess inclusions accrue and before the end of the next succeeding taxable year.
A safe harbor in the REMIC Regulations provides that the reasonable expectation
requirement will be satisfied if the above test would be met at all assumed
prepayment rates for the mortgage loans from 50 percent to 200 percent of the
Prepayment Assumption. If the non-U.S. Person transfers the Residual Security
back to a U.S. Person, the transfer will be disregarded and the foreign
transferor will continue to be treated as the owner unless arrangements are made
so that the transfer does not have the effect of allowing the transferor to
avoid tax on accrued excess inclusions.
The prospectus supplement relating to the Certificates of a series may
provide that a Residual Security may not be purchased by or transferred to any
person that is not a U.S. Person or may describe the circumstances and
restrictions pursuant to which the transfer may be made. The term "U.S. Person"
means a citizen or resident of the United States, a corporation or partnership
(or other entity properly treated as a partnership or as a corporation for
federal income tax purposes) created or organized in or under the laws of the
United States or of any state (including, for this purpose, the District of
Columbia), an estate that is subject to U.S. federal income tax regardless of
the source of its income, or a trust if 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 the authority to control all substantial decisions of the
trust (or, to the extent provided in applicable Treasury regulations, trusts in
existence on August 20, 1996, which are eligible to elect and do elect to be
treated as U.S. Persons).
(6) Sale or Exchange of a Residual Security
Upon the sale or exchange of a Residual Security, the Residual Holder
will recognize gain or loss equal to the excess, if any, of the amount realized
over the adjusted basis (as described above under "--Taxation of Owners of
Residual Securities--Basis and Losses") of the Residual Holder in the Residual
Security at the time of the sale or exchange.
Further, as described above under "--Taxation of Owners of Residual
Securities--Basis and Losses", if a Residual Security's basis is reduced to
zero, any cash distributions with respect to that Residual Security in any
taxable year in excess of its share of the REMIC's income for that year would be
taxable to the holder as gain on the sale or exchange of its interest in the
REMIC. If a Residual Holder has an adjusted basis in its Residual Security when
its interest in the REMIC Pool terminates, then it will recognize a capital loss
(assuming the Residual Security was held as a capital asset) at that time in an
amount equal to the remaining adjusted basis.
Any gain on the sale of a Residual Security will be treated as
ordinary income (1) if a Residual Security is held as part of a "conversion
transaction" as defined in Code Section 1258(c), up to the amount of interest
that would have accrued on the Residual Holder's net investment in the
conversion transaction at 120% of the appropriate applicable federal rate in
effect at the time the taxpayer entered into the transaction minus any amount
previously treated as ordinary income for any prior disposition of property that
was held as a part of that transaction or (2) in the case of a non-corporate
taxpayer, to the extent that the taxpayer has made an election under Code
Section 163(d)(4) to have net capital gains taxed as investment income at
ordinary income rates. In addition, gain or loss recognized from the sale of a
Residual Security by some banks or thrift institutions will be treated as
ordinary income or loss pursuant to Code Section 582(c).
Except as provided in Treasury regulations yet to be issued, the wash
sale rules of Code Section 1091 will apply to dispositions of Residual
Securities where the seller of the Residual Security, during the period
beginning six months before the sale or disposition of the Residual Security and
ending six months after the sale or disposition, acquires (or enters into any
other transaction that results in the application of Code Section 1091) any
residual interest in any REMIC or any interest in a "taxable mortgage pool"
(such as a non-REMIC owner trust) that is economically comparable to a Residual
Security.
(7) Mark to Market Regulations
Treasury regulations provide that a Residual Security acquired on or
after January 4, 1995 is not treated as a security and thus may not be marked to
market pursuant to Section 475 of the Code.
TAXES THAT MAY BE IMPOSED ON THE REMIC POOL
(1) Prohibited Transactions
Income from transactions by the REMIC Pool, called prohibited
transactions, will not be part of the calculation of income or loss includible
in the federal income tax returns of Residual Holders, but rather will be taxed
directly to the REMIC Pool at a 100% rate. Prohibited transactions generally
include:
(1) the disposition of a qualified mortgages other than for
(a) substitution for a defective (including a defaulted)
obligation within two years of the Startup Day (or repurchase in
lieu of substitution of a defective (including a defaulted)
obligation at any time) or for any qualified mortgage within
three months of the Startup Day;
(b) foreclosure, default, or imminent default of a qualified
mortgage;
(c) bankruptcy or insolvency of the REMIC Pool; or
(d) a qualified (complete) liquidation;
(2) the receipt of income from assets that are not the type of
mortgages or investments that the REMIC Pool is permitted to hold;
(3) the receipt of compensation for services; or
(4) the receipt of gain from disposition of cash flow investments
other than pursuant to a qualified liquidation.
Notwithstanding (1) and (4) above, it is not a prohibited transaction
to sell a qualified mortgage or cash flow investment held by a REMIC Pool to
prevent a default on Regular Securities as a result of a default on qualified
mortgages or to facilitate a clean-up call (generally, an optional termination
to save administrative costs when no more than a small percentage of the Notes
or Certificates, as applicable, is outstanding). The REMIC Regulations indicate
that the modification of a mortgage loan generally will not be treated as a
disposition if it is occasioned by a default or reasonably foreseeable default,
an assumption of the mortgage loan, the waiver of a due-on-sale or
due-on-encumbrance clause, or the conversion of an interest rate by a borrower
pursuant to the terms of a convertible adjustable rate mortgage loan.
(2) Contributions to the REMIC Pool After the Startup Day
In general, the REMIC Pool will be subject to a tax at a 100% rate on
the value of any property contributed to the REMIC Pool after the Startup Day.
Exceptions are provided for cash contributions to the REMIC Pool
(1) during the three months following the Startup Day,
(2) made to a qualified reserve fund by a Residual Holder,
(3) in the nature of a guarantee,
(4) made to facilitate a qualified liquidation or clean-up call, and
(5) as otherwise permitted in Treasury regulations yet to be issued.
It is not anticipated that there will be any contributions to the REMIC Pool
after the Startup Day.
(3) Net Income from Foreclosure Property
The REMIC Pool will be subject of federal income tax at the highest
corporate rate on "net income from foreclosure property," determined by
reference to the rules applicable to real estate investment trusts. Generally,
property acquired by deed in lieu of foreclosure would be treated as
"foreclosure property" until the close of the third calendar year after the year
in which the REMIC Pool acquired that property, with possible extensions. Net
income from foreclosure property generally means gain from the sale of a
foreclosure property that is inventory property and gross income from
foreclosure property other than qualifying rents and other qualifying income for
a real estate investment trust. It is not anticipated that the REMIC Pool will
have any taxable net income from foreclosure property.
(4) Liquidation of the REMIC Pool
If a REMIC Pool adopts a plan of complete liquidation, within the
meaning of Code Section 860F(a)(4)(A)(i), which may be accomplished by
designating in the REMIC Pool's final tax return a date on which that adoption
is deemed to occur, and sells all of its assets (other than cash) within a
90-day period beginning on that date, the REMIC Pool will not be subject to the
prohibited transaction rules on the sale of its assets, provided that the REMIC
Pool credits or distributes in liquidation all of the sale proceeds plus its
cash (other than amounts retained to meet claims) to holders of Regular
Securities and Residual Holders within the 90-day period.
(5) Administrative Matters
The REMIC Pool will be required to maintain its books on a calendar
year basis and to file federal income tax returns for federal income tax
purposes in a manner similar to a partnership. The form for the income tax
return is Form 1066, U.S. Real Estate Mortgage Investment Conduit Income Tax
Return. The trustee will be required to sign the REMIC Pool's returns. Treasury
regulations provide that, except where there is a single Residual Holder for an
entire taxable year, the REMIC Pool will be subject to the procedural and
administrative rules of the Code applicable to partnerships, including the
determination by the Internal Revenue Service of any adjustments to, among other
things, items of REMIC income, gain, loss, deduction, or credit in a unified
administrative proceeding. The master servicer will be obligated to act as "tax
matters person," as defined in applicable Treasury regulations, for the REMIC
Pool as agent of the Residual Holders holding the largest percentage interest in
the Residual Securities. If the Code or applicable Treasury regulations do not
permit the master servicer to act as tax matters person in its capacity as agent
of the Residual Holder, the Residual Holder or any other person specified
pursuant to Treasury regulations will be required to act as tax matters person.
The tax matters person generally has responsibility for overseeing and providing
notice to the other Residual Holders of administrative and judicial proceedings
regarding the REMIC Pool's tax affairs, although other holders of the Residual
Securities of the same series would be able to participate in those proceedings
in appropriate circumstances.
(6) Limitations on Deduction of Certain Expenses
An investor who is an individual, estate, or trust will be subject to
limitation with respect to some itemized deductions described in Code Section
67, to the extent that those itemized deductions, in total, do not exceed 2% of
the investor's adjusted gross income. In the case of a partnership that has 100
or more partners and elects to be treated as an "electing large partnership,"
70% of that partnership's miscellaneous itemized deductions will be disallowed,
although the remaining deductions will generally be allowed at the partnership
level and will not be subject to the 2% floor that would otherwise be applicable
to individual partners. In addition, Code Section 68 provides that itemized
deductions otherwise allowable for a taxable year of an individual taxpayer will
be reduced by the lesser or (1) 3% of the excess, if any, of adjusted gross
income over $100,000 ($50,000 in the case of a married individual filing a
separate return) (subject to adjustment for inflation), or (2) 80% of the amount
of itemized deductions otherwise allowable for that year. In the case of a REMIC
Pool, those deductions may include deductions under Code Section 212 for the
Servicing Fee and all administrative and other expenses relating to the REMIC
Pool, or any similar expenses allocated to the REMIC Pool for a regular interest
it holds in another REMIC. Those investors who hold REMIC Securities either
directly or indirectly through pass-through entities may have their pro rata
share of those expenses allocated to them as additional gross income, but may be
subject to that limitation on deductions. In addition, those expenses are not
deductible at all for purposes of computing the alternative minimum tax, and may
cause those investors to be subject to significant additional tax liability.
Temporary Treasury regulations provide that the additional gross income and
corresponding amount of expenses generally are to be allocated entirely to the
holders of Residual Securities in the case of a REMIC Pool that would not
qualify as a fixed investment trust in the absence of a REMIC election. For a
REMIC Pool that would be classified as an investment trust in the absence of a
REMIC election or that is substantially similar to an investment trust, any
holder of a Regular Security that is an individual, trust, estate, or
pass-through entity also will be allocated its pro rata share of those expenses
and a corresponding amount of income and will be subject to the limitations or
deductions imposed by Code Sections 67 and 68, as described above. The
prospectus supplement will indicate if all those expenses will not be allocable
to the Residual Securities.
TAXATION OF CERTAIN FOREIGN INVESTORS
(1) Regular Securities
Interest, including original issue discount, distributable to Regular
Securityholders who are non-resident aliens, foreign corporations, or other
Non-U.S. Persons (as defined below), generally will be considered "portfolio
interest" and, therefore, generally will not be subject to 30% United States
withholding tax, provided that (1) the interest is not effectively connected
with the conduct of a trade or business in the United States of the
securityholder, (2) the Non-U.S. Person is not a "10-percent shareholder" within
the meaning of Code Section 871(h)(3)(B) or a controlled foreign corporation
described in Code Section 881(c)(3)(C) and (3) that Non-U.S. Person complies to
the extent necessary with certain certification requirements, which generally
relate to the identity of the beneficial owner and the status of the beneficial
owner as a person that is a Non-U.S. person. Each Regular Securityholder should
consult its tax advisors regarding the tax documentation and certifications that
must be provided to secure the exemption from United States withholding taxes.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Regular Security by a Non-U.S. Person generally will be
exempt from United States federal income and withholding tax, provided that (i)
such gain is not effectively connected with the conduct of a trade or business
in the United States by the Non-U.S. Person and (ii) in the case of an
individual Non-U.S. Person, the Non-U.S. Person is not present in the United
States for 183 days or more in the taxable year.
If the interest on the Regular Security is effectively connected with
the conduct of a trade or business within the United States by that Non-U.S.
Person, the Non-U.S. Person, although exempt from the withholding tax previously
discussed if the holder provides an appropriate statement establishing that such
income is so effectively connected, will be subject to United States federal
income tax at regular rates. Investors who are Non-U.S. Persons should consult
their own tax advisors regarding the specific tax consequences to them of owning
a Regular Security. The term "Non-U.S. Person" means any person who is not a
U.S. Person.
(2) Residual Securities
The Conference Committee Report to the 1986 Act indicates that amounts
paid to Residual Holders who are Non-U.S. Persons generally should be treated as
interest for purposes of the 30% (or lower treaty rate) United States
withholding tax. Treasury regulations provide that amount distributed to
Residual Holders may qualify as "portfolio interest," subject to the conditions
described in "Regular Securities" above, but only to the extent that (1) the
mortgage loans were issued after July 18, 1984, and (2) the trust fund or
segregated pool of assets in the trust fund (as to which a separate REMIC
election will be made), to which the Residual Security relates, consists of
obligations issued in "registered form" within the meaning of Code Section 163
(f) (1). Generally, mortgage loans will not be, but regular interests in another
REMIC Pool will be, considered obligations issued in registered form.
Furthermore, Residual Holders will not be entitled to any exemption from the 30%
withholding tax (or lower treaty rate) to the extent of that portion of REMIC
taxable income that constitutes an "excess inclusion." See "--Taxation of Owners
of Residual Securities--Limitations on Offset or Exemption of REMIC Income"
above. If the amounts paid to Residual Holders who are Non-U.S. Persons are
effectively connected with the conduct of a trade or business within the United
States by those Non-U.S. Persons, although exempt from the withholding tax
previously discussed if the holder provides an appropriate statement
establishing that such income is so effectively connected, the amounts paid to
those Non-U.S. Persons will be subject to United States federal income tax at
regular rates. See "--Tax-Related Restrictions on Transfer of Residual
Securities--Foreign Investors" above concerning the disregard of transfers
having "tax avoidance potential." Investors who are Non-U.S. Persons should
consult their own tax advisors regarding the specific tax consequences to them
of owning Residual Securities.
(3) Backup Withholding
Distributions made on the REMIC Securities, and proceeds from the sale
of the REMIC Securities to or through certain brokers, may be subject to a
"backup" withholding tax under Code Section 3406 of 31% on "reportable payments"
(including interest distributions, original issue discount, and, under some
circumstances, principal distributions) if the Holder fails to comply with
certain identification procedures, unless the Holder is otherwise an exempt
recipient under applicable provisions of the Code, and, if necessary,
demonstrates such status. Any amounts to be withheld from distribution on the
REMIC Securities would be refunded by the Internal Revenue Service or allowed as
a credit against the Regular Holder's federal income tax liability.
FASITS
CLASSIFICATION OF FASITS
For each series of FASIT Securities, assuming compliance with all
provisions of the related pooling and servicing agreement, in the opinion of
Stroock & Stroock & Lavan LLP, the related trust fund (or each applicable
portion of the trust fund) will qualify as a FASIT. The trust fund will qualify
under the Code as a FASIT in which FASIT regular securities (the "FASIT Regular
Securities") and the ownership interest security (the "FASIT Ownership
Security") will constitute the "regular interests" and the "ownership interest,"
respectively, if
(1) a FASIT election is in effect;
(2) tests concerning
(a) the composition of the FASIT's assets and
(b) the nature of the securityholders' interests in the
FASIT are met on a continuing basis; and
(3) the trust fund is not a regulated investment company as
defined in Section 851(a) of the Code.
A segregated pool of assets may also qualify as a FASIT.
(1) Asset Composition
In order for the trust fund to be eligible for FASIT status,
substantially all of the assets of the trust fund must consist of "permitted
assets" as of the close of the third month beginning after the closing date and
at all times thereafter. Permitted assets include:
(1) cash or cash equivalents;
(2) debt instruments with fixed terms that would qualify as
regular interests if issued by a REMIC as defined in Section 860D of
the Code (generally, instruments that provide for interest at a fixed
rate, a qualifying variable rate, or a qualifying interest-only type
rate);
(3) foreclosure property;
(4) some hedging instruments (generally, interest and currency
rate swaps and credit enhancement contracts) that are reasonably
required to guarantee or hedge against the FASIT's risks associated
with being the obligor on FASIT interests;
(5) contract rights to acquire qualifying debt instruments or
qualifying hedging instruments;
(6) FASIT regular interests; and
(7) REMIC regular interests.
Permitted assets do not include any debt instruments issued by the
holder of the FASIT's ownership interest or by any person related to that
holder. A debt instrument is a permitted asset only if the instrument is
indebtedness for federal income tax purposes, including regular interests in a
REMIC or regular interests issued by another FASIT, and it bears (1) fixed
interest or (2) variable interest of a type that relates to qualified variable
rate debt (as defined in Treasury regulations prescribed under section
860G(a)(1)(B)). Permitted hedges include interest rate or foreign currency
notional principal contracts, letters of credit, insurance, guarantees against
payment default and similar instruments to be provided in regulations, and which
are reasonably required to guarantee or hedge against the FASIT's risks
associated with being the obligor on interests issued by the FASIT. Foreclosure
property is real property acquired by the FASIT in connection with the default
or imminent default of a debt instrument, provided the depositor had no
knowledge or reason to know as of the date the debt instrument was acquired by
the FASIT that a default had occurred or would occur.
(2) Interests in a FASIT
In addition to the foregoing asset qualification requirements, the
interests in a FASIT also must meet specific requirements. All of the interests
in a FASIT must belong to either of the following:
(1) one or more classes of regular interests or
(2) a single class of ownership interest that is held by an
Eligible Corporation (as defined in this prospectus).
FASIT regular interests generally will be treated as debt for federal
income tax purposes. FASIT ownership interests generally will not treated as
debt for federal income tax purposes, but rather as representing rights and
responsibilities with respect to the taxable income or loss of the related
FASIT. The prospectus supplement for each Series of Notes or Certificates, as
applicable, will indicate which securities of the Series will be designated as
regular interests, and which, if any, will be designated as ownership interests.
A FASIT interest generally qualifies as a regular interest if:
(1) it is designated as a regular interest;
(2) it has a stated maturity no greater than thirty years;
(3) it entitles its holder to a specified principal amount;
(4) the issue price of the interest does not exceed 125% of its
stated principal amount;
(5) the yield to maturity of the interest is less than the
applicable Treasury rate published by the IRS plus 5%; and
(6) if it pays interest, this interest is payable at either:
(a) a fixed rate with respect to the principal amount of the
regular interest or
(b) a permissible variable rate with respect to the
principal amount.
Permissible variable rates for FASIT regular interests are the same as those for
REMIC regular interests. See "REMICs--Taxation of Owners of Regular
Securities--(1) General" for a discussion of permissible variable rates for
REMIC regular interests.
If an interest in a FASIT fails to meet one or more of the
requirements set out in clauses (3), (4), or (5) in the immediately preceding
paragraph, but otherwise meets all requirements to be treated as a FASIT, it may
still qualify as a type of regular interest known as a "high-yield interest." In
addition, if an interest in a FASIT fails to meet the requirement of clause (6),
but the interest payable on the interest consists of a specified portion of the
interest payments on permitted assets and that portion does not vary over the
life of the security, the interest will also qualify as a high-yield interest.
See "--Taxation of Owners of FASIT Regular Securities," "--Taxation of
Owners of High-Yield Interests" and "--Taxation of FASIT Ownership Securities"
below.
(3) Consequences of Disqualification
If the trust fund fails to comply with one or more of the Code's
ongoing requirements for FASIT status during any taxable year, the Code provides
that it's FASIT status may be lost for that year and thereafter. If FASIT status
is lost, the treatment of the former FASIT and interests in the FASIT for U.S.
federal income tax purposes is uncertain. Although the Code authorizes the
Treasury to issue regulations that address situations where a failure to meet
the requirements for FASIT status occurs inadvertently and in good faith, final
regulations have not yet been issued. It is possible that disqualification
relief might be accompanied by sanctions, such as the imposition of a corporate
tax on all or a portion of the FASIT's income for the period of time in which
the requirements for FASIT status are not satisfied.
TAXATION OF OWNERS OF FASIT REGULAR SECURITIES
(1) General
Payments received by holders of FASIT Regular Securities generally
will be accorded the same tax treatment under the Code as payments received on
other taxable debt instruments. Holders of FASIT Regular Securities must report
income from these Notes or Certificates, as applicable, under an accrual method
of accounting, even if they otherwise would have used the cash receipts and
disbursements method. Except in the case of FASIT Regular Securities issued with
original issue discount, interest paid or accrued on a FASIT Regular Security
generally will be treated as ordinary income to the Holder and a principal
payment on the security will be treated as a return of capital to the extent
that the securityholder's basis is allocable to that payment.
(2) Original Issue Discount; Market Discount; Acquisition Premium
FASIT Regular Securities issued with original issue discount or
acquired with market discount or acquisition premium generally will treat
interest and principal payments on these Notes or Certificates, as applicable,
in the same manner described for REMIC Regular Securities. See "--REMICs -
Taxation of Owners of Regular Securities" above.
(3) Sale or Exchange
If the FASIT Regular Securities are sold, the holder generally will
recognize gain or loss upon the sale in the manner described above for REMIC
Regular Securities. See "--REMICs--Taxation of Owners of Regular
Securities--Sale or Exchange of Regular Securities."
TAXATION OF OWNERS OF HIGH-YIELD INTERESTS
(1) General
The treatment of high-yield interests is intended to ensure that the
return on instruments issued by a FASIT yielding an equity-like return continues
to have a corporate level tax. High-yield interests are subject to special rules
regarding the eligibility of holders of this interest, and the ability of these
holders to offset income derived from their FASIT Security with losses.
High-yield interests may only be held by Eligible Corporations, other
FASITs, and dealers in securities who acquire such interests as inventory
(together, "Eligible Holders").
o An "Eligible Corporation" is a taxable domestic C corporation
that does not qualify as a regulated investment company, a real
estate investment trust, a REMIC, or a cooperative.
If a securities dealer (other than an Eligible Corporation) initially
acquires a high-yield interest as inventory, but later begins to hold it for
investment, the dealer will be subject to an excise tax equal to the income from
the high-yield interest multiplied by the highest corporate income tax rate. In
addition, transfers of high-yield interests to a person that is not an Eligible
Holder will be disregarded for federal income tax purposes, and the transferor
will continue to be treated as the holder of the high-yield interest.
In addition, the FASIT Provisions contain an anti-abuse rule that
imposes corporate income tax on income derived from a FASIT Regular Interest
that is held by a pass-through entity (other than another FASIT) that issues
debt or equity securities backed by the FASIT Regular Interest and that have an
original yield to maturity that is both five percentage points above the
applicable federal rate and more than the yield on the FASIT Regular Interest.
The excise tax is limited to those arrangements that have a principal purpose of
avoiding the ownership restriction relating to high-yield interests.
(2) Treatment of Losses
The holder of a high-yield interest may not use non-FASIT current
losses or net operating loss carryforwards or carrybacks to offset any income
derived from the high-yield interest, for either regular federal income tax
purposes or for alternative minimum tax purposes.
TAXATION OF FASIT OWNERSHIP SECURITY
(1) General
A FASIT Ownership Security represents the residual equity interest in
a FASIT. As such, the holder of a FASIT Ownership Security determines its
taxable income by taking into account all assets, liabilities, and items of
income, gain, deduction, loss, and credit of a FASIT. The holder, however, does
not take into account any item of income, gain or deduction allocable to a
"prohibited transaction" as discussed below. In general, the character of the
income to the holder of a FASIT Ownership Security will be the same as the
character of the income to the FASIT, except that any tax-exempt interest income
taken into account by the holder of a FASIT Ownership Security is treated as
ordinary income. In determining that taxable income, the holder of a FASIT
Ownership Security must determine the amount of interest, original issue
discount, market discount, and premium recognized with respect to each debt
instrument held by the FASIT according to a constant yield methodology and under
an accrual method of accounting. In addition, a holder of a FASIT Ownership
Security is subject to the same limitations on their ability to use losses to
offset income from their FASIT Regular Securities as are holders of high-yield
interest. See "--Taxation of Owners of High-Yield Interests" above.
Rules similar to the wash sale rules applicable to REMIC Residual
Securities also will apply to FASIT Ownership Security. Accordingly, losses on
dispositions of a FASIT Ownership Security generally will be disallowed where
within six months before or after the disposition, the seller of the Security
acquires any other FASIT Ownership Security that is economically comparable to a
FASIT Ownership Security. In addition, if any security that is sold or
contributed to a FASIT by the holders of the related FASIT Ownership Security
was required to be marked-to-market under Section 475 of the Code by the holder,
then Section 475 of the Code will continue to apply to these securities, except
that the amount realized under the mark-to-market rules cannot be less than the
securities' value determined after applying special valuation rules contained in
the FASIT Provisions. Those special valuation rules generally require that the
value of debt instruments that are not traded on an established securities
market be determined by calculating the present value of the reasonably expected
payments under the instrument using a discount rate of 120% of the applicable
federal rate, compounded semi-annually.
(2) Prohibited Transaction
The holder of a FASIT Ownership Security is required to pay a penalty
excise tax equal to 100 percent of net income derived from:
(1) an asset that is not a permitted asset;
(2) any disposition of an asset other than a permitted
disposition (as described below);
(3) any income attributable to loans originated by the FASIT; and
(4) compensation for services (other than fees for a waiver,
amendment, or consent with respect to permitted assets other than
foreclosure property).
A permitted disposition is any disposition of any permitted asset:
(1) arising from complete liquidation of a class of regular
interest;
(2) incident to the foreclosure, default (or imminent default) on
the asset;
(3) incident to the bankruptcy or insolvency of the FASIT;
(4) necessary to avoid a default on any indebtedness of the a
FASIT attributable to a default (or imminent default) on an asset of
the FASIT;
(5) to facilitate a clean-up call; or
(6) to substitute a permitted debt instrument for another
permitted debt instrument or in order to reduce over-collateralization
by distributing a debt instrument contributed by the holder of the
FASIT Ownership Security to such holder, but only if a principal
purpose of acquiring the debt instrument which is disposed of was not
the recognition of gain (or the reduction of a loss) arising from an
increase in its market value after its acquisition by the FASIT.
Notwithstanding this rule, the holder of an Ownership Security may currently
deduct its losses incurred in prohibited transactions in computing its taxable
income for the year of the loss. A Series of Notes or Certificates, as
applicable, for which a FASIT election is made generally will be structured in
order to avoid application of the prohibited transactions tax.
(3) Backup Withholding, Reporting and Tax Administration
Holders of FASIT Securities will be subject to backup withholding to
the same extent as holders of REMIC Securities.
GRANTOR TRUST FUNDS
CHARACTERIZATION. For each series of Grantor Trust Securities, Federal
Tax Counsel will deliver its opinion that the Grantor Trust Fund will not be
classified as an association taxable as a corporation and that the Grantor Trust
Fund will be classified as a grantor trust under subpart E, Part I of subchapter
J of the Code. In this case, beneficial owners of Grantor Trust Securities
(referred to in this Prospectus as "Grantor Trust Securityholders") will be
treated for federal income tax purposes as owners of a portion of the Grantor
Trust Fund's assets as described below.
TAXATION OF GRANTOR TRUST SECURITYHOLDERS. Subject to the discussion
below under "Stripped Certificates" and "Subordinated Certificates," each
Grantor Trust Securityholder will be treated as the owner of a pro rata
undivided interest in the assets of the Grantor Trust Fund. Accordingly, and
subject to the discussion below of the recharacterization of the servicing fee,
each Grantor Trust Securityholder must include in income its pro rata share of
the interest and other income from the assets of the Grantor Trust Fund,
including any interest, original issue discount, market discount, prepayment
fees, assumption fees, and late payment charges with respect to the assets, and,
subject to limitations discussed below, may deduct its pro rata share of the
fees and other deductible expenses paid by the Grantor Trust Fund, at the same
time and to the same extent as these items would be included or deducted by the
Grantor Trust Securityholder if the Grantor Trust Securityholder held directly a
pro rata interest in the assets of the Grantor Trust Fund and received and paid
directly the amounts received and paid by the Grantor Trust Fund. Any amounts
received by a Grantor Trust Securityholder in lieu of amounts due with respect
to any asset of the Grantor Trust Fund because of a default or delinquency in
payment will be treated for federal income tax purposes as having the same
character as the payments they replace.
Each Grantor Trust Securityholder will be entitled to deduct its pro
rata share of servicing fees, prepayment fees, assumption fees, any loss
recognized upon an assumption and late payment charges retained by the servicer,
provided that these amounts are reasonable compensation for services rendered to
the Grantor Trust Fund. Grantor Trust Securityholders that are individuals,
estates or trusts will be entitled to deduct their share of expenses only to the
extent these expenses plus all other miscellaneous itemized deductions exceed
two percent of the Grantor Trust Securityholder's adjusted gross income, and
will be allowed no deduction for these expenses in determining their liabilities
for alternative minimum tax. In addition, Section 68 of the Code provides that
the amount of itemized deductions otherwise allowable for the taxable year for
an individual whose adjusted gross income exceeds a prescribed threshold amount
will be reduced by the lesser of (1) 3% of the excess of adjusted gross income
over the specified threshold amount or (2) 80% of the amount of itemized
deductions otherwise allowable for the applicable taxable year. In the case of a
partnership that has 100 or more partners and elects to be treated as an
"electing large partnership," 70% of the partnership's miscellaneous itemized
deductions will be disallowed, although the remaining deductions will generally
be allowed at the partnership level and will not be subject to the 2% floor that
would otherwise be applicable to individual partners.
The servicing compensation to be received by the servicer may be
questioned by the IRS as exceeding a reasonable fee for the services being
performed in exchange for the servicing compensation, and a portion of the
servicing compensation could be recharacterized as an ownership interest
retained by the servicer or other party in a portion of the interest payments to
be made with respect to the Grantor Trust Fund's assets. In this event, a
certificate might be treated as a Stripped Certificate subject to the stripped
bond rules of Section 1286 of the Code, and either the original issue discount
or the market discount rules. See the discussion below under "--Stripped
Certificates". Except as discussed below under "Stripped Certificates" or
"--Subordinated Certificates," this discussion assumes that the servicing fees
paid to the servicer do not exceed reasonable servicing compensation.
A purchaser of a Grantor Trust Security will be treated as purchasing
an interest in each asset in the Grantor Trust Fund at a price determined by
allocating the purchase price paid for the certificate among all asset of the
Grantor Trust Fund in proportion to their fair market values at the time of the
purchase of the certificate. To the extent that the portion of the purchase
price of a Grantor Trust Security allocated to an asset of the Grantor Trust
Fund is less than or greater than the stated redemption price at maturity of the
asset, the interest in the asset will have been acquired at a discount or
premium. See "--Market Discount" and "--Premium," below.
The treatment of any discount on an asset of the Grantor Trust Fund
will depend on whether the discount represents original issue discount or market
discount. Except as indicated otherwise in the applicable Prospectus Supplement,
it is not expected that any asset of the Grantor Trust Fund (other than a
Stripped Agency Security or other instrument evidencing ownership of specific
interest and/or principal of a particular bond) will have original issue
discount (except as discussed below under "Stripped Certificates" or
"Subordinated Certificates"). For the rules governing original issue discount,
see "REMICs--Taxation of Owners of Regular Securities--Original Issue Discount"
above.
The information provided to Grantor Trust Securityholders will not
include information necessary to compute the amount of discount or premium, if
any, at which an interest in each asset of the Grantor Trust Fund is acquired.
MARKET DISCOUNT. A Grantor Trust Securityholder that acquires an
undivided interest in the Grantor Trust Fund's assets may be subject to the
market discount rules of Sections 1276 through 1278 to the extent an undivided
interest in an asset of the Grantor Trust Fund is considered to have been
purchased at a "market discount". For a discussion of the market discount rules
under the Code, see "REMICs--Taxation of Owners of Regular Securities--Market
Discount" above. As discussed above, to the extent an asset of the Grantor Trust
Fund is a Stripped Agency Security or other instrument evidencing ownership of
specific interest and/or principal of a particular bond, it will be subject to
the rules relating to original issue discount (in lieu of the rules relating to
market discount). See "REMICs--Taxation of Owners of Regular
Securities--Original Issue Discount" above.
PREMIUM. To the extent a Grantor Trust Securityholder is considered to
have purchased an undivided interest in an asset of the Grantor Trust Fund for
an amount that is greater than the stated redemption price at maturity of the
interest, the Grantor Trust Securityholder will be considered to have purchased
the interest in the asset with "amortizable bond premium" equal in amount to the
excess. For a discussion of the rules applicable to amortizable bond premium,
see "REMICs--Taxation of Owners of Regular Securities--Amortizable Premium"
above.
STATUS OF THE GRANTOR TRUST SECURITIES. Except for that portion of a
trust fund consisting of unsecured home improvement loans and except as
qualified below, a Grantor Trust Security owned by a:
o "domestic building and loan association" within the meaning of
Code Section 7701(a)(19) will be considered to represent "loans .
. . secured by an interest in real property" within the meaning
of Code Section 7701(a)(19)(C)(v), provided that the real
property securing the mortgage loans represented by that Grantor
Trust Security is of the type described in that section of the
Code.
o real estate investment trust will be considered to represent
"real estate assets" within the meaning of Code Section
856(c)(4)(A) to the extent that the assets of the related Grantor
Trust Fund consist of qualified assets, and interest income on
those assets will be considered "interest on obligations secured
by mortgages on real property" to that extent within the meaning
of Code Section 856(c)(3)(B).
o REMIC will be considered to represent an "obligation (including
any participation or certificate of beneficial ownership therein)
which is principally secured by an interest in real property"
within the meaning of Code Section 860G(a)(3)(A) to the extent
that the assets of the related Grantor Trust Fund consist of
"qualified mortgages" within the meaning of Code Section
860G(a)(3).
An issue arises as to whether Buydown Mortgage Loans may be
characterized in their entirety under the Code provisions cited in the first two
bullet points of the immediately preceding paragraph or whether the amount
qualifying for that treatment must be reduced by the amount of the Buydown
Mortgage Funds. Further, although it is not entirely clear, Grantor Trust
Certificates that are Stripped Certificates (as described below under "Stripped
Certificates") should be treated as qualifying under the Code provisions cited
in the bullet points above to the same extent as Grantor Trust Certificates that
are not Stripped Certificate. Grantor Trust Securityholders are urged to consult
their own tax advisors concerning the characterization of the securityholder's
investment for federal income tax purposes.
STRIPPED CERTIFICATES. Some classes of certificates may be subject to
the stripped bond rules of Section 1286 of the Code and for purposes of this
discussion will be referred to as "Stripped Certificates." In general, a
Stripped Certificate will be subject to the stripped bond rules where there has
been a separation of ownership of the right to receive some or all of the
principal payments on a mortgage loan held by the Grantor Trust Fund from
ownership of the right to receive some or all of the related interest payments.
Generally, where a separation has occurred, under the stripped bond rules of
Section 1286 of the Code, the holder of a right to receive a principal or
interest payment on the bond is required to accrue into income, on a constant
yield basis under rules governing original issue discount (see "REMICs--Taxation
of Owners of Regular Securities--Original Issue Discount"), the difference
between the holder's initial purchase price for the right to receive principal
or interest, and the principal or interest payment to be received with respect
to that right. However, a holder of a Stripped Certificate will account for any
discount on the Stripped Certificate (other than an interest treated as a
"stripped coupon") as market discount rather than original issue discount if
either (i) the amount of original issue discount with respect to the Stripped
Certificate was treated as zero under the original issue discount DE MINIMIS
rule when the Stripped Certificate was stripped or (ii) no more than 100 basis
points (including any amount of servicing in excess of reasonable servicing) is
stripped off from the mortgage assets.
Certificates will constitute Stripped Certificates and will be subject
to these rules under various circumstances, including the following:
o if any servicing compensation is deemed to exceed a reasonable
amount;
o if the company or any other party retains a retained yield with
respect to the assets held by the Grantor Trust Fund;
o if two or more classes of certificates are issued representing
the right to non-pro rata percentages of the interest or
principal payments on the Grantor Trust Fund's assets; or
o if certificates are issued which represent the right to
interest-only payments or principal-only payments.
The tax treatment of the Stripped Certificates with respect to the
application of the original issue discount provisions of the Code is currently
unclear. However, the trustee intends to treat each Stripped Certificate as a
single debt instrument issued on the day it is purchased for purposes of
calculating any original issue discount. Original issue discount with respect to
a Stripped Certificate must be included in ordinary gross income for federal
income tax purposes as it accrues in accordance with the constant yield method
that takes into account the compounding of interest and this accrual of income
may be in advance of the receipt of any cash attributable to that income. See
"REMICs--Taxation of Owners of Regular Securities--Original Issue Discount"
above. For purposes of applying the original issue discount provisions of the
Code, the issue price of a Stripped Certificate will be the purchase price paid
by each holder of the Stripped Certificate and the stated redemption price at
maturity may include the aggregate amount of all payments to be made with
respect to the Stripped Certificate whether or not denominated as interest. The
amount of original issue discount with respect to a Stripped Certificate may be
treated as zero under the original issue discount DE MINIMIS rules described
above.
SUBORDINATED CERTIFICATES. In the event the Grantor Trust Fund issues
two classes of Grantor Trust Securities that are identical except that one class
is a subordinate class, with a relatively high certificate pass-through rate,
and the other is a senior class, with a relatively low certificate pass-through
rate (referred to in this Prospectus as the "Subordinate Certificates" and
"Senior Certificates", respectively), the Grantor Trust Securityholders in the
aggregate will be deemed to have acquired the following assets: (1) the
principal portion of each mortgage loan plus a portion of the interest due on
each mortgage loan (the "Grantor Trust Fund Stripped Bond"), and (2) a portion
of the interest due on each mortgage loan equal to the difference between the
Interest Rate on the Subordinate Certificates and the Interest Rate on the
Senior Certificates, if any, which difference is then multiplied by the
Subordinate Class Percentage (the "Grantor Trust Fund Stripped Coupon"). The
"Subordinate Class Percentage" equals the initial aggregate principal amount of
the Subordinate Certificates divided by the sum of the initial aggregate
principal amount of the Subordinate Certificates and the Senior Certificates.
The "Senior Class Percentage" equals the initial aggregate principal amount of
the Senior Certificates divided by the sum of the initial aggregate principal
amount of the Subordinate Certificates and the Senior Certificates.
The Senior Certificateholders in the aggregate will own the Senior
Class Percentage of the Grantor Trust Fund Stripped Bond and accordingly each
Senior Certificateholder will be treated as owning its pro rata share of such
asset. The Senior Certificateholders will not own any portion of the Grantor
Trust Fund Stripped Coupon. The Subordinate Certificateholders in the aggregate
own both the Subordinate Class Percentage of the Grantor Trust Fund Stripped
Bond plus 100% of the Grantor Trust Fund Stripped Coupon, if any, and
accordingly each Subordinate Certificateholder will be treated as owning its pro
rata share in both assets. The Grantor Trust Fund Stripped Bond will be treated
as a "stripped bond" and the Grantor Trust Fund Stripped Coupon will be treated
as "stripped coupons" within the meaning of Section 1286 of the Code.
Although not entirely clear, the interest income on the Subordinate
Certificates and the portion of the servicing fee allocable to such certificates
that does not constitute excess servicing will be treated by the Grantor Trust
Fund as qualified stated interest, assuming the interest with respect to the
mortgage loans held by the Grantor Trust Fund would otherwise qualify as
qualified stated interest. Accordingly, except to the extent modified below, the
income of the Subordinate Certificates will be reported in the same manner as
described generally above for holders of Senior Certificates.
If the Subordinate Certificateholders receive distribution of less
than their share of the Grantor Trust Fund's receipts of principal or interest
(the "Shortfall Amount") because of the subordination of the Subordinate
Certificates, holders of Subordinate Certificates would probably be treated for
federal income tax purposes as if they had
o received as distributions their full share of receipts;
o paid over to the Senior Certificateholders an amount equal to the
Shortfall Amount; and
o retained the right to reimbursement of the relevant amounts to
the extent these amounts are otherwise available as a result of
collections on the mortgage loans or amounts available from a
reserve account or other form of credit enhancement, if any.
Under this analysis,
o Subordinate Certificateholders would be required to accrue as
current income any interest income, original issue discount, or
(to the extent paid on assets of the Grantor Trust Fund) accrued
market discount of the Grantor Trust Fund that was a component of
the Shortfall Amount, even though that amount was in fact paid to
the Senior Certificateholders;
o a loss would only be allowed to the Subordinate
Certificateholders when their right to receive reimbursement of
the Shortfall Amount became worthless (i.e., when it becomes
clear that amount will not be available from any source to
reimburse the loss); and
o reimbursement of the Shortfall Amount prior to a claim of
worthlessness would not be taxable income to Subordinate
Certificateholders because the amount was previously included in
income.
Those results should not significantly affect the inclusion of income for
Subordinate Certificateholders on the accrual method of accounting, but could
accelerate inclusion of income to Subordinate Certificateholders on the cash
method of accounting by, in effect, placing them on the accrual method.
Moreover, the character and timing of loss deductions are unclear. Subordinate
Certificateholders are strongly urged to consult their own tax advisors
regarding the appropriate timing, amount and character of any losses sustained
with respect to the Subordinate Certificates including any loss resulting from
the failure to recover previously accrued interest or discount income.
ELECTION TO TREAT ALL INTEREST AS ORIGINAL ISSUE DISCOUNT. The
Treasury Regulations relating to original issue discount permit a Grantor Trust
Securityholder to elect to accrue all interest, discount, including DE MINIMIS
market or original issue discount, reduced by any premium, in income as
interest, based on a constant yield method. If an election were to be made with
respect to an interest in a mortgage loan with market discount, the Grantor
Trust Securityholder would be deemed to have made an election to include in
income currently market discount with respect to all other debt instruments
having market discount that the Grantor Trust Securityholder acquires during the
year of the election or afterward. See "--Market Discount" above. Similarly, a
Grantor Trust Securityholder that makes this election for an interest in a
mortgage loan that is acquired at a premium will be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that the Grantor Trust Securityholder owns at the
beginning of the first taxable year to which the election applies or acquires
afterward. See "--Premium" above. The election to accrue interest, discount and
premium on a constant yield method with respect to a Grantor Trust Security is
irrevocable.
PREPAYMENTS. The Taxpayer Relief Act of 1997 (the "1997 Act") contains
a provision requiring original issue discount on any pool of debt instruments
the yield on which may be affected by reason of prepayments be calculated taking
into account the Prepayment Assumption and requiring the discount to be taken
into income on the basis of a constant yield to assumed maturity taking account
of actual prepayments. The legislative history to the 1986 Act states that
similar rules apply with respect to market discount and amortizable bond premium
on debt instruments.
SALE OR EXCHANGE OF A GRANTOR TRUST SECURITY. Sale or exchange of a
Grantor Trust Security prior to its maturity will result in gain or loss equal
to the difference, if any, between the amount realized, exclusive of amounts
attributable to accrued and unpaid interest (which will be treated as ordinary
income allocable to the related asset of the Grantor Trust Fund), and the
owner's adjusted basis in the Grantor Trust Security. The adjusted basis
generally will equal the seller's cost for the Grantor Trust Security, increased
by the original issue discount and any market discount included in the seller's
gross income with respect to the Grantor Trust Security, and reduced, but not
below zero, by any premium amortized by the seller and by principal payments on
the Grantor Trust Security previously received by the seller. The gain or loss
will, except as discussed below, be capital gain or loss to an owner for which
the assets of the Grantor Trust Fund represented by a Grantor Trust Security are
"capital assets" within the meaning of Section 1221. A capital gain or loss will
be long-term or short-term depending on whether or not the Grantor Trust
Security has been owned for the long-term capital gain holding period, currently
more than one year.
Notwithstanding the foregoing, any gain realized on the sale or
exchange of a Grantor Trust Security will be ordinary income to the extent of
the seller's interest in accrued market discount on Grantor Trust Fund assets
not previously taken into income. See "--Market Discount," above. Further,
Grantor Trust Securities will be "evidences of indebtedness" within the meaning
of Section 582(c)(1), so that gain or loss recognized from the sale of a Grantor
Trust Security by a bank or thrift institution to which such section applied
will be treated as ordinary gain or loss.
FOREIGN INVESTORS IN GRANTOR TRUST SECURITIES. A holder of a Grantor
Trust Security who is not a "U.S. person" (as defined above at "REMICs--Tax
Related Restrictions on Transfer of Residual Securities--Foreign Investors") and
is not subject to federal income tax as a result of any direct or indirect
connection to the United States other than its ownership of a Grantor Trust
Security generally will not be subject to United States income or withholding
tax in respect of payments of interest or original issue discount on its Grantor
Trust Security to the extent attributable to debt obligations held by the
Grantor Trust Fund that were originated after July 18, 1984, provided that the
Grantor Trust Securityholder complies to the extent necessary with certain
certification requirements which generally relate to the identity of the
beneficial owner and the status of the beneficial owner as a person that is not
a U.S. person. Interest or original issue discount on a Grantor Trust Security
attributable to debt obligations held by the Grantor Trust Fund that were
originated prior to July 19, 1984 will be subject to a 30% withholding tax
(unless such tax is reduced or eliminated by an applicable tax treaty). All
holders of Grantor Trust Securities should consult their tax advisors regarding
the tax documentation and certifications that must be provided to secure any
applicable exemptions from United States withholding taxes.
Any capital gain realized on the sale or other taxable disposition of
a Grantor Trust Security by a Non-U.S. Person (as defined above at
"REMICs--Taxation of Certain Foreign Investors--Regular Securities") generally
will be exempt from United States federal income and withholding tax, provided
that (i) such gain is not effectively connected with the conduct of a trade or
business in the United States by the Non-U.S. Person and (ii) in the case of an
individual Non-U.S. Person, the Non-U.S. Person is not present in the United
States for 183 days or more in the taxable year.
If the interest, gain or income with respect to a Grantor Trust
Security held by a Non-U.S. Person is effectively connected with the conduct of
a trade or business in the United States by the Non-U.S. Person (although exempt
from the withholding tax previously discussed if the holder provides an
appropriate statement establishing that such income is so effectively
connected), the holder generally will be subject to United States federal income
tax on the interest, gain or income at regular federal income tax rates. In
addition, if the Non-U.S. Person is a foreign corporation, it may be subject to
a branch profits tax equal to 30% of its "effectively connected earnings and
profits," within the meaning of the Code, for the taxable year, as adjusted for
certain items, unless it qualifies for a lower rate under an applicable tax
treaty (as modified by the branch profits tax rules).
BACKUP WITHHOLDING. Distributions made on the Grantor Trust Securities
and proceeds from the sale of the Grantor Trust Securities will be subject to a
"backup" withholding tax of 31% if, in general, the Grantor Trust Securityholder
fails to comply with particular identification procedures, unless the holder is
an exempt recipient under applicable provisions of the Code and, if necessary,
demonstrates such status. Any amounts so withheld would be refunded by the IRS
or allowable as a credit against the Grantor Trust Securityholder's federal
income tax.
PARTNERSHIP TRUST FUNDS AND DISREGARDED TRUST FUNDS
CLASSIFICATION OF TRUST FUNDS
For each series of Partnership Certificates or Debt Securities,
Stroock & Stroock & Lavan LLP will deliver its opinion that the trust fund will
not be a taxable mortgage pool or an association (or publicly traded
partnership) taxable as a corporation for federal income tax purposes. This
opinion will be based on the assumption that the terms of the related Agreement
and related documents will be complied with, and on counsel's opinion that the
nature of the income of the trust fund will exempt it from the rule that some
publicly traded partnerships are taxable as corporations.
TAXATION OF DEBT SECURITYHOLDERS
The depositor will agree, and the securityholders will agree by their
purchase of Debt Securities, to treat the Debt Securities as debt for federal
income tax purposes. No regulations, published rulings, or judicial decisions
exist that discuss the characterization for federal income tax purposes of
securities with terms substantially the same as the Debt Securities. However,
for each series of Debt Securities, Stroock & Stroock & Lavan LLP will deliver
its opinion that the Debt Securities will be classified as indebtedness for
federal income tax purposes. The discussion below assumes this characterization
of the Debt Securities is correct.
If, contrary to the opinion of counsel, the Internal Revenue Service
successfully asserted that the Debt Securities were not debt for federal income
tax purposes, the Debt Securities might be treated as equity interests in the
trust fund. If so treated, the trust fund might be treated as a publicly traded
partnership that would be taxable as a corporation unless it met particular
qualifying income tests, and the resulting taxable corporation would not be able
to reduce its taxable income by deductions for interest expense on Debt
Securities recharacterized as equity. Treatment of the Debt Securities as equity
interests in a partnership could have adverse tax consequences to some holders,
even if the trust fund were not treated as a publicly traded partnership taxable
as a corporation. For example, income allocable to foreign holders might be
subject to United States tax and United States tax return filing and withholding
requirements, income allocable to tax-exempt holders might constitute "unrelated
business taxable income" (if some, but not all, of the Debt Securities were
recharacterized as equity in a partnership), individual holders might be subject
to limitations on their ability to deduct their share of trust fund expenses,
and income from the trust fund's assets would be taxable to owners of Debt
Securities without regard to whether cash distributions are made to such owners
and without regard to the owners' method of tax accounting.
Debt Securities generally will be subject to the same rules of
taxation as Regular Securities issued by a REMIC, as described above, except
that (1) income reportable on Debt Securities is not required to be reported
under the accrual method unless the holder otherwise uses the accrual method and
(2) the special 110% yield rule treating a portion of the gain on sale or
exchange of a Regular Security as ordinary income is inapplicable to Debt
Securities. See "--REMICs--Taxation of Owners of Regular Securities" and "--Sale
or Exchange of Regular Securities."
Further, for federal income tax purposes, (i) Debt Securities held by
a thrift institution taxed as a domestic building and loan association will not
constitute "loans . . . secured by an interest in real property" within the
meaning of Section 7701(a)(19)(C)(v) of the Code; (ii) interest on Debt
Securities held by a real estate investment trust will not be treated as
"interest on obligations secured by mortgages on real property or on interests
in real property "within the meaning of Code Section 856(c)(3)(B); (iii) Debt
Securities held by a real estate investment trust will not constitute "real
estate assets" or "Government securities" within the meaning of Section
856(c)(4)(A) of the Code; (iv) Debt Securities held by a regulated investment
company will not constitute "Government securities" within the meaning of
Section 851(b)(3)(A)(i) of the Code; and (v) Debt Securities will not constitute
"qualified mortgages" with in the meaning of Section 860G(a)(3) of the Code for
REMICs.
TAXATION OF OWNERS OF PARTNERSHIP CERTIFICATES
(1) Treatment of the Trust Fund as a Partnership
The Partnership Trust Fund will agree, and the related owners of
Partnership Certificates ("Partnership Certificate Owners") will agree by their
purchase of Partnership Certificates, if there is more than one Partnership
Certificate Owner, to treat the Partnership Trust Fund as a partnership for
purposes of federal and state income tax, franchise tax and any other tax
measured in whole or in part by income, with the assets of the partnership being
the assets held by the Partnership Trust Fund, the partners of the partnership
being the Partnership Certificate Owners, including, to the extent relevant, the
depositor in its capacity as recipient of distributions from any reserve fund,
and the Debt Securities, if any, being debt of the partnership, and if there is
one Partnership Certificate Owner, to treat the Partnership Certificate Owner as
the owner of the assets of the Partnership Trust Fund and to treat the
Partnership Trust Fund as a disregarded entity. However, the proper
characterization of the arrangement involving the Partnership Trust Fund, the
Partnership Certificates, the Debt Securities and the depositor is not certain
because there is no authority on transactions closely comparable to that
contemplated in this prospectus.
A variety of alternative characterizations are possible. For example,
because the Partnership Certificates have certain features characteristic of
debt, the Partnership Certificates might be considered debt of the Partnership
Trust Fund. Generally, provided such Partnership Certificates are issued at or
close to face value, any such characterization would not result in materially
adverse tax consequences to holders of Partnership Certificates as compared to
the consequences from treatment of the Partnership Certificates as equity in a
partnership, described below. The following discussion assumes that the
Partnership Certificates represent equity interests in a partnership. The
following discussion also assumes that all payments on the Partnership
Certificates are denominated in U.S. dollars, none of the Partnership
Certificates have Interest Rates which would qualify as contingent interest
under the Treasury regulations relating to original issue discount, and that a
series of securities includes a single class of Partnership Certificates. If
these conditions are not satisfied with respect to any given series of
Partnership Certificates, additional tax considerations with respect to such
Partnership Certificates will be disclosed in the applicable prospectus
supplement.
(2) Partnership Taxation
As a partnership, the Partnership Trust Fund will not be subject to
federal income tax. Rather, each Partnership Certificate Owner will be required
to take into account separately the Partnership Certificate Owner's allocable
share of income, gains, losses, deductions and credits of the Partnership Trust
Fund, whether or not there is a corresponding cash distribution. Thus, cash
basis holders will in effect be required to report income from the Partnership
Certificates on the accrual basis and Partnership Certificate Owners may become
liable for taxes on Partnership Trust Fund income even if they have not received
cash from the Partnership Trust Fund to pay the taxes. The Partnership Trust
Fund's income will consist primarily of interest and finance charges earned on
the related mortgage loans, including appropriate adjustments for market
discount, original issue discount and bond premium, and any gain upon collection
or disposition of the mortgage loans.
The Partnership Trust Fund's deductions will consist primarily of
interest accruing with respect to the Debt Securities, servicing and other fees,
and losses or deductions upon collection or disposition of mortgage loans.
The tax items of a partnership are allocable to the partners in
accordance with the Code, Treasury regulations and the partnership agreement
(i.e., the Agreement and related documents). The Agreement will provide, in
general, that the Partnership Certificate Owners will be allocated taxable
income of the Partnership Trust Fund for each month equal to the sum of:
o the interest or other income that accrues on the Partnership
Certificates in accordance with their terms for the relevant
month including, as applicable, interest accruing at the related
Partnership Certificate Interest Rate for that month and interest
on amounts previously due on the Partnership Certificates but not
yet distributed;
o any income of the Partnership Trust Fund attributable to discount
on the related mortgage loans that corresponds to any excess of
the principal amount of the Partnership Certificates over their
initial issue price;
o any prepayment premium payable to the Partnership Certificate
Owners for the applicable month; and
o any other amounts of income payable to the Partnership
Certificate Owners for the applicable month.
The allocation will be reduced by any amortization by the Partnership Trust Fund
of premium on mortgage loans that corresponds to any excess of the issue price
of Partnership Certificates over their principal amount. All remaining taxable
income of the Partnership Trust Fund will be allocated to the depositor. Losses
will generally be allocated in the manner in which they are borne.
Based on the economic arrangement of the parties, the foregoing
approach for allocating income of the Partnership Trust Fund should be
permissible under applicable Treasury regulations, although no assurance can be
given that the IRS would not require a greater amount of income to be allocated
to Partnership Certificate Owners. Moreover, even under the foregoing method of
allocation, Partnership Certificate Owners may be allocated income equal to the
entire Partnership Certificate Interest Rate plus the other items described
above, even though the Partnership Trust Fund might not have sufficient cash to
make current cash distributions of the amount. In addition, because tax
allocations and tax reporting will be done on a uniform basis for all
Partnership Certificate Owners, but Partnership Certificate Owners may be
purchasing Partnership Certificates at different times and at different prices,
Partnership Certificate Owners may be required to report on their tax returns
taxable income that is greater or less than the amount reported to them by the
Partnership Trust Fund.
Assuming Debt Securities are also issued, all or substantially all of
the taxable income allocated to a Partnership Certificate Owner that is a
pension, profit sharing or employee benefit plan or other tax-exempt entity,
including an individual retirement account, will constitute "unrelated business
taxable income" generally taxable to the holder under the Code.
An individual taxpayer's share of expenses of the Partnership Trust
Fund, including fees to the servicer, but not interest expense, would be
miscellaneous itemized deductions and thus deductible only to the extent such
expenses plus all other miscellaneous itemized deductions exceeds two percent of
the individual's adjusted gross income. An individual taxpayer will be allowed
no deduction for his share of expenses of the Partnership Trust Fund, other than
interest, in determining his liability for alternative minimum tax. In addition,
Section 68 of the Code provides that the amount of itemized deductions otherwise
allowable for the taxable year for an individual whose adjusted gross income
exceeds a prescribed threshold amount will be reduced by the lesser of (1) 3% of
the excess of adjusted gross income over the specified threshold amount or (2)
80% of the amount of itemized deductions otherwise allowable for the applicable
taxable year. Accordingly, deductions might be disallowed to the individual in
whole or in part and might result in the Partnership Certificate Owner being
taxed on an amount of income that exceeds the amount of cash actually
distributed to the holder over the life of the Partnership Trust Fund. In the
case of a partnership that has 100 or more partners and elects to be treated as
an "electing large partnership," 70% of that partnership's miscellaneous
itemized deductions will be disallowed, although the remaining deductions will
generally be allowed at the partnership level and will not be subject to the 2%
floor that would otherwise be applicable to individual partners.
The Partnership Trust Fund intends to make all tax calculations
relating to income and allocations to Partnership Certificate Owners on an
aggregate basis to the extent relevant. If the IRS were to require that the
calculations be made separately for each mortgage loan, the calculations may
result in some timing and character differences under some circumstances.
(3) Discount and Premium
The purchase price paid by the Partnership Trust Fund for the related
mortgage loans may be greater or less than the remaining principal balance of
the mortgage loans at the time of purchase. If so, the mortgage loans will have
been acquired at a premium or market discount, as the case may be. See
"REMICs--Taxation of Owners of Regular Securities--Acquisition Premium" and "--
Market Discount" above. As indicated above, the Partnership Trust Fund will make
this calculation on an aggregate basis, but it is possible that the IRS might
require that it be recomputed on a mortgage loan-by-mortgage loan basis.
Further, with respect to any asset of the Partnership Trust Fund that is a
Stripped Agency Security or other instrument evidencing ownership of specific
interest and/or principal of a particular bond, it will be subject to the rules
relating to original issue discount with respect to such security or instrument
(in lieu of the rules relating to market discount). See "REMICs--Taxation of
Owners of Regular Securities--Original Issue Discount" above.
If the Partnership Trust Fund acquires the mortgage loans at a market
discount or premium, the Partnership Trust Fund will elect to include any market
discount in income currently as it accrues over the life of the mortgage loans
or to offset any premium against interest income on the mortgage loans. As
indicated above, a portion of the market discount income or premium deduction
may be allocated to Partnership Certificate Owners.
(4) Section 708 Termination
Under Section 708 of the Code, the Partnership Trust Fund will be
deemed to terminate for federal income tax purposes if 50% or more of the
capital and profits interests in the Partnership Trust Fund are sold or
exchanged within a 12-month period. If a termination occurs under Section 708 of
the Code, the Partnership Trust Fund will be considered to contribute its assets
to a new Partnership Trust Fund, which would be treated as a new partnership, in
exchange for Partnership Certificates in the new Partnership Trust Fund. The
original Partnership Trust Fund will then be deemed to distribute the
Partnership Certificates in the new Partnership Trust Fund to each of the owners
of Partnership Certificates in the original Partnership Trust Fund in
liquidation of the original Partnership Trust Fund. The Partnership Trust Fund
will not comply with particular technical requirements that might apply when a
constructive termination occurs. As a result, the Partnership Trust Fund may be
subject to some tax penalties and may incur additional expenses if it is
required to comply with those requirements. Furthermore, the Partnership Trust
Fund might not be able to comply with these requirements due to lack of data.
(5) Disposition of Partnership Certificates
Generally, capital gain or loss will be recognized on a sale of
Partnership Certificates in an amount equal to the difference between the amount
realized and the seller's tax basis in the Partnership Certificates sold. Any
gain or loss would be long-term capital gain or loss if the Partnership
Certificate Owner's holding period exceeded one year. A Partnership Certificate
Owner's tax basis in a Partnership Certificate will generally equal its cost,
increased by its share of Partnership Trust Fund income allocable to the
Partnership Certificate Owner and decreased by any distributions received or
losses allocated with respect to the Partnership Certificate. In addition, both
the tax basis in the Partnership Certificates and the amount realized on a sale
of a Partnership Certificate would include the Partnership Certificate Owner's
share, determined under Treasury Regulations, of the Debt Securities and other
liabilities of the Partnership Trust Fund. A Partnership Certificate Owner
acquiring Partnership Certificates at different prices will generally be
required to maintain a single aggregate adjusted tax basis in the Partnership
Certificates and, upon a sale or other disposition of some of the Partnership
Certificates, allocate a portion of the aggregate tax basis to the Partnership
Certificates sold, rather than maintaining a separate tax basis in each
Partnership Certificate for purposes of computing gain or loss on a sale of that
Partnership Certificate.
If a Partnership Certificate Owner is required to recognize an
aggregate amount of income (not including income attributable to disallowed
itemized deductions described above) over the life of the Partnership
Certificates that exceeds the aggregate cash distributions with respect to the
Partnership Certificates, the excess will generally give rise to a capital loss
upon the retirement of the Partnership Certificates.
(6) Allocations Between Transferors and Transferees
In general, the Partnership Trust Fund's taxable income and losses
will be determined each Due Period and the tax items for a particular Due Period
will be apportioned among the Partnership Certificate Owners in proportion to
the principal amount of Partnership Certificates owned by them as of the close
of the last day of that Due Period. As a result, a Partnership Certificate Owner
purchasing Partnership Certificates may be allocated tax items, which will
affect the purchaser's tax liability and tax basis, attributable to periods
before the actual transaction.
The use of a Due Period convention may not be permitted by existing
Treasury regulations. If a Due Period convention is not allowed, or only applies
to transfers of less than all of the partner's interest, taxable income or
losses of the Partnership Trust Fund might be reallocated among the Partnership
Certificate Owners. The Partnership Trust Fund's method of allocation between
transferors and transferees may be revised to conform to a method permitted by
future laws, regulations or other IRS guidance.
(7) Section 731 Distributions
In the case of any distribution to a Partnership Certificate Owner, no
gain will be recognized to that Partnership Certificate Owner to the extent that
the amount of any money distributed for that Partnership Certificate exceeds the
adjusted basis of that Partnership Certificate Owner's interest in the
Partnership Certificate. To the extent that the amount of money distributed
exceeds that Partnership Certificate Owner's adjusted basis, gain will be
currently recognized. In the case of any distribution to a Partnership
Certificate Owner, no loss will be recognized except upon a distribution in
liquidation of a Partnership Certificate Owner's interest. Any gain or loss
recognized by a Partnership Certificate Owner generally will be capital gain or
loss.
(8) Section 754 Election
In the event that a Partnership Certificate Owner sells its
Partnership Certificates at a profit (or loss), the purchasing Partnership
Certificate Owner will have a higher (or lower) basis in the Partnership
Certificates than the selling Partnership Certificate Owner had. The tax basis
of the Partnership Trust Fund's assets will not be adjusted to reflect that
higher (or lower) basis unless the Partnership Trust Fund were to file an
election under Section 754 of the Code. In order to avoid the administrative
complexities that would be involved in keeping accurate accounting records, as
well as potentially onerous information reporting requirements, the Partnership
Trust Fund current does not intend to make an election under Section 754 of the
Code. As a result, Partnership Certificate Owners might be allocated a greater
or lesser amount of Partnership Trust Fund income than would be appropriate
based on their own purchase price for Partnership Certificates.
(9) Administrative Matters
The trustee is required to keep or cause to be kept complete and
accurate books of the Partnership Trust Fund. The trustee will file a
partnership information return (IRS Form 1065) with the IRS for each taxable
year of the Partnership Trust Fund and will report each Partnership Certificate
Owner's allocable share of items of Partnership Trust Fund income and expense to
Partnership Certificate Owners and the IRS on Schedule K-1. The Partnership
Trust Fund will provide the Schedule K-1 information to nominees that fail to
provide the Partnership Trust Fund with the information statement described
below and the nominees will be required to forward this information to the
beneficial owners of the Partnership Certificates. Generally, holders must
timely file tax returns that are consistent with the information return filed by
the Partnership Trust Fund or be subject to penalties unless the holder notifies
the IRS of all the inconsistencies.
Under Section 6031 of the Code, any person that holds Partnership
Certificates as a nominee at any time during a calendar year is required to
furnish the Partnership Trust Fund with a statement containing specific
information on the nominee, the beneficial owners and the Partnership
Certificates so held. The information includes (1) the name, address and
taxpayer identification number of the nominee and (2) as to each beneficial
owner
o the name, address and identification number of such person,
o whether such person is a United States person, a tax-exempt
entity or a foreign government, an international organization, or
any wholly owned agency or instrumentality of either of the
foregoing, and
o particular information on Partnership Certificates that were
held, bought or sold on behalf of the person throughout the year.
In addition, brokers and financial institutions that hold Partnership
Certificates through a nominee are required to furnish directly to the
Partnership Trust Fund information as to themselves and their ownership of
Partnership Certificates. A clearing agency registered under Section 17A of the
Exchange Act is not required to furnish any information statement to the
Partnership Trust Fund. The information referred to above for any calendar year
must be furnished to the Partnership Trust Fund on or before the following
January 31. Nominees, brokers and financial institutions that fail to provide
the Partnership Trust Fund with the information described above may be subject
to penalties.
Unless another designation is made, the depositor will be designated
as the tax matters partner for each Partnership Trust Fund in the pooling and
servicing greement and, as the tax matters partner, will be responsible for
representing the Partnership Certificate Owners in some specific disputes with
the IRS. The Code provides for administrative examination of a partnership as if
the partnership were a separate and distinct taxpayer. Generally, the statute of
limitations for partnership items does not expire before the later of three
years after the date on which the partnership information return is filed or the
last day for filing the return for the applicable year, determined without
regard to extensions. Any adverse determination following an audit of the return
of the Partnership Trust Fund by the appropriate taxing authorities could result
in an adjustment of the returns of the Partnership Certificate Owners, and,
under some circumstances, a Partnership Certificate Owner may be precluded from
separately litigating a proposed adjustment to the items of the Partnership
Trust Fund. An adjustment could also result in an audit of a Partnership
Certificate Owner's returns and adjustments of items not related to the income
and losses of the Partnership Trust Fund.
A special audit system exists for qualifying large partnerships that
have elected to apply a simplified flow-through reporting system under Sections
771 through 777 of the Code. Unless otherwise specified in the applicable
prospectus supplement, a Partnership Trust Fund will not elect to apply the
simplified flow-through reporting system.
(10) Taxation of Certain Foreign Partnership Certificate Owners
As used below, the term "Non-United States Owner" means a Partnership
Certificate Owner that is not a U.S. Person, as defined under "REMICs--Taxation
of Owners of Residual Securities--Tax Related Restrictions on Transfer of
Residual Securities--Foreign Investors," above.
It is not clear whether the Partnership Trust Fund would be considered
to be engaged in a trade or business in the United States for purposes of
federal withholding taxes with respect to Non-United States Owners because there
is no clear authority dealing with that issue under facts substantially similar
to those described in this Prospectus. Although it is not expected that the
Partnership Trust Fund would be engaged in a trade or business in the United
States for these purposes, the Partnership Trust Fund will withhold as if it
were so engaged in order to protect the Partnership Trust Fund from possible
adverse consequences of a failure to withhold. The Partnership Trust Fund
expects to withhold on the portion of its taxable income that is allocable to
Non-United States Owners pursuant to Section 1446 of the Code, as if the income
were effectively connected to a U.S. trade or business, at a rate of 35% for
Non-United States Owners that are taxable as corporations and 39.6% for all
other Non-United States Owners.
Subsequent adoption of Treasury regulations or the issuance of other
administrative pronouncements may require the Partnership Trust Fund to change
its withholding procedures.
Each Non-United States Owner might be required to file a U.S.
individual or corporate income tax return on its share of the income of the
Partnership Trust Fund including, in the case of a corporation, a return in
respect of the branch profits tax. Assuming the Partnership Trust Fund is not
engaged in a U.S. trade or business, a Non-United States Owner would be entitled
to a refund with respect to all or a portion of taxes withheld by the
Partnership Trust Fund if, in particular, the Owner's allocable share of
interest from the Partnership Trust Fund constituted "portfolio interest" under
the Code.
The interest, however, may not constitute "portfolio interest" if,
among other reasons, the underlying obligation is not in registered form or if
the interest is determined without regard to the income of the Partnership Trust
Fund, in the later case, the interest being properly characterized as a
guaranteed payment under Section 707(c) of the Code. If this were the case,
Non-United States Owners would be subject to a United States federal income and
withholding tax at a rate of 30 percent on the Partnership Trust Fund's gross
income, without any deductions or other allowances for costs and expenses
incurred in producing the income, unless reduced or eliminated pursuant to an
applicable treaty. In this case, a Non-United States Owner would only be
entitled to a refund for that portion of the taxes, if any, in excess of the
taxes that should have been withheld with respect to the interest.
(11) Backup Withholding
Distributions made on the Partnership Certificates and proceeds from
the sale of the Partnership Certificates will be subject to a "backup"
withholding tax of 31% if, in general, the Partnership Certificate Owner fails
to comply with particular identification procedures, unless the holder is an
exempt recipient under applicable provisions of the Code and, if necessary,
demonstrates such status. Any amounts so withheld would be refunded by the IRS
or allowable as a credit against the Non-United States Owner's federal income
tax.
CONSEQUENCES FOR PARTICULAR INVESTORS
The federal tax discussions above may not be applicable depending on a
securityholder's particular tax situation. The depositor recommends that
prospective purchasers consult their tax advisors for the tax consequences to
them of the purchase, ownership and disposition of REMIC Securities, FASIT
Securities, Grantor Trust Securities, Partnership Certificates and Debt
Securities, including the tax consequences under state, local, foreign and other
tax laws and the possible effects of changes in federal or other tax laws.
STATE AND OTHER TAX CONSIDERATIONS
In addition to the federal income tax consequences described in
"Material Federal Income Tax Considerations," potential investors should
consider the state and local tax consequences of the acquisition, ownership, and
disposition of the Notes or Certificates, as applicable, offered under this
prospectus. State tax law may differ substantially from the corresponding
federal tax law, and the discussion above does not purport to describe any
aspect of the tax laws of any state or other jurisdiction. Therefore,
prospective investors should consult their own tax advisors for the various tax
consequences of investments in the Notes or Certificates, as applicable, offered
under this prospectus.
ERISA CONSIDERATIONS
GENERAL
A fiduciary of a pension, profit-sharing, retirement or other employee
benefit plan subject to Title I of ERISA should consider the fiduciary standards
under the Employee Retirement Income Security Act of 1974, as amended ("ERISA")
in the context of the plan's particular circumstances before authorizing an
investment of a portion of such plan's assets in the Securities. Accordingly,
pursuant to Section 404 of ERISA, such fiduciary should consider among other
factors (i) whether the investment is for the exclusive benefit of plan
participants and their beneficiaries; (ii) whether the investment satisfies the
applicable diversification requirements; (iii) whether the investment is in
accordance with the documents and instruments governing the plan; and (iv)
whether the investment is prudent, considering the nature of the investment.
Fiduciaries of plans also should consider ERISA's prohibition on improper
delegation of control over, or responsibility for, plan assets.
In addition, employee benefit plans or other retirement arrangements
subject to ERISA, as well as individual retirement accounts, certain types of
Keogh plans not subject to ERISA but subject to Section 4975 of the Code, or any
entity (including insurance company separate or general accounts) whose
underlying assets include plan assets by reason of such plans, arrangements or
accounts investing in the entity (each, a "Plan") are prohibited from engaging
in a broad range of transactions involving Plan assets and persons having
certain specified relationships to a Plan ("parties in interest" and
"disqualified persons"). Such transactions are treated as "prohibited
transactions" under Sections 406 of ERISA and excise taxes and/or other
penalties are imposed upon such persons under ERISA and/or Section 4975 of the
Code unless an exemption applies. The depositor, Underwriter, each master
servicer or other servicer, any insurer, the trustee, the indenture trustee and
certain of their affiliates might be considered "parties in interest" or
"disqualified persons" with respect to a Plan. If so, the acquisition, holding
or disposition of Securities by or on behalf of such Plan could be considered to
give rise to a "prohibited transaction" within the meaning of ERISA and the Code
unless a statutory, regulatory or administrative exception or exemption is
available.
ERISA CONSIDERATIONS RELATING TO CERTIFICATES
Plan Assets
In 29 C.R.F ss.2510.3-101 (the "Plan Asset Regulations"), the U.S.
Department of Labor ("DOL") has defined what constitutes "plan assets" for
purposes of ERISA and Section 4975 of the Code. The Plan Asset Regulations
provide that if a Plan makes an investment in an "equity interest" in an entity,
an undivided portion of the assets of the entity will be considered the assets
of such Plan unless certain exceptions set forth in such Regulations apply. The
Certificates will be deemed an equity interest for purposes of the Plan Asset
Regulations, and the depositor can give no assurance that the Certificates will
qualify for any of the exceptions under the Plan Asset Regulations. As a result,
(i) a Plan may be deemed to have acquired an interest in the Assets of the trust
fund and not merely an interest in the Certificates, (ii) the fiduciary
investment standards of ERISA could apply to such Assets and (iii) transactions
occurring in the course of managing, operating and servicing the trust fund and
its Assets might constitute prohibited transactions, unless a statutory,
regulatory or administrative exemption applies.
Prohibited Transaction Class Exemption 83-1
The DOL has issued an administrative exemption, Prohibited Transaction
Class Exemption 83-1 ("PTCE 83-1"), which under certain conditions exempts from
the application of the prohibited transaction rules of ERISA and the excise tax
provisions of Section 4975 of the Code transactions involving a Plan in
connection with the operation of a "mortgage pool" and the purchase, sale and
holding of Certificates which are "mortgage pool pass-through certificates." A
"mortgage pool" is defined as a fixed investment pool consisting solely of
interest-bearing obligations secured by first or second mortgages or deeds of
trust on single-family residential property, property acquired in foreclosure
and undistributed cash. A "mortgage pool pass-through certificate" is defined as
a Certificate which represents a beneficial undivided interest in a mortgage
pool which entitles the holder to pass through payments of principal and
interest from the mortgage loans. PTCE 83-1 requires that: (i) the depositor and
the trustee maintain a system of insurance or other protection for the mortgage
loans, the property securing such mortgage loans and for indemnifying holders of
Certificates against reductions in pass-through payments due to defaults in loan
payments or property damage in an amount at least equal to the greater of (x) 1%
of the aggregate principal balance of the mortgage loans or (y) 1% of the
principal balance of the largest covered pooled mortgage loans; (ii) the trustee
may not be an affiliate of the depositor; and (iii) the payments made to, and
retained by, the depositor in connection with the trust fund, together with all
funds inuring to its benefit for administering the trust fund, represent no more
than "adequate consideration" for selling the mortgage loans, plus reasonable
compensation for services provided to the trust fund. In addition, PTCE 83-1
exempts the initial sale of Certificates to a Plan with respect to which the
depositor, the insurer, the master servicer or other servicer or the trustee is
a party in interest if the Plan does not pay more than fair market value for
such Certificates and the rights and interests evidenced by such Certificates
are not subordinated to the rights and interests evidenced by other Certificates
of the same pool.
PTCE 83-1 also exempts from the prohibited transaction rules any
transactions in connection with the servicing and operation of the mortgage
pool, provided that any payments made to the master servicer in connection with
the servicing of the trust fund are made in accordance with a binding agreement,
copies of which must be made available to prospective Plan investors. In the
case of any Plan with respect to which the depositor, the master servicer, the
insurer or the trustee is a fiduciary, PTCE 83-1 will only apply if, in addition
to the other requirements: (i) the initial sale, exchange or transfer of
Certificates is expressly approved by an independent fiduciary who has authority
to manage and control those Plan assets being invested in Certificates; (ii) the
Plan pays no more for the Certificates than would be paid in an arm's-length
transaction; (iii) no investment management, advisory or underwriting fee, sales
commission or similar compensation is paid to the depositor with regard to the
sale, exchange or transfer of Certificates to the Plan; (iv) the total value of
the Certificates purchased by such Plan does not exceed 25% of the amount issued
and (v) at least 50% of the aggregate amount of Certificates is acquired by
persons independent of the depositor, the trustee, the master servicer and the
insurer. Before purchasing Certificates, a fiduciary of a Plan should confirm
that the trust fund is a "mortgage pool," that the Certificates constitute
"mortgage pool pass-through certificates" and that the conditions set forth in
PTCE 83-1 would be satisfied. In addition to making its own determination as to
the availability of the exemptive relief provided in PTCE 83-1, the Plan
fiduciary should consider the availability of any other prohibited transaction
exemptions. The Plan fiduciary should also consider its general fiduciary
obligations under ERISA in determining whether to purchase any Certificates on
behalf of a Plan pursuant to PTCE 83-1.
Underwriter Exemption
The DOL has granted to Deutsche Bank Alex. Brown an individual
exemption, Prohibited Transaction Exemption 94-84, and to Deutsche Morgan
Grenfell/C.J. Lawrence Inc., similar approval (FAN 97-03E), which were both
amended by Prohibited Transaction Exemption 97-34 ("PTE 97-34") and further
recently amended pursuant to Prohibited Transaction Exemption 2000-58 ("PTE
2000-58") (collectively, the "Exemption") which is applicable to Certificates
which meet its requirements whenever the Underwriter or its affiliate is the
sole underwriter, manager or co-manager of an underwriting syndicate or is the
selling or placement agent. The Exemption generally exempts certain transactions
from the application of certain of the prohibited transaction provisions of
ERISA and the Code provided that the conditions set forth in the Exemption are
satisfied. These transactions include the servicing, managing and operation of
investment trusts holding fixed (generally non-revolving pools) of enumerated
categories of assets which include: single and multi-family residential mortgage
loans, home equity loans or receivables (including cooperative housing loans)
and guaranteed government mortgage pool certificates and the purchase, sale and
holding of Certificates which represent beneficial ownership interests in the
assets of such trusts.
GENERAL CONDITIONS OF EXEMPTION
The Exemption sets forth general conditions which must be satisfied
for a transaction involving the purchase, sale and holding of the Certificates
to be eligible for exemptive relief thereunder. First, the acquisition of
Certificates by Plans must be on terms that are at least as favorable to the
Plan as they would be in an arm's-length transaction with an unrelated party.
Second, the Assets held by the trust fund must be fully secured (other than
one-to-four family residential mortgage loans and home equity loans or
receivables backing certain types of Certificates, as described below).
(Mortgage loans, loans, obligations and receivables will be collectively
referred to herein as "loans."). Third, unless the Certificates are issued in
"designated transactions" (as described below) and are backed by fully-secured
loans, they may not be subordinated. Fourth, the Certificates at the time of
acquisition by the Plan must generally be rated in one of the three (or in the
case of designated transactions, four) highest generic rating categories by
Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies,
Inc., Moody's Investors Services, Inc. or Fitch, Inc. (each, a "Rating Agency").
Fifth, the trustee and the indenture trustee generally cannot be affiliates of
any member of the "Restricted Group" which consists of any (i) underwriter as
defined in the Exemption, (ii) the depositor, (iii) the master servicer, (iv)
each servicer, (v) the insurer, (vi) the counterparty of any "interest swap" (as
described below) held as an Asset of the trust fund and (vii) any obligor with
respect to loans constituting more than 5% of the aggregate unamortized
principal balance of the loans held in the trust fund as of the date of initial
issuance of the Certificates. Sixth, the sum of all payments made to, and
retained by, such underwriters must represent not more than reasonable
compensation for underwriting the Certificates; the sum of all payments made to,
and retained by, the depositor pursuant to the assignment of the loans to the
related trust fund must represent not more than the fair market value of such
loans; and the sum of all payments made to, and retained by, the master servicer
and any servicer must represent not more than reasonable compensation for such
person's services under the Agreement and reimbursement of such person's
reasonable expenses in connection therewith. Seventh, (i) the investment pool
must consist only of assets of the type enumerated in the Exemption and which
have been included in other investment pools; (ii) Certificates evidencing
interests in such other investment pools must have been rated in one of the
three (or in the case of designated transactions, four) highest generic rating
categories by one of the Rating Agencies for at least one year prior to a Plan's
acquisition of Certificates; and (iii) Certificates evidencing interests in such
other investment pools must have been purchased by investors other than Plans
for at least one year prior to a Plan's acquisition of Certificates. Finally,
the investing Plan must be an accredited investor as defined in Rule 501(a)(1)
of Regulation D of the Commission under the Securities Act of 1933, as amended.
The depositor assumes that only Plans which are accredited investors under the
federal securities laws will be permitted to purchase the Certificates.
RECENT AMENDMENTS TO EXEMPTION
PTE 2000-58 (the "Amendment") recently amended the Exemption to make
the acquisition of Certificates by Plans in an initial offering or in a
secondary market transaction, the holding or transfer of Certificates and the
servicing, management and operation of the trust fund and its Assets on or after
November 13, 2000 eligible for exemptive relief to a broader range of
Certificates. Prior to such amendment, the Exemption generally permitted Plans
to purchase only unsubordindated Certificates rated within the highest three
generic rating categories backed by secured collateral. Such Certificates had to
be issued by a trust fund which was a grantor trust, REMIC or a FASIT whose
corpus could not include certain types of Assets such as interest-rate swaps.
TYPES OF TRUST FUNDS
The Amendment has expanded the types of permitted trust funds to
include owner-trusts, as well as grantor trusts, REMICs and FASITs. Owner-trusts
are subject to certain restrictions in their governing documents to ensure that
their Assets may not be reached by the creditors of the depositor in the event
of bankruptcy or other insolvency and must provide certain legal opinions.
DESIGNATED TRANSACTIONS
In the case where the Certificates are backed by trust fund Assets
which are residential, home equity or multi-family loans which are described and
defined in the Exemption as designated transactions ("Designated Transactions"),
the Amendment permits the Certificates issued by the trust fund in such
transactions to be rated in one of the highest four generic rating categories by
a Rating Agency and/or to be subordinated. The Assets will qualify for
Designated Transaction treatment under the Exemption unless otherwise specified
in the prospectus supplement. In addition, one subset of Designated
Transactions, residential (one- to-four family) and home equity loans, may be
less than fully secured, provided that the rights and interests evidenced by
Certificates issued in such Designated Transactions are: (a) not subordinated to
the rights and interests evidenced by Securities of the same trust fund; (b)
such Certificates acquired by the Plan have received a rating from a Rating
Agency at the time of such acquisition that is in one of the two highest generic
rating categories; and (c) any loan included in the corpus or Assets of the
trust fund is secured by collateral whose fair market value on the closing date
of the Designated Transactions is at least equal to 80% of the sum of: (i) the
outstanding principal balance due under the loan which is held by the trust fund
and (ii) the outstanding principal balance(s) of any other loan(s) of higher
priority (whether or not held by the trust fund) which are secured by the same
collateral.
INSURANCE COMPANY GENERAL ACCOUNTS
In the event that Certificates do not meet the requirements of the
Exemption solely because they are Subordinate Certificates or fail to meet a
minimum rating requirement under the Exemption, certain Plans may be eligible to
purchase Certificates pursuant to Section III of Prohibited Transaction Class
Exemption 95-60 ("PTCE 95-60") which permits insurance company general accounts
as defined in PTCE 95-60 to purchase such Certificates if they otherwise meet
all of the other requirements of the Exemption.
PERMITTED ASSETS
The Amendment permits an interest-rate swap to be an Asset of a trust
fund which issues Certificates acquired by Plans in an initial offering or in
the secondary market on or after November 13, 2000 and clarifies the
requirements regarding yield supplement agreements. An interest-rate swap (or if
purchased by or on behalf of the trust fund) an interest-rate cap contract
(collectively, a "Swap" or "Swap Agreement") is a permitted trust fund Asset if
it: (a) is an "eligible Swap;" (b) is with an "eligible counterparty;" (c) is
purchased by a "qualified plan investor;" (d) meets certain additional specific
conditions which depend on whether the Swap is a "ratings dependent Swap" or a
"non-ratings dependent Swap" and (e) permits the trust fund to make termination
payments to the Swap (other than currently scheduled payments) solely from
excess spread or amounts otherwise payable to the servicer or depositor.
An "eligible Swap" is one which: (a) is denominated in U.S. dollars;
(b) pursuant to which the trust fund pays or receives, on or immediately prior
to the respective payment or distribution date for the class of Certificates to
which the Swap relates, a fixed rate of interest or a floating rate of interest
based on a publicly available index (E.G., LIBOR or the U.S. Federal Reserve's
Cost of Funds Index (COFI)), with the trust fund receiving such payments on at
least a quarterly basis and obligated to make separate payments no more
frequently than the counterparty, with all simultaneous payments being netted
("Allowable Interest Rate"); (c) has a notional amount that does not exceed
either: (i) the principal balance of the class of Certificates to which the Swap
relates, or (ii) the portion of the principal balance of such class represented
by obligations ("Allowable Notional Amount"); (d) is not leveraged (I.E.,
payments are based on the applicable notional amount, the day count fractions,
the fixed or floating rates permitted above, and the difference between the
products thereof, calculated on a one-to-one ratio and not on a multiplier of
such difference) ("Leveraged"); (e) has a final termination date that is either
the earlier of the date on which the issuer terminates or the related class of
Certificates are fully repaid and (f) does not incorporate any provision which
could cause a unilateral alteration in the interest rate requirements described
above or the prohibition against leveraging.
An "eligible counterparty" means a bank or other financial institution
which has a rating at the date of issuance of the Certificates, which is in one
of the three highest long-term credit rating categories or one of the two
highest short-term credit rating categories, utilized by at least one of the
Rating Agencies rating the Certificates; provided that, if a counterparty is
relying on its short-term rating to establish eligibility hereunder, such
counterparty must either have a long-term rating in one of the three highest
long-term rating categories or not have a long-term rating from the applicable
Rating Agency.
A "qualified plan investor" is a Plan or Plans where the decision to
buy such class of Certificates is made on behalf of the Plan by an independent
fiduciary qualified to understand the Swap transaction and the effect the Swap
would have on the rating of the Certificates and such fiduciary is either (a) a
"qualified professional asset manager" ("QPAM") under Prohibited Transaction
Class Exemption 84-14 ("PTCE 84-14") (see below), (b) an "in-house asset
manager" under Prohibited Transaction Class Exemption 96-23 ("PTCE 96-23") (see
below) or (c) has total assets (both Plan and non-Plan) under management of at
least $100 million at the time the Certificates are acquired by the Plan.
In "ratings dependent Swaps" (where the rating of a class of
Certificates is dependent on the terms and conditions of the Swap), the Swap
Agreement must provide that if the credit rating of the counterparty is
withdrawn or reduced by any Rating Agency below a level specified by the Rating
Agency, the servicer must, within the period specified under the Swap Agreement:
(a) obtain a replacement Swap Agreement with an eligible counterparty which is
acceptable to the Rating Agency and the terms of which are substantially the
same as the current Swap Agreement (at which time the earlier Swap Agreement
must terminate); or (b) cause the Swap counterparty to establish any
collateralization or other arrangement satisfactory to the Rating Agency such
that the then current rating by the Rating Agency of the particular class of
Certificates will not be withdrawn or reduced (and the terms of the Swap
Agreement must specifically obligate the counterparty to perform these duties
for any class of Certificates with a term of more than one year). In the event
that the servicer fails to meet these obligations, Plan certificateholders must
be notified in the immediately following periodic report which is provided to
certificateholders but in no event later than the end of the second month
beginning after the date of such failure. Sixty days after the receipt of such
report, the exemptive relief provided under the Exemption will prospectively
cease to be applicable to any class of Certificates held by a Plan which
involves such ratings dependent Swap.
"Non-ratings dependent Swaps" (those where the rating of the
Certificates does not depend on the terms and conditions of the Swap) are
subject to the following conditions. If the credit rating of the counterparty is
withdrawn or reduced below the lowest level permitted above, the servicer will,
within a specified period after such rating withdrawal or reduction: (a) obtain
a replacement Swap Agreement with an eligible counterparty, the terms of which
are substantially the same as the current Swap Agreement (at which time the
earlier Swap Agreement must terminate); (b) cause the counterparty to post
collateral with the trust fund in an amount equal to all payments owed by the
counterparty if the Swap transaction were terminated; or (c) terminate the Swap
Agreement in accordance with its terms.
An "eligible yield supplement agreement" is any yield supplement
agreement or similar arrangement (or if purchased by or on behalf of the trust
fund) an interest rate cap contract to supplement the interest rates otherwise
payable on obligations held by the trust fund ("EYS Agreement"). If the EYS
Agreement has a notional principal amount and/or is written on an International
Swaps and Derivatives Association, Inc. (ISDA) form, the EYS Agreement may only
be held as an Asset of the trust fund with respect to Certificates purchased by
Plans on or after April 7, 1998 if it meets the following conditions: (a) it is
denominated in U.S. dollars; (b) it pays an Allowable Interest Rate; (c) it is
not Leveraged; (d) it does not allow any of these three preceding requirements
to be unilaterally altered without the consent of the trustee; (e) it is entered
into between the trust fund and an eligible counterparty and (f) it has an
Allowable Notional Amount.
PRE-FUNDING ACCOUNTS
The Exemption was amended by PTE 97-34 to extend exemptive relief to
Certificates issued in transactions using pre-funding accounts whereby a portion
of the loans backing the Certificates are transferred to the trust fund within a
specified period following the closing date ("DOL Pre-Funding Period") (see
below) instead of requiring that all such loans be either identified or
transferred on or before the closing date. The relief is effective for
transactions occurring on or after May 23, 1997 provided that the following
conditions are met. First, the ratio of the amount allocated to the Pre-Funding
Account to the total principal amount of the Certificates being offered
("Pre-Funding Limit") must not exceed twenty-five percent (25%). Second, all
loans transferred after the closing date (referred to here as "additional
loans") must meet the same terms and conditions for eligibility as the original
loans used to create the trust fund, which terms and conditions have been
approved by the Rating Agency. Third, the transfer of such additional loans to
the trust fund during the DOL Pre-Funding Period must not result in the
Certificates receiving a lower credit rating from the Rating Agency upon
termination of the DOL Pre-Funding Period than the rating that was obtained at
the time of the initial issuance of the Certificates by the trust fund. Fourth,
solely as a result of the use of pre-funding, the weighted average annual
percentage interest rate (the "average interest rate") for all of the loans in
the trust fund at the end of the DOL Pre-Funding Period must not be more than
100 basis points lower than the average interest rate for the loans which were
transferred to the trust fund on the closing date. Fifth, either: (i) the
characteristics of the additional loans must be monitored by an insurer or other
credit support provider which is independent of the depositor; or (ii) an
independent accountant retained by the depositor must provide the depositor with
a letter (with copies provided to the Rating Agency, the underwriter and the
trustee) stating whether or not the characteristics of the additional loans
conform to the characteristics described in the Prospectus, Prospectus
Supplement, Private Placement Memorandum ("Offering Documents") and/or the
Agreement. In preparing such letter, the independent accountant must use the
same type of procedures as were applicable to the loans which were transferred
as of the closing date. Sixth, the DOL Pre-Funding Period must end no later than
three months or 90 days after the closing date or earlier, in certain
circumstances, if the amount on deposit in the Pre-Funding Account is reduced
below the minimum level specified in the Agreement or an event of default occurs
under the Agreement. Seventh, amounts transferred to any Pre-Funding Account
and/or Capitalized Interest Account used in connection with the pre-funding may
be invested only in investments which are permitted by the Rating Agency and (i)
are direct obligations of, or obligations fully guaranteed as to timely payment
of principal and interest by, the United States or any agency or instrumentality
thereof (provided that such obligations are backed by the full faith and credit
of the United States); or (ii) have been rated (or the obligor has been rated)
in one of the three highest generic rating categories by the Rating Agency
("Acceptable Investments"). Eighth, certain disclosure requirements must be met.
REVOLVING POOL FEATURES
The Exemption only covers Certificates backed by "fixed" pools of
loans which require that all the loans must be transferred to the trust fund or
identified at closing (or transferred within the DOL Pre-Funding Period, if
pre-funding meeting the conditions described above is used). Accordingly,
Certificates issued by trust funds which feature revolving pools of Assets will
not be eligible for a purchase by Plans. However, Securities which are Notes
backed by revolving pools of Assets may be eligible for purchase by Plans
pursuant to certain other prohibited transaction exemptions. See discussion
below in "ERISA Considerations Relating to Notes."
LIMITATIONS ON SCOPE OF THE EXEMPTION
If the general conditions of the Exemption are satisfied, the
Exemption may provide an exemption from the restrictions imposed by ERISA and
the Code in connection with the initial acquisition, transfer or holding, and
the acquisition or disposition in the secondary market, of the Certificates by
Plans. However, no exemption is provided from the restrictions of ERISA for the
acquisition or holding of a Certificates on behalf of an "Excluded Plan" by any
person who is a fiduciary with respect to the assets of such Excluded Plan. For
those purposes, an Excluded Plan is a Plan sponsored by any member of the
Restricted Group. Exemptive relief may also be provided for the acquisition,
holding and disposition of Certificates by Plans if the fiduciary or its
affiliate is the obligor with respect to 5% or less of the fair market value of
the Loans in the trust fund provided that: (i) the Plan is not an Excluded Plan,
(ii) each Plan's investment in each class of Certificates does not exceed 25% of
the outstanding Certificates in the class, (iii) after the Plan's acquisition of
the Certificates, no more than 25% of the assets over which the fiduciary has
investment authority are invested in Certificates of a trust containing assets
which are sold or serviced by the same entity and (iv) in the case of initial
issuance (but not secondary market transactions), at least 50% of each class of
Certificates and at least 50% of the aggregate interests in the trust fund are
acquired by persons independent of the Restricted Group.
ERISA CONSIDERATIONS RELATING TO NOTES
Under the Plan Asset Regulations, the Assets of the trust fund would
be treated as "plan assets" of a Plan for the purposes of ERISA and the Code
only if the Plan acquires an "equity interest" in the trust fund and none of the
exceptions contained in the Plan Asset Regulations is applicable. An equity
interest is defined under the Plan Asset Regulations as an interest other than
an instrument which is treated as indebtedness under applicable local law and
which has no substantial equity features. Assuming that the Notes are treated as
indebtedness without substantial equity features for purposes of the Plan Asset
Regulations, then such Notes will be eligible for purchase by Plans. However,
without regard to whether the Notes are treated as an "equity interest" for such
purposes, the acquisition or holding of Notes by or on behalf of a Plan could be
considered to give rise to a prohibited transaction if the trust fund or any of
its affiliates is or becomes a party in interest or disqualified person with
respect to such Plan, or in the event that a Note is purchased in the secondary
market and such purchase constitutes a sale or exchange between a Plan and a
party in interest or disqualified person with respect to such Plan. There can be
no assurance that the trust fund or any of its affiliates will not be or become
a party in interest or a disqualified person with respect to a Plan that
acquires Notes.
The Amendment to the Exemption permits trust funds which are grantor
trusts, owner-trusts, REMICs or FASITs to issue Notes, as well as Certificates,
provided a legal opinion is received to the effect that the noteholders have a
perfected security interest in the trust fund's Assets. The exemptive relief
provided under the Exemption for any prohibited transactions which could be
caused as a result of the operation, management or servicing of the trust fund
and its Assets would not be necessary with respect to Notes with no substantial
equity features which are issued as obligations of the trust fund. However,
effective for the acquisition, holding or transfer of Notes between a Plan and a
party in interest which occurs on or after November 13, 2000, the Exemption
would provide prohibited transaction exemptive relief, provided that the same
conditions of the Exemption described above relating to Certificates are met
with respect to the Notes. The same limitations of such exemptive relief
relating to acquisitions of Certificates by fiduciaries with respect to Excluded
Plans would also be applicable to the Notes as described herein in "LIMITATIONS
ON SCOPE OF THE EXEMPTION."
In the event that the Exemption is not applicable to the Notes, one or
more other prohibited transactions exemptions may be available to Plans
purchasing or transferring the Notes depending in part upon the type of Plan
fiduciary making the decision to acquire the Notes and the circumstances under
which such decision is made. These exemptions include, but are not limited to,
Prohibited Transaction Class Exemption 90-1 (regarding investments by insurance
company pooled separate accounts), Prohibited Transaction Class Exemption 91-38
(regarding investments by bank collective investments funds), PTCE 84-14
(regarding transactions effected by "qualified professional asset managers"),
PTCE 95-60 (regarding investments by insurance company general accounts) and
PTCE 96-23 (regarding transactions effected by "in-house asset managers")
(collectively, the "Investor-Based Exemptions"). However, even if the conditions
specified in these Investor-Based Exemptions are met, the scope of the relief
provided under such Exemptions might or might not cover all acts which might be
construed as prohibited transactions.
EACH PROSPECTUS SUPPLEMENT WILL CONTAIN INFORMATION CONCERNING
CONSIDERATIONS RELATING TO ERISA AND THE CODE THAT ARE APPLICABLE TO THE RELATED
SECURITIES. BEFORE PURCHASING SECURITIES IN RELIANCE ON PTCE 83-1, THE
EXEMPTION, THE INVESTOR-BASED EMEMPTIONS OR ANY OTHER EXEMPTION, A FIDUCIARY OF
A PLAN SHOULD ITSELF CONFIRM THAT REQUIREMENTS SET FORTH IN SUCH EXEMPTION WOULD
BE SATISFIED.
ANY PLAN INVESTOR WHO PROPOSES TO USE "PLAN ASSETS" OF ANY PLAN TO
PURCHASE SECURITIES OF ANY SERIES OR CLASS SHOULD CONSULT WITH ITS COUNSEL WITH
RESPECT TO THE POTENTIAL CONSEQUENCES UNDER ERISA AND SECTION 4975 OF THE CODE
OF THE ACQUISITION AND OWNERSHIP OF SUCH SECURITIES.
Governmental plans and church plans as defined in ERISA are not
subject to ERISA or Code Section 4975, although they may elect to be qualified
under Section 401(a) of the Code and exempt from taxation under Section 501(a)
of the Code and would then be subject to the prohibited transaction rules set
forth in Section 503 of the Code. In addition, governmental plans may be subject
to federal, state and local laws which are to a material extent similar to the
provisions of ERISA or a Code Section 4975 ("Similar Law"). A fiduciary of a
governmental plan should make its own determination as to the propriety of an
investment in Securities under applicable fiduciary or other investment
standards and the need for the availability of any exemptive relief under any
Similar Law.
LEGAL INVESTMENT
The prospectus supplement will specify which classes of the Notes or
Certificates, as applicable, if any, will constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984, as amended ("SMMEA"). Generally, only classes of Offered Notes or Offered
Certificates, as applicable that (1) are rated in one of the two highest rating
categories by one or more rating agencies and (2) are part of a series
representing interests in, or secured by, a trust fund consisting of loans
secured by first liens on real property and originated by particular types of
originators specified in SMMEA, will be "mortgage related securities" for
purposes of SMMEA.
Those classes of Offered Notes or Offered Certificates, as applicable,
qualifying as "mortgage related securities" will constitute legal investments
for persons, trusts, corporations, partnerships, associations, business trusts
and business entities (including, but not limited to, state chartered savings
banks, commercial banks, savings and loan associations and insurance companies,
as well as trustees and state government employee retirement systems) created
pursuant to or existing under the laws of the United States or of any state
(including the District of Columbia and Puerto Rico) whose authorized
investments are subject to state regulation to the same extent that, under
applicable law, obligations issued by or guaranteed as to principal and interest
by the United States or any agency or instrumentality of the United States
constitute legal investments for those entities. Pursuant to SMMEA, a number of
states enacted legislation, on or before the October 3, 1991 cut-off for those
enactments, limiting to varying extents the ability of some entities (in
particular, insurance companies) to invest in mortgage related securities
secured by liens on residential, or mixed residential and commercial,
properties, in most cases by requiring the affected investors to rely solely
upon existing state law, and not SMMEA.
SMMEA also amended the legal investment authority of
federally-chartered depository institutions as follows: federal savings and loan
associations and federal savings banks may invest in, sell or otherwise deal in
"mortgage related securities" without limitation as to the percentage of their
assets represented thereby, federal credit unions may invest in these
securities, and national banks may purchase these securities for their own
account without regard to the limitations generally applicable to investment
securities set forth in 12 U.S.C. ss.24 (Seventh), subject in each case to
regulations that the applicable federal regulatory authority may prescribe. In
this connection, the Office of the Comptroller of the Currency (the "OCC") has
amended 12 C.F.R. Part 1 to authorize national banks to purchase and sell for
their own account, without limitation as to a percentage of the bank's capital
and surplus (but subject to compliance with general standards concerning "safety
and soundness" and retention of credit information in 12 C.F.R. ss.1.5), some
"Type IV securities," defined in 12 C.F.R. ss.1.2(l) to include some
"residential mortgage related securities." As so defined, "residential
mortgage-related security" means, in relevant part, "mortgage related security"
within the meaning of SMMEA. The National Credit Union Administration ("NCUA")
has adopted rules, codified at 12 C.F.R. Part 703, which permit federal credit
unions to invest in "mortgage related securities" under some limited
circumstances, other than stripped mortgage related securities, residual
interests in mortgage related securities, and commercial mortgage related
securities, unless the credit union has obtained written approval from the NCUA
to participate in the "investment pilot program" described in 12 C.F.R.
ss.703.140. Thrift institutions that are subject to the jurisdiction of the
Office of Thrift Supervision (the "OTS") should consider the OTS' Thrift
Bulletin 13a (December 1, 1998), "Management of Interest Rate Risk, Investment
Securities, and Derivatives Activities," before investing in any of the Offered
Notes or Offered Certificates, as applicable.
All depository institutions considering an investment in the
Certificates should review the "Supervisory Policy Statement on Investment
Securities and End-User Derivatives Activities" (the "1998 Policy Statement") of
the Federal Financial Institutions Examination Council ("FFIEC"), which has been
adopted by the Board of Governors of the Federal Reserve System, the Federal
Deposit Insurance Corporation, the OCC and the OTS, effective May 26, 1998, and
by the NCUA, effective October 1, 1998. The 1998 Policy Statement sets forth
general guidelines which depository institutions must follow in managing risks
(including market, credit, liquidity, operational (transaction), and legal
risks) applicable to all securities (including mortgage pass-through securities
and mortgage-derivative products) used for investment purposes.
If specified in the prospectus supplement, other classes of Offered
Notes or Offered Certificates, as applicable, offered pursuant to this
prospectus will not constitute "mortgage related securities" under SMMEA. The
appropriate characterization of those classes under various legal investment
restrictions, and thus the ability of investors subject to these restrictions to
purchase these Offered Notes or Offered Certificates, as applicable, may be
subject to significant interpretive uncertainties.
Institutions whose investment activities are subject to regulation by
federal or state authorities should review rules, policies and guidelines
adopted from time to time by those authorities before purchasing any Offered
Notes or Offered Certificates, as applicable, as some classes or subclasses may
be deemed unsuitable investments, or may otherwise be restricted, under those
rules, policies or guidelines (in some instances irrespective of SMMEA).
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, "prudent investor" provisions, percentage-of-assets limits provisions that
may restrict or prohibit investment in securities that are not "interest
bearing" or "income paying," and with regard to any Offered Notes or Offered
Certificates, as applicable, issued in book-entry form, provisions that may
restrict or prohibit investments in securities that are issued in book-entry
form.
Except as to the status of some classes of Offered Notes or Offered
Certificates, as applicable, as "mortgage related securities," no representation
is made as to the proper characterization of the Offered Notes or Offered
Certificates, as applicable, for legal investment, financial institution
regulatory, or other purposes, or as to the ability of particular investors to
purchase any Offered Notes or Offered Certificates, as applicable, under
applicable legal investment restrictions. The uncertainties described above (and
any unfavorable future determinations concerning legal investment or financial
institution regulatory characteristics of the Offered Notes or Offered
Certificates, as applicable) may adversely affect the liquidity of the Offered
Notes or Offered Certificates, as applicable.
Accordingly, all investors whose investment activities are subject to
legal investment laws and regulations, regulatory capital requirements or review
by regulatory authorities should consult with their own legal advisors in
determining whether and to what extent the Offered Notes or Offered
Certificates, as applicable, of any class constitute legal investments for them
or are subject to investment, capital or other restrictions, and, if applicable,
whether SMMEA has been overridden in any jurisdiction relevant to that investor.
METHODS OF DISTRIBUTION
The Notes or Certificates, as applicable, offered by this prospectus
and by the supplements to this prospectus will be offered in series. The
distribution of the Notes or Certificates, as applicable, may be effected from
time to time in one or more transactions, including negotiated transactions, at
a fixed public offering price or at varying prices to be determined at the time
of sale or at the time of commitment therefor. If specified in the prospectus
supplement, the Notes or Certificates, as applicable, will be distributed in a
firm commitment underwriting, subject to the terms and conditions of the
underwriting agreement, by Deutsche Banc Securities Inc. ("DBSI") acting as
underwriter with other underwriters, if any, named in the underwriting
agreement. In that event, the prospectus supplement may also specify that the
underwriters will not be obligated to pay for any Notes or Certificates, as
applicable, agreed to be purchased by purchasers pursuant to purchase agreements
acceptable to the depositor. In connection with the sale of the Notes or
Certificates, as applicable, underwriters may receive compensation from the
depositor or from purchasers of the Notes or Certificates, as applicable, in the
form of discounts, concessions or commissions. The prospectus supplement will
describe any compensation paid by the depositor.
Alternatively, the prospectus supplement may specify that the Notes or
Certificates, as applicable, will be distributed by DBSI acting as agent or in
some cases as principal with respect to Notes or Certificates, as applicable,
that it has previously purchased or agreed to purchase. If DBSI acts as agent in
the sale of Notes or Certificates, as applicable, DBSI will receive a selling
commission for each series of Notes or Certificates, as applicable, depending on
market conditions, expressed as a percentage of the total principal balance of
the related mortgage loans as of the Cut-off Date. The exact percentage for each
series of Notes or Certificates, as applicable, will be disclosed in the
prospectus supplement. To the extent that DBSI elects to purchase Notes or
Certificates, as applicable, as principal, DBSI may realize losses or profits
based upon the difference between its purchase price and the sales price. The
prospectus supplement for any series offered other than through underwriters
will contain information regarding the nature of that offering and any
agreements to be entered into between the depositor and purchasers of Notes or
Certificates, as applicable, of that series.
The depositor will indemnify DBSI and any underwriters against
particular civil liabilities, including liabilities under the Securities Act of
1933, or will contribute to payments DBSI and any underwriters may be required
to make in respect of these civil liabilities.
In the ordinary course of business, DBSI and the depositor may engage
in various securities and financing transactions, including repurchase
agreements to provide interim financing of the depositor's mortgage loans
pending the sale of those mortgage loans or interests in those mortgage loans,
including the Notes or Certificates, as applicable. DBSI performs management
services for the depositor.
The depositor anticipates that the Notes or Certificates, as
applicable, will be sold primarily to institutional investors. Purchasers of
Notes or Certificates, as applicable, including dealers, may, depending on the
facts and circumstances of those purchases, be deemed to be "underwriters"
within the meaning of the Securities Act of 1933 in connection with reoffers and
sales by them of Notes or Certificates, as applicable, securityholders should
consult with their legal advisors in this regard before any reoffer or sale of
Notes or Certificates, as applicable.
As to each series of Notes or Certificates, as applicable, only those
classes rated in one of the four highest rating categories by any rating agency
will be offered by this prospectus. Any lower rated or unrated class may be
initially retained by the depositor, and may be sold by the depositor at any
time to one or more institutional investors.
ADDITIONAL INFORMATION
The Depositor has filed with the Commission a registration statement
on Form S-3 under the Securities Act of 1933, as amended, with respect to the
Securities (the "Registration Statement"). This prospectus, which forms a part
of the Registration Statement, omits some of the information contained in the
Registration Statement pursuant to the rules and regulations of the Commission.
The Registration Statement and the exhibits to the Registration Statement can be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at Regional
Offices in the following locations:
o Chicago Regional Office, Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511; and
o New York Regional Office, 7 World Trade Center, Suite 1300, New
York, New York 10048.
Copies of these materials can also be obtained from the Public Reference Section
of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates.
The Commission also maintains a site on the world wide web at
"http://www.sec.gov" at which users can view and download copies of reports,
proxy and information statements and other information filed electronically
through the Electronic Data Gathering, Analysis and Retrieval ("EDGAR") system.
The Depositor has filed the Registration Statement, including all exhibits to
the Registration Statement, through the EDGAR system and therefore these
materials should be available by logging onto the Commission's web site. The
Commission maintains computer terminals providing access to the EDGAR system at
each of the offices referred to above.
Copies of the most recent Fannie Mae prospectus for Fannie Mae
certificates and Fannie Mae's annual report and quarterly financial statements
as well as other financial information are available from the Director of
Investor Relations of Fannie Mae, 3900 Wisconsin Avenue, N.W., Washington, D.C.
20016 (202-752-7115). The Depositor did not participate in the preparation of
Fannie Mae's prospectus or its annual or quarterly reports or other financial
information and, accordingly, makes no representation as to the accuracy or
completeness of the information in those documents.
Copies of the most recent Offering Circular for Freddie Mac
certificates as well as Freddie Mac's most recent Information Statement and
Information Statement supplement and any quarterly report made available by
Freddie Mac may be obtained by writing or calling the Investor Inquiry
Department of Freddie Mac at 8200 Jones Branch Drive, McLean, Virginia 22102
(outside Washington, D.C. metropolitan area, telephone 800-336-3672; within
Washington, D.C. metropolitan area, telephone 703-759-8160). The Depositor did
not participate in the preparation of Freddie Mac's Offering Circular,
Information Statement or any supplement to the Information Statement or any
quarterly report of the Information Statement and, accordingly, makes no
representation as to the accuracy or completeness of the information in those
documents.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents subsequently filed by or on behalf of the trust fund
referred to in the prospectus supplement with the Commission pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act, after the date of this prospectus
and prior to the termination of any offering of the Notes or Certificates, as
applicable, issued by that trust fund will be deemed to be incorporated by
reference in this prospectus and to be a part of this prospectus from the date
of the filing of those documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference in this prospectus will
be deemed to be modified or superseded for all purposes of this prospectus to
the extent that a statement contained in this prospectus (or in the prospectus
supplement) or in any other subsequently filed document that also is or is
deemed to be incorporated by reference modifies or replaces that statement. Any
statement so modified or superseded will not be deemed, except as so modified or
superseded, to constitute a part of this prospectus.
The Trustee on behalf of any trust fund will provide without charge to
each person to whom this prospectus is delivered, upon request, a copy of any or
all of the documents referred to above that have been or may be incorporated by
reference in this prospectus (not including exhibits to the information that is
incorporated by reference unless the exhibits are specifically incorporated by
reference into the information that this prospectus incorporates). Requests for
information should be directed to the corporate trust office of the Trustee
specified in the prospectus supplement.
LEGAL MATTERS
Certain legal matters, including the federal income tax consequences
to securityholders of an investment in the Notes or Certificates, as applicable,
of a series, will be passed upon for the depositor by Stroock & Stroock & Lavan
LLP.
FINANCIAL INFORMATION
A new trust fund will be formed for each series of Notes or
Certificates, as applicable, and no trust fund will engage in any business
activities or have any assets or obligations before the issuance of the related
series of Notes or Certificates, as applicable. Accordingly, financial
statements for a trust fund will generally not be included in this prospectus or
in the prospectus supplement.
RATING
As a condition to the issuance of any class of Offered Notes or
Offered Certificates, as applicable, they must not be rated lower than
investment grade; that is, they must be rated in one of the four highest rating
categories, by a rating agency.
Ratings on mortgage pass-through certificates and mortgage-backed
notes address the likelihood of receipt by securityholders of all distributions
on the underlying mortgage loans. These ratings address the structural, legal
and issuer-related aspects associated with the Notes or Certificates, as
applicable, the nature of the underlying assets and the credit quality of the
guarantor, if any. Ratings on mortgage pass-through certificates,
mortgage-backed notes and other asset backed securities do not represent any
assessment of the likelihood of principal prepayments by borrowers or of the
degree by which prepayments might differ from those originally anticipated. As a
result, securityholders might suffer a lower than anticipated yield, and, in
addition, holders of stripped interest certificates in extreme cases might fail
to recoup their initial investments.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating.
INDEX OF DEFINED TERMS
1998 Policy Statement........................................................134
Accrual Period................................................................15
Accrual Securities............................................................22
Accrued Security Interest.....................................................25
Adjustable Rate Assets.........................................................2
Agency Securities..............................................................2
Agreemen......................................................................36
ARM Loans......................................................................5
Asset Conservation Act........................................................74
Asset Group...................................................................22
Asset Seller...................................................................2
Assets.........................................................................2
Available Distribution Amount.................................................23
Balloon Payment Assets.........................................................3
Bankruptcy Code...............................................................72
Beneficial Owner..............................................................31
Bi-weekly Assets...............................................................3
Book-Entry Certificates.......................................................22
Book-Entry Notes............................. ............................... 22
borrower......................................................................63
Buy Down Assets................................................................2
Buydown Funds.................................................................83
Buydown Mortgage Loans........................................................19
Buydown Period................................................................19
Capitalized Interest Account..................................................13
Cash Flow Agreement...........................................................14
Clearstream Luxembourg........................................................31
CERCLA........................................................................73
Certificates..................................................................21
Charter Act....................................................................9
Code..........................................................................78
Collection Account............................................................40
Commission.....................................................................6
contract borrower.............................................................65
contract lender...............................................................65
Convertible Assets.............................................................3
Cooperative...................................................................64
Cooperative Corporation.......................................................32
Cooperative Loans.............................................................64
Cooperatives...................................................................4
Covered Trust.................................................................60
CPR...........................................................................17
credit support................................................................14
Crime Control Act.............................................................78
Cut-off Date...................................................................5
DBSI.........................................................................135
Debt Securities...............................................................79
defective obligation..........................................................81
Definitive Certificates.......................................................22
Definitive Notes..............................................................22
Determination Date............................................................23
Disqualified Holder..........................................................110
Disqualified Organization.....................................................98
Distribution Date.............................................................15
DOL..........................................................................128
DTC...........................................................................31
Due Period....................................................................23
EDGAR........................................................................136
Eligible Corporation.........................................................110
ERISA........................................................................127
Euroclear.....................................................................31
Euroclear Operator............................................................32
European Depositaries.........................................................33
excess servicing.............................................................115
Exchange Act..................................................................31
Excluded Plan................................................................130
Exemption....................................................................128
Fannie Mae.....................................................................2
FASIT.........................................................................79
FASIT Ownership Security.....................................................106
FASIT Provisions..............................................................79
FASIT Regular Securities.....................................................106
FASIT Securities..............................................................79
FDIC..........................................................................40
FFIEC........................................................................134
FHA............................................................................5
Financial Intermediary........................................................33
Fitch........................................................................129
Freddie Mac....................................................................2
Freddie Mac Act...............................................................10
Freddie Mac Certificate Group.................................................10
Garn-St. Germain Act..........................................................75
GEM Assets.....................................................................3
Ginnie Mae.....................................................................2
GPM Assets.....................................................................3
Grantor Trust Fund............................................................79
Grantor Trust Securities......................................................79
Home Equity Loans..............................................................4
Housing Act....................................................................7
HUD...........................................................................48
Increasing Payment Asset.......................................................3
Indirect Participants.........................................................31
Insurance Proceeds............................................................23
Interest Rate.................................................................24
Interest Reduction Assets......................................................3
land sale contract............................................................65
Land Sale Contracts............................................................4
Level Payment Assets...........................................................2
Liquidation Proceeds..........................................................23
Loan-to-Value Ratio............................................................5
Lock-out Date..................................................................6
Lock-out Period................................................................6
Mark to Market Regulations...................................................101
Mortgage Securities............................................................2
Mortgaged Properties...........................................................4
Mortgages......................................................................4
NCUA.........................................................................134
new partnership..............................................................123
New Regulations..............................................................104
Non-Equity Securities........................................................130
Non-Pro Rata Security.........................................................85
Nonrecoverable Advance........................................................27
Non-U.S. Person..............................................................104
Notes.........................................................................21
OCC..........................................................................133
Offered Securities............................................................22
OID Regulations...........................................................80, 84
old partnership..............................................................123
Participants..................................................................31
Parties in Interest..........................................................127
Partnership Securities........................................................79
Partnership Trust Fund........................................................79
Pass-Through Entity...........................................................99
PCBs..........................................................................73
Permitted Investments.........................................................40
Plans........................................................................127
pooling and servicing agreement...............................................36
Pre-Funded Amount.............................................................13
Pre-Funding Account...........................................................13
Pre-Funding Limit............................................................132
Pre-Funding Period............................................................13
prepayment....................................................................17
Prepayment Assumption.........................................................86
PTCE.........................................................................131
Purchase Price................................................................38
RCRA..........................................................................74
Record Date...................................................................23
Refinance Loans................................................................5
Registration Statement.......................................................136
Regular Securities............................................................80
Regular Securityholder........................................................84
Related Proceeds..............................................................27
Relevant Depositary...........................................................33
Relief Act....................................................................78
REMIC.........................................................................79
REMIC Pool....................................................................79
REMIC Regulations.............................................................80
REMIC Securities..............................................................36
REO Property..................................................................28
Residual Securities...........................................................80
Restricted Group.............................................................129
Retained Interest.............................................................50
Revolving Credit Line Loans....................................................7
RICO..........................................................................78
Rules.........................................................................33
S&P..........................................................................129
SBJPA of 1996.................................................................83
secured-creditor exemption....................................................73
Securities....................................................................21
Security Balance..............................................................25
Senior Securities.............................................................22
Servicemen's Readjustment Act.................................................13
Servicing Standard............................................................44
Single Family Property.........................................................4
SMMEA........................................................................133
SPA...........................................................................17
Special servicer..............................................................52
Standard Securities..........................................................112
Startup Day...................................................................80
Step-up Rate Assets............................................................3
Strip Securities..............................................................22
Stripped Agency Securities....................................................11
Stripped Securities..........................................................112
Subordinate Securities........................................................22
Subsequent Assets.............................................................13
Superliens....................................................................73
super-premium.................................................................85
Taxable Mortgage Pools........................................................80
Terms and Conditions..........................................................32
thrift institutions...........................................................97
Tiered REMICs.................................................................84
Title V.......................................................................76
Title VIII....................................................................77
U.S. Person..................................................................100
UCC...........................................................................31
UST...........................................................................74
VA ............................................................................5
VA Guaranty Policy............................................................49
Value..........................................................................5
Warranting Party..............................................................38
Yield Considerations..........................................................25
The information in this prospectus supplement is not complete and may be
changed. We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This prospectus
supplement is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
SUBJECT TO COMPLETION, [ ], 20[ ]
PROSPECTUS SUPPLEMENT (TO PROSPECTUS DATED [ ], 20[ ])
[ ] CREDIT CARD MASTER NOTE TRUST [ ]-[ ]
ACE SECURITIES CORP.
Transferor
[ ]
Servicer
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-[ ] OF THIS PROSPECTUS
SUPPLEMENT AND ON PAGE [ ] OF THE PROSPECTUS.
For a list of capitalized terms used in this prospectus supplement and the
prospectus, see the index of defined terms beginning on page S-[ ] of this
prospectus supplement and on page [ ] of the prospectus.
The notes will represent interests in the trust fund only and will not represent
interests in or obligations of any other entity.
This prospectus supplement may be used to offer and sell the notes only if
accompanied by the prospectus.
The trust will issue the following classes of asset backed notes:
CLASS A NOTES CLASS B NOTES CLASS C NOTES
PRINCIPAL AMOUNT: $ $ $
INTEREST RATE: [Libor plus] [ ]% [Libor plus] [ ]% [Libor plus] [ ]%
per year per year per year
INTEREST PAYMENT Monthly on the [ ], Monthly on the [ ], Monthly on the [ ],
DATES: beginning, [ ], beginning, [ ], beginning, [ ],
20[ ] 20[ ] 20[ ]
EXPECTED PRINCIPAL
PAYMENT DATE: [ ], 20[ ] [ ], 20[ ] [ ], 20[ ]
LEGAL MATURITY DATE: [ ], 20[ ] [ ], 20[ ] [ ], 20[ ]
PRICE TO PUBLIC: $ (or %) $ (or %) $ (or %)
UNDERWRITING
DISCOUNT: $ (or %) $ (or %) $ (or %)
PROCEEDS TO ISSUER: $ (or %) $ (or %) $ (or %)
The Class B notes are subordinated to the Class A notes. The Class C notes are
subordinated to the Class A and Class B notes.
We expect to issue your series of notes on or about, [ ] 20[ ]. We will deliver
your series of notes in book-entry form.
The notes are obligations of [ ] Credit Card Master Note Trust [ ]-[ ] only and
are not obligations of ACE Backed Securities Corp., [ ], [ ] or any other
person.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THESE NOTES OR DETERMINED THAT THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
UNDERWRITER:
DEUTSCHE BANK ALEX. BROWN
The date of this prospectus supplement is [ ], 20[ ]
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS:
We provide information to you about the securities offered by this
prospectus supplement in two separate documents that progressively provide more
detail: (1) the accompanying prospectus, which provides general information,
some of which may not apply to your notes, and (2) this prospectus supplement,
which describes the specific terms of your notes.
IF INFORMATION VARIES BETWEEN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS, YOU SHOULD RELY ON THE INFORMATION IN THIS PROSPECTUS
SUPPLEMENT.
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We have
not authorized anyone to provide you with different information.
We are not offering the notes in any state where the offer is not
permitted. We do not claim that the information in this prospectus supplement
and prospectus is accurate as of any date other than the date stated on their
respective covers.
____________________
Dealers will deliver a prospectus supplement and prospectus when acting as
underwriters of the notes and with respect to their unsold allotments or
subscriptions. In addition, all dealers selling the notes will be required to
deliver a prospectus supplement and prospectus for ninety days following the
date of this prospectus supplement.
____________________
We include cross-references in this prospectus supplement and the
accompanying prospectus to captions in these materials where you can find
further related discussions. The following table of contents and the table of
contents included in the accompanying prospectus provide the pages on which
these captions are located.
TABLE OF CONTENTS PAGE
Transaction Summary.............................................................
Summary Of Terms................................................................
Risk Factors....................................................................
[ ]'s Credit Card Portfolio.....................................................
The Trust Portfolio.............................................................
Maturity Considerations.........................................................
The Originator..................................................................
The Servicer....................................................................
The Transferor..................................................................
Description Of Series Provisions................................................
Reports To Noteholders..........................................................
Erisa Considerations............................................................
Underwriting....................................................................
Legal Matters...................................................................
Index Of Terms For Prospectus Supplement........................................
Annex I Other Series Issued And Outstanding....................................
PROSPECTUS PAGE
Risk Factors....................................................................
The Trusts......................................................................
Trust Assets....................................................................
Series Enhancement..............................................................
Servicing of Receivables........................................................
Certain Matters Regarding the Servicer..........................................
Description of the Notes........................................................
Description of the Certificates.................................................
Certain Information Regarding the Securities....................................
Description of the Trust Agreements or Pooling and Servicing Agreements.........
Certain Legal Aspects of the Receivables........................................
The Depositor...................................................................
Use of Proceeds.................................................................
Material Federal Income Tax Consequences........................................
Owner Trusts....................................................................
Grantor Trusts..................................................................
Master Trust....................................................................
Certain State and Local Tax Consequences........................................
ERISA Considerations............................................................
Plan of Distribution............................................................
Legal Matters...................................................................
Index of Defined Terms..........................................................
Annex I; Global Clearance, Settlement and Tax Documentation Procedures..........
TRANSACTION SUMMARY
Trust: [ ] Credit Card Master Note Trust [ ]-[ ]
Transferor: ACE Securities Corp.
Originator: [ ]
Servicer: [ ]
Indenture Trustee: [ ]
Owner Trustee: [ ]
Closing Date: [ ]
Clearance and Settlement: DTC/Clearstream Luxembourg/Euroclear
Primary Trust Assets: Receivables originated in [MasterCard(R) and
VISA(R)] accounts
Servicing Fee Rate: [ ] %
CLASS A NOTES CLASS B NOTES CLASS C NOTES
Anticipated Ratings
(Moody's/Standard &
Poor's/Fitch IBCA):* Aaa/AAA/AAA A2/A/A Baa2/BBB/BBB
Credit Enhancement: subordination of subordination of spread account
Class B and Class C Class C
Interest Rate: [One-Month LIBOR] [One-Month LIBOR] [One-Month LIBOR]
plus [ ]% per year plus [ ]% per year plus [ ]% per year
Interest Accrual
Method: [actual/360] [actual/360] [actual/360]
Interest Payment Dates: monthly ([ th]) monthly ([ th]) monthly ([ th])
[Interest Rate Index [2 London business [2 London business [2 London business
Reset Date:] days before each days before each days before each
interest payment interest payment interest payment
date] date] date]
First Interest
Payment Date: [ ], 20[ ] [ ], 20[ ] [ ], 20[ ]
Expected Principal
Payment Date: [ ], 20[ ] [ ], 20[ ] [ ], 20[ ]
Commencement of
Accumulation Period
(subject to adjustment): [ ], 20[ ] [ ], 20[ ] [ ], 20[ ]
Legal Final Maturity
Date: [ ], 20[ ] [ ], 20[ ] [ ], 20[ ]
[ ], 20[ ] [ ], 20[ ] [ ], 20[ ]
_______________
* It is a condition to issuance that one of these ratings be obtained.
SUMMARY OF TERMS
o THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROSPECTUS
SUPPLEMENT AND DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU NEED TO
CONSIDER IN MAKING YOUR INVESTMENT DECISION. TO UNDERSTAND ALL OF THE TERMS
OF THE OFFERING OF THE NOTES, IT IS NECESSARY THAT YOU READ CAREFULLY THIS
ENTIRE PROSPECTUS SUPPLEMENT AND ACCOMPANYING PROSPECTUS.
o WHILE THIS SUMMARY CONTAINS AN OVERVIEW OF CERTAIN CALCULATIONS, CASH FLOW
PRIORITIES, AND OTHER INFORMATION TO AID YOUR UNDERSTANDING, YOU SHOULD
READ CAREFULLY THE FULL DESCRIPTION OF THESE CALCULATIONS, CASH FLOW
PRIORITIES AND OTHER INFORMATION IN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS BEFORE MAKING ANY INVESTMENT DECISION.
THE ISSUER
The notes will be issued by [ ] Credit Card Master Note Trust [ ]-[ ], a
Delaware statutory business trust, pursuant to an indenture supplement to an
indenture, each between the trust and the indenture trustee.
The indenture trustee is [ ].
THE SERIES [ ]-[ ] NOTES
INTEREST
The Class A notes will bear interest at [one-month LIBOR as determined each
month] plus [ ]% per annum.
The Class B notes will bear interest at [one-month LIBOR as determined each
month] plus [ ]% per annum.
The Class C notes will bear interest at [one-month LIBOR as determined each
month] plus [ ]% per annum.
For each class of the Series [ ]-[ ] notes, interest will be calculated as
follows:
o Principal balance, multiplied by
o Number of days in prior monthly interest period, multiplied by
o applicable interest rate, divided by
o 360.
Each interest period begins on and includes a distribution date and ends on but
excludes the next distribution date. However, the first interest period will
begin on and include the closing date.
Interest on the Series [ ]-[ ] notes will be paid on each distribution date,
which will be [ ] and the [ th] day of each following month if the [ th] is a
business day and, if not, the following business day.
SEE "DESCRIPTION OF SERIES PROVISIONS -- INTEREST PAYMENTS" IN THIS PROSPECTUS
SUPPLEMENT FOR A DESCRIPTION OF HOW AND WHEN LIBOR WILL BE DETERMINED.
PRINCIPAL
Principal of the Class A notes, the Class B notes and the Class C notes is
expected to be paid in full on the [ ] distribution date. However:
o no principal will be paid on the Class B notes until the Class A notes are
paid in full; and
o no principal will be paid on the Class C notes until the Class A and Class
B notes are paid in full.
We are scheduled to begin accumulating collections of principal receivables
starting on, [ ] for payment to the Series [ ]-[ ] noteholders on the expected
principal payment date, but we may begin accumulating at a later date.
Principal of the Series [ ]-[ ] notes may be paid earlier or later than the
expected principal payment date. You will not be entitled to any premium for
early or late payment of principal. If specified adverse events known as pay out
events occur, principal may be paid earlier than expected. If collections of the
credit card receivables are less than expected or are collected more slowly than
expected, then principal payments may be delayed. If the Series [ ]-[ ] notes
are not paid on the expected principal payment date, collections of principal
receivables will continue to be used to pay principal on the Series [ ]-[ ]
notes until the notes are paid or until [..], whichever occurs first. [ ] is the
legal maturity date for Series [ ]-[ ] .
FOR MORE INFORMATION ABOUT PRINCIPAL PAYMENTS, SEE "MATURITY CONSIDERATIONS,"
"DESCRIPTION OF SERIES PROVISIONS -- PRINCIPAL PAYMENTS" AND "-- ALLOCATION
PERCENTAGES" IN THIS PROSPECTUS SUPPLEMENT.
CREDIT ENHANCEMENT
SUBORDINATION
Credit enhancement for the Class A notes is provided by the subordination of the
Class B notes and the Class C notes.
Credit enhancement for the Class B notes is provided by the subordination of the
Class C notes.
SPREAD ACCOUNT
A spread account will provide credit enhancement for the Class C notes. The
spread account initially will not be funded. After the Series [ ]-[ ] notes are
issued, deposits into the spread account will be made each month from available
finance charge collections and, if necessary and available, excess finance
charge collections from other series in group one up to the required spread
account amount as described in this prospectus supplement under "Description of
Series Provisions -- Spread Account." The spread account will be used to make
payments on the Class C notes if collections of receivables allocated to the
Class C notes are insufficient to make required payments.
Credit enhancement for your series is for your series' benefit only, and you are
not entitled to the benefits of credit enhancement available to other series.
FOR MORE INFORMATION ABOUT CREDIT ENHANCEMENT, SEE "DESCRIPTION OF SERIES
PROVISIONS -- REALLOCATED PRINCIPAL COLLECTIONS," "-- APPLICATION OF
COLLECTIONS" AND "-- DEFAULTED RECEIVABLES; INVESTOR CHARGE-OFFS" IN THIS
PROSPECTUS SUPPLEMENT.
EVENTS OF DEFAULT
The Series [ ]-[ ] notes are subject to specified events of default described
under "Description of Series Provisions -- Events of Default" in this prospectus
supplement and "The Indenture -- Events of Default; Rights upon Event of
Default" in the accompanying prospectus. These include, among other things, the
failure to pay interest for [ ] days after it is due or to pay principal on the
legal maturity date.
In case any event of default occurs and continues with respect to the Series
[ ]-[ ] notes, the indenture trustee or holders of more than 50% of the
then-outstanding principal balance of the Series [ ]-[ ] notes may declare the
principal amount of the notes to be immediately due and payable. That
declaration may, be rescinded by holders of more than 50% of the
then-outstanding principal balance of the Series [ ]-[ ] notes.
After an event of default and the acceleration of the Series [ ]-[ ] notes,
funds on deposit in the collection account, the principal funding account, the
reserve account and, with respect to the Class C notes, the spread account will
be applied to pay principal of and interest on the Series [ ]-[ ] notes to the
extent permitted by law. Principal collections and finance charge collections
allocated to Series [ ]-[ ] will be applied to make monthly principal and
interest payments on the Series [ ]-[ ] notes until the earlier of the date
those notes are paid in full or the legal final maturity of those notes.
If the Series [ ]-[ ] notes are accelerated or the issuer fails to pay the
principal of the Series [ ]-[ ] notes on the legal maturity, once conditions
described in the prospectus under "The Indenture -- Events of Default; Rights
upon Event of Default" are satisfied, the indenture trustee may, if legally
permitted, or will at the direction of holders of at least 66 2/3% of the
principal amount of each class of Series [ ]-[ ] notes:
o institute proceedings in its own name for the collection of all amounts
then payable on the Series [ ]-[ ] notes;
o take any other appropriate action to protect and enforce the rights and
remedies of the indenture trustee and the Series [ ]-[ ] noteholders; or
o foreclose on a portion of the trust's assets by causing the trust to sell
an interest in the assets of the trust by issuing a foreclosure certificate
to the holders of the notes or to a third party selected by the indenture
trustee or by holders of more than 50% of the then-outstanding principal
balance of the Series [ ]-[ ] notes.
A foreclosure certificate is an investor certificate issued by the trust
representing ownership of the interest in the assets of the trust securing the
Series [ ]-[ ] notes. A foreclosure certificate held by a noteholder or a third
party will be subject to restrictions on transfer described under "The Indenture
- -- Events of Default; Rights upon Event of Default" in the accompanying
prospectus.
OTHER INTERESTS IN THE TRUST
OTHER SERIES OF NOTES
The trust will issue other series of notes secured by the assets of the trust
from time to time in the future. A summary of the outstanding series is in
"Annex I: Other Series Issued and Outstanding" included at the end of this
prospectus supplement. The issuance of future series will occur without prior
review or consent by you or any other noteholder.
THE TRANSFEROR INTEREST
The interest in the trust not securing your series or any other series is the
transferor interest. The transferor interest is owned by the transferor. The
transferor may, however, sell all or a portion of its interest in the transferor
interest. The transferor interest does not provide credit enhancement for your
series or any other series.
THE RECEIVABLES
The primary assets of the trust are receivables in [MasterCard(R) and VISA(R)]*
revolving credit card accounts. The receivables consist of principal receivables
and finance charge receivables.
_______________
* MasterCard(R) and VISA(R) are federally registered service marks of
MasterCardInternational Inc. and VISA U.S.A., Inc., respectively.
The following information is as of [ ]:
o Receivables in the trust: $ [ ]
o Accounts designated to the trust: []
For more information, see "The Trust Portfolio" in this prospectus supplement.
ALLOCATIONS OF COLLECTIONS
The servicer will collect payments on the receivables and will deposit those
collections in an account. It will keep track of those collections that are
finance charge receivables and those that are principal receivables.
Each month, the servicer will allocate collections received among:
o your series;
o other series outstanding; and
o the transferor interest in the trust.
The amount allocated to your series will be determined based mainly upon the
size of the invested amount of your series compared to the total amount of
principal receivables in the trust. At the time of issuance of the Series [ ]-[
] notes, the invested amount for Series [ ]-[ ] will be $[ ]. You are entitled
to receive payments of interest and principal only from collections of
receivables and other trust assets allocated to your series. If the invested
amount of your series declines, amounts allocated and available for payment to
your series and to you may be reduced. For a description of the allocation
calculations and the events which may lead to these reductions, see "Description
of Series Provisions -- Allocation Percentages" and "-- Reallocated Principal
Collections" in this prospectus supplement.
APPLICATION OF COLLECTIONS
FINANCE CHARGE COLLECTIONS
The trust will apply your series' share of collections of finance charge
receivables each month in the following order of priority:
o to pay interest on the Class A notes;
o to pay interest on the Class B notes;
o to pay the servicing fee;
o to pay interest on the Class C notes;
o to cover your series' allocation of defaulted receivables;
o to cover reductions in your series' invested amount resulting from investor
charge-offs allocated to your series and from reallocated principal
collections, in each case that have not been reimbursed;
o to fund, in limited circumstances, a reserve account to cover interest
payment shortfalls for Class A and Class B during the accumulation period;
o to make a deposit, if needed, to the spread account for Class C up to the
required spread account amount; and
o to other series in group one or to the holders of the transferor
certificates.
FOR A MORE DETAILED DESCRIPTION OF THESE APPLICATIONS, SEE "DESCRIPTION OF
SERIES PROVISIONS -- APPLICATION OF COLLECTIONS" IN THIS PROSPECTUS SUPPLEMENT.
PRINCIPAL COLLECTIONS
The trust will apply your series' share of principal collections each month as
follows:
o During the revolving period, no principal will be paid to you or
accumulated in a trust account. Instead, your series' share of principal
collections will be treated as shared principal collections and may be
available to make principal payments for other series in group one.
o The accumulation period is scheduled to begin on, [ ], but may begin at a
later date. During the accumulation period, your series' share of principal
collections will be deposited in a trust account, up to a controlled
deposit amount. On the expected principal payment date, amounts on deposit
in that account will be paid first to the Class A noteholders, then to the
Class B noteholders and then to the Class C noteholders.
o If a pay out event (described below) that applies to Series [ ]-[ ] or to
all series occurs, the early amortization period will begin. During the
early amortization period, your series' share of principal collections will
be paid first to the Class A noteholders, then to the Class B noteholders
and then to the Class C noteholders.
o During any of the above periods, principal collections allocated to your
series, may be reallocated, if necessary, to make required interest
payments on the Class A notes and the Class B notes not made from available
finance charge collections, excess finance charge collections available
from other series in group one or funds in the reserve account. However,
for any monthly period, the sum of these reallocated principal collections
cannot exceed [ ]% of the initial invested amount of your series, as
reduced due to the writing off of receivables or for previously reallocated
principal collections, in each case that have not been reimbursed.
o Any remaining principal collections will first be made available to other
series in group one and then be paid to the holders of the transferor
certificates or deposited in the special funding account.
FOR A MORE DETAILED DESCRIPTION OF THESE APPLICATIONS, SEE "DESCRIPTION OF
SERIES PROVISIONS -- APPLICATION OF COLLECTIONS" IN THIS PROSPECTUS SUPPLEMENT.
PAY OUT EVENTS
The documents under which the Series [ ]-[ ] notes will be issued include a list
of adverse events known as pay out events. If a pay out event that applies to
Series [ ]-[ ] or to all series occurs, the trust will use collections of
principal receivables allocated to Series [ ]-[ ] each month to pay principal on
the Series [ ]-[ ] notes.
Pay out events may occur if the transferor fails to make required payments or
deposits, violates other covenants and agreements or makes representations and
warranties that are materially incorrect.
The following also are pay out events:
o The yield on the trust portfolio less the amount of receivables that are
written off as uncollectible allocated to Series [ ]-[ ], averaged over
three months is less than the weighted average interest rate for Series [
]-[ ], calculated by taking into account the interest rate for the Class A
notes, the Class B notes and the Class C notes, plus the servicing fee rate
for Series [ ]-[ ];
o The Class A notes, the Class B notes or the Class C notes are not paid in
full on their expected principal payment dates;
o Bankruptcy, insolvency or similar events relating to the transferor
(including any additional transferor) or the servicer;
o The transferor (including any additional transferor) is unable to transfer
receivables to the trust as required under the transfer and servicing
agreement;
o The transferor does not transfer receivables in additional accounts to the
trust within 5 business days of when required under the transfer and
servicing agreement;
o Specified defaults of the servicer;
o The trust becomes subject to regulation as an "investment company" under
the Investment Company Act of 1940; or
o An event of default occurs for the Series [ ]-[ ] notes.
FOR A MORE DETAILED DISCUSSION OF THE PAY OUT EVENTS, SEE "DESCRIPTION OF SERIES
PROVISIONS -- PAY OUT EVENTS" IN THIS PROSPECTUS SUPPLEMENT AND "DESCRIPTION OF
THE NOTES -- PAY OUT EVENTS" IN THE ACCOMPANYING PROSPECTUS.
OPTIONAL REDEMPTION
The trust has the option to repurchase your notes when the outstanding principal
amount for your series has been reduced to 10% or less of the initial principal
amount (as increased by the principal amount of any notes of your series issued
after the closing date). See "Description of the Notes -- Final Payment of
Principal; Termination" in the accompanying prospectus.
DENOMINATIONS
Beneficial interests in the [ ]-[ ] notes may be purchased in minimum
denominations of $1,000 and multiples of $1,000 in excess of that amount.
REGISTRATION, CLEARANCE AND SETTLEMENT
The Series [ ]-[ ] notes will be in book-entry form and will be registered in
the name of Cede & Co., as the nominee of The Depository Trust Company. Except
in limited circumstances, you will not receive a definitive instrument
representing your notes. See "Description of the Notes -- Definitive Notes" in
the accompanying prospectus.
You may elect to hold your Series [ ]-[ ] notes through The Depository Trust
Company, in the United States, or Clearstream, Luxembourg or the Euroclear
System, in Europe.
Transfers will be made in accordance with the rules and operating procedures of
those clearing systems. See "Description of the Notes -- Book-Entry
Registration" in the accompanying prospectus.
TAX STATUS
Subject to important considerations described under "Material Federal Income Tax
Consequences" in the accompanying prospectus, Stroock & Stroock Lavan LLP, as
special tax counsel to the trust, is of the opinion that under existing law your
Series [ ]-[ ] notes will be characterized as debt for federal income tax
purposes and the trust will not be an association or publicly traded
partnership, taxable as a corporation for federal income tax purposes. By your
acceptance of a Series [ ]-[ ] note, you will agree to treat your Series [ ]-[ ]
notes as debt for federal, state and local income and franchise tax purposes.
[The trust does not anticipate treating the Series [ ]-[ ] notes as being issued
with original issue discount.] See "Material Federal Income Tax Consequences" in
the accompanying prospectus (and, in particular, the portion thereof relating to
"Trusts Which Are Not Treated as Grantor Trusts -- Tax Consequences to Note
Owners" for additional information concerning the application of federal income
tax laws.
ERISA CONSIDERATIONS
Subject to important considerations described under "ERISA Considerations" in
this prospectus supplement and in the accompanying prospectus, the Series
200_-__ notes are eligible for purchase by persons investing assets of employee
benefit plans or individual retirement accounts. A fiduciary or other person
contemplating purchasing the Series 200_-__ notes on behalf of or with plan
assets of any plan or account should consult with its counsel regarding whether
the purchase or holding of the Series 200_-__ notes could give rise to a
transaction prohibited or not otherwise permissible under ERISA or Section 4975
of the Internal Revenue Code.
RISK FACTORS
THE FOLLOWING INFORMATION, WHICH YOU SHOULD CAREFULLY CONSIDER, IDENTIFIES
CERTAIN SIGNIFICANT SOURCES OF RISK ASSOCIATED WITH AN INVESTMENT IN THE NOTES.
YOU MAY HAVE DIFFICULTY SELLING
YOUR NOTES............................. The notes will not be listed on any
securities exchange. As a result, if you
wish to sell your notes, you will have
to find a purchaser that is willing to
purchase your notes. The underwriter
intends to make a secondary market for
the offered notes. The underwriter may
do so by offering to buy the notes from
investors that wish to sell. However,
the underwriter will not be obligated to
make offers to buy the notes and may
stop making offers at any time. In
addition, the prices offered, if any,
may not reflect prices that other
potential purchasers, were they to be
given the opportunity, would be willing
to pay. There have been times in the
past where there have been very few
buyers of similar asset backed
securities, and there may be times again
in the future. As a result, you may not
be able to sell your notes when you wish
to do so or you may not be able to
obtain the price you wish to receive.
[GEOGRAPHIC CONCENTRATION MAY
AFFECT PERFORMANCE..................... Discuss any geographic risks, if
applicable]
[CONCENTRATION OF CREDIT RISK.......... Discuss impact on noteholders of
material concentration of credit risk,
if applicable.]
THE SUBORDINATED NOTES HAVE A
GREATER RISK OF LOSS THAN THE
OTHER NOTES............................ The class C notes will not be paid any
distributions of interest until the
class B notes receive their interest
distributions and will not receive any
distributions of principal until the
class B notes receive their principal
distributions. The class B notes will
not be paid any distributions of
interest until the class A notes receive
their interest distributions and will
not receive any distributions of
principal until the class A notes
receive their principal distributions.
If the available funds are insufficient
to make all of the required
distributions on the class A, class B
and class C notes, the class C notes
will not and class B notes may not
receive all of their distributions. In
addition, losses due to defaults will be
allocated first to the class C notes and
second to the class B notes to the
extent not covered by excess interest at
that time. Any allocation of a loss to
class B notes or class C notes will
reduce the amount of interest and, to
the extent not reimbursed from future
excess interest, principal they will
receive. As a result of the foregoing,
the class C notes and the class B notes
will be affected to a larger degree by
any losses on the receivables.
THE TRUST ASSETS ARE THE ONLY SOURCE
OF PAYMENTS ON THE NOTES............... All distributions on the notes will be
made from payments by borrowers under
the receivables. The trust has no other
assets [other than [ ]] to make
distributions on the notes. The
receivables are NOT insured or
guaranteed by any person. The notes
represent obligations of the trust and
will not be insured or guaranteed by any
entity. The trust is the only person
that is obligated to make distributions
on the notes. The notes are NOT insured
by any governmental agency.
NOTE RATING............................ The rating of the notes will depend on
an assessment by the rating agencies of
the receivables. The rating by the
rating agencies of the notes is not a
recommendation for you to purchase, hold
or sell the notes, and the rating does
not comment as to the market price or
suitability for a particular investor.
There is no assurance that the ratings
will remain in place for any given
period of time or that the ratings will
not be lowered or withdrawn by the
rating agencies. The ratings do not
address the possibility that offered
noteholders might realize a lower than
anticipated yield. The ratings of the
offered notes do not address the
possibility of the imposition of United
States withholding tax with respect to
non-U.S. persons. No rating of the
originator, the servicer or the company
is required to maintain the rating of
the offered notes.
THE NOTES ARE NOT SUITABLE
INVESTMENTS FOR ALL INVESTORS.......... The notes are not suitable investments
for any investor that requires a regular
or predictable schedule of payments or
payment on any specific date. The notes
are complex investments that should be
considered only by investors who, either
alone or with their financial, tax and
legal advisors, have the expertise to
analyze the prepayment, reinvestment,
default and market risk, the tax
consequences of an investment, and the
interaction of these factors.
[ ]'S CREDIT CARD PORTFOLIO
The following discussion describes terms and characteristics that generally
apply to the accounts in the portfolio from which the accounts in the trust
portfolio were selected. The accounts selected for the trust portfolio do not
represent [ ]'s entire portfolio. Additional accounts consist of eligible
accounts which may or may not currently be in existence and which may be
selected using different criteria from those used in selecting the accounts
already included in the trust portfolio. See "Description of the Notes --
Addition of Trust Assets" in the accompanying prospectus. Consequently, actual
loss and delinquency, revenue and monthly payment rate experience with respect
to the initial accounts and the additional accounts may be different from the
experience for the trust portfolio described in this prospectus supplement.
BILLING AND PAYMENTS
Each credit card account may have different billing and payment structures,
including different periodic finance charges and fees. The following information
reflects the typical billing and payment characteristics of the accounts.
[To be inserted]
DELINQUENCY AND LOSS EXPERIENCE
An account is contractually delinquent if the minimum payment is not
received by the appropriate due date indicated on the customer's statement.
[To be inserted]
The following tables set forth the aggregate delinquency and loss
experience for cardholder payments on the credit card accounts in [ ]'s
portfolio for each of the three calendar years in the period ended [ ], and in
the trust portfolio for the period ended [ ]. Any particular segment of [ ]'s
portfolio may have delinquency and gross charge-off characteristics different
from those of [ ]'s portfolio.
As of the beginning of the day on [ ], the receivables in the trust
portfolio represented approximately [ ]% of [.. ]'s portfolio. Because the trust
portfolio is only a portion of [ ]'s portfolio, actual delinquency and loss
experience with respect to the receivables may be different from that set forth
below for [...... ]'s portfolio. We cannot assure you that the future
delinquency and loss experience for the receivables in either [ ]'s portfolio or
trust portfolio will be similar to the historical experience set forth below.
DELINQUENCY AS PERCENTAGE OF [ ]'S PORTFOLIO
(Dollars in Thousands)
Year Ended
-------------------------------------------------------------------------------
Number of At Month End
Delinquent Days [ ] [ ] [ ] [ ]
---------------- -------------------------- --------------------------- -------------------------- ------------------------
PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT
---------- ------ ---------- ------ ---------- ------ ---------- ------
30 to 59 Days..........
60 to 80 days..........
90 Days or Greater.....
Totals.................
LOSS EXPERIENCE FOR [ ]'S PORTFOLIO
(Dollars in Thousands)
[Three] Months [Three] Months Year Ended
Ended Ended ----------------------------------------------
[ ] [ ] [ ] [ ] [ ]
-------------- -------------- ----------- ----------- -----------
Average Receivables
Outstanding............
Gross Losses.............
Gross Losses as a
Percentage of Average
Receivables
Outstanding............
Recoveries...............
Net Losses...............
Net Losses as a
Percentage of Average
Receivables
Outstanding............
REVENUE EXPERIENCE
The following table sets forth the revenues from the cardholder payments on
the credit card accounts in [ ]'s portfolio for each of the periods shown.
REVENUE EXPERIENCE FOR [...]'S PORTFOLIO
(Dollars in Thousands)
[Three] Months [Three] Months Year Ended
Ended Ended ----------------------------------------------
[ ] [ ] [ ] [ ] [ ]
-------------- -------------- ----------- ----------- -----------
Average Receivables
Outstanding Finance
Charges and Fees.......
Yield from Finance
Charges and Fees.......
Interchange..............
Yield from Interchange...
Yield from Finance
Charges Fees and
Interchange............
There can be no assurance that the yield experience with respect to the
trust portfolio will be comparable to that set forth above for the [ ]'s
portfolio. In addition, revenue from the trust portfolio will depend on the
types of fees and charges assessed on the accounts, and could be adversely
affected by future changes made by [ ] in fees and charges or by other factors.
INTERCHANGE
Creditors participating in the VISA(R) and MasterCard(R) associations
receive fees ("Interchange") as partial compensation for taking credit risk,
absorbing fraud losses and funding receivables for a limited period prior to
initial billing. Under the VISA(R) and MasterCard(R) systems, a portion of
Interchange in connection with cardholder charges for goods and services is
collected by banks that issue credit cards by applying a discount to the amount
paid by these banks to the banks that clear the related transactions for
merchants. Interchange will be allocated to the trust on a monthly basis based
on an equivalent percentage that the transferor receives each month [ ]'s
portfolio.
RECOVERIES
Pursuant to the terms of the transfer and servicing agreement, the
transferor will be required to transfer to the trust all of the recoveries that
are reasonably estimated by the servicer on receivables in charged-off accounts
of the trust, including amounts received by the transferor or the servicer from
the purchaser or transferee with respect to the sale or other disposition of
receivables in defaulted accounts ("Recoveries"). Collections of recoveries will
be treated as collections of finance charge receivables and included as part of
the Portfolio Yield.
PAYMENT RATES
The following table sets forth the highest and lowest cardholder monthly
payment rates on the credit card accounts during any month in the periods shown
and the average cardholder monthly payment rates for all months in the periods
shown, in each case calculated as a percentage of total opening monthly account
balances during the periods shown. Payment rates shown in the table are based on
amounts which would be deemed payments of principal receivables and finance
charge receivables with respect to the accounts.
CARDHOLDER MONTHLY PAYMENT RATES(1)
YEAR ENDED DECEMBER 31,
[ ] [ ] [ ]
Lowest Month % % %
Highest Month % % %
Monthly Average % % %
_______________
(1) For each of the three calendar years in the period ended [ ], information
is presented for credit card accounts in the originator's portfolio. For
the [ ], this information is presented for credit card accounts in the
trust portfolio.
Generally, cardholders must make a monthly minimum payment equal to 2.0% of
the statement balance plus any past due amounts. However, the cardholder is
usually required to make at least a monthly minimum payment of $15 plus any past
due amounts. The minimum monthly payment typically will be increased to 3.0% of
the statement balance plus any past due amounts if the account becomes greater
than 60 days delinquent. In the case of delinquency, however, the cardholder is
usually required to make at least a monthly payment of $25 plus any past due
amounts. We cannot assure you that the cardholder monthly payment rates in the
future will be similar to the historical experience set forth above. In
addition, the amount of collections of receivables may vary from month to month
due to seasonal variations, general economic conditions and payment habits of
individual cardholders.
THE TRUST PORTFOLIO
The receivables conveyed to the trust arise in accounts selected from [ ]'s
portfolio at the time the trust was established, and in additional accounts
selected since that time, on the basis of criteria set forth in the transfer and
servicing agreement (the "Trust Portfolio"). The transferor has the right to
designate additional accounts for the trust portfolio and to transfer to the
trust all receivables of those additional accounts, whether the receivables
already exist or arise after the designation, if conditions are satisfied. For a
discussion of these conditions, see "Description of the Notes -- Addition of
Trust Assets" in the accompanying prospectus. In addition, the transferor will
be required to designate additional accounts, to the extent available, (a) to
maintain the Transferor Interest so that, during any period of 30 consecutive
days, the Transferor Interest averaged over that period equals or exceeds the
Required Transferor Interest for the same period and (b) to maintain, for so
long as notes of any series remain outstanding, an aggregate amount of principal
receivables in the trust portfolio equal to or greater than the Required Minimum
Principal Balance (as adjusted for any series having a paired series as
described in the related indenture supplement).
The "Transferor Interest" on any date is equal to the difference between:
(a) the sum of
(1) the product of (x) total amount of principal receivables in the
trust portfolio on immediately prior day and (x) 1 minus the
Discount Percentage and
(2) the special funding account balance, minus
(b) the total adjusted invested amounts of all series of notes then
outstanding.
The "Required Transferor Interest" is the product of :
o Required Transferor Percentage;
o Total amount of principal receivables in the trust portfolio; and
o 1 minus the Discount Percentage.
The "Required Transferor Percentage" initially is [ ]%, but may be reduced
if conditions set forth in the transfer and servicing agreement are satisfied,
including receipt of written confirmation that reducing the Required Transferor
Percentage will not result in the reduction or withdrawal by any rating agency
of its rating of any outstanding series or class.
The "Discount Percentage" on the closing date is [ ]%.
The "Required Minimum Principal Balance" on any date is, for all
outstanding series, unless otherwise provided in the related indenture
supplement for a series having a paired series, the sum of the initial invested
amounts for each series outstanding on that date plus the Required Transferor
Interest on that date minus the amounts on deposit in the special funding
account.
The transferor also has the right to designate removed accounts and to
require the indenture trustee to transfer all receivables in the removed
accounts back to the transferor, whether the receivables already exist or arise
after the designation, if conditions are satisfied. For a discussion of these
conditions, see "Description of the Notes -- Removal of Accounts" in the
accompanying prospectus.
Throughout the term of the trust, the accounts from which the receivables
arise will be the accounts designated by the transferor at the time the trust is
established plus any additional accounts minus any removed accounts. As a
result, the composition of the trust assets is expected to change over time. For
a general description of the receivables in the trust, see "The Trust Portfolio"
in the accompanying prospectus.
The following is selected information about the receivables:
o The receivables in the trust portfolio, as of the beginning of the day
on [ ], included $[ ] of principal receivables and $[ ] of finance
charge receivables.
o The accounts designated for the trust portfolio had an average
principal receivable balance of $[ ] and an average credit limit of $[
].
o The percentage of the aggregate total receivable balance to the
aggregate total credit limit was [ ]%. The average age of the accounts
was approximately months.
o As of the beginning of the day on, [ ], cardholders whose accounts are
designated for the trust portfolio had billing addresses in all 50
states and the District of Columbia.
The following tables summarize the trust portfolio by various criteria as
of the beginning of the day on, [ ]. Because the future composition of the trust
portfolio may change over time, these tables are not necessarily indicative of
the composition of the trust portfolio at any subsequent time.
COMPOSITION BY ACCOUNT BALANCE
TRUST PORTFOLIO
(as of [ ])
(Dollars in Thousands)
Receivables Account
Balance Range Outstanding
- -------------------------
Credit Balance................
No Balance....................
More than $0 and less than or
equal to $1,500.............
$1,500.01 - $5,000............
$5,000 - $10,000..............
Over $10,000..................
COMPOSITION BY CREDIT LIMIT
TRUST PORTFOLIO
(as of [ ])
(Dollars in Thousands)
Receivables Account
Balance Range Outstanding
- -------------------------
Less than or equal to $1,500..
$1,500.01 - $5,000............
$5,000 - $10,000..............
Over $10,000..................
COMPOSITION BY PAYMENT STATUS
TRUST PORTFOLIO
(as of [ ])
(Dollars in Thousands)
Receivables Account
Balance Range Outstanding
- -------------------------
Current to 29 days............
Past due 30 - 59 days.........
Past due 60 - 89 days.........
Past due 90+ days.............
Total.........................
COMPOSITION BY ACCOUNT AGE
TRUST PORTFOLIO
(as of [ ])
(Dollars in Thousands)
Receivables Account
Balance Range Outstanding
- -------------------------
Not more than 6 months........
Over 6 months to 12 months....
Over 1 year to 2 years........
Over 2 years to 3 years.......
Over 3 years to 4 years.......
Over 4 years..................
Total.........................
COMPOSITION BY ACCOUNTHOLDER BILLING ADDRESS
TRUST PORTFOLIO
(as of [ ])
(Dollars in Thousands)
Location
- --------
Alaska.........................
Arizona........................
Arkansas.......................
California.....................
Colorado.......................
Connecticut....................
Delaware.......................
District of Columbia...........
Florida........................
Georgia........................
Hawaii.........................
Idaho..........................
Illinois.......................
Indiana........................
Iowa...........................
Kansas.........................
Kentucky.......................
Louisiana......................
Maine..........................
Maryland.......................
Massachusetts..................
Michigan.......................
Minnesota......................
Mississippi....................
Missouri.......................
Montana........................
Nebraska.......................
Nevada.........................
New Hampshire..................
New Jersey.....................
New Mexico.....................
New York.......................
North Carolina.................
North Dakota...................
Ohio...........................
Oklahoma.......................
Oregon.........................
Pennsylvania...................
Rhode Island...................
South Carolina.................
South Dakota...................
Tennessee......................
Texas..........................
Utah...........................
Vermont........................
Virginia.......................
Washington.....................
West Virginia..................
Alabama........................
Wyoming........................
Other..........................
MATURITY CONSIDERATIONS
You are expected to receive payment of principal in full on [ ], the
"Expected Principal Payment Date." You may, however, receive payments of
principal earlier than the expected principal payment date if a pay out event
occurs and the early amortization period begins. The holders of the Class B
notes will not begin to receive payments of principal until the final principal
payment on the Class A notes has been made. The holders of the Class C notes
will not begin to receive payments of principal until the final principal
payments on the Class A notes and Class B notes have been made.
CONTROLLED ACCUMULATION PERIOD
Principal for payment to the Series [ ]-[ ] noteholders will accumulate
during the controlled accumulation period in the principal funding account
established by the indenture trustee. The controlled accumulation period is
scheduled to begin at the close of business on [ ], but may be delayed based on
recent payment rate experience, as discussed under "Description of Series
Provisions -- Postponement of the Controlled Accumulation Period" in this
prospectus supplement. On each distribution date during the controlled
accumulation period, an amount will be deposited into the principal funding
account equal to, for each monthly period, the least of:
o Available Principal Collections;
o the Controlled Deposit Amount; and
o the Adjusted Invested Amount prior to any deposits on that day.
We expect, but cannot assure you, that the amounts available in the
principal funding account on the expected principal payment date will be
sufficient to pay in full the outstanding principal balance of the Class A
notes, the Class B notes and the Class C notes. If these amounts are not
available on the expected principal payment date, a pay out event will occur and
the early amortization period will begin.
EARLY AMORTIZATION PERIOD
If a pay out event occurs during either the revolving period or the
controlled accumulation period, the early amortization period will begin. If a
pay out event occurs during the controlled accumulation period, on the next
distribution date any amount on deposit in the principal funding account will be
paid to the Class A noteholders and, after the outstanding principal balance of
the Class A notes has been paid in full, any remaining amount will be paid to
the Class B noteholders and, after the outstanding principal balance of the
Class B notes has been paid in full, any remaining amount will be paid to the
Class C noteholders, up to the outstanding principal balance of the Class C
notes.
In addition, if the outstanding principal balance of the Class A notes has
not been paid in full, Available Principal Collections will be paid to the Class
A noteholders on each distribution date until the earlier of:
o the date the Class A notes are paid in full; and
o [ ], called the "Series [ ]-[ ] Termination Date".
After the Class A notes have been paid in full, and if the Series [ ]-[ ]
termination date or the trust termination date has not occurred, Available
Principal Collections will be paid to the Class B noteholders on each
distribution date until the earlier of:
o the date the Class B notes are paid in full; and
o the Series [ ]-[ ] termination date.
After the Class B notes have been paid in full, and if the Series [ ]-[ ]
termination date or the trust termination date has not occurred, Available
Principal Collections will be paid to the Class C noteholders on each
distribution date until the earlier of:
o the date the Class C notes are paid in full; and
o the Series [ ]-[ ] termination date.
THE ORIGINATOR
The "Originator" is [ ]. [Insert description of the Originator.]
THE SERVICER
The "Servicer" is [ ]. [Insert description of the Servicer.]
THE TRANSFEROR
ACE Securities Corp., the transferor, is a special purpose corporation
incorporated in the State of Delaware on June 3, 1998. The principal executive
offices of the depositor are located at 6525 Morrison Boulevard, Suite 318,
Charlotte, North Carolina 28211. Its telephone number is (704) 365-0569. The
depositor does not have, nor is it expected in the future to have, any
significant assets.
The limited purposes of the depositor are, in general, to acquire, own and
sell loans and financial assets; to issue, acquire, own, hold and sell
securities and notes secured by or representing ownership interests in loans and
other financial assets, collections on the loans and related assets; and to
engage in any acts that are incidental to, or necessary, suitable or convenient
to accomplish, these purposes.
All of the shares of capital stock of the depositor are held by Altamont
Holdings Corp., a Delaware corporation.
DESCRIPTION OF SERIES PROVISIONS
The following is a summary of the material provisions of the Series [ ]-[ ]
notes. This summary is not a complete description of the terms of the Series [
]-[ ] notes. You should refer to "Description of the Notes" in the accompanying
prospectus as well as to the transfer and servicing agreement, the indenture and
the Series [ ]-[ ] indenture supplement for a complete description. The form of
each of the transfer and servicing agreement, the indenture and an indenture
supplement has been filed with the SEC as an exhibit to the registration
statement relating to the notes.
The Class A notes, Class B notes and Class C notes comprise the "Series
[ ]-[ ] Notes" and will be issued under the indenture, as supplemented by the
indenture supplement relating to the Series [ ]-[ ] notes (the "Series [ ]-[ ]
Indenture Supplement"), in each case between the trust and the indenture
trustee. As described under "Description of the Notes--New Issuances" in the
accompanying prospectus, the transferor may cause the owner trustee, on behalf
of the trust, and the indenture trustee to execute further indenture supplements
in order to issue additional series.
The "Closing Date" for Series [ ]-[ ] is [ ]. The Series [ ]-[ ] notes will
be issued in denominations of $1,000 and integral multiples of $1,000 and will
be available only in book-entry form, registered in the name of Cede, as nominee
of DTC. As described under "Description of the Notes--General," "-- Book-Entry
Registration" and "-- Definitive Notes" in the accompanying prospectus, unless
and until definitive notes are issued, you will be able to transfer your notes
only through the facilities of DTC. You will receive payments and notices
through DTC and its participants. Payments of interest and principal will be
made on each distribution date on which those amounts are due to the noteholders
in whose names Series [ ]-[ ] notes were registered on the last day of the
calendar month preceding that distribution date (each, a "Record Date").
INTEREST PAYMENTS
The Class A notes will accrue interest from and including the closing date
through but excluding [ ], and for each following interest period, at a rate of
[ ]% per annum above LIBOR for the related LIBOR determination date with respect
to each interest period (the "Class A Note Interest Rate").
The Class B notes will accrue interest from and including the closing date
through but excluding [ ], and for each following interest period, at a rate of
[ ]% per annum above LIBOR for the related LIBOR determination date with respect
to each interest period (the "Class B Note Interest Rate").
The Class C notes will accrue interest from and including the closing date
through but excluding [ ], and for each following interest period, at a rate of
[ ]% per annum above LIBOR for the related LIBOR determination date with respect
to each interest period (the "Class C Note Interest Rate").
The indenture trustee will determine LIBOR for each interest period two
London business days before the related interest period commences. We refer to
each of these determination dates as a "LIBOR Determination Date." For purposes
of calculating LIBOR, a "London Business Day" is any business day on which
dealings in deposits in United States dollars are transacted in the London
interbank market.
An "Interest Period" begins on and includes a distribution date and ends on
but excludes the next distribution date. However, the first interest period will
begin on and include the closing date.
"LIBOR" means, for any LIBOR determination date, the rate for deposits in
United States dollars for a one-month period which appears on Telerate Page 3750
as of 11:00 a.m., London time, on that date. If that rate does not appear on
Telerate Page 3750, the rate for that LIBOR determination date will be
determined based on the rates at which deposits in United States dollars are
offered by four major banks selected by the servicer at approximately 11:00
a.m., London time, on that day to prime banks in the London interbank market for
a one-month period. The indenture trustee will request the principal London
office of each of those banks to provide a quotation of its rate. If at least
two quotations are provided, the rate for that LIBOR determination date will be
the arithmetic mean of the quotations. If fewer than two quotations are
provided, the rate for that LIBOR determination date will be the arithmetic mean
of the rates quoted by major banks in New York City, selected by the servicer,
at approximately 11:00 a.m., New York City time, on that day for loans in United
States dollars to leading European banks for a one-month period.
"Telerate Page 3750" means the display page currently so designated on the
Bridge Telerate Capital Markets Report (or any other page as may replace that
page on that service for the purpose of displaying comparable rates or prices).
The Class A note interest rate, the Class B note interest rate and the
Class C note interest rate applicable to the then current and immediately
preceding interest period may be obtained by telephoning the indenture trustee
at its corporate trust office at [ ].
Interest on the notes will be calculated on the basis of the actual number
of days in the related interest period and a 360-day year.
Interest will be paid on each "Distribution Date," which will be [ ] and
the [ th] day of each following month (or, if the [ th] day is not a business
day, the following business day). For purposes of this prospectus supplement and
the accompanying prospectus, a "Business Day" is, unless otherwise indicated,
any day other than a Saturday, a Sunday or a day on which banking institutions
in New York, New York, Delaware or any other state in which the principal
executive offices of the bank, the owner trustee, the indenture trustee or other
account owner, as the case may be, are located, are authorized or obligated by
law, executive order or governmental decree to be closed.
Interest payments on the Class A notes, the Class B notes and the Class C
notes on any distribution date will be calculated on the outstanding principal
balance of the Class A notes, the Class B notes and the Class C notes, as
applicable, as of the preceding record date, except that interest for the first
distribution date will accrue at the applicable note interest rate on the
initial outstanding principal balance of the Class A notes, the Class B notes
and the Class C notes, as applicable, from the closing date.
Interest due on the Class A notes, the Class B notes and the Class C notes
but not paid on any distribution date will be payable on the following
distribution date, together with additional interest on that amount at the
applicable note interest rate. We refer to this additional interest as "Class A
Additional Interest," "Class B Additional Interest" and "Class C Additional
Interest," as applicable. Additional interest will accrue on the same basis as
interest on the Series [ ]-[ ] notes, and will accrue from the distribution date
on which the overdue interest became due, to but excluding the distribution date
on which the additional interest is paid.
Interest payments on the Series [ ]-[ ] notes on any distribution date will
be paid from Available Finance Charge Collections for the related monthly period
and, to the extent Available Finance Charge Collections are insufficient to pay
the interest, from Excess Finance Charge Collections and Reallocated Principal
Collections (to the extent available) for the related monthly period. Interest
payments on the Class C notes on any distribution date will also be paid from
available amounts on deposit in the spread account to the extent needed.
"Available Finance Charge Collections" means, with respect to any monthly
period, an amount equal to the sum of:
(a) the Investor Percentage of collections of finance charge
receivables deposited in the collection account for that monthly
period;
(b) an amount equal to the Principal Funding Investment Proceeds, if
any, for the related distribution date; and
(c) amounts, if any, to be withdrawn from the reserve account which
are required to be included in Available Finance Charge
Collections pursuant to the Series [ ]-[ ] indenture supplement
for the related distribution date.
Each "Monthly Period" will be the period from and including the first day
of a calendar month to and including the last day of that calendar month (other
than the initial monthly period, which will commence on and include the closing
date and end on and include, 20[ ]).
PRINCIPAL PAYMENTS
Principal payments on the Series [ ]-[ ] notes will be paid from "Available
Principal Collections" which, for any monthly period, equal:
(a) the Investor Percentage of collections of principal receivables
deposited in the collection account for that monthly period;
minus
(b) the amount of Reallocated Principal Collections for that monthly
period; plus
(c) any Shared Principal Collections from other series in group one
and any Shared Transferor Principal Collections allocated to your
series.
REVOLVING PERIOD
The "Revolving Period" for the Series [ ]-[ ] notes begins on the closing
date and ends on the earlier of the date the controlled accumulation period or
the early amortization period begins. During the revolving period, the Investor
Percentage of collections of principal receivables will, subject to limitations,
including the allocation of any Reallocated Principal Collections for that
monthly period, be treated as Shared Principal Collections and used to pay
principal to other series in group one or will be paid to the holders of the
transferor certificates.
CONTROLLED ACCUMULATION PERIOD
The "Controlled Accumulation Period" for the Series [ ]-[ ] notes is
scheduled to begin on [ ], but may be postponed, as discussed under "Description
of Series Provisions -- Postponement of the Controlled Accumulation Period" in
this prospectus supplement, and ends on the earliest of:
o the beginning of the early amortization period;
o the payment in full of the Invested Amount; and
o the Series [ ]-[ ] termination date.
If a pay out event occurs before the controlled accumulation period begins,
there will be no controlled accumulation period and the early amortization
period will begin.
On each distribution date relating to the controlled accumulation period,
the indenture trustee will deposit in the principal funding account an amount
equal to the least of
(a) Available Principal Collections with respect to that distribution
date,
(b) the applicable Controlled Deposit Amount and
(c) the Adjusted Invested Amount prior to any deposits on that date.
Amounts in the principal funding account will be paid:
o first to Class A noteholders, up to the outstanding principal balance
of the Class A notes;
o then to Class B noteholders, up to the outstanding principal balance
of the Class B notes; and
o then to Class C noteholders, up to the outstanding principal balance
of the Class C notes;
in each case, on the expected principal payment date unless paid earlier due to
the commencement of the early amortization period.
During the controlled accumulation period, the portion of Available
Principal Collections not applied for the payment of principal on the Class A
notes, the Class B notes or the Class C notes on a distribution date generally
will be treated as Shared Principal Collections.
EARLY AMORTIZATION PERIOD
The "Early Amortization Period" for the Series [ ]-[ ] notes will begin on
the day on which a pay out event with respect to Series [ ]-[ ] occurs and ends
on the earlier of:
o the payment in full of the Invested Amount; and
o the Series [ ]-[ ] termination date.
On each distribution date relating to the early amortization period, the
Class A noteholders will be entitled to receive Available Principal Collections
for the related monthly period in an amount up to the outstanding principal
balance of the Class A notes.
After payment in full of the outstanding principal balance of the Class A
notes, the Class B noteholders will be entitled to receive, on each distribution
date relating to the early amortization period, Available Principal Collections
for the related monthly period in an amount up to the outstanding principal
balance of the Class B notes.
After payment in full of the outstanding principal balance of the Class B
notes, the Class C noteholders will be entitled to receive on each distribution
date relating to the early amortization period, Available Principal Collections
for the related monthly period in an amount up to the outstanding principal
balance of the Class C notes.
See "-- Pay Out Events" below for a discussion of events that might lead to
the commencement of the early amortization period.
POSTPONEMENT OF CONTROLLED ACCUMULATION PERIOD
The controlled accumulation period is scheduled to last [ ] months.
However, the servicer may elect to extend the revolving period and postpone the
controlled accumulation period by providing a notice to the indenture trustee.
The servicer can make this election only if the number of months needed to fund
the principal funding account based on expected principal collections needed to
pay principal on the Series [ ]-[ ] notes is less than [.......] months.
On each determination date beginning in [ ] and ending when the controlled
accumulation period begins, the servicer will review the amount of expected
principal collections and determine the number of months expected to be required
to fully fund the principal funding account by the expected principal payment
date and may elect to postpone the controlled accumulation period. In making its
decision, the servicer is required to assume that the principal payment rate
will be no greater than the lowest monthly payment rate for the prior 12 months
and will consider the amount of principal expected to be allocable to
noteholders of all other series which are expected to be amortizing or
accumulating principal during the controlled accumulation period for Series [
]-[ ]. In no case will the controlled accumulation period be reduced to less
than one month.
The method for determining the number of months required to fully fund the
principal funding account may be changed upon receipt of written confirmation
that the change will not result in the reduction or withdrawal by any rating
agency of its rating of any outstanding series or class.
SUBORDINATION
The Class B notes and the Class C notes are subordinated to the Class A
notes. Interest payments will be made on the Class A notes prior to being made
on the Class B notes and the Class C notes. Interest payments will be made on
the Class B notes prior to being made on the Class C notes. Principal payments
on the Class B notes will not begin until the Class A notes have been paid in
full. Principal payments on the Class C notes will not begin until the Class A
notes and the Class B notes have been paid in full. If principal collections
allocated to your series are reallocated to pay the interest on the Class A
notes, the principal amount of the Class B notes and the Class C notes may not
be repaid. If principal collections allocated to your series are reallocated to
pay interest on the Class B notes, the principal amount of the Class C notes may
not be repaid. If a foreclosure certificate is sold after an event of default,
the net proceeds of that sale which are available to pay principal on the Series
[ ]-[ ] notes would be paid first to the Class A notes before any remaining net
proceeds would be available for payments due to the Class B notes or the Class C
notes.
ALLOCATION PERCENTAGES
Pursuant to the indenture, with respect to each monthly period, the
servicer will allocate among the Invested Amount, the invested amount for all
other series issued and outstanding and the Transferor Interest, all amounts
collected on finance charge receivables, all amounts collected on principal
receivables and all Defaulted Amounts with respect to that monthly period. These
amounts will be allocated based on the Investor Percentage.
"Investor Percentage," for any monthly period, means (a) for Defaulted
Amounts at anytime and for collections of finance charge receivables and
principal receivables during the revolving period, the Floating Investor
Percentage and (b) for collections of finance charge receivables and principal
receivables during the controlled accumulation period and early amortization
period, the Fixed Investor Percentage.
FLOATING ALLOCATION DEFINITIONS
Defaulted Amounts at any time and collections of finance charge receivables
and principal receivables during the revolving period will be allocated to the
Invested Amount based on the Floating Investor Percentage. The "Floating
Investor Percentage" means, with respect to any monthly period, the percentage
equivalent of a fraction:
(a) the numerator of which is the Adjusted Invested Amount as of the close
of business on the last day of the preceding monthly period (or with
respect to the first monthly period, the initial Invested Amount); and
(b) the denominator of which is the greater of:
(1) the sum of (A) the product of (x) the aggregate amount of
principal receivables in the trust as of the close of business on
the last day of the preceding monthly period (or with respect to
the first monthly period, the aggregate amount of principal
receivables in the trust as of the close of business on the
closing date) and (y) one minus the Discount Percentage and (B)
the principal amount on deposit in the special funding account as
of the close of business on the last day of the preceding monthly
period (or with respect to the first monthly period, as of the
closing date) and
(2) the sum of the numerators used to calculate the investor
percentages for allocations with respect to finance charge
receivables, Defaulted Amounts or principal receivables, as
applicable, for all outstanding series on the date of
determination.
The denominator used in the calculation of Floating Investor Percentage,
however, will be adjusted as follows, with respect to any monthly period in
which an addition date occurs or in which a removal date occurs on which, if any
series has been paid in full, principal receivables in an aggregate amount
approximately equal to the initial invested amount of that series are removed
from the trust, the amount in clause (b)(1)(A) above shall be:
(1) the product of (x) the aggregate amount of principal receivables in
the trust as of the close of business on the last day of the prior
monthly period and (y) one minus the Discount Percentage, for the
period from and including the first day of the prior monthly period to
but excluding the related addition date or removal date; and
(2) the product of (x) the aggregate amount of principal receivables in
the trust as of the close of business on the related addition date or
removal date after adjusting for the aggregate amount of principal
receivables added to or removed from the trust on the related addition
date or removal date, as the case may be, and (y) one minus the
Discount Percentage, for the period from and including the related
addition date or removal date to and including the last day of that
monthly period.
FIXED ALLOCATION DEFINITIONS
Collections of finance charge receivables and principal receivables during
the controlled accumulation period and early amortization period will be
allocated to the Invested Amount based on the Fixed Investor Percentage. The
"Fixed Investor Percentage" means, with respect to any monthly period, the
percentage equivalent of a fraction:
(a) the numerator of which is the Invested Amount as of the close of
business on the last day of the revolving period; and
(b) the denominator of which is the greater of:
(1) the sum of (A) the product of (x) the aggregate amount of
principal receivables in the trust as of the close of business on
the last day of the prior monthly period (or with respect to the
first monthly period, the aggregate amount of principal
receivables in the trust as of the closing date) and (y) one
minus the Discount Percentage and (B) the principal amount on
deposit in the special funding account as of the close of
business on the last day of the preceding monthly period (or with
respect to the first monthly period, as of the closing date) and
(2) the sum of the numerators used to calculate the investor
percentages for allocations with respect to principal receivables
or finance charge receivables, as applicable, for all outstanding
series on the date of determination.
The denominator used in the calculation of Fixed Investor Percentage,
however, will be adjusted as follows, with respect to any monthly period in
which an addition date occurs or in which a removal date occurs on which, if any
series has been paid in full, principal receivables in an aggregate amount
approximately equal to the initial invested amount of that series are removed
from the trust, the amount in clause (b)(1)(A) above shall be:
(1) the product of (x) the aggregate amount of principal receivables
in the trust as of the close of business on the last day of the
prior monthly period and (y) one minus the Discount Percentage,
for the period from and including the first day of the prior
monthly period to but excluding the related addition date or
removal date; and
(2) the product of (x) the aggregate amount of principal receivables
in the trust as of the close of business on the related addition
date or removal date after adjusting for the aggregate amount of
principal receivables added to or removed from the trust on the
related addition date or removal date, as the case may be, and
(y) one minus the Discount Percentage, for the period from and
including the related addition date or removal date to and
including the last day of that monthly period.
INVESTED AMOUNT DEFINITIONS
"Invested Amount," for any date of determination, means an amount equal to
(a) the initial outstanding principal amount of the Series [ ]-[ ] notes
(as increased by the principal balance of any [ ]-[ ] notes issued
after the closing date), minus
(b) the amount of principal previously paid to the Series [ ]-[ ]
noteholders, minus
(c) the amount of unreimbursed Investor Charge-Offs and Reallocated
Principal Collections.
"Adjusted Invested Amount," for any date of determination, means the (a)
the Invested Amount as of that date, minus (b) the amount on deposit in the
principal funding account for that date.
REALLOCATED PRINCIPAL COLLECTIONS
On each distribution date, if the sum of Class A interest, Class B interest
and the monthly servicing fee cannot be paid from Available Finance Charge
Collections and Excess Finance Charge Collections as described below under
"--Application of Collections," then collections of principal receivables
allocated to the Invested Amount will be treated as collections of finance
charge receivables and will be available to pay these amounts, in an amount
equal to the Reallocated Principal Collections, and the Invested Amount will be
reduced accordingly. A reduction in the Invested Amount will reduce the
allocation of finance charge and principal collections to your series.
"Reallocated Principal Collections" means, for any monthly period,
Available Principal Collections used to pay interest on the Class A notes and
the Class B notes or used to pay the monthly servicing fee in an amount equal to
the lesser of:
o the Monthly Principal Reallocation Amount for that monthly period; and
o the Invested Amount after giving effect to any Investor Charge-Offs
for that distribution date.
"Monthly Principal Reallocation Amount" means, for any monthly period, the
sum of:
o the lower of:
o the excess of the amounts needed to pay current and past due
Class A Monthly Interest and Class A Additional Interest as
described under " --Application of Collections -- Payment of
Interest, Fees and Other Items" below over the Available Finance
Charge Collections allocated to cover these amounts; and
o [ ]% of the initial Invested Amount minus the amount of
unreimbursed Investor Charge-Offs and unreimbursed Reallocated
Principal Collections; plus
the lower of:
o the sum of (A) the excess of the amounts needed to pay current
and past due Class B Monthly Interest and Class B Additional
Interest as described under "--Application of Collections --
Payments of Interest, Fees and Other Items" below over the
Available Finance Charge Collections allocated to cover these
amounts and (B) the excess of the monthly servicing fee over the
Available Finance Charge Collections allocated to cover these
amounts; and
o [ ]% of the initial Invested Amount minus the amount of
unreimbursed Investor Charge-Offs and unreimbursed Reallocated
Principal Collections.
APPLICATION OF COLLECTIONS
PAYMENT OF INTEREST, FEES AND OTHER ITEMS
On each distribution date, the servicer will direct the indenture trustee
to apply Available Finance Charge Collections and Excess Finance Charge
Collections on deposit in the collection account in the following order:
o an amount equal to the Class A Monthly Interest plus Class A
Additional Interest due for the related distribution date, and past
due for any prior distribution dates, will be paid to the Class A
noteholders on that distribution date;
o an amount equal to the Class B Monthly Interest plus Class B
Additional Interest due for the related distribution date, and past
due for any prior distribution dates, will be paid to the Class B
noteholders on that distribution date;
o an amount equal to the monthly servicing fee due for the related
distribution date, and past due for any prior distribution date, will
be paid to the servicer;
o an amount equal to the Class C Monthly Interest plus Class C
Additional Interest due for the related distribution date, and past
due for any prior distribution dates, will be paid to the Class C
noteholders on that distribution date;
o an amount equal to the Investor Default Amount, if any, for the
related monthly period, will be treated as Available Principal
Collections;
o an amount equal to the sum of the Investor Charge-Offs and the amount
of unreimbursed Reallocated Principal Collections will be treated as
Available Principal Collections;
o on and after the reserve account funding date, an amount equal to the
excess, if any, of the Required Reserve Account Amount over the amount
then on deposit in the reserve account will be deposited into the
reserve account;
o an amount equal to the excess, if any, of the Required Spread Account
Amount over the amount then on deposit in the spread account will be
deposited into the spread account;
o all remaining amounts will be treated as Excess Finance Charge
Collections and will be available to cover any shortfalls in finance
charge collections for other outstanding series in group one and,
after payment of these shortfalls, the remaining amount will be paid
to the holders of the transferor certificates.
In the event that Available Finance Charge Collections and Excess Finance
Charge Collections for any monthly period are insufficient to pay Class C
Monthly Interest when due, a draw will be made from amounts available in the
spread account and will be paid to the Class C noteholders on the related
distribution date.
"Class A Monthly Interest" with respect to any distribution date will equal
the product of
(a) the Class A note interest rate for the related interest period,
(b) the actual number of days in that interest period divided by 360 and
(c) the outstanding principal balance of the Class A notes as of the close
of business on the last day of the prior monthly period or, with
respect to the first distribution date, the outstanding principal
balance of the Class A notes as of the closing date.
"Class B Monthly Interest" with respect to any distribution date will equal
the product of
(a) the Class B note interest rate for the related interest period,
(b) the actual number of days in that interest period divided by 360 and
(c) the outstanding principal balance of the Class B notes as of the close
of business on the last day of the prior monthly period or, with
respect to the first distribution date, the outstanding principal
balance of the Class B notes as of the closing date.
"Class C Monthly Interest" with respect to any distribution date will equal
the product of
(a) the Class C note interest rate for the related interest period,
(b) the actual number of days in that interest period divided by 360 and
(c) the outstanding principal balance of the Class C notes as of the close
of business on the last day of the prior monthly period or, with
respect to the first distribution date, the outstanding principal
balance of the Class C notes as of the closing date.
"Monthly Interest" with respect to any distribution date will equal the sum
of the Class A Monthly Interest, the Class B Monthly Interest and the Class C
Monthly Interest for that distribution date.
"Payments of Principal"
On each distribution date, the servicer will direct the indenture trustee
to apply Available Principal Collections on deposit in the collection account in
the following priority:
(a) on each distribution date with respect to the revolving period, all
Available Principal Collections will be treated as Shared Principal Collections
and applied as described under "Description of Series Provisions -Shared
Principal Collections and Transferor Principal Collections" in this prospectus
supplement and "Description of the Notes -Shared Principal Collections and
Transferor Principal Collections" in the accompanying prospectus;
(b) on each distribution date with respect to the controlled accumulation
period and the early amortization period, all Available Principal Collections
will be distributed or deposited in the following priority:
(1) during the controlled accumulation period, an amount equal to
Monthly Principal will be deposited in the principal funding
account;
(2) during the early amortization period, an amount equal to the
Monthly Principal will be distributed to the paying agent for
payment to the Class A noteholders until the outstanding
principal balance of the Class A notes has been paid in full;
(3) during the early amortization period, an amount equal to Monthly
Principal will, after the outstanding principal balance of the
Class A notes has been paid in full, be distributed to the paying
agent for payment to the Class B noteholders until the
outstanding principal balance of the Class B notes has been paid
in full; and
(4) during the early amortization period, an amount equal to Monthly
Principal will, after the outstanding principal balances of the
Class A notes and the Class B notes have been paid in full, be
distributed to the paying agent for payment to the Class C
noteholders until the outstanding principal balance of the Class
C notes has been paid in full;
(c) on each distribution date with respect to the controlled accumulation
period and the early amortization period, the balance of Available Principal
Collections not applied pursuant to (b) above, if any, will be treated as Shared
Principal Collections and applied as described under "Description of Series
Provisions -Shared Principal Collections and Transferor Principal Collections"
in this prospectus supplement and "Description of the Notes -Shared Principal
Collections and Transferor Principal Collections" in the accompanying
prospectus.
"Monthly Principal" with respect to any distribution date will equal the
least of
o the Available Principal Collections on deposit in the collection
account with respect to that distribution date,
o for each distribution date with respect to the controlled accumulation
period, the Controlled Deposit Amount for that distribution date and
o the Adjusted Invested Amount (as adjusted for any Investor Charge-Offs
and Reallocated Principal Collections on that distribution date) prior
to any deposits into the principal funding account on that
distribution date.
"Controlled Deposit Amount" means, for any distribution date, the sum of
(1) the Controlled Accumulation Amount for that distribution date, plus (2) the
Accumulation Shortfall, if any.
"Controlled Accumulation Amount" means for any distribution date with
respect to the controlled accumulation period, $[....]. However, if the
commencement of the controlled accumulation period is postponed as described
above under "--Postponement of Controlled Accumulation Period," the Controlled
Accumulation Amount may be higher than the amount stated above for each
distribution date with respect to the controlled accumulation period and will be
determined by the servicer in accordance with the Series [ ]-[ ] indenture
supplement based on the principal payment rates for the accounts and on the
invested amounts of other series (other than excluded series) which are
scheduled to be in their revolving periods and then scheduled to create Shared
Principal Collections during the controlled accumulation period.
"Accumulation Shortfall" means:
(a) on the first distribution date during the controlled accumulation
period, the excess, if any, of the Controlled Accumulation Amount for that
distribution date over the amount deposited in the principal funding account on
that distribution date; and
(b) on each subsequent distribution date during the controlled accumulation
period, the excess, if any, of the applicable Controlled Accumulation Amount for
that subsequent distribution date plus any Accumulation Shortfall for the prior
distribution date over the amount deposited in the principal funding account on
that subsequent distribution date.
SHARED EXCESS FINANCE CHARGE COLLECTIONS
Finance charge collections -and other amounts treated like finance charge
collections -in excess of the amount required to make payments or deposits for
your series will be made available to other series included in group one whose
allocation of finance charge collections is not sufficient to make its required
payments or deposits. We call these collections "Excess Finance Charge
Collections." If your series requires more finance charge collections than
allocated through the Investor Percentage, it will have access to finance charge
collections -and other amounts treated like finance charge collections -from
other series in group one. Each series that is part of group one and has a
shortfall will receive a share of the total amount of Excess Finance Charge
Collections available for that month based on the amount of shortfall for that
series divided by the total shortfall for all series for that same month.
SHARED PRINCIPAL COLLECTIONS AND TRANSFEROR PRINCIPAL COLLECTIONS
Collections of principal receivables for any monthly period allocated to
the Invested Amount will first be used to cover, during the controlled
accumulation period, deposits of the applicable Controlled Deposit Amount to the
principal funding account, and during the early amortization period, payments to
the noteholders. The servicer will determine the amount of collections of
principal receivables for any monthly period allocated to the Invested Amount
remaining after covering required payments to the noteholders and any similar
amount remaining for any other series in group one ("Shared Principal
Collections"). The servicer will allocate the Shared Principal Collections to
cover any scheduled or permitted principal distributions to noteholders and
deposits to principal funding accounts, if any, for any series in group one
which have not been covered out of the collections of principal receivables
allocable to the other series in group one and other amounts for those series
("Principal Shortfalls"). Shared Principal Collections will not be used to cover
investor charge-offs for any series. If Principal Shortfalls exceed Shared
Principal Collections for any monthly period, Shared Principal Collections will
be allocated pro rata among the applicable series in group one based on the
relative amounts of Principal Shortfalls. To the extent that Shared Principal
Collections exceed Principal Shortfalls, the balance will, subject to
limitations, be paid to the holders of the transferor certificates.
In addition, the servicer will, under the terms of the indenture, determine
the amount of collections of principal receivables for any monthly period
allocated to the Transferor Interest but not due to the holder of any
supplemental certificate and other amounts payable to the transferor with
respect to collections of principal receivables ("Shared Transferor Principal
Collections"). Shared Transferor Principal Collections will be applied, if
necessary, to cover payments of principal due to noteholders during the
controlled accumulation period and the early amortization period that have not
been covered out of collections of principal receivables allocated to Series [
]-[ ] and other amounts and Shared Principal Collections. To the extent
Principal Shortfalls for series designated to receive Shared Transferor
Principal Collections exceed Shared Principal Collections allocable to each of
these series and Shared Transferor Principal Collections, for any monthly
period, Shared Transferor Principal Collections will be allocated pro rata among
the applicable series in group one based on the remaining Principal Shortfalls
for each of these series.
DEFAULTED RECEIVABLES; INVESTOR CHARGE-OFFS
The Investor Default Amount represents the series' share of losses from the
trust portfolio. On each distribution date, the servicer will calculate the
"Investor Default Amount" by multiplying:
o the Floating Investor Percentage for that month, by
o the "Defaulted Amount," which is the total amount of principal
receivables (other than ineligible receivables) in the trust that were
charged-off for that month.
If the Investor Default Amount exceeds the amount of finance charge collections
allocated to fund this amount for the prior month, then the Invested Amount will
be reduced by the excess. The Invested Amount will also be reduced by the amount
of any Reallocated Principal Collections used to cover any Investor Default
Amounts. In no event, however, will the Invested Amount be reduced below zero.
Reductions in the Invested Amount from both of these items may be reimbursed
from subsequent finance charge collections allocated for reimbursement, if
available. If the Invested Amount is reduced to zero, your series will not
receive any further allocations of finance charge and principal collections.
PRINCIPAL FUNDING ACCOUNT
The indenture trustee will establish and maintain with an eligible
institution a segregated trust account held for the benefit of the noteholders
to serve as the "Principal Funding Account." During the controlled accumulation
period, the indenture trustee at the direction of the servicer will transfer
Available Principal Collections from the collection account to the principal
funding account as described under "-Application of Collections" in this
prospectus supplement.
Funds on deposit in the principal funding account will be invested to the
following distribution date by the indenture trustee at the direction of the
servicer in eligible investments. Investment earnings (net of investment losses
and expenses) on funds on deposit in the principal funding account (the
"Principal Funding Investment Proceeds") will be deposited in the collection
account and included in Available Finance Charge Collections for the related
interest period. If, for any distribution date, the Principal Funding Investment
Proceeds are less than the sum of:
(a) the product of
o the balance of the principal funding account, up to the
outstanding principal balance of the Class A notes, on the record
date immediately preceding that distribution date,
o the Class A note interest rate for the related interest period
and
o the number of days in the related interest period divided by 360,
plus
(b) the product of
o the balance of the principal funding account in excess of the
outstanding principal balance of the Class A notes on the record
date immediately preceding that distribution date,
o the Class B note interest rate for the related interest period
and
o the number of days in the related interest period divided by 360,
then the indenture trustee will withdraw the shortfall, called the "Reserve Draw
Amount," to the extent required and available, from the reserve account and
deposit it in the collection account for use as Available Finance Charge
Collections.
RESERVE ACCOUNT
The indenture trustee will establish and maintain with an eligible
institution a segregated trust account held for the benefit of the noteholders
to serve as the "Reserve Account." The reserve account is established to assist
with the subsequent distribution of interest on the notes during the controlled
accumulation period and on the first distribution date with respect to the early
amortization period. On each distribution date from and after the reserve
account funding date, but prior to the termination of the reserve account, the
indenture trustee, acting pursuant to the servicer's instructions, will apply
Available Finance Charge Collections and Excess Finance Charge Collections
allocated to the Series [ ]-[ ] notes (to the extent described above under
"-Application of Collections -Payment of Interest, Fees and Other Items") to
increase the amount on deposit in the reserve account (to the extent that amount
is less than the Required Reserve Account Amount).
The "Reserve Account Funding Date" will be the distribution date with
respect to the monthly period which commences no later than three months prior
to the commencement of the controlled accumulation period, or an earlier date as
the servicer may determine.
The "Required Reserve Account Amount" for any distribution date on or after
the reserve account funding date will be equal to (a) [ ]% of the outstanding
principal balance of the Class A notes or (b) any other amount designated by the
transferor; except that if the designation is of a lesser amount, the transferor
will provide the servicer and the indenture trustee with written confirmation
that the designation will not result in the reduction or withdrawal by any
rating agency of its rating of any outstanding series or class and the
transferor will deliver to the indenture trustee a certificate of an authorized
officer of the transferor to the effect that, based on the facts known to that
officer at the time, in the reasonable belief of the transferor, the designation
will not cause a pay out event or an event that, after the giving of notice or
the lapse of time, would cause a pay out event to occur with respect to Series [
]-[ ].
On each distribution date, after giving effect to any deposit to be made
to, and any withdrawal to be made from, the reserve account on that distribution
date, the indenture trustee will withdraw from the reserve account an amount
equal to the excess, if any, of the amount on deposit in the reserve account
over the Required Reserve Account Amount, will deposit the excess in the spread
account to the extent that funds available in the spread account are less than
the Required Spread Account Amount and will distribute any remaining excess to
the holders of the transferor certificates. Any amounts withdrawn from the
reserve account and deposited in the spread account as described above will be
available for distribution only to the holders of the Class C notes. Any amounts
withdrawn from the reserve account and distributed to the holders of the
transferor certificates as described above will not be available for
distribution to the noteholders.
So long as the reserve account is not terminated as described below, all
amounts on deposit in the reserve account on any distribution date (after giving
effect to any deposits to, or withdrawals from, the reserve account to be made
on that distribution date) will be invested to the following distribution date
by the indenture trustee at the direction of the servicer in eligible
investments. The interest and other investment income (net of investment
expenses and losses) earned on these investments will be retained in the reserve
account (to the extent the amount on deposit is less than the Required Reserve
Account Amount) or deposited in the collection account and treated as Available
Finance Charge Collections.
On or before each distribution date with respect to the controlled
accumulation period and on the first distribution date with respect to the early
amortization period, a withdrawal will be made from the reserve account, and the
amount of this withdrawal will be deposited in the collection account and
included as Available Finance Charge Collections, as provided in the Series [
]-[ ] indenture supplement, for that distribution date in an aggregate amount
equal to the least of (a) the amount then on deposit in the reserve account with
respect to that distribution date, (b) the Required Reserve Account Amount and
(c) the reserve draw amount with respect to that distribution date. However, the
amount of the withdrawal will be reduced to the extent that funds otherwise
would be available to be deposited in the reserve account on that distribution
date.
The reserve account will be terminated upon the earliest to occur of:
o the first distribution date for the early amortization period;
o the expected principal payment date; and
o the termination of the trust.
Upon the termination of the reserve account, all amounts on deposit in the
reserve account (after giving effect to any withdrawal from the reserve account
on that date as described above) will be deposited in the spread account to the
extent that funds available in the spread account are less than the Required
Spread Account Amount and any remaining amounts will be distributed to the
holders of the transferor certificates. Any amounts withdrawn from the reserve
account and deposited in the spread account as described above will be available
for distribution only to the holders of the Class C notes. Any amounts withdrawn
from the reserve account and distributed to the holders of the transferor
certificates as described above will not be available for distribution to the
noteholders.
SPREAD ACCOUNT
The servicer will establish and maintain with an eligible institution the
spread account as a segregated account held as security for the benefit of the
Class C noteholders (the "Spread Account"). Amounts on deposit in the spread
account will be used (a) to fund shortfalls in interest payments on the Class C
notes and (b) on the Series [ ]-[ ] termination date, to fund any shortfall in
payment of the outstanding principal balance of the Class C notes.
The spread account initially will not be funded, but will be funded by (a)
Available Finance Charge Collections and Excess Finance Charge Collections, as
described above under "-Application of Collections -Payment of Interest, Fees
and Other Items," and (b) amounts, if any, withdrawn from the reserve account to
be treated as Available Finance Charge Collections, as described above under
"-Reserve Account," and deposited into the spread account on any distribution
date to the extent that the funds available in the spread account are less than
the Required Spread Account Amount on that distribution date.
The "Required Spread Account Amount" will be determined on each
distribution date, and, in general, for any date of determination, will be equal
to the product of (a) the Spread Account Percentage in effect on the date of
determination and (b) the initial Invested Amount. However, as long as no event
of default for your series has occurred and is continuing, the Required Spread
Account Amount will not exceed the outstanding principal balance of the Class C
Notes minus the excess, if any, of the principal funding account balance over
the sum of the outstanding principal balances of the Class A notes and the Class
B notes on the date of determination.
Once an event of default for your series occurs and is continuing, the
Required Spread Account Amount for any distribution date will automatically
increase to the sum of
(a) the amount on deposit in the spread account on that distribution date
plus
(b) Available Finance Charge Collections and Excess Finance Charge
Collections for that distribution date available immediately after
funding the reserve account plus
(c) amounts withdrawn from the reserve account to be treated as Available
Finance Charge Collections, as described above under "-Reserve
Account." However, following an event of default for your series, if
the maturity of your notes is not accelerated, the increase in the
Required Spread Account Amount will be limited to an amount equal to
the outstanding principal amount of your series of notes.
"Spread Account Percentage" will be determined as follows:
IF THE QUARTERLY EXCESS
SPREAD PERCENTAGE IS GREATER THEN, THE SPREAD ACCOUNT
THAN OR EQUAL TO: AND LESS THAN: PERCENTAGE WILL EQUAL:
[ ]% [ ]% [ ]%
[ ]% [ ]% [ ]%
[ ]% [ ]% [ ]%
However, if a pay out event (other than a pay out event resulting from the
occurrence of an event of default) for Series [ ]-[ ] has occurred, the Spread
Account Percentage will be [ ]%.
After the Spread Account Percentage has been increased above zero as
specified in the table above, it will remain at the specified percentage until:
(a) further increased to a higher required percentage as specified above,
or
(b) the distribution date on which the Quarterly Excess Spread Percentage
has increased to a level above that for the then current Spread Account
Percentage, in which case the Spread Account Percentage will be decreased to the
appropriate percentage as specified above (or, if the Quarterly Excess Spread
Percentage is greater than or equal to [ ]%, the Spread Account Percentage will
be zero and the Required Spread Account Amount will be zero).
However, if a pay out event (other than a pay out event resulting from the
occurrence of an event of default) with respect to Series [ ]-[ ] has occurred,
the Spread Account Percentage will equal [ ]% (as provided in the definition of
Spread Account Percentage above) and may not be subsequently reduced.
The "Quarterly Excess Spread Percentage" will be determined as follows:
For the [Month 1] 20[ ]
distribution date: The Modified Excess Spread Percentage.
For the [Month 2] 20[ ]
distribution date: The Modified Excess Spread Percentage for the
first monthly period, plus the Excess Spread
Percentage for the [Month 1] 20[ ] monthly
period .
For the [Month 3] 20[ ]
distribution date: The Modified Excess Spread Percentage for the
first monthly period, plus the Excess Spread
Percentage for the [Month 1] 20[ ]monthly
period, plus the Excess Spread Percentage for
the [Month 2] 20[ ] monthly period.
For each following
distribution date: The sum of the Excess Spread Percentages for
the 3 prior monthly periods.
The "Excess Spread Percentage" for any monthly period will be determined as
follows:
o during the controlled accumulation period, but only if the amount on
deposit in the reserve account is greater than or equal to the
Required Reserve Account Amount:
o Available Finance Charge Collections for that monthly period
available immediately after covering Class A's portion of the
Investor Default Amount times 12, divided by
o The Adjusted Invested Amount on the first day of that monthly
period
o in all other cases:
o Available Finance Charge Collections for that monthly period
available immediately after covering Class A's portion of the
Investor Default Amount times 12, divided by
o The Invested Amount on the first day of that monthly period.
The "Modified Excess Spread Percentage" will be calculated for the first
monthly period in accordance with the Series [ ]-[ ] indenture supplement based
on collections of finance charge receivables for that monthly period in relation
to the amount of interest and servicing fee accrued for the first distribution
date.
Funds on deposit in the spread account will be invested at the direction of
the servicer in eligible investments. For purposes of the spread account, the
reference in the definition of eligible investments to a rating in the "highest
rating category" refers to a rating of at least A-2 by Standard & Poor's, P-2 by
Moody's or F2 by Fitch. Investment earnings (net of losses and investment
expenses) will, except as otherwise indicated in this prospectus supplement, not
be deposited into the spread account and will be paid to the holders of the
transferor certificates. However, after an event of default relating to your
series of notes, these investment earnings will be available for payment to
holders of the Class C notes.
SPREAD ACCOUNT DISTRIBUTIONS
If on any distribution date, the interest to be paid on the Class C notes
exceeds the amount allocated to pay that interest, the indenture trustee, at the
instruction of the servicer, will withdraw from the spread account the lesser of
(1) the amount on deposit in the spread account (including investment earnings
to the extent necessary to fund that excess) and (2) the amount of the excess,
and will deposit that amount into the collection account for payment of interest
on the Class C notes.
On the Series [ ]-[ ] termination date, funds available in the spread
account (after giving effect to any withdrawals to be made as discussed in the
preceding paragraph) will be used to fund any shortfall in the payment of the
outstanding principal balance of the Class C notes.
Funds on deposit in the spread account on any distribution date in excess
of the Required Spread Account Amount on that date will be paid to the holders
of the transferor certificates. On the date on which all amounts due to the
Class C noteholders from the spread account have been paid in full, all amounts,
if any, then remaining in the spread account will be distributed to the holders
of the transferor certificates.
ISSUANCE OF ADDITIONAL NOTES
The Series [ ]-[ ] indenture supplement provides that, from time to time
during the revolving period, the transferor may, subject to conditions described
below, cause the trust to issue additional notes of Series [ ]-[ ](each
issuance, an "Additional Issuance"). When issued, the additional notes of each
class will be identical in all respects to the other outstanding notes of that
class and will be equally and ratably entitled to the benefits of the transfer
and servicing agreement, the indenture and the Series [ ]-[ ] indenture
supplement without preference, priority or distinction.
In connection with each additional issuance, the outstanding principal
amounts of each class of notes and the series enhancement will be increased
proportionately. The additional series enhancement provided in connection with
an additional issuance may take the form of a letter of credit, the
establishment of a cash collateral account, the purchase of interest rate caps
or swaps and/or another form of series enhancement, provided that the form and
amount of additional series enhancement will not cause a reduction or withdrawal
by any rating agency of its rating of any outstanding series or class.
Following an additional issuance, the respective portions of the series
enhancement that are for the benefit of the noteholders will remain the same, as
a percentage of the total series enhancement, as the respective proportions in
effect on the closing date. The Controlled Accumulation Amount also will be
increased proportionately to reflect the principal amount of additional notes.
In order to issue additional notes, several conditions must be satisfied,
including:
o notice to the indenture trustee, the owner trustee, the servicer and
any series enhancer of the issuance and the date upon which it is to
occur;
o after giving effect to the additional issuance, the total amount of
principal receivables must at least equal the Required Minimum
Principal Balance, and the Transferor Interest must equal or exceed
the Required Transferor Interest;
o delivery to the indenture trustee of any additional series enhancement
agreement related to the additional issuance, executed by each of the
parties to the series enhancement agreement;
o delivery to the indenture trustee of written confirmation that the
additional issuance will not result in the reduction or withdrawal by
any rating agency of its rating of any outstanding series or class;
o delivery to the indenture trustee of a certificate of an authorized
officer of the transferor to the effect that, in the transferor's
reasonable belief, the issuance will not have a material adverse
effect on the interests of the noteholders at the date of issuance or
at any future date;
o as of the date of the additional issuance, all amounts due to the
Series [ ]-[ ] noteholders must have been paid, and there must not be
any unreimbursed Investor Charge-Offs;
o the excess of the principal amount of the additional notes over their
issue price shall not exceed the maximum amount permitted under the
Code without the creation of original issue discount; and
o delivery by the transferor to the indenture trustee of an opinion of
counsel acceptable to the indenture trustee that, for federal income
tax purposes,
(1) the issuance will not adversely affect the tax
characterization as debt of notes of any outstanding series
or class that were characterized as debt at the time of
their issuance;
(2) the new issuance will not cause the trust to be deemed to be
an association (or publicly traded partnership) taxable as a
corporation; and
(3) the new issuance will not cause or constitute an event in
which gain or loss would be recognized by any noteholder.
There are no restrictions on the timing or amount of any additional
issuance, provided that the conditions described above are met. As of the date
of any additional issuance, the Invested Amount will be increased to reflect the
initial principal balance of the additional notes of each class.
PAIRED SERIES
Your series of notes may be paired with one or more series of notes issued
at a later time once the controlled accumulation period or the early
amortization period for your series begins. We call each of these later issued
series a "Paired Series." All or a portion of a paired series may be pre-funded
with an initial deposit to a funding account that is for the sole benefit of the
paired series; in the alternative, a paired series may have a principal amount
that can be increased. Once your series is paid in full, if there have been no
unreimbursed investor charge-offs for any paired series, the invested amount of
the paired series will be increased by an amount up to the full Invested Amount
of your series. The issuance of the paired series will be subject to the
conditions described under "Description of the Notes -New Issuances" in the
accompanying prospectus.
We cannot assure you that the terms of any paired series will not have an
impact on the calculation of the Investor Percentage or the timing or amount of
payments received by you as a Series [ ]-[ ] noteholder. The extent to which the
timing or amount of payments received by you may be affected will depend on many
factors, only one of which is a change in the calculation of the Investor
Percentage.
PAY OUT EVENTS
As described above, the revolving period will continue through [ ], 200
(unless that date is postponed as described under "-Postponement of Controlled
Accumulation Period" in this prospectus supplement), unless a pay out event
occurs prior to that date.
A "Pay Out Event" refers to any of the following events:
(a) failure by the transferor (1) to make any payment or deposit on the
date required under the transfer and servicing agreement, the indenture or the [
]-[ ] indenture supplement (or within the applicable grace period which shall
not exceed five days) or (2) to observe or perform in any material respect any
other covenants or agreements of the transferor set forth in the transfer and
servicing agreement, the indenture or the [ ]-[ ] indenture supplement, which
failure has a material adverse effect on the Series [ ]-[ ] noteholders and
which continues unremedied for a period of 60 days after written notice of the
failure, requiring the same to be remedied, and continues to materially and
adversely affect the interests of the noteholders for the designated period;
(b) any representation or warranty made by the transferor in the transfer
and servicing agreement, the indenture or the Series [ ]-[ ] indenture
supplement, or any information required to be given by the transferor to the
indenture trustee to identify the accounts proves to have been incorrect in any
material respect when made or delivered and which continues to be incorrect in
any material respect for a period of 60 days after written notice of the
failure, requiring the same to be remedied, and as a result of which the
interests of the noteholders are materially and adversely affected and continue
to be materially and adversely affected for the designated period; except that a
pay out event pursuant to this subparagraph (b) will not occur if the transferor
has accepted reassignment of the related receivable or all related receivables,
if applicable, during the designated period in accordance with the provisions of
the transfer and servicing agreement;
(c) a failure by the transferor to convey receivables in additional
accounts or participations to the trust within 5 business days after the date
required by the transfer and servicing agreement;
(d) any servicer default occurs which would have a material adverse effect
on the Series [ ]-[ ] noteholders;
(e) the average of the Portfolio Yields for any three consecutive monthly
periods is less than the average of the Base Rates for the same monthly periods;
(f) insufficient moneys are available to pay in full the outstanding
principal balances of all the Series [ ]-[ ] notes on the expected principal
payment date;
(g) bankruptcy, insolvency, liquidation, conservatorship, receivership or
similar events relating to the transferor (including any additional transferor)
or the originator;
(h) the transferor is unable for any reason to transfer receivables to the
trust in accordance with the provisions of the transfer and servicing agreement;
(i) the trust becomes subject to regulation as an "investment company"
within the meaning of the Investment Company Act of 1940, as amended; or
(j) an event of default for Series [ ]-[ ] occurs under the indenture.
In the case of any event described in clause (a), (b), (d) or (f) above, a
pay out event will be deemed to have occurred with respect to the notes only if,
after any applicable grace period, either the indenture trustee or the Series [
]-[ ] noteholders evidencing interests aggregating not less than 50% of the
aggregate unpaid principal amount of the Series [ ]-[ ] notes, by written notice
to the transferor and the servicer (and to the indenture trustee if given by the
Series [ ]-[ ] noteholders), declare that a pay out event has occurred with
respect to the Series [ ]-[ ] notes as of the date of the notice.
In the case of any event described in clause (g), (h) or (i), a pay out
event with respect to all series then outstanding, and in the case of any event
described in clause (c), (e) or (j), a pay out event with respect to only the
Series [ ]-[ ] notes, will occur without any notice or other action on the part
of the indenture trustee or the Series [ ]-[ ] noteholders immediately upon the
occurrence of the event.
On the date on which a pay out event is deemed to have occurred, the early
amortization period will begin.
See "Description of the Notes -Pay Out Events" in the accompanying
prospectus for an additional discussion of the consequences of an insolvency,
conservatorship or receivership of the transferor.
The term "Base Rate" means, with respect to any monthly period, the
annualized percentage equivalent of a fraction:
o the numerator of which is the sum of the Monthly Interest and the
Monthly Servicing Fee, each for the related distribution date; and
o the denominator of which is the Invested Amount as of the close of
business on the last day of that monthly period.
The term "Portfolio Yield" means, with respect to any monthly period, the
annualized percentage equivalent of a fraction:
o the numerator of which is the sum of collections of finance charge
receivables, Excess Finance Charge Collections, Principal Funding
Investment Proceeds and amounts withdrawn from the reserve account, if
any, deposited in the collection account and allocable to the Series [
]-[ ] notes for that monthly period, calculated on a cash basis after
subtracting the Investor Default Amount for that monthly period; and
o the denominator of which is the Invested Amount as of the close of
business on the last day of that monthly period.
EVENTS OF DEFAULT
The events of default for Series [ ]-[ ], as well as the rights and
remedies available to the indenture trustee and the Series [ ]-[ ] noteholders
when an event of default occurs, are described under "The Indenture -Events of
Default; Rights Upon Event of Default" in the accompanying prospectus.
If an event of default for Series [ ]-[ ] occurs, the indenture trustee or
the holders of a majority of the then-outstanding principal balance of the
Series [ ]-[ ] notes may declare the Series [ ]-[ ] notes to be immediately due
and payable. If the Series [ ]-[ ] notes are accelerated, you may receive
principal prior to the expected principal payment date for your notes.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The share of the servicing fee allocable to the Invested Amount with
respect to any distribution date (the "Monthly Servicing Fee") will be equal to
one-twelfth of the product of (a) [ ]% and (b) (1) the Adjusted Invested Amount
as of the last day of the monthly period preceding that distribution date, minus
(2) the product of the amount, if any, on deposit in the special funding account
as of the last day of the monthly period preceding that distribution date and
the Investor Percentage of collections of finance charge receivables with
respect to that monthly period. However, with respect to the first distribution
date, the monthly servicing fee will equal $[ ].
The servicer will pay from its servicing compensation expenses incurred in
connection with servicing the receivables including, without limitation, payment
of the fees and disbursements of the indenture trustee and independent certified
public accountants and other fees which are not expressly stated in the transfer
and servicing agreement, the indenture or the Series [ ]-[ ] indenture
supplement to be payable by the trust or the noteholders other than federal,
state and local income and franchise taxes, if any, of the trust.
REPORTS TO NOTEHOLDERS
On each distribution date, the paying agent, on behalf of the indenture
trustee will forward to each noteholder of record, a statement prepared by the
servicer setting forth the items described in "Description of the Notes -Reports
to Noteholders" in the accompanying prospectus.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and Section 4975 of the Code impose requirements on employee benefit plans and
other plans and arrangements, including individual retirement accounts and
annuities, Keogh plans and collective investment funds or insurance company
general or separate accounts in which the plans, accounts or arrangements are
invested, that are subject to the fiduciary responsibility provisions of ERISA
and/or Section 4975 of the Code (collectively, "Plans"), and on persons who are
fiduciaries with respect to Plans, in connection with the investment of "plan
assets" of any Plan ("Plan Assets"). ERISA generally imposes on Plan fiduciaries
general fiduciary requirements, including those of investment prudence and
diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan.
ERISA and Section 4975 of the Code prohibit a broad range of transactions
involving Plan Assets and persons ("parties in interest" under ERISA and
"disqualified persons" under the Code, collectively, "Parties In Interest") who
have specified relationships to a Plan or its Plan Assets, unless a statutory or
administrative exemption is available. Parties in Interest that participate in a
prohibited transaction may be subject to a penalty imposed under ERISA and/or an
excise tax imposed pursuant to Section 4975 of the Code, unless a statutory or
administrative exemption is available. These prohibited transactions generally
are set forth in Section 406 of ERISA and Section 4975 of the Code.
Subject to the considerations described below and in the accompanying
Prospectus, the notes are eligible for purchase with Plan Assets of any Plan.
Any fiduciary or other Plan investor considering whether to purchase the
notes with Plan Assets of any Plan should determine whether that purchase is
consistent with its fiduciary duties and whether that purchase would constitute
or result in a non-exempt prohibited transaction under ERISA and/or Section 4975
of the Code because any of the transferor, the servicer, the indenture trustee,
the owner trustee or any other party may be Parties in Interest with respect to
the investing Plan and may be deemed to be benefiting from the issuance of the
notes. If the transferor or the servicer is a Party in Interest with respect to
the prospective Plan investor, any fiduciary or other Plan investor considering
whether to purchase or hold the notes should consult with its counsel regarding
the availability of exemptive relief under U.S. Department of Labor ("DOL")
Prohibited Transaction Class Exemption ("PTCE") 96-23 (relating to transactions
determined by "in-house asset managers"), 95-60 (relating to transactions
involving insurance company general accounts), 91-38 (relating to transactions
involving bank collective investment funds), 90-1 (relating to transactions
involving insurance company pooled separate accounts) or 84-14 (relating to
transactions determined by independent "qualified professional asset managers")
or any other prohibited transaction exemption issued by the DOL. A purchaser of
the notes should be aware, however, that even if the conditions specified in one
or more of the above-referenced exemptions are met, the scope of the exemptive
relief provided by the exemption might not cover all acts which might be
construed as prohibited transactions.
In addition, under DOL Regulation Section 2510.3-101 (the "Plan Asset
Regulation"), the purchase with Plan Assets of equity interests in the issuer
could, in specified circumstances, cause the receivables and other assets of the
issuer to be deemed Plan Assets of the investing Plan which, in turn, would
subject the issuer and its assets to the fiduciary responsibility provisions of
ERISA and the prohibited transaction provisions of ERISA and Section 4975 of the
Code. Nevertheless, because the notes (a) are expected to be treated as
indebtedness under local law and will, in the opinion of Special Tax Counsel, be
treated as debt, rather than equity, for federal tax purposes (see "Federal
Income Tax Consequences -Tax Characterization of the Trust and the Notes
- -Treatment of the Notes as Debt" in the accompanying prospectus), and (b) should
not be deemed to have any "substantial equity features," purchases of the notes
with Plan Assets should not be treated as equity investments and, therefore, the
receivables and other assets included as assets of the issuer should not be
deemed to be Plan Assets of the investing Plans. Those conclusions are based, in
part, upon the traditional debt features of the notes, including the reasonable
expectation of purchasers of the notes that the notes will be repaid when due,
as well as the absence of conversion rights, warrants and other typical equity
features.
The notes may not be purchased or held by any Plan, or any person investing
Plan Assets of any Plan, if any of the transferor, the servicer, the indenture
trustee, the owner trustee or any of their respective affiliates
(a) has investment or administrative discretion with respect to the Plan
Assets used to effect the purchase;
(b) has authority or responsibility to give, or regularly gives,
investment advice with respect to the Plan Assets, for a fee and
pursuant to an agreement or understanding that the advice (1) will
serve as a primary basis for investment decisions with respect to the
Plan Assets, and (2) will be based on the particular investment needs
of that Plan; or
(c) unless PTCE 95-60, 91-38 or 90-1 is applicable, is an employer
maintaining or contributing to that Plan. Each purchaser or holder of
the notes or any interest in the notes will be deemed to have
represented by its purchase and holding that it is not subject to the
foregoing limitation.
Any fiduciary or other Plan investor considering whether to purchase any
notes on behalf of or with Plan Assets of any Plan should consult with its
counsel and refer to this prospectus supplement for guidance regarding the ERISA
considerations applicable to the notes offered by this prospectus supplement and
the accompanying prospectus.
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
as supplemented by a terms agreement relating to the Class A notes (together,
the "Class A Underwriting Agreement") between the transferor and the Class A
underwriters named below (the "Class A Underwriters"), the terms and conditions
set forth in an underwriting agreement as supplemented by a terms agreement
relating to the Class B notes (together, the "Class B Underwriting Agreement")
between the transferor and the Class B underwriters named below (the "Class B
Underwriters") and the terms and conditions set forth in an underwriting
agreement as supplemented by a terms agreement relating the Class C notes
(together, the "Class C Underwriting Agreement" and, together with the Class A
underwriting agreement and the Class B underwriting agreement, the "Underwriting
Agreement") between the transferor and the Class C underwriters named below (the
"Class C Underwriters" and, together with the Class A underwriters and the Class
B underwriters, the "UNDERWRITERS"), the transferor has agreed to sell to the
underwriters, and each of the underwriters has severally agreed to purchase, the
principal amount of the notes set forth opposite its name:
UNDERWRITERS PRINCIPAL AMOUNT PRINCIPAL AMOUNT PRINCIPAL AMOUNT
OF CLASS A NOTES OF CLASS B NOTES OF CLASS C NOTES
Total.................. $
In the Class A underwriting agreement, the Class A underwriters have
agreed, subject to the terms and conditions set forth in that agreement, to
purchase all of the Class A notes offered hereby if any of the Class A notes are
purchased. In the Class B underwriting agreement, the Class B underwriters have
agreed, subject to the terms and conditions set forth in that agreement, to
purchase all of the Class B notes offered hereby if any of the Class B notes are
purchased. In the Class C underwriting agreement, the Class C underwriters have
agreed, subject to the terms and conditions set forth in that agreement, to
purchase all of the Class C notes offered hereby if any of the Class C notes are
purchased.
The Class A underwriters propose initially to offer the Class A notes to
the public at [ ]% of their principal amount and to dealers at that price less
concessions not in excess of [ ]% of the principal amount of the Class A notes.
The Class A underwriters may allow, and the dealers may reallow, concessions not
in excess of [ ]% of the principal amount of the Class A notes to brokers and
dealers. After the initial public offering, the public offering price and other
selling terms may be changed by the Class A underwriters.
The Class B underwriters propose initially to offer the Class B notes to
the public at [ ]% of their principal amount and to dealers at that price less
concessions not in excess of [ ]% of the principal amount of the Class B notes.
The Class B underwriters may allow, and the dealers may reallow, concessions not
in excess of [ ]% of the principal amount of the Class B notes to brokers and
dealers. After the initial public offering, the public offering price and other
selling terms may be changed by the Class B underwriters.
The Class C underwriters propose initially to offer the Class C notes to
the public at [ ]% of their principal amount and to dealers at that price less
concessions not in excess of [ ]% of the principal amount of the Class C notes.
The Class C underwriters may allow, and the dealers may reallow, concessions not
in excess of [ ]% of the principal amount of the Class C notes to brokers and
dealers. After the initial public offering, the public offering price and other
selling terms may be changed by the Class C underwriters.
We will receive proceeds of approximately $[] from the sale of the notes
(representing [ ]% of the principal amount of each Class A note, [ ]% of the
principal amount of each Class B note and [ ]% of the principal amount of each
Class C note) after paying the underwriting discount of $[] (representing [ ]%
of the principal amount of each Class A note, [ ]% of the principal amount of
each Class B note and [ ]% of the principal amount of each Class C note).
Additional offering expenses are estimated to be $[].
The transferor will indemnify the underwriters against liabilities,
including liabilities under the Securities Act, or contribute to payments the
underwriters may be required to make.
The underwriters may engage in over-allotment transactions, stabilizing
transactions, syndicate covering transactions and penalty bids with respect to
the notes in accordance with Regulation M under the Exchange Act. Over-allotment
transactions involve syndicate sales in excess of the offering size, which
creates a syndicate short position. Stabilizing transactions permit bids to
purchase the notes so long as the stabilizing bids do not exceed a specified
maximum. Syndicate covering transactions involve purchases of the notes in the
open market after the distribution has been completed in order to cover
syndicate short positions. Penalty bids permit the underwriters to reclaim a
selling concession from a syndicate member when the notes originally sold by
that syndicate member are purchased in a syndicate covering transaction.
Over-allotment transactions, stabilizing transactions, syndicate covering
transactions and penalty bids may cause the prices of the notes to be higher
than they would otherwise be in the absence of those transactions. Neither the
transferor nor the underwriters represent that the underwriters will engage in
any of these transactions or that those transactions, once commenced, will not
be discontinued without notice at any time.
The transferor is an affiliate of the underwriters.
LEGAL MATTERS
Certain legal matters relating to the issuance of the notes will be passed
upon for the transferor and the underwriters by Stroock & Stroock Lavan LLP, New
York, New York, special counsel to the transferor.
INDEX OF TERMS FOR PROSPECTUS SUPPLEMENT
Terms Page
Accumulation Shortfall........................................................37
Additional Issuance...........................................................45
Adjusted Invested Amount......................................................33
Available Finance Charge Collections..........................................27
Available Principal Collections...............................................28
Base Rate.....................................................................49
Business Day..................................................................27
Class A Additional Interest...................................................27
Class A Monthly Interest......................................................35
Class A Note Interest Rate....................................................26
Class A Underwriters..........................................................52
Class A Underwriting Agreement................................................52
Class B Additional Interest...................................................27
Class B Monthly Interest......................................................36
Class B Note Interest Rate....................................................26
Class B Underwriters..........................................................52
Class B Underwriting Agreement................................................52
Class C Additional Interest...................................................27
Class C Monthly Interest......................................................36
Class C Note Interest Rate....................................................26
Class C Underwriters..........................................................52
Class C Underwriting Agreement................................................52
Closing Date..................................................................25
Controlled Accumulation Amount................................................37
Controlled Accumulation Period................................................28
Controlled Deposit Amount.....................................................37
Defaulted Amount..............................................................39
Discount Percentage...........................................................19
Distribution Date.............................................................27
Early Amortization Period.....................................................29
ERISA.........................................................................50
Excess Finance Charge Collections.............................................38
Excess Spread Percentage......................................................44
Expected Principal Payment Date...............................................23
Fixed Investor Percentage.....................................................32
Floating Investor Percentage..................................................31
Interchange...................................................................17
Interest Period...............................................................26
Invested Amount...............................................................33
Investor Default Amount.......................................................39
LIBOR Determination Date......................................................26
London Business Day...........................................................26
Modified Excess Spread Percentage.............................................44
Monthly Interest..............................................................36
Monthly Period................................................................28
Monthly Principal.............................................................37
Monthly Principal Reallocation Amount.........................................34
Monthly Servicing Fee.........................................................50
Originator....................................................................24
Paired Series.................................................................47
Parties In Interest...........................................................50
Pay Out Event.................................................................47
Payments of Principal.........................................................36
Plan Asset Regulation.........................................................51
Plan Assets...................................................................50
Plans.........................................................................50
Portfolio Yield...............................................................49
Principal Funding Account.....................................................39
Principal Funding Investment Proceeds.........................................39
Principal Shortfalls..........................................................38
Quarterly Excess Spread Percentage............................................43
Reallocated Principal Collections.............................................34
Record Date...................................................................26
Recoveries....................................................................18
Required Minimum Principal Balance............................................19
Required Reserve Account Amount...............................................40
Required Spread Account Amount................................................42
Required Transferor Interest..................................................19
Required Transferor Percentage................................................19
Reserve Account...............................................................40
Reserve Account Funding Date..................................................40
Reserve Draw Amount...........................................................40
Revolving Period..............................................................28
Series 200[ ]-[ ] Termination Date............................................24
Series 200_-__ Indenture Supplement...........................................25
Series 200_-__ Notes..........................................................25
Servicer......................................................................24
Shared Principal Collections..................................................38
Shared Transferor Principal Collections.......................................39
Spread Account................................................................42
Spread Account Percentage.....................................................43
Telerate Page 3750............................................................27
Transferor Interest...........................................................19
Trust Portfolio...............................................................18
Underwriting Agreement........................................................52
ANNEX I
OTHER SERIES ISSUED AND OUTSTANDING
The table below sets forth the principal characteristics of the other
series previously issued by the trust that are currently outstanding, all of
which are in group one. For more specific information with respect to any
series, any prospective investor should contact [ ] at [ ]. [ ] will provide,
without charge, to any prospective purchaser of the notes, a copy of the
disclosure documents for any previous publicly-issued series.
[1. Series [ ]-[ ]
Current Class A Invested Amount......$
Class A note interest rate...........[one-month] LIBOR plus []% per annum
Initial Class B Invested Amount......$
Current Class B Invested Amount......$
Class B note interest rate...........[one-month] LIBOR plus []% per annum
Initial Class C Invested Amount......$
Current Class C Invested Amount......$
Class C note interest rate...........[one-month] LIBOR plus []% per annum
[Controlled Accumulation Amount......$*]
[Expected principal payment date.....[] distribution date]
Annual servicing fee percentage......[]% per annum
[Enhancement for the Class A notes...Subordination of Class B and Class C notes]
[Enhancement for the Class B notes...Subordination of Class C notes]
[Enhancement for the Class C notes...spread account]
Series 200_-__ termination date......[] distribution date
Series Issuance Date................. , 20[]
Initial Class A Invested Amount......$
______________
* Subject to change if the commencement of the accumulation period or controlled
accumulation period, as applicable, is delayed.]
The information in this prospectus supplement is not complete and may be
changed. We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This prospectus
supplement is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
SUBJECT TO COMPLETION, [ ]
PROSPECTUS SUPPLEMENT (to prospectus date [ ])
$[ ] (APPROXIMATE)
ACE SECURITIES CORP.
ACE SECURITIES CORP. CARD ACCOUNT
MASTER LOAN TRUST [ ]-[ ]
ASSET BACKED CERTIFICATES
[ ]
Seller
[ ]
Servicer
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-[ ] OF THIS PROSPECTUS
SUPPLEMENT AND ON PAGE [ ] OF THE PROSPECTUS.
For a list of capitalized terms used in this prospectus supplement and the
prospectus, see the index of defined terms beginning on page S-[ ] of this
prospectus supplement and on page [ ] of the prospectus.
The certificates will represent interests in the trust fund only and will not
represent interests in or obligations of any other entity.
This prospectus supplement may be used to offer and sell the certificates only
if accompanied by the prospectus.
The sources for payment of the certificates are among other assets, a portfolio
of [consumer] [corporate] [revolving] [credit card] [charge card][debit card]
receivables generated or to be generated from time to time in a portfolio of
[consumer] [corporate] [revolving] [credit card] [charge card][debit card]
accounts [owned by the Seller]. Interest [and principal] on the certificates are
scheduled to be paid [monthly] on the [ ] day of the month. The first scheduled
distribution will be made in [ ].
The Trust will issue:
FINAL SCHEDULED
PRINCIPAL CERTIFICATE DISTRIBUTION
CERTIFICATES BALANCE RATE DATE
- ------------ --------- ----------- ---------------
A $[ ] [ ]% [ ]
B $[ ] [ ]% [ ]
Deutsche Banc Alex. Brown will purchase the certificates from the trust at
approximately [ ]% of the principal amount of the certificates. Deutsche Banc
Alex. Brown will offer the certificates from time to time in negotiated
transactions or at varying prices which will be determined at the time of sale.
The aggregate proceeds to the trust, before deducting expenses payable by or on
behalf of the trust estimated at $[ ], will be approximately $[ ].
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THESE NOTES OR DETERMINED THAT THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
UNDERWRITER:
DEUTSCHE BANK ALEX. BROWN
The date of this prospectus supplement is [ ], 20[ ]
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS:
We provide information to you about the certificates offered by this
prospectus supplement in two separate documents that progressively provide more
detail: (1) the accompanying prospectus, which provides general information,
some of which may not apply to your certificates, and (2) this prospectus
supplement, which describes the specific terms of your certificates.
IF INFORMATION VARIES BETWEEN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS, YOU SHOULD RELY ON THE INFORMATION IN THIS PROSPECTUS
SUPPLEMENT.
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We have
not authorized anyone to provide you with different information.
We are not offering the certificates in any state where the offer is not
permitted. We do not claim that the information in this prospectus supplement
and prospectus is accurate as of any date other than the dates stated on their
respective covers.
____________________
Dealers will deliver a prospectus supplement and prospectus when acting as
underwriters of the certificates and with respect to their unsold allotments or
subscriptions. In addition, all dealers selling the certificates will be
required to deliver a prospectus supplement and prospectus for ninety days
following the date of this prospectus supplement.
____________________
We include cross-references in this prospectus supplement and the
accompanying prospectus to captions in these materials where you can find
further related discussions. The following table of contents and the table of
contents included in the accompanying prospectus provide the pages on which
these captions are located.
Table of Contents
PROSPECTUS SUPPLEMENT
Summary of Terms..............................................................S-
Risk Factors..................................................................S-
Maturity Considerations.......................................................S-
Master Trust Considerations...................................................S-
The Identified Pool...........................................................S-
Use of Proceeds...............................................................S-
The Seller....................................................................S-
The Servicer..................................................................S-
The Depositor.................................................................S-
Description of the Certificates...............................................S-
Erisa Considerations..........................................................S-
Legal Investment Considerations...............................................S-
Underwriting..................................................................S-
Legal Matters.................................................................S-
Ratings.......................................................................S-
Index of Defined Terms........................................................S-
PROSPECTUS
Risk Factors....................................................................
The Trusts......................................................................
Trust Assets....................................................................
Series Enhancement..............................................................
Servicing of Receivables........................................................
Certain Matters Regarding the Service...........................................
Description of the Notes........................................................
Description of the Certificates.................................................
Certain Information Regarding the Securities....................................
Description of the Trust Agreements or
Pooling and Servicing Agreements..............................................
Certain Legal Aspects of the Receivables........................................
The Depositor...................................................................
Use of Proceeds.................................................................
Material Federal Income Tax Consequences........................................
Owner Trusts....................................................................
Grantor Trusts..................................................................
Master Trust....................................................................
Certain State and Local Tax Considerations......................................
ERISA Considerations............................................................
Plan of Distribution............................................................
Legal Matters...................................................................
Index of Defined Terms..........................................................
Annex I.........................................................................
SUMMARY OF TERMS
o THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROSPECTUS
SUPPLEMENT AND DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU NEED TO
CONSIDER IN MAKING YOUR INVESTMENT DECISION. TO UNDERSTAND ALL OF THE TERMS
OF THE OFFERING OF THE CERTIFICATES, IT IS NECESSARY THAT YOU READ
CAREFULLY THIS ENTIRE PROSPECTUS SUPPLEMENT AND ACCOMPANYING PROSPECTUS.
o WHILE THIS SUMMARY CONTAINS AN OVERVIEW OF CERTAIN CALCULATIONS, CASH FLOW
PRIORITIES, AND OTHER INFORMATION TO AID YOUR UNDERSTANDING, YOU SHOULD
READ CAREFULLY THE FULL DESCRIPTION OF THESE CALCULATIONS, CASH FLOW
PRIORITIES AND OTHER INFORMATION IN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS BEFORE MAKING ANY INVESTMENT DECISION.
ISSUER
ACE Securities Corp. Card Account Master Trust [ ].
SELLER AND ORIGINATOR
[ ].
DEPOSITOR
ACE Securities Corp., a special purpose Delaware corporation. ACE
Securities Corp. will sell the home equity loans to the issuing trust.
SERVICER
[ ].
TRUSTEE
[ ].
CLOSING DATE
[ ].
CUT-OFF DATE
The close of business on [ ]
DISTRIBUTION DATE
The [ ] day of each [month] [quarter] [semi-annual period] or if it is not
a business day, then the next succeeding business day. The first distribution
date for interest will be in [ ]. The first distribution date with respect to
principal is expected to occur in [ ].
RECORD DATE
With respect to any distribution date, the last business day of the month
immediately preceding the calendar month in which a distribution date occurs.
THE CERTIFICATES
GENERAL
On the closing date, the trust will issue the certificates. Each
certificate represents an undivided ownership interest in the trust.
DENOMINATION
The certificates will be offered for purchase in denominations of $[ ] and
multiples thereof.
BOOK-ENTRY REGISTRATION
We will issue the certificates in book-entry form. You will hold your
interests through a depository. While the certificates are book-entry they will
be registered in the name of the applicable depository, or in the name of the
nominee of the depository. Transfers within any depository system will be in
accordance with the usual rules and operating procedures of that system.
DISTRIBUTIONS TO CERTIFICATEHOLDERS
GENERAL
You will be entitled to receive payments of interest on each distribution
date. The amount of principal you will be entitled to receive will vary. If you
hold a certificate on the applicable record date, you will be entitled to
receive payments on the related distribution date.
INTEREST
The interest rate on any distribution date for a certificate will be the
interest rate set forth in this prospectus supplement.
You can use the following formula to calculate your current interest
payment on any distribution date:
N
- ------ x IR x PB = your interest payment
360
N= [30], [the number of days from the last distribution date (or in the case of
the initial distribution date, from [ ]) until the current distribution date].
IR= the applicable per annum interest rate.
PB= the principal balance of immediately prior to any distributions on each
distribution date.
PRINCIPAL
On each distribution date, the trustee will distribute principal of the
classes of certificates depending on the amortization period and in the manner
and priority discussed under the caption "Description of the Certificates -
Distributions" in this prospectus supplement.
AMORTIZATION PERIOD
[CONTROLLED AMORTIZATION PERIOD
Unless a rapid amortization period begins, the certificates will have a
controlled amortization period. During a controlled amortization period,
collections of principal receivables that are allocable to the percentage
interest of a series of certificates will be used to make principal
distributions in scheduled amounts to the certificateholders entitled to those
distributions. The amount to be distributed on any distribution date during the
controlled amortization period will be limited to:
o an amount equal to [ ], plus
o any existing deficit controlled amortization amount arising from prior
payment dates.
The controlled amortization period will commence at the close of business
on [ ] and continue until the earliest of:
o the commencement of the rapid amortization period;
o payment in full of the certificates; and
o the series termination date].
[PRINCIPAL AMORTIZATION PERIOD
Unless a rapid amortization period begins, the certificates will have an
amortization period during which collections of principal receivables allocable
to the percentage interest of the certificates will be used on each payment date
to make principal distributions to the holders of the certificates then entitled
to distributions. The principal amortization period will commence at the close
of business on [ ] and continue until the earliest of:
o the commencement of the rapid amortization period;
o payment in full of the certificates; and
o the series termination date].
[ACCUMULATION PERIOD
Unless a rapid amortization period begins, the certificates will have an
accumulation period. During an accumulation period, collections of principal
receivables allocable to the percentage interest of such certificates will be
deposited on the business day immediately prior to each payment date in a
principal funding account. The principal funding account is established for the
benefit of the holders of the certificates. Amounts on deposit in the principal
funding account will be used to make distributions of principal to the holders
on the scheduled payment date. The amount to be deposited in the principal
funding account on any transfer date will be limited to an amount equal to [ ].
The accumulation period will commence at the close of business on [ ] and
continue until the earliest of:
o the commencement of the rapid amortization period;
o payment in full of the certificates; and
o the series termination date].
[RAPID AMORTIZATION PERIOD
The rapid amortization period shall run from the day on which an
amortization event has occurred, to the earlier of the date on which
certificates have been paid in full or the related series termination date.
During the rapid amortization period, collections of principal receivables
allocable to the percentage interest of a series of certificates will be
distributed as principal payments to the holders of the certificates on each
payment date. During the rapid amortization period, distributions of principal
to holders of the certificates will not be subject to any controlled deposit
amount or controlled distribution amount. In addition, upon the commencement of
the rapid amortization period, any funds on deposit in a principal funding
account will be paid to the holders of certificates on the first payment date in
the rapid amortization period.
TRUST PROPERTY
The trust property is held by the trustee for the benefit of the
certificateholders. The trust property includes:
o among other assets, a portfolio of [consumer] [corporate] [revolving]
[credit card] [charge card] [debit card] receivables generated or to
be generated from time to time in a portfolio of [consumer]
[corporate] [revolving] [credit card] [charge card] [debit card]
accounts [owned by the seller];
o payments on the receivables after the cut-off date (other than
payments of interest due on or prior to [ ]);
o certain rights of the depositor under a loan purchase agreement;
o amounts on deposit in the accounts specified in this prospectus
supplement; and
o proceeds of the foregoing.
THE RECEIVABLES
On the closing date, the trust will purchase receivables having an
aggregate principal balance of approximately $[ ] as of the initial cut-off
date, from the depositor pursuant to the agreement. On and after the closing
date, pursuant to the agreement, the depositor will sell, if available, and the
trust will purchase, additional receivables from time to time during the funding
period specified in this prospectus supplement. We expect the amount of
additional receivables to be purchased with moneys in the pre-funding account to
have an aggregate principal balance equal to approximately $[ ].
The statistical information presented in this prospectus supplement is with
respect to the initial receivables as of the initial cut-off date. Certain of
the initial receivables may not be purchased by the trust and other receivables
may be purchased by the trust on the closing date.
The initial receivables have been selected, and the subsequent receivables
will be selected, from the receivables owned or originated by the seller based
on the criteria specified in the pooling and servicing agreement and described
in this prospectus supplement.
After the transfer of subsequent receivables to the trust, the
characteristics of the entire pool of receivables included in the trust may vary
significantly from those of the initial receivables.
The initial receivables will have the following characteristics as of the
cut-off date:
o number of receivables: [ ]
o aggregate principal balance: $[ ]
o average principal balance: $[ ]
o maximum principal balance: $____
o minimum principal balance: $[ ]
o latest maturity date: [ ]
o weighted average current interest rate:
o current interest rates range: [ ]% to [ ]%
o weighted average gross margin: [ ]% (approximate)
o gross margin range: [ ]% to [ ]%
o weighted average maximum interest rate:
o maximum interest rate range: [ ]% to [ ]%
o weighted average minimum interest rate:
o minimum interest rate range: [ ]% to [ ]%
o weighted average remaining term: vmonths (approximate)
o remaining term range: [ ]months to [ ] months
CREDIT ENHANCEMENT
Credit enhancement refers to a mechanism that is intended to protect the
holders of certain classes of certificates against losses due to defaults by the
borrowers under the home equity loans.
The certificates have the benefit of [four] types of credit enhancement:
o [a cash collateral account],
o [ ]
o [ ]
o with respect to the class A certificates, subordination of the class B
certificates; and
OPTIONAL TERMINATION
On any date when the adjusted invested amount is less than or equal to [ ]%
of the invested amount on the closing date and to the extent certain conditions
specified in the agreement are satisfied, the [depositor] [seller] will have the
right to purchase the invested amount from the trust.
FEDERAL TAX CONSEQUENCES
Stroock & Stroock & Lavan LLP has acted as counsel to the depositor and is
of the opinion that for federal income tax purposes:
o The certificates will be treated as indebtedness, and
o The trust will not be classified as an association, or publicly traded
partnership, taxable as a corporation.
[The trust does not anticipate treating the certificates as being issued with
original issue discount.] By your acceptance of a certificate, you will agree to
treat your Series [ ]-[ ] certificates as indebtedness for federal, state and
local income and franchise tax purposes. See "Material Federal Income Tax
Consequences--Certain Certificates Treated As Indebtedness" in the accompanying
prospectus for additional information concerning the application of federal
income tax laws.
ERISA CONSIDERATIONS
An employee benefit plan subject to the requirements of the fiduciary
responsibility provisions of the Employee Retirement Income Security Act of
1974, as amended, or ERISA, or the provisions of Section 4975 of the Internal
Revenue Code of 1986 as amended, contemplating the purchase of the class A
certificates should consult its counsel before making a purchase, and the
fiduciary and such legal advisors should consider whether the class A
certificates will satisfy all of the requirements of the "publicly offered
securities" exemption described herein and the possible application of other
ERISA prohibited transaction exemptions described herein. Although the depositor
expects that the "publicly offered securities" exemption or the other ERISA
prohibited transaction exemptions will apply to certain purchases of the class A
certificates by employee benefit plans, there can be no assurance that such
exemption will apply to all purchases of the class A certificates by such plans.
The class B certificates are not eligible for purchase by plans.
SEE "ERISA CONSIDERATIONS" IN THIS PROSPECTUS SUPPLEMENT.
CERTIFICATE RATING
Before the certificates can be issued, the trust must obtain the following
ratings:
CLASS A CERTIFICATES
o [the highest rating category by [ ]]
CLASS B CERTIFICATES
o [One of the four highest rating category by [ ]]
RISK FACTORS
THE FOLLOWING INFORMATION, WHICH YOU SHOULD CAREFULLY CONSIDER, IDENTIFIES
CERTAIN SIGNIFICANT SOURCES OF RISK ASSOCIATED WITH AN INVESTMENT IN THE NOTES.
YOU MAY HAVE DIFFICULTY
SELLING YOUR CERTIFICATES.............. The certificates will not be listed on
any securities exchange. As a result, if
you wish to sell your certificates, you
will have to find a purchaser that is
willing to purchase your certificates.
The underwriter intends to make a
secondary market for the offered
certificates. The underwriter may do so
by offering to buy the offered
certificates from investors that wish to
sell. However, the underwriter will not
be obligated to make offers to buy the
offered certificates and may stop making
offers at any time. In addition, the
prices offered, if any, may not reflect
prices that other potential purchasers,
were they to be given the opportunity,
would be willing to pay. There have been
times in the past where there have been
very few buyers of similar asset backed
securities, and there may be times again
in the future. As a result, you may not
be able to sell your certificates when
you wish to do so or you may not be able
to obtain the price you wish to receive.
[GEOGRAPHIC CONCENTRATION MAY
AFFECT PERFORMANCE..................... Discuss any geographic risks, if
applicable]
[CONCENTRATION OF CREDIT RISK.......... Discuss impact on Certificateholders of
material concentration of credit risk,
if applicable.]
THE SUBORDINATED CERTIFICATES HAVE
A GREATER RISK OF LOSS THAN THE
OTHER CERTIFICATES..................... The class B certificates will not be
paid any distributions of interest until
the class A certificates receive their
interest distributions and will not
receive any distributions of principal
until the class A certificates receive
their principal distributions. If the
available funds are insufficient to make
all of the required distributions on the
class A, and class B certificates, the
class B certificates will not receive
all of their distributions. In addition,
losses due to defaults by [ ], will be
allocated first to the class B
certificates to the extent not covered
by excess interest at that time. Any
allocation of a loss to class B
certificates will reduce the amount of
interest and, to the extent not
reimbursed from future excess interest,
principal they will receive. As a result
of the foregoing, the class B
certificates will be affected to a
larger degree by any losses on the
receivables. In addition, following the
exercise of the clean-up call, the class
B certificates and consequently, may not
receive amounts with respect to any
losses allocated to the class B
certificates that have not been
previously reimbursed.
THE TRUST ASSETS ARE THE ONLY SOURCE
OF PAYMENTS ON THE CERTIFICATES........ All distributions on the certificates
will be made from payments by borrowers
under the receivables. The trust has no
other assets [other than [ ]] to make
distributions on the certificates. The
receivables are NOT insured or
guaranteed by any person. The trust is
the only person that is obligated to
make distributions on the certificates.
The certificates are NOT insured by any
governmental agency.
CERTIFICATE RATING..................... The rating of the certificates will
depend on an assessment by the rating
agencies of the receivables. The rating
by the rating agencies of the
certificates is not a recommendation for
you to purchase, hold or sell the
certificates, and the rating does not
comment as to the market price or
suitability for a particular investor.
There is no assurance that the ratings
will remain in place for any given
period of time or that the ratings will
not be lowered or withdrawn by the
rating agencies. The ratings do not
address the possibility that offered
certificateholders might realize a lower
than anticipated yield. The ratings of
the offered certificates do not address
the possibility of the imposition of
United States withholding tax with
respect to non-U.S. persons. No rating
of the originator, the servicer or the
company is required to maintain the
rating of the offered certificates.
THE CERTIFICATES ARE NOT SUITABLE
INVESTMENTS FOR ALL INVESTORS.......... The certificates are not suitable
investments for any investor that
requires a regular or predictable
schedule of payments or payment on any
specific date. The offered certificates
are complex investments that should be
considered only by investors who, either
alone or with their financial, tax and
legal advisors, have the expertise to
analyze the prepayment, reinvestment,
default and market risk, the tax
consequences of an investment, and the
interaction of these factors.
[THE RECEIVABLES, THE PRE-FUNDING
ACCOUNT AND THE RISK OF PREPAYMENT..... On the closing date, the depositor will
transfer to the trust the approximately
$[ ] of initial receivables and the
approximately $[ ] pre-funded amount on
deposit in the pre-funding account. If
the principal amount of eligible
receivables originated by [seller] and
acquired by the depositor during the
funding period is less than the
pre-funded amount, the depositor will
have insufficient receivables to sell to
the trust on the subsequent transfer
dates, resulting in a prepayment of
principal to the Certificateholders as
described in the following paragraph.
[To the extent that amounts on deposit
in the pre-funding account have not been
fully applied to the conveyance of
subsequent receivables to the trust by
the end of the funding period, you will
receive, on the distribution date on or
immediately following the last day of
the funding period, a prepayment of
principal from amounts remaining in the
pre- funding account. We anticipate that
the principal amount of subsequent
receivables sold to the trust will not
be exactly equal to the amount on
deposit in the pre-funding account and
that therefore there will be at least a
nominal amount of principal prepaid to
you.]
[RISKS ATTENDANT TO INVESTMENTS IN
INTEREST-ONLY OR PRINCIPAL-ONLY
CERTIFICATES........................... [If certificates are interest-only or
principal-only certificates, discuss
risks attendant to these types of
certificates.]]
MATURITY CONSIDERATIONS
The Pooling and Servicing Agreement (the "Agreement") and the series
supplement to the Agreement (the "Series Supplement" or a "Supplement") provide
that holders of Class A Certificates (the "Class A Certificateholders") will not
receive payments of principal until the first Distribution Date with respect to
the Controlled Amortization Period, which is the [ ] Distribution Date, unless a
Pay Out Event shall occur. Class A Certificateholders will receive payments of
principal on the [ ] day of each [month] [quarter] [semi-annual period] or if it
is not a business day, then the next succeeding business day (the "Distribution
Date") following the Monthly Period in which a Pay Out Event occurs (each
Distribution Date following a Pay Out Event, a "Special Payment Date") until the
Class A Invested Amount has been paid in full or until [ ] (the "Termination
Date"). The "Monthly Period" is [the calendar month preceding the Distribution
Date]. The holders of Class B Certificates (the "Class B Certificateholders",
and together with the Class A Certificateholders, the "Certificateholders"))
will not begin to receive payments of principal until the final principal
payment on the Class A Certificates has been made.
On each Distribution Date with respect to the Class A Accumulation
Period, amounts equal to the lesser of:
o Available Principal Collections for the related Monthly Period on
deposit in the Collection Account,
o the sum of the applicable Controlled Accumulation Amount for the
Monthly Period and any applicable Deficit Controlled Accumulation
Amount, (the "Controlled Deposit Amount") and
o the Class A Adjusted Invested Amount
will be deposited in the Principal Funding Account until the Principal Funding
Account Balance is equal to the Class A Invested Amount.
After the Class A Invested Amount has been paid in full, on each Distribution
Date with respect to the Class B Accumulation Period amounts equal to the lesser
of:
o Available Principal Collections for the related Monthly Period on
deposit in the Collection Account,
o the applicable Controlled Deposit Amount, and
o the Class B Adjusted Invested Amount
will be deposited in the Principal Funding Account until the Principal Funding
Account Balance equals the Class B Invested Amount.
See "Description Of The Certificates -- Principal Payments" for a discussion of
circumstances under which the commencement of an Accumulation Period may be
delayed.
On each Distribution Date during the Controlled Amortization Period,
the Certificateholders will be entitled to receive monthly payments of
principal, until the Certificates have been paid in full, in an amount equal to
the lesser of:
o Available Principal Collections for the related Monthly Period on
deposit in the Collection Account,
o the sum of the applicable Controlled Distribution Amount and any
applicable Deficit Controlled Amortization Amount, and
o the Invested Amount.
The [Seller] [Depositor] may, at or after the time at which the
[Controlled Amortization Period] [Accumulation Period] commences for Series 200[
]- [ ] cause the Trust to issue another Series, or some portion of another
Series, to the extent that the full principal amount of the other Series is not
otherwise outstanding at that time, as a Paired Series with respect to Series
200[ ]- [ ] to be used to finance the increase in the Seller's Interest caused
by the accumulation of principal in the Principal Funding Account with respect
to Series 200[ ]- [ ]. No assurances can be given as to whether the other Series
will be issued and, if issued, the terms of the newly issued Series. Because the
terms of the Certificates may vary from the terms of the other series, the Pay
Out Events with respect to the series may vary from the Pay Out Events with
respect to Series 200[ ]- [ ] and may include Pay Out Events which are unrelated
to the status of the Seller, or the Servicer or the Receivables, such as Pay Out
Events related to the continued availability and rating of specific providers of
enhancement to the other Series. If a Pay Out Event does occur with respect to
any Paired Series prior to the payment in full of the Certificates, the final
payment of principal to the Certificateholders may be delayed.
Should a Pay Out Event occur with respect to the Certificates and the
Rapid Amortization Period commence,
o any amount on deposit in the Principal Funding Account will be paid to
the Certificateholders on the first Special Payment Date, and the
Certificateholders will be entitled to receive Available Principal
Collections on each Distribution Date with respect to the Rapid
Amortization Period or following the Expected Final Payment Date, as
the case may be, as described in this prospectus supplement until the
Class A Invested Amount and Class B Invested Amount are paid in full
or until the Termination Date occurs, and
o any amount on deposit in the Excess Funding Account will be released
and treated as Shared Principal Collections to the extent needed to
cover principal payments due to or for the benefit of any Series
entitled to the benefits of Shared Principal Collections.
In addition, on the first Special Payment Date following the occurrence of a Pay
Out Event, after giving effect to any payment of principal on that date,
(a) an amount equal to the lesser of:
(i) the Available Shared Collateral Amount, after giving effect to any
withdrawal from the Cash Collateral Account on that date of amounts to
fund the Class A Required Amount and the Class B Required Amount, and
(ii) the unpaid principal amount of the Class A Certificates, less the
Principal Funding Account Balance allocable to the Class A
Certificates, will be withdrawn from the Cash Collateral Account and
distributed to the Class A Certificateholders as a payment of
principal of the Class A Certificates, and
(b) an amount equal to the lesser of:
(i) the remainder of the Available Cash Collateral Amount, and
(ii) the unpaid principal amount of the Class B Certificates, less the
Principal Funding Account Balance, if any, allocable to the Class B
Certificates, will be withdrawn from the Cash Collateral Account and
distributed to the Class B Certificateholders as a payment of
principal of the Class B Certificates.
The ability of Certificateholders to receive payments of principal on
the applicable Expected Final Payment Date on each Distribution Date during the
Controlled Amortization Period depends on the payment rates on the Receivables,
the amount of outstanding Receivables, delinquencies, charge-offs and new
borrowings on the Accounts, the potential issuance by the Trust of additional
Series and the availability of Shared Principal Collections. The amount of
outstanding Receivables and the delinquencies, charge-offs and new borrowings on
the Accounts may vary from month to month due to seasonal variations, the
availability of other sources of credit, legal factors, general economic
conditions and spending and borrowing habits of individual accountholders.
Monthly payment rates on the Receivables may vary because, among other things,
accountholders may fail to make a required minimum payment, may only make
payments as low as the minimum required amount or may make payments as high as
the entire outstanding balance. Monthly payment rates may also vary due to
seasonal purchasing and payment habits of accountholders and to changes in any
terms of rebate programs in which accountholders participate. The Depositor
cannot predict, and no assurance can be given, as to the accountholder monthly
payment rates that will actually occur in any future period, as to the actual
rate of payment of principal of the Certificates or whether the terms of any
previously or subsequently issued Series might have an impact on the amount or
timing of any payment of principal. The foregoing factors will affect both the
Class A Certificates and the Class B Certificates.
There can be no assurance that collections of Principal Receivables
with respect to the Trust, and thus the rate at which Certificateholders could
expect to receive payments of principal on the Certificates during the Rapid
Amortization Period or the rate at which the Principal Funding Account could be
funded during the Accumulation Period, or the rate at which payments of
principal will be made during the Controlled Amortization Period, will be
similar to the historical experience set forth in the "Accountholder Monthly
Payment Rates for the Identified Pool" table under "The Identified Pool" in this
prospectus supplement. The Depositor may shorten the Class A Accumulation Period
and, in that event, there can be no assurance that there will be sufficient time
to accumulate all amounts necessary to pay the Class A Invested Amount on the
Class A Expected Final Payment Date.
The Trust, as a master trust, may issue additional Series from time to
time, and there can be no assurance that the terms of any additional Series
might not have an impact on the timing or amount of payments received by
Certificateholders. Further, if a Pay Out Event occurs, the average life and
maturity of the Class A Certificates and Class B Certificates, respectively,
could be significantly reduced.
Due to the reasons set forth above, there can be no assurance that
deposits in the Principal Funding Account will be made in accordance with the
applicable Controlled Accumulation Amount that payments of principal will be
made in accordance with the applicable Controlled Amortization Amount or that
the actual number of months elapsed from the date of issuance of the Class A
Certificates and the Class B Certificates to their respective final Distribution
Dates will equal the expected number of months.
MASTER TRUST CONSIDERATIONS
IMPACT OF ADDITIONAL SERIES
The Trust, as a master trust, may issue additional Series from time to time.
While the terms of any Series will be specified in a Supplement, the provisions
of a Supplement and, therefore, the terms of any additional Series, will not be
subject to prior review by, or consent of, holders of the Certificates of any
previously issued Series. These terms may include methods for determining
applicable investor percentages and allocating collections, provisions creating
different or additional security or other credit enhancement for the Series
("Series Enhancement"), provisions subordinating the Series to another Series or
other Series, if the Supplement relating to the Series so permits, to the
Series, and any other amendment or supplement to the Agreement which is made
applicable only to the Series. The obligation of the Trustee to issue any new
Series is subject to the following conditions, among others:
o the [Seller] [Depositor] shall have received written notice that the
new issuance will not result in any Rating Agency's reducing or
withdrawing its rating of the Certificates of any outstanding Series
(any reduction or withdrawal is referred to in this prospectus
supplement as a "Ratings Effect"), and
o the [Seller] [Depositor] shall have delivered to the Trustee and
specific providers of Series Enhancement a certificate of an
authorized officer to the effect that, based on the facts known to the
officer at the time, in the reasonable belief of the [Seller]
[Depositor], the new issuance will not at the time of its occurrence
cause a Pay Out Event or an event that, after the giving of notice or
the lapse of time, would constitute a Pay Out Event, to occur with
respect to any Series.
There can be no assurance, however, that the terms of any other Series,
including any Series later issued, might not have an impact on the timing or
amount of payments received by a Certificateholder.
IMPACT OF DISCOUNT OPTION
Pursuant to the Agreement, the [Seller] [Depositor] has the option from time to
time to designate a fixed or variable percentage of Receivables that otherwise
would be treated as Principal Receivables to be treated as Finance Charge
Receivables. Any designation would result in an increase in the amount of
Finance Charge Receivables and a slower payment rate of collections in respect
of Principal Receivables than otherwise would occur. Pursuant to the Agreement,
the [Seller] [Depositor] can make a designation without notice to or the consent
of Certificateholders. Subsequently, pursuant to the Agreement, the [Seller]
[Depositor] may, without notice to or the consent of Certificateholders, reduce
or eliminate the percentage of Receivables subject to this designation. The
[Seller] [Depositor] must provide 30 days prior written notice to the Servicer,
the Trustee, any provider of Series Enhancement and each Rating Agency of any
designation or reduction of Principal Receivables to be treated as Finance
Charge Receivables, and the designation or reduction will become effective only
if:
o the [Seller] [Depositor] shall have delivered to the Trustee and
specific providers of Series Enhancement a certificate of an
authorized officer to the effect that, based on the facts known to the
officer at the time, in the reasonable belief of the [Seller]
[Depositor], the designation or reduction would not at the time of its
occurrence cause a Pay Out Event or an event that, after the giving of
notice or the lapse of time would constitute a Pay Out Event, to occur
with respect to any Series,
o the [Seller] [Depositor] shall have received written notice from each
Rating Agency that the designation or reduction will not have a
Ratings Effect, and
o in the case of a reduction or withdrawal, the [Seller] [Depositor]
shall have delivered to the Trustee a certificate of an authorized
officer to the effect that, in the reasonable belief of the [Seller]
[Depositor], the reduction or withdrawal shall not have adverse
regulatory implications for the [Seller] [Depositor].
IMPACT OF ADDITION OF TRUST ASSETS
The [Seller] [Depositor] expects, and in some cases will be obligated to
designate additional Accounts, the Receivables in which will be conveyed to the
Trust. These additional Accounts may include accounts originated using criteria
different from those which were applied to the Accounts previously included in
the Trust because the additional Accounts were originated at a different date or
were part of a portfolio of accounts which were not part of the Seller's
portfolio at the time Accounts were previously conveyed to the Trust or which
were acquired from other institutions. Moreover, additional Accounts may or may
not be accounts of the same type as those previously included in the Trust.
Consequently, there can be no assurance that the additional Accounts will be of
the same credit quality as the Accounts previously included in the Trust. In
addition, the additional Accounts may consist of accounts which have
characteristics different from the characteristics of Accounts previously
included in the Trust, including lower periodic rate finance charges and other
fees and charges, which may have the effect of reducing the average yield on the
portfolio of Accounts included in the Trust, different payment rates and higher
loss or delinquency experience, which may have the effect of reducing the
average yield on the portfolio of accounts included in the Trust. The
designation of additional Accounts will be subject to the satisfaction of
particular conditions, including that:
o the [Seller] [Depositor] shall have received written notice from each
Rating Agency that the addition will not have a Ratings Effect, and
o the [Seller] [Depositor] shall have delivered to the Trustee and
specific providers of Series Enhancement a certificate of an
authorized officer to the effect that, based on the facts known to the
officer at the time, in the reasonable belief of the [Seller]
[Depositor], the addition will not at the time of its occurrence cause
a Pay Out Event or an event that, after the giving of notice or the
lapse of time, would constitute a Pay Out Event, to occur with respect
to any Series.
Although the addition of participations will require an amendment to the Pooling
and Servicing Agreement, no consent of Certificateholders will be required for
any amendment.
THE IDENTIFIED POOL
A pool of [consumer] [corporate] [revolving] [credit] [charge] [debit]
card accounts owned by the Seller was identified (the "Identified Pool"), from
which the Accounts included in the Trust as of the Cut-Off Date (the "Trust
Portfolio") were selected based on the eligibility criteria specified in the
Agreement. Set forth below is certain information with respect to the Identified
Pool. There can be no assurance that the yield, loss and delinquency experience
with respect to the Receivables will be comparable to that set forth below with
respect to the entire Identified Pool.
DELINQUENCY AND LOSS EXPERIENCE
The following tables set forth the delinquency and loss experience for
the Identified Pool for each of the periods shown. Because the Trust Portfolio
is only a portion of the Identified Pool, actual delinquency and loss experience
with respect to the Receivables is expected to be different from that set forth
below for the Identified Pool.
Delinquency as Percentage of the Identified Pool
(Dollars in Thousands)
Year Ended
-------------------------------------------------------------------------------
Number of At Month End
Delinquent Days ____ 31, [ ] [ ] [ ] [ ]
---------------- --------------------------- --------------------------- -------------------------- ------------------------
PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT
---------- ------ ---------- ------ ---------- ------ ---------- ------
30 to 59 Days..........
60 to 80 days..........
90 Days or Greater.....
Totals.................
Loss Experience for the Identified Pool
(Dollars in Thousands)
Three Months Three Months Year Ended
Ended Ended ----------------------------------------------
[ ] [ ] [ ] [ ] [ ]
-------------- -------------- ----------- ----------- -----------
Average Receivables
Outstanding............
Gross Losses.............
Gross Losses as a
Percentage of Average
Receivables
Outstanding............
Recoveries...............
Net Losses...............
Net Losses as a
Percentage of Average
Receivables
Outstanding............
REVENUE EXPERIENCE
The following table sets forth the revenues from the Finance Charges
and Fees billed and Interchange received with respect to the Identified Pool for
each of the periods shown.
Revenue Experience for the Identified Pool
(Dollars in Thousands)
Three Months Three Months Year Ended
Ended Ended ----------------------------------------------
[ ] [ ] [ ] [ ] [ ]
-------------- -------------- ----------- ----------- -----------
Average Receivables
Outstanding Finance
Charges and Fees.......
Yield from Finance
Charges and Fees.......
Interchange..............
Yield from Interchange...
Yield from Finance
Charges Fees and
Interchange............
There can be no assurance that the yield experience with respect to
the Receivables will be comparable to that set forth above for the Identified
Pool. In addition, revenue from the Receivables will depend on the types of fees
and charges assessed on the Accounts, and could be adversely affected by future
changes made by the Seller in such fees and charges or by other factors.
PAYMENT RATES
The following table sets forth the highest and lowest accountholder
monthly payment rates for the Identified Pool during any single month in each of
the periods shown and the average accountholder monthly payment rates for all
months during each of the periods shown, in each case calculated as a percentage
of average monthly account balances during the periods shown. Monthly payment
rates shown in the table are based on amounts which would be payments of
Principal Receivables and Finance Charge Receivables with respect to the
Accounts.
VISA and MasterCard are registered trademarks of VISA USA, Inc. and
MasterCard International Incorporated, respectively.
1 [private label] [other] credit card accounts, of which [ ]% were
standard accounts and [ ]% were premium accounts.
The following tables summarize the Trust Portfolio by various criteria
as of [ ]. References to "Receivables Outstanding" in the following tables
include both Finance Charge Receivables and Principal Receivables. Because the
future composition of the Trust Portfolio may change over time, these tables are
not necessarily indicative of the composition of the Trust Portfolio at any
subsequent time.
Composition by Account Balance
Trust Portfolio
(as of [ ])
(Dollars in Thousands)
Receivables Account
Balance Range Outstanding
- -------------------------
Credit Balance................
No Balance....................
More than $0 and less than or
equal to $1,500.............
$1,500.01 - $5,000............
$5,000 - $10,000..............
Over $10,000..................
Composition by Credit Limit
Trust Portfolio
(as of [ ])
(Dollars in Thousands)
Receivables Account
Balance Range Outstanding
- -------------------------
Less than or equal to
$1,500......................
$1,500.01 - $5,000............
$5,000 - $10,000..............
Over $10,000..................
Composition by Payment Status
Trust Portfolio
(as of [ ])
(Dollars in Thousands)
Receivables Account
Balance Range Outstanding
- -------------------------
Current to 29 days............
Past due 30 - 59 days.........
Past due 60 - 89 days.........
Past due 90+ days.............
Total.........................
Composition by Account Age
Trust Portfolio
(as of [ ])
(Dollars in Thousands)
Receivables Account
Balance Range Outstanding
- -------------------------
Not more than 6 months........
Over 6 months to 12 months....
Over 1 year to 2 years........
Over 2 years to 3 years.......
Over 3 years to 4 years.......
Over 4 years..................
Total.........................
Composition by Accountholder Billing Address
Trust Portfolio
(as of [ ])
(Dollars in Thousands)
LOCATION
- --------
Alaska.........................
Arizona........................
Arkansas.......................
California.....................
Colorado.......................
Connecticut....................
Delaware.......................
District of Columbia...........
Florida........................
Georgia........................
Hawaii.........................
Idaho..........................
Illinois.......................
Indiana........................
Iowa...........................
Kansas.........................
Kentucky.......................
Louisiana......................
Maine..........................
Maryland.......................
Massachusetts..................
Michigan.......................
Minnesota......................
Mississippi....................
Missouri.......................
Montana........................
Nebraska.......................
Nevada.........................
New Hampshire..................
New Jersey.....................
New Mexico.....................
New York.......................
North Carolina.................
North Dakota...................
Ohio...........................
Oklahoma.......................
Oregon.........................
Pennsylvania...................
Rhode Island...................
South Carolina.................
South Dakota...................
Tennessee......................
Texas..........................
Utah...........................
Vermont........................
Virginia.......................
Washington.....................
West Virginia..................
Alabama........................
Wyoming........................
Other..........................
USE OF PROCEEDS
The net proceeds from the sale of the Certificates will be paid to the
Depositor. The Depositor will use the net proceeds to pay the Seller the
purchase price of the Receivables [and the Seller will use the net proceeds for
general corporate purposes.]
THE SELLER
The "Seller" is [ ]. [Insert description of the Seller.]
THE SERVICER
The "Servicer" is [ ]. [Insert description of the Servicer, if
different from the Seller.]
THE DEPOSITOR
ACE Securities Corp., the depositor, is a special purpose corporation
incorporated in the State of Delaware on June 3, 1998. The principal executive
offices of the depositor are located at 6525 Morrison Boulevard, Suite 318,
Charlotte, North Carolina 28211. Its telephone number is (704) 365-0569. The
depositor does not have, nor is it expected in the future to have, any
significant assets.
The limited purposes of the depositor are, in general, to acquire, own
and sell loans and financial assets; to issue, acquire, own, hold and sell
securities and notes secured by or representing ownership interests in loans and
other financial assets, collections on the loans and related assets; and to
engage in any acts that are incidental to, or necessary, suitable or convenient
to accomplish, these purposes.
All of the shares of capital stock of the depositor are held by
Altamont Holdings Corp., a Delaware corporation.
DESCRIPTION OF THE CERTIFICATES
Pursuant to the Agreement and the Series Supplement, ACE Securities
Corp. Card Account Master Trust [ ]- [ ] (the "Trust") will issue Class A
Certificates (the "Class A Certificates") and Class B Certificates (the "Class B
Certificates", and together with the Class A Certificates, the "Certificates" or
the "Securities") which are a separate series (the "Series") of securities
issued under the Prospectus. The following summary describes the material terms
of the Certificates, the Agreement and the Series Supplement. The summaries do
not purport to be complete descriptions of all of the terms of the Certificates,
the Agreement and the Series Supplement and therefore are subject to, and
qualified in their entirety by reference to, all the provisions of the
Certificates, the Agreement and the Series Supplement. Reference should be made
to the Prospectus for additional information concerning the Certificates, the
Agreement and the Series Supplement.
The final expected Payment Date for the Class A Certificates is [ ]
(the "Class A Expected Final Payment Date") and the final expected Payment Date
for the Class B Certificates is [ ] (the "Class B Expected Final Payment Date"
and together with the Class A Expected Final Payment Date, the "Expected Final
Payment Date").
Interest Payments
Interest on the Class A Certificates and the Class B Certificates will
accrue from the [Issuance Date] [Closing Date] on the Class A Invested Amount
and Class B Invested Amount, respectively, at the Class A Certificate Rate and
Class B Certificate Rate, respectively. ").] Interest with respect to the
Certificates will be distributed on the [ ] day of each [month] [quarter]
[semi-annual period] (an "Interest Period") (or if such a day is not a business
day, the next succeeding business day) commencing on [ ] and on each [ ]
thereafter (each a "Distribution Date"). The "Class A Certificate Rate" for an
Interest Period will be a rate per annum equal to [insert Class A Certificate
Rate formula] for a period of [one] [three] [six] months [or following a Pay Out
Event, for a period of one month]. The "Class B Certificate Rate" for an
Interest Period will be a rate per annum equal to [insert Class B Certificate
Rate formula] for a period of [one] [three] [six] months [or following a Pay Out
Event, for a period one month.]. Interest will be distributed on [ ] the [ ] day
of each month (the "Interest Payment Date"), and on each subsequent Interest
Payment Date, or if any of these days is not a business day, the next succeeding
business day, commencing on the [ ] Distribution Date, to Certificateholders in
whose names the Certificates were registered at the close of business on the
last day of the calendar month preceding the date of payment (a "Record Date").
Interest for any Interest Payment Date or Special Payment Date will accrue from
and including the preceding Interest Payment Date or Special Payment Date, or in
the case of the first Interest Payment Date, from and including the [Issuance
Date] [Closing Date], to but excluding the Interest Payment Date or Special
Payment Date.
Interest payments or deposits with respect to the Class A Certificates
for each Distribution Date will be calculated on the Class A Invested Amount as
of the preceding Record Date, or in the case of the initial Distribution Date,
on the initial Class A Invested Amount, based upon the Class A Certificate Rate.
Interest payments or deposits with respect to each Distribution Date will be
calculated on the basis of [the actual number of days in the period from and
including the preceding Distribution Date, or in the case of the initial
Distribution Date the Closing Date, to but excluding the Distribution Date and a
360-day year] [a 360-day year of twelve 30-day months]. On each Distribution
Date, Class A Monthly Interest and Class A Monthly Interest previously due but
not deposited in the Interest Funding Account or distributed in respect of Class
A Certificates will be:
a) paid to Class A Certificateholders from Class A Available Funds if the
Distribution Date is an Interest Payment Date or Special Payment Date,
or
b) deposited in an Eligible Deposit Account in the name of the [ ] (the
"Trustee") and for the benefit of the Certificateholders (the
"Interest Funding Account"), if the Distribution Date is not an
Interest Payment Date or a Special Payment Date.
"Eligible Deposit Account" means either:
o a segregated account with an eligible institution, or
o a segregated trust account with the corporate trust department of a
depository institution organized under the laws of the United States or any
one of the states of the United States 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 the account, so long as any of the
securities of the depository institution have a credit rating from each
Rating Agency in one of its generic rating categories which signifies
investment grade.
To the extent Class A Available Funds allocated to the Class A
Certificateholders' Interest for the Monthly Period are insufficient to pay the
interest, Excess Spread and Excess Finance Charges allocated to Series 200[ ]- [
], amounts, if any, on deposit in the Cash Collateral Account up to the
Available Shared Collateral Amount and Reallocated Principal Receivables will be
used to make these payments.
"Class A Available Funds" means, with respect to any Monthly Period,
an amount equal to the sum of:
a) the Class A Floating Percentage of collections of Finance Charge
Receivables allocated to the Certificates with respect to the Monthly
Period, including any investment earnings and other amounts that are
to be treated as collections of Finance Charge Receivables in
accordance with the Agreement and the Series Supplement, but excluding
the portion of collections of Finance Charge Receivables attributable
to Interchange that is allocable to Servicer Interchange;
b) [if the Monthly Period relates to a Distribution Date that occurs
prior to the Class B Principal Commencement Date,] the Principal
Funding Investment Proceeds, if any, with respect to the related
Distribution Date; [and]
c) amounts, if any, to be withdrawn from the Reserve Account which are
required to be included in Class A Available Funds pursuant to the
Series Supplement with respect to the Distribution Date; [and
d) Excess Spread, if any, for the Monthly Period.]
[Interest payments on the Class B Certificates for each Payment Date
will be calculated on the Class B Invested Amount as of the preceding Record
Date, or in the case of the initial Interest Payment Date, on the initial Class
B Invested Amount, based upon the Class B Certificate Rate. Interest will be
calculated on the basis of [the actual number of days in the period from and
including the preceding Distribution Date or in the case of the initial
Distribution Date the Closing Date, to but excluding the Distribution Date and
360-day year] [a 360-day year of twelve 30-day months]. On each Distribution
Date, Class B Monthly Interest and Class B Monthly Interest previously due but
not distributed to Class B Certificateholders will be paid from Class B
Available Funds for the related Distribution Date and, if necessary, from Excess
Spread and Excess Finance Charges allocated to Series 200[ ]- [ ] and amounts,
if any, on deposit in the Cash Collateral Account up to the Available Cash
Collateral Amount.
["Class B Available Funds" (together with the Class A Available Funds,
the "Available Funds") means, with respect to any Monthly Period, an amount
equal to the sum of:
a) the Class B Floating Percentage of collections of Finance Charge
Receivables allocated to the Certificates with respect to the Monthly
Period, including any investment earnings and other amounts that are
to be treated as collections of Finance Charge Receivables in
accordance with the Agreement, but excluding the portion of
collections of Finance Charge Receivables attributable to Interchange
that is allocable to Servicer Interchange;
b) if the Monthly Period relates to a Distribution Date that occurs on or
after the Class B Principal Commencement Date, the Principal Funding
Investment Proceeds, if any, with respect to the related Distribution
Date; [and]
c) amounts, if any, to be withdrawn from the Reserve Account which are
required to be included in Class B Available Funds pursuant to the
Series Supplement with respect to the Distribution Date; [and
d) Excess Spread, if any, for the Monthly Period].]
Principal Payments
The "Revolving Period" begins on the close of business on [ ] (the
"Cut-Off Date"), and ends on the day before the commencement of the [Controlled
Amortization Period] [Accumulation Period] or, if earlier, the Rapid
Amortization Period. During the Revolving Period no principal payments will be
made to Certificateholders.
[On each Distribution Date during the Revolving Period, unless a
reduction in the Required Cash Collateral Amount has occurred, collections of
Principal Receivables allocable to the Certificateholders' Interest and the
Collateral Indebtedness Interest will, subject to limitations, including the
allocation of any Reallocated Principal Collections with respect to the related
Monthly Period to pay the Required Amount, be paid to the Seller to purchase
additional Receivables in order to maintain the Invested Amount, and if
necessary, be treated as Shared Principal Collections. If a reduction in the
Required Cash Collateral Amount has occurred, collections of Principal
Receivables allocable to the Collateral Indebtedness Amount will be applied in
accordance with a collateral agreement to reduce the Collateral Indebtedness
Amount to the Required Cash Collateral Amount.]
[Unless a Pay Out Event occurs and the Rapid Amortization Period
commences, the Certificates will have an accumulation period (the "Accumulation
Period"), which will commence at the close of business on [ ]; provided, that
subject to the conditions set forth in this prospectus supplement, the day on
which the Revolving Period ends and the Accumulation Period begins may be
delayed to no later than the close of business on [ ]. The Accumulation Period
will end on the earliest of:
(a) the commencement of the Rapid Amortization Period,
(b) payment in full of the Invested Amount, and
(c) the Termination Date.
During the Accumulation Period, until the Certificates are paid in full,
collections of Principal Receivables and certain other amounts allocable to the
Certificateholders' Interest will be deposited on each Distribution Date in a
trust account (the "Principal Funding Account") and used to make principal
distributions to the Certificateholders when due.]
[During the Accumulation Period, on or prior to the respective
Expected Final Payment Dates, principal will be deposited in the Principal
Funding Account as described below and on the Class A Expected Final Payment
Date will be distributed to Class A Certificateholders up to the Class A
Invested Amount [and then to Class B Certificateholders on the Class B Expected
Final Payment Date up to the Class B Invested Amount]. During any Rapid
Amortization Period, which will begin upon the occurrence of a Pay Out Event,
and until the Termination Date occurs, principal will be paid [first] to the
Class A Certificateholders until the Class A Invested Amount has been paid in
full[, and then to the Class B Certificateholders until the Class B Invested
Amount has been paid in full].]
The "Controlled Amortization Period" is scheduled to commence at the
close of business on the last day of the [ ]. The Controlled Amortization Period
will end on the earliest of"
(a) the commencement of the Rapid Amortization Period,
(b) the payment in full of the Invested Amount, or
(c) the Termination Date.
[During the Controlled Amortization Period, which is scheduled to
begin on [ ], and during any Rapid Amortization Period, which will begin upon
the occurrence of a Pay Out Event, and until the Termination Date, principal
will be paid to the Certificateholders on each Distribution Date until the
Invested Amount has been paid in full.]
[On each Distribution Date during the Controlled Amortization Period,
unless a Rapid Amortization Period commences, the Certificateholders will be
entitled to receive [for each related Monthly Period since the previous Interest
Payment Date] the lesser of:
o collections of Principal Receivables received during each Controlled
Amortization Period allocated to the Series 200[ ]- [ ] Certificates
[Shared Principal Collections allocated to Series 200[ ]- [ ]], [and
o miscellaneous payments allocated to Series 200[ ]- [ ] other
amounts].]
[On each Distribution Date with respect to the "Class A Accumulation
Period", amounts equal to the least of:
o Available Investor Principal Collections for the related Distribution
Date on deposit in the Collection Account,
o the applicable Controlled Deposit Amount for the Distribution Date,
and
o the Class A Adjusted Invested Amount, will be deposited in the
Principal Funding Account until the Principal Funding Account Balance
is equal to the Class A Invested Amount.
Amounts on deposit in the Principal Funding Account will be paid to the Class A
Certificateholders on the Class A Expected Final Payment Date. [After the Class
A Invested Amount has been paid in full, on each Distribution Date with respect
to the "Class B Accumulation Period" an amount equal to the least of:
o Available Investor Principal Collections for the related Distribution
Date on deposit in the Collection Account, minus the portion of
Available Investor Principal Collections applied to Class A Monthly
Principal on the Distribution Date,
o the applicable Controlled Deposit Amount for the Monthly Period, and
o the Class B Adjusted Invested Amount will be deposited in the
Principal Funding Account until the Principal Funding Account Balance
equals the Class B Invested Amount.
Amounts on deposit in the Principal Funding Account in respect of the Class B
Certificates will be paid to the Class B Certificateholders on the Class B
Expected Final Payment Date].]
[If a Pay Out Event occurs with respect to Series 200[ ]- [ ] during
the Accumulation Period, the Rapid Amortization Period will commence and any
amount on deposit in the Principal Funding Account will be paid [first] to the
Class A Certificateholders on the first Special Payment Date [and then, to the
extent the Class A Invested Amount is paid in full, to the Class B
Certificateholders]. If, on any Expected Final Payment Date, monies on deposit
in the Principal Funding Account are insufficient to pay the scheduled principal
amount, a Pay Out Event will occur and the Rapid Amortization Period will
commence. [After payment in full of the Class A Invested Amount, the Class B
Certificateholders will be entitled to receive an amount equal to the Class B
Invested Amount].]
The "Rapid Amortization Period" is the period beginning with the
occurrence of any Pay Out Event and ending on the earlier of:
(a) the day after the Payment Date on which the Invested Amount has
been paid in full, and
(b) the Termination Date.
"Available Principal Collections" means, with respect to any Monthly
Period, an amount equal to [the sum of:
a) ]an amount equal to the Principal Allocation Percentage of all
collections of Principal Receivables received during the Monthly
Period, minus the amount of Reallocated Principal Collections with
respect to the Monthly Period used to fund the Class A Required
Amount, [plus
b) the amount of miscellaneous payments, if any, for the Monthly Period
allocated to Series 200[ ]- [ ],] [plus
c) any Shared Principal Collections with respect to other Series that are
allocated to Series 200[ ]- [ ],] [plus
d) any other amounts which pursuant to the Series Supplement are to be
treated as Available Investor Principal Collections with respect to
the related Distribution Date].
[The Accumulation Period is scheduled to commence at the close of
business on [ ]; however, the [Depositor] [Seller] may, upon notice to [the
Trustee,] [the Seller,] [the Servicer,] [the Depositor,] [each Rating Agency]
[and the Cash Collateral Holder] elect to postpone the commencement of the
Accumulation Period, and extend the length of the Revolving Period. The
Depositor may make an election only if the Accumulation Period Length
(determined as described below) is less than [ ]. On each Determination Date
until the Accumulation Period begins, the [Depositor] [Seller] [Servicer] will
determine the "Accumulation Period Length"), which is the number of months
expected to be required to fully fund the Principal Funding Account no later
than the Expected Final Payment Date, based on:
o expected Monthly Period collections of Principal Receivables expected
to be distributable to the Certificateholders of all Series, excluding
other Series, assuming a principal payment rate no greater than the
lowest Monthly Principal payment rate on the Receivables for the
preceding twelve months, and
o the amount of principal expected to be distributable to
Certificateholders of all Series, excluding other Series, which are
not expected to be in their revolving period during the Accumulation
Period.
If the Accumulation Period Length is less than [ ], the [Depositor] [Seller]
may, at its option, postpone the commencement of the Accumulation Period so that
the number of months included in the Accumulation Period will be equal to or
exceed the Accumulation Period Length. The effect of the foregoing calculation
is to permit the reduction of the length of the Accumulation Period based on the
Invested Amounts of other Series which are expected to be in their revolving
periods during the Accumulation Period or on increases in the principal payment
rate occurring after the Series Issuance Date. The [Depositor] [Seller] may not
postpone or further postpone the commencement date of the Accumulation Period
after a Pay Out Event, as defined with respect to each other outstanding Series,
shall have occurred and is continuing with respect to any other outstanding
Series. The length of the Accumulation Period will not be less than one month.
If the commencement of the Accumulation Period is delayed in accordance with the
foregoing, and if a Pay Out Event occurs after the date originally scheduled as
the commencement of the Accumulation Period, then it is probable that the
Certificateholders would receive some of their principal later than if the
Accumulation Period had not been delayed.]
On each Distribution Date with respect to the Rapid Amortization
Period until the Class A Invested Amount has been paid in full or the
Termination Date occurs, the Class A Certificateholders will be entitled to
receive Available Investor Principal Collections in an amount up to the Class A
Invested Amount. [After payment in full of the Class A Invested Amount, the
Class B Certificateholders will be entitled to receive on each Distribution
Date, Available Principal Collections until the earlier of the date on which the
Class B Invested Amount is paid in full or the Termination Date.] In addition,
on the first Special Payment Date following the occurrence of a Pay Out Event,
after giving effect to any payment of principal on that date, principal payments
will be made to the Class A Certificateholders [and the Class B
Certificateholders] from amounts on deposit in the Cash Collateral Account.
[On the Distribution Date following the Class A Expected Final Payment
(the "Class B Principal Commencement Date"), unless a Pay Out Event has
occurred, a withdrawal will be made from the Cash Collateral Account to pay
principal with respect to the Class B Certificates to the extent that the amount
initially invested in Class B (the "Class B Initial Invested Amount") minus the
sum of the aggregate amount of principal payments previously distributed to
Class B Certificateholders or deposited in the Principal Funding Account in
respect of the Class B Certificates exceeds the Class B Invested Amount on the
last day of the related Monthly Period, determined after giving effect to any
change made to the Class B Invested Amount as a result of unreimbursed
charge-offs on the following Distribution Date.]
[During the Rapid Amortization Period, collections of Principal
Receivables allocable to the Collateral Indebtedness will be deposited in the
Cash Collateral Account. Amounts will be retained in the Cash Collateral Account
at its required level and be made available to cover shortfalls with respect to
the Certificates. [In addition, on the first Special Payment Date following the
occurrence of any Pay Out Event, after giving effect to any payment of principal
on that date as described under "Application of Collections--Payments of
Principal," principal payments will be made to the Certificateholders from
amounts on deposit in the Cash Collateral Account as described under "Cash
Collateral Account" below.]]
[Subordination of the Class B Certificates]
[The Class B Certificateholders' Interest will be subordinated, other
than with respect to the Initial Class B Collateral Amount, to the extent
necessary to fund specified payments with respect to the Class A Certificates.
Some principal payments otherwise allocable to the Class B Certificateholders
may be reallocated to the Class A Certificateholders and the Class B Invested
Amount may be decreased. To the extent the Class B Invested Amount is reduced,
the percentage of collections of Finance Charge Receivables allocated to the
Class B Certificateholders in subsequent Monthly Periods will be reduced.
Moreover, to the extent the amount of the reduction in the Class B Invested
Amount is not reimbursed, the amount of principal and interest distributable to
the Class B Certificateholders will be reduced.]
Allocation Percentages
Pursuant to the Agreement, the [Seller] [Servicer] will allocate among
the Certificateholders' Interest, the certificateholders' interest for all other
Series of certificates issued and outstanding and the Seller's Interest [and the
Collateral Interest], all collections of Finance Charge Receivables and
Principal Receivables and the Defaulted Amount with respect to each Monthly
Period.
Collection of Finance Charge Receivables and the Defaulted Amount with
respect to any Monthly Period will be allocated to Series 200[ ]- [ ] based on
the Floating Allocation Percentage. The "Floating Allocation Percentage" means,
with respect to any Monthly Period, the percentage equivalent, which percentage
shall never exceed 100%, of a fraction, the numerator of which is the sum of the
Adjusted Invested Amount and the Collateral Invested Amount, if any, as of the
last day of the preceding Monthly Period, or with respect to the first Monthly
Period, the Initial Invested Amount as of the Issuance Date, and the denominator
of which is the sum of the total amount of the Principal Receivables in the
Trust as of the day, or with respect to the first Monthly Period, the total
amount of Principal Receivables in the Trust on the Cut-Off Date, and the
principal amount on deposit in an account (the "Excess Funding Account"), the
[Seller] [Servicer] [Depositor] will establish and maintain in the name of the
Trustee, on behalf of the Trust as an Eligible Account held for the benefit of
the Certificateholders. [These amounts so allocated will be further allocated
between the Class A Certificateholders and the Class B Certificateholders in
accordance with the Class A Floating Percentage and the Class B Floating
Percentage, respectively. The "Class A Floating Percentage" means, with respect
to any Monthly Period, the percentage equivalent, which percentage shall never
exceed 100%, of a fraction, the numerator of which is equal to the Class A
Adjusted Investment Amount as of the close of business on the last day of the
preceding Monthly Period, or with respect to the first Monthly Period, as of the
Issuance Date, and the denominator of which is equal to the Adjusted Invested
Amount as of the close of business on the day, or with respect to the first
Monthly Period, the Initial Invested Amount. The "Class B Floating Percentage"
means, with respect to any Monthly Period, the percentage equivalent, which
percentage shall never exceed 100%, of a fraction, the numerator of which is
equal to the Class B Adjusted Invested Amount as of the close of business on the
day, or with respect to the first Monthly Period, the Initial Invested Amount.]
Collections of Principal Receivables will be allocated to Series 200[
]- [ ] based on the Principal Allocation Percentage. The "Principal Allocation
Percentage" means, with respect to any Monthly Period, the percentage
equivalent, which percentage shall never exceed 100%, of a fraction, the
numerator of which is:
(a) during the Revolving Period, the Invested Amount as of the
last day of the immediately preceding Monthly Period, or, in the case
of the first Monthly Period, the Issuance Date, and
(b) during the [Controlled Amortization Period] [Accumulation
Period] or the Rapid Amortization Period, the Invested Amount as of
the last day of the Revolving Period, and the denominator of which is
the greater of:
(1) the sum of the total amount of Principal Receivables in
the Trust as of the last day of the immediately preceding Monthly
Period and the principal amount on deposit in the Excess Funding
Account as of the last day, or, in the case of the first Monthly
Period, the Cut-Off Date, and
(2) the sum of the numerators used to calculate the
principal allocation percentages for all Series outstanding as of
the date as to which a determination is being made;
provided, however, that because the Certificates offered by this prospectus
supplement are subject to being paired with a future Series, if a Pay Out Event
occurs with respect to the Paired Series during the [Controlled Amortization
Period] [Accumulation Period] with respect to Series 200[ ]- [ ], [the
Depositor] [the Seller] [the Servicer] may, by written notice delivered to [the
Trustee] [and] [the Seller] [and] [the Servicer], designate a different
numerator for the foregoing fraction, provided that the numerator is not less
than the Adjusted Invested Amount as of the last day of the revolving period for
the Paired Series and [the Depositor] [the Seller] [the Servicer] shall have
received written notice from each Rating Agency that the designation will not
have a Ratings Effect, and [the Depositor] [the Seller] [the Servicer] shall
have delivered to the Trustee a certificate of an authorized officer to the
effect that, based on the facts known to the officer at the time, in the
reasonable belief of [the Depositor] [the Seller] [the Servicer], the
designation will not cause a Pay Out Event or an event that, after the giving of
notice or the lapse of time, would constitute a Pay Out Event, to occur with
respect to Series 200[ ]- [ ].
[Amounts so allocated to the Certificateholders will be further
allocated between the Class A Certificateholders and the Class B
Certificateholders based on the Class A Principal Percentage and the Class B
Principal Percentage, respectively. The "Class A Principal Percentage" means,
with respect to any Monthly Period:
o during the Revolving Period, the percentage equivalent, which shall
never exceed 100%, of a fraction, the numerator of which is equal to
the Class A Invested Amount as of the last day of the immediately
preceding Monthly Period, or, in the case of the first Monthly Period,
the amount initially invested in Class A (the "Class A Initial
Invested Amount"), and the denominator of which is equal to the
Invested Amount as of the day, or, in the case of the first Monthly
Period, the Initial Invested Amount, and
o during the [Controlled Amortization Period] [Accumulation Period] or
the Rapid Amortization Period, the percentage equivalent, which shall
never exceed 100%, of a fraction, the numerator of which is the Class
A Invested Amount as of the last day of the Revolving Period, and the
denominator of which is the Invested Amount as of the last day.
The "Class B Principal Percentage" means, with respect to any Monthly Period,
o during the Revolving Period, the percentage equivalent, which
percentage shall never exceed 100%, of a fraction, the numerator of
which is the Class B Invested Amount as of the last day of the
immediately preceding Monthly Period, or, in the case of the first
Monthly Period, the Class B Initial Invested Amount, and the
denominator of which is the Invested Amount as of that day, or, in the
case of the first Monthly Period, the Initial Invested Amount, and
o during the [Controlled Amortization Period] [Accumulation Period] or
the Rapid Amortization Period, the percentage equivalent, which
percentage shall never exceed 100%, of a fraction, the numerator of
which is the Class B Invested Amount as of the last day of the
Revolving Period, and the denominator of which is the Invested Amount
as of that last day.]
As used in this prospectus supplement, the following terms have the
meanings indicated:
"Class A Invested Amount" for any date means an amount equal to:
(a) the Class A Initial Invested Amount, minus
(b) the aggregate amount of principal payments made to the Class
A Certificateholders on or prior to the date, minus
(c) the excess, if any, of the aggregate amount of Class A
Investor Charge-Offs for all prior Distribution Dates over the
aggregate amount of any reimbursements of Class A Investor Charge-Offs
for all Distribution Dates prior to that date.
["Class B Invested Amount" for any date means an amount equal to:
(a) the Initial Class B Invested Amount, minus
(b) the aggregate amount of principal payments made to Class B
Certificateholders on or prior to the date, other than principal
payments made from the proceeds of amounts received from the Cash
Collateral Account for the purpose of reimbursing previous reductions
in the Class B Invested Amount, minus
(c) the excess, if any, of the aggregate amount of Class B
Investor Charge-Offs for all prior Distribution Dates over the
aggregate amount of any reimbursement of Class B Investor Charge-Offs
for all Distribution Dates preceding the date, minus
(d) the amount of Reallocated Principal Receivables for all prior
Distribution Dates which have been used to fund the Class A Required
Amount with respect to the Distribution Dates, excluding any
Reallocated Principal Receivables that have resulted in a reduction of
the Collateral Invested Amount, minus
(e) an amount equal to the amount by which the Class B Invested
Amount has been reduced to fund the Class A Default Amount on all
prior Distribution Dates as described under "Class A Investor
Charge-Offs ", plus
(f) the amount of Excess Spread and Excess Finance Charges
allocated to Series 200[ ]- [ ] and available on all prior
Distribution Dates for the purpose of reimbursing amounts deducted
pursuant to the foregoing clauses (c), (d) and (e).]
"Class A Adjusted Invested Amount", for any date of determination,
means an amount equal to:
(a) then current Class A Invested Amount, minus
(b) the funds on deposit in the Principal Funding Account of the
date.
["Class B Adjusted Invested Amount"(together with the Class A Adjusted
Invested Amount, the "Adjusted Invested Amount"), for any date of determination,
means:
(a) if the date occurs prior to the Class B Principal
Commencement Date, an amount equal to the Class B Invested Amount, and
(b) if the date occurs on or after the Class B Principal
Commencement Date, an amount equal to the Class B Invested Amount
minus the funds on deposit in the Principal Funding Account on the
date.]
["Collateral Indebtedness Amount" means an amount equal to:
(a) the initial Collateral Indebtedness Amount, minus
(b) the aggregate amount of deposits made to the Cash Collateral
Account from Principal Collections, minus
(c) the aggregate amount of Reallocated Principal Collections
allocable to the Collateral Indebtedness Amount for all prior
Distribution Dates which have been used to fund the Required Amount,
minus
(d) an amount equal to the aggregate amount by which the
Collateral Indebtedness Amount has been reduced to fund the Investor
Default Amount on all prior Distribution Dates as described under "--
Defaulted Receivables; Investor Charge-Offs", minus
(e) an amount equal to the product of the Collateral Floating
Percentage and the Investor Default Amount (the "Collateral Defaulted
Amount") with respect to any Distribution Date that is not funded out
of Available Funds [and Excess Finance Charges allocated to Series
200[ ]- [ ] and available for the purpose on the related Distribution
Date], plus
(f) the aggregate amount of Available Funds [and Excess Finance
Charges] allocated and available to reimburse amounts deducted
pursuant to the foregoing clauses (c), (d) and (e) provided, however,
that the Collateral Indebtedness Amount may not be reduced below
zero.]
["Collateral Invested Amount" means for any date, an amount equal to:
(a) the amount withdrawn from the Cash Collateral Account and
applied to the payment of principal of the Certificates on the first
Special Payment Date following an Pay Out Event, minus
(b) the aggregate amount of principal payments made to the
Collateral Interest Holder prior to the date, minus
(c) the amount by which the Collateral Invested Amount has been
reduced to fund the Class A Default Amount [and the Class B Default
Amount] on all prior Distribution Dates as described below, minus
(d) the amount by which the Collateral Invested Amount has been
reduced by Reallocated Principal Receivables applied to reimburse the
Required Amount, plus
(e) the aggregate amount of Excess Spread and Excess Finance
Charges allocated to Series 200[ ]- [ ] and available on all prior
Distribution Dates for the purpose of reimbursing amounts deducted
pursuant to the foregoing clauses (c) and (d).
In the absence of the occurrence of a Pay Out Event and a related withdrawal
from the Cash Collateral Account to pay principal of the Certificates, the
Collateral Invested Amount will be zero.]
["Invested Amount", for any date, means an amount equal to the sum of:
(a) the Class A Invested Amount,
(b) the Class B Invested Amount,] and
(c) [the Collateral Invested Amount].]
(d) [Principal Funding Account]
[The [Seller] [Servicer] [Depositor] will establish and maintain in
the name of the Trustee, on behalf of the Trust, the Principal Funding Account,
as an Eligible Account held for the benefit of the Certificateholders. During
the Accumulation Period, the Servicer will transfer collections from one or more
accounts, established and maintained on behalf of the related Certificateholders
and, into which payments are made on or with respect to the related Receivables
(each, a "Collection Account"), in respect of Principal Receivables, Shared
Principal Collections allocated to Series 200[ ]- [ ], [miscellaneous payments
allocated to Series 200[ ]- [ ]] and other amounts described in this prospectus
supplement, to be treated in the same manner as collections of Principal
Receivables, to the Principal Funding Account.
[Unless a Pay Out Event has occurred with respect to the Certificates,
all amounts on deposit in the Principal Funding Account (the "Principal Funding
Account Balance") on any Distribution Date, after giving effect to any deposits
to, or withdrawals from the Principal Funding Account to be made on the
Distribution Date, will be invested until the following Distribution Date by the
Trustee at the direction of [the Seller] [the Servicer] [the Depositor] in
investments specified in the Pooling and Servicing Agreement and limited to
investments which meet the criteria of each Rating Agency from time to time as
being consistent with its then-current ratings of the Certificates (the
"Eligible Investments"). On each Distribution Date with respect to the
Accumulation Period [, on or prior to the Class B Expected Final Payment Date,]
the interest and other investment income, net of investment expenses and losses,
earned on the investments (the "Principal Funding Investment Proceeds") will be
withdrawn from the Principal Funding Account and will be treated as a portion of
Class A Available Funds, [prior to the Class B Principal Commencement Date and,
after, as a portion of Class B Available Funds]. If the investments with respect
to any Distribution Date yield less than the applicable Certificate Rate, the
Principal Funding Investment Proceeds with respect to the Distribution Date will
be less than the Covered Amount for the following Distribution Date. It is
intended that any shortfall will be funded from Class A Available Funds [or
Class B Available Funds, as the case may be], including a withdrawal from the
Reserve Account, if necessary, [or a withdrawal from the Cash Collateral
Account] [other sources]. The Available Reserve Account Amount at any time will
be limited and there can be no assurance that sufficient funds will be available
to fund any shortfall.
The "Covered Amount" shall mean:
(a) for any Distribution Date with respect to the Class A Accumulation
Period or the first Special Payment Date, [if the related Special
Payment Date occurs prior to the Class B Principal Commencement Date,]
an amount equal to one [twelfth] [quarter] [half] of the product of,
(1) the Class A Certificate Rate, and
(2) the Principal Funding Account Balance, if any, as of the
preceding Distribution Date, [and
(b) for any Distribution Date with respect to the Class B Accumulation
Period or the first Special Payment Date, if this Special Payment Date
occurs on or after the Class B Principal Commencement Date, an amount
equal to one [twelfth] [quarter] [half] of the product of,
(1) the Class B Certificate Rate, and
(2) the Principal Funding Account Balance, if any, as of the
preceding Distribution Date].
[Reserve Account]
The [Seller] [Servicer] [Depositor] will establish and maintain in the
name of the Trustee, on behalf of the Trust, an Eligible Deposit Account for the
benefit of the Certificateholders (the "Reserve Account"). The Reserve Account
is established to assure the subsequent distribution of interest on the
Certificates as provided in this prospectus supplement during the Accumulation
Period. On each Distribution Date from and after the Reserve Account Funding
Date, but prior to the termination of the Reserve Account, the Trustee, acting
pursuant to the [Servicer's] [Seller's] [Depositor's] instructions, will apply
Excess Spread and Excess Finance Charges allocated to Series 200[ ]-[ ] (to the
extent described below under "Application of Collections--Payment of Interest,
Fees and Other Items") to increase the amount on deposit in the Reserve Account,
to the extent the amount is less than the Required Reserve Account Amount. [In
addition, on each Distribution Date, the [Seller] [Depositor] will have the
option, but will not be required, to make a deposit in the Reserve Account, to
the extent that the amount on deposit in the Reserve Account is less than the
Required Reserve Account Amount.]
[The "Reserve Account Funding Date" will be the Distribution Date with
respect to the Monthly Period which commences no later than three months prior
to the Distribution Date with respect to the Monthly Period which commences the
Class A Accumulation Period or an earlier date as the Servicer may designate.
The "Required Reserve Account Amount" for any Distribution Date on or after the
Reserve Account Funding Date will be equal to the product of [ ]% of the Class A
Invested Amount as of the preceding Distribution Date and the Reserve Account
Factor as of the Distribution Date, or a lower amount approved by each Rating
Agency. On each Distribution Date, after giving effect to any deposit to be made
to, and any withdrawal to be made from, the Reserve Account on the Distribution
Date, the Trustee will withdraw from the Reserve Account an amount equal to the
excess, if any, of the amount on deposit in the Reserve Account over the
Required Reserve Account Amount and shall distribute the excess to, or at the
direction of, [the Seller] [the Depositor]. The "Reserve Account Factor for any
Distribution Date will be equal to the percentage, not to exceed 100%,
equivalent of a fraction, the numerator of which is the number of Monthly
Periods scheduled to be included in the Accumulation Period, which may have been
postponed at the option of the [Seller] [Depositor] [Servicer], as of the
Distribution Date and the denominator of which is [ ] .]
[Provided that the Reserve Account has not terminated as described
below, all amounts on deposit in the Reserve Account on any Distribution Date,
after giving effect to any deposits to, or withdrawals from, the Reserve Account
to be made on the Distribution Date, will be invested until the following
Distribution Date by the Trustee at the direction of the [Seller] [Servicer]
[Depositor] in Eligible Investments. The interest and other investment income,
net of investment expenses and losses, earned on the investments will be
retained in the Reserve Account, to the extent the amount on deposit in the
Reserve Account is less than the Required Reserve Account Amount, or deposited
in the Collection Account and treated as collections of Finance Charge
Receivables.]
[On or before each Distribution Date with respect to the Accumulation
Period, on or prior to the Class A Expected Final Payment Date, and on the first
Special Payment Date, a withdrawal will be made from the Reserve Account, and
the amount of the withdrawal will be deposited in the Collection Account and
included in Class A Available Funds, prior to the Class B Principal Commencement
Date, and, then, in Class B Available Funds,] in an amount equal to the lesser
of:
(a) the Available Reserve Account Amount with respect to the
Distribution Date or Special Payment Date, and
(b) the excess, if any, of the Covered Amount with respect to the
Distribution Date or Special Payment Date over the Principal Funding
Investment Proceeds with respect to the Distribution Date or Special
Payment Date;
provided that the amount of the withdrawal shall be reduced to the extent that
funds otherwise would be available to be deposited in the Reserve Account on the
Distribution Date or Special Payment Date. On each Distribution Date, the amount
available to be withdrawn from the Reserve Account (the "Available Reserve
Account Amount") will be equal to the lesser of the amount on deposit in the
Reserve Account, before giving effect to any deposit to be made to the Reserve
Account on the Distribution Date, and the Required Reserve Account Amount for
the Distribution Date.]
[The Reserve Account will be terminated following the earlier to occur
of:
(a) the termination of the Trust pursuant to the Agreement,
(b) the date on which the Certificates are paid in full, and
(c) if the Accumulation Period has not commenced, the occurrence of a
Pay Out Event with respect to Series 200[ ]- [ ] or, if the
Accumulation Period has commenced, the earlier of the first Special
Payment Date and the [Class B] Expected Final Payment Date.
Upon the termination of the Reserve Account, all amounts on deposit in the
Reserve Account, after giving effect to any withdrawal from the Reserve Account
on the date as described above, will be distributed to, or at the direction of,
the Depositor. Any amounts withdrawn from the Reserve Account and distributed
to, or at the direction of, the Depositor as described above will not be
available for distribution to the Certificateholders.]
Reallocation of Cash Flows; Class B Invested Amount
With respect to each Distribution Date, on each Determination Date,
the Servicer will determine the "Class A Required Amount," which will be equal
to the amount, if any, by which, the sum of:
(a) Class A [Monthly] [Quarterly] [Semi-Annual] Interest for the
Distribution Date,
(b) any Class A [Monthly] [Quarterly] [Semi-Annual] Interest
previously due but not paid to Class A Certificateholders on a
prior Distribution Date,
(c) any Class A additional Interest,
(d) the Class A Servicing Fee for the Distribution Date and any
unpaid Class A Servicing Fee, and
(e) the Class A Default Amount, if any, for the Distribution
Date,
exceeds the Class A Available Funds. If the Class A Required Amount is greater
than zero, Excess Spread and Excess Finance Charges allocated to Series 200[ ]-
[ ] and available for that purpose will be used to fund the Class A Required
Amount with respect to the Distribution Date. If the Excess Spread and Excess
Finance Charges available with respect to the Distribution Date are less than
the Class A Required Amount, then amounts, if any, on deposit in the Cash
Collateral Account available to pay amounts in respect of the Class A
Certificates will then be used to fund the remaining Class A Required Amount.
[If the Excess Spread and Excess Finance Charges and amounts available from the
Cash Collateral Account are insufficient to fund the Class A Required Amount,
then collections of Principal Receivables allocable to the Class B Certificates
for the related Monthly Period will then be used to fund the remaining Class A
Required Amount ("Reallocated Principal Receivables").] If Reallocated Principal
Receivables with respect to the related Monthly Period, together with Excess
Spread and Excess Finance Charges allocated to Series 200[ ]- [ ] and amounts
available from the Cash Collateral Account, are insufficient to fund the Class A
Required Amount for the related Monthly Period, then the Collateral Invested
Amount, if any, will be reduced by the amount of the excess, but not by more
than the Class A Default Amount for the Distribution Date. In the event that the
reduction would cause the Collateral Invested Amount to be a negative number,
the Collateral Invested Amount will be reduced to zero, and the Class B Invested
Amount will be reduced by the amount by which the Collateral Invested Amount
would have been reduced below zero, but not by more than the excess of the Class
A Default Amount, if any, for the Distribution Date over the amount of the
reduction, if any, of the Collateral Invested Amount with respect to the
Distribution Date. In the event that the reduction would cause the Class B
Invested Amount to be a negative number, then the Class B Invested Amount will
be reduced to zero, and the Class A Invested Amount will be reduced by the
amount by which the Class B Invested Amount would have been reduced below zero,
but not by more than the excess, if any, of the Class A Default Amount for the
Distribution Date over the amount of the reductions, if any, of the Collateral
Invested Amount and the Class B Invested Amount with respect to the Distribution
Date as described above. Any reduction in the Class A Invested Amount will have
the effect of slowing or reducing the return of principal and interest to the
Class A Certificateholders. In this case, the Class A Certificateholders will
bear directly the credit and other risks associated with their undivided
interest in the Trust.
[The "Class B Required Amount" (and together with the Class A Required
Amount, the "Required Amount") means, with respect to any Distribution Date, the
amount, if any, by which the sum of:
(a) current and overdue Class B Monthly Interest,
(b) current and overdue Class B Additional Interest,
(c) current and overdue Class B Servicing Fee, and
(d) the Class B Default Amount
exceeds Class B Available Funds. If the Class B Required Amount is greater than
zero, then Excess Spread and Excess Finance Charges allocable to the Series 200[
]- [ ], and not required to pay the Class A Required Amount or reimburse Class A
Charge-Offs, will be applied to fund the deficiency. [If Excess Spread and
Excess Finance Charges allocable to Series 200[ ]-[ ] with respect to the
Distribution Date and not required to pay the Class A Required Amount are less
than the Class B Required Amount, then the amounts, if any, on deposit in the
Cash Collateral Account and available to make payments with respect to the Class
B Certificates with respect to that Distribution Date will be withdrawn and
applied to fund the Class B Required Amount.] If [amounts, if any, in deposit in
the Cash Collateral Account and available to make payments with respect to the
Class B Certificates with respect to the Distribution Date (together with]
Excess Spread and Excess Finance Charges with respect to the Distribution Date
[)] are insufficient to fund the remaining Class B Required Amount, then the
[Collateral] Invested Amount, if any, will be reduced by the amount of the
deficiency, but not more than the Class B Default Amount for the relevant
Monthly Period. If the reduction would cause the [Collateral] Invested Amount to
be reduced below zero, then the Class B Invested amount will be reduced by the
amount by which the [Collateral] Invested Amount would have been reduced below
zero, but not by more than the excess of the Class B Default Amount for the
related Monthly Period over the reduction in the [Collateral] Invested Amount
with respect to the Monthly Period, (this reduction, a "Class B Charge-Off"). In
the event of a reduction of the Class B Invested Amount, the amount of principal
and interest available to fund payments with respect to the Class B Certificates
will be decreased.]
Reductions of the Class A or Class B Invested Amount shall
subsequently be reimbursed and the Class A [or Class B] Invested Amount will be
increased on each Distribution Date by the amount, if any, of Excess Spread and
Excess Finance Charges. See "Application of Collections -- Excess Spread; Excess
Finance Charges". When reductions of the Class A and Class B Invested Amount
have been fully reimbursed, reductions of the [Collateral] Invested Amount shall
be reimbursed and the [Collateral] Invested Amount increased in a similar
manner.
Application of Collections
Payment of Interest, Fees and Other Items. On each Distribution Date,
the Trustee, acting pursuant to the [Seller's] [Servicer's] instructions, will
apply the Class A Available Funds [and Class B Available Funds] (see "--Interest
Payments" above) on deposit in the Collection Account in the following priority:
(a) On each Distribution Date, an amount equal to the Class A
Available Funds with respect to the Distribution Date will be distributed in the
following priority:
(1) an amount equal to Class A Monthly Interest for the
Distribution Date, plus the amount of any Class A Monthly Interest
previously due but not distributed to the Class A Certificateholders
on a prior Distribution Date, plus any additional interest with
respect to interest amounts that were due but not distributed to the
Class A Certificateholders on a prior Distribution Date at a rate
equal to the Class A Certificate Rate [plus [ ]% per annum ("Class A
Additional Interest"),] will be:
[(A)] distributed to Class A Certificateholders [if the
Distribution Date is an Interest Payment Date, or
(B) deposited in the Interest Funding Account, if the
Distribution Date is not an Interest Payment Date or Special
Payment Date for distribution to Class A Certificateholders on
the next Interest Payment Date or Special Payment Date];
(2) an amount equal to the Class A Servicing Fee for the
Distribution Date, plus the amount of any Class A Servicing Fee
previously due but not distributed to the Servicer on a prior
Distribution Date, will be distributed to the Servicer, unless the
amount has been netted against deposits to the Collection Account;
(3) an amount equal to the Class A Default Amount for the
Distribution Date will be treated as a portion of Available Investor
Principal Collections for the Distribution Date; and
(4) the balance, if any, shall constitute Excess Spread and shall
be allocated and distributed as described under "--Excess Spread;
Excess Finance Charges" below.
[(b) On each Distribution Date, an amount equal to the Class B
Available Funds with respect to the Distribution Date will be distributed in the
following priority:]
[(1) an amount equal to Class B Monthly Interest for the
Distribution Date, plus the amount of any Class B Monthly Interest
previously due but not distributed to the Class B Certificateholders
on a prior Distribution Date, plus any additional interest with
respect to interest amounts that were due but not distributed to the
Class B Certificateholders on a prior Distribution Date at a rate
equal to the Class B Certificate Rate plus [ ]% per annum ("Class B
Additional Interest"), will be:]
[(A)] distributed to Class B Certificateholders [if the
Distribution Date is an Interest Payment Date, or
(B) deposited in the Interest Funding Account, if the
Distribution Date is not an Interest Payment Date or Special
Payment Date for distribution to Class B Certificateholders on
the next Interest Payment Date or Special Payment Date];]
[(2) an amount equal to the Class B Servicing Fee for the
Distribution Date, plus the amount of any Class B Servicing Fee
previously due but not distributed to the Servicer on a prior
Distribution Date, will be distributed to the Servicer, unless the
amount has been netted against deposits to the Collection Account;
and]
[(3) the balance, if any, shall constitute Excess Spread and
shall be allocated and distributed as described under "--Excess
Spread; Excess Finance Charges" below.]
"Class A Monthly Interest" means, with respect to any Distribution
Date, an amount equal to the product of:
(a) a fraction, the numerator of which is the actual number of
days in the period from and including the prior Distribution Date
to but excluding Distribution Date and the denominator of which
is 360,
(b) the Class A Certificate Rate, and
(c) the Class A Invested Amount as of the preceding Record Date.
["Class B Monthly Interest" means, with respect to any Distribution
Date, an amount equal to the product of:
(a) a fraction, the numerator of which is the actual number of
days in the period from and including the prior Distribution Date
to but excluding that Distribution Date and the denominator of
which is 360,
(b) the Class B Certificate Rate, and
(c) the Class B Invested Amount as of the preceding Record Date.]
"Excess Spread" means, with respect to any Distribution Date, an
amount equal to the sum of the amounts described in clause (a)(4) above [and
clause (b)(3) above,] [in the definition of Class A Monthly Interest [and Class
B Monthly Interest]].
Excess Spread; Excess Finance Charges. On each Distribution Date, the
Trustee, acting pursuant to the Servicer's instructions, will apply Excess
Spread and Excess Finance Charges allocated to Series 200[ ]- [ ] with respect
to the related Monthly Period to make the following distributions in the
following priority to the extent funds are available:
[(a)] an amount equal to the Class A Required Amount, if any, with
respect to the Distribution Date will be used to fund any deficiency
pursuant to clauses (a) (1), (2) and (3) above in the order of
priority;
[(b)] [an amount equal to the aggregate amount of Class A Investor
Charge-Offs which have not been previously reimbursed, after giving
effect to the allocation on the Distribution Date of other amounts
applied for that purpose, will be treated as a portion of Available
Investor Principal Collections for the Distribution Date as described
under "--Payments of Principal" below;]
[(c)] [an amount equal to the Class B Required Amount, if any, with
respect to the Distribution Date will be used first;
(1) to fund any deficiency pursuant to clauses (b) (1) and
(2) above under "--Payment of Interest, Fees and Other Items" in
the order of priority, and
(2) second to pay any Class B Default Amount with respect to
the Distribution Date];
[(d)] [an amount equal to the aggregate by which the Class B
Invested Amount has been reduced pursuant to clauses (4), (5) and (6)
of the definition of "Class B Invested Amount" under "--Allocation
Percentages" above, but not in excess of the aggregate amount of the
reductions which have not been previously reimbursed, shall be treated
as a portion of Available Investor Principal Collections for the
Distribution Date;]
[(e)] [an amount equal to the "Cash Collateral Fee" as described
in the [Loan] Agreement among the [Depositor] [Seller], [ ] (the "Cash
Collateral Depositor") and the Trustee for the Distribution Date shall
be distributed to the Cash Collateral Depositor for application in
accordance with the [Loan] Agreement;]
[(f)] [an amount equal to the aggregate amount by which the
Collateral Invested Amount has been reduced pursuant to clauses (c)
and (d) of the definition of "Collateral Invested Amount" under
"--Allocation Percentages" above, but not in excess of the aggregate
amount of the reductions which have not been previously reimbursed,
shall be treated as a portion of Available Principal Collections for
the Distribution Date;]
[(g)] [an amount equal to the Monthly Servicing Fee due but not
paid to the Servicer on the Distribution Date or a prior Distribution
Date shall be paid to the Servicer;]
[(h)] [an amount up to the excess, if any, of the Required Cash
Collateral Amount over the remaining Available Cash Collateral Amount
shall be deposited into the Cash Collateral Account;]
[(i)] [on each Distribution Date from and after the Reserve
Account Funding Date, but prior to the date on which the Reserve
Account terminates, an amount up to the excess, if any, of the
Required Reserve Account Amount over the Available Reserve Account
Amount shall be deposited into the Reserve Account;]
[(j)] [an amount equal to the aggregate of any other amounts then
due to the Collateral Interest Holder pursuant to the [Loan]
Agreement, to the extent these amounts are payable pursuant to the
[Loan] Agreement out of Excess Spread and Excess Finance Charges,
shall be distributed to the Collateral Interest Holder for application
in accordance with the [Loan] Agreement; and
[(k)] the balance, if any, will constitute a portion of Excess
Finance Charges for the Distribution Date and will be available for
allocation to other Series in the Group [ ] or to the [Seller]
[Depositor] as described in "Description of the Certificates --
Sharing of Excess Finance Charges" in the Prospectus.
Payments of Principal. On each Distribution Date, the Trustee, acting
pursuant to the [Seller's] [Servicer's] instructions, will distribute Available
Principal Collections (see "--Principal Payments" above) on deposit in the
Collection Account in the following priority:
(a) on each Distribution Date with respect to the Revolving Period,
all Available Principal Collections will be distributed [or deposited]
in the following priority:
[(1)] [an amount equal to the excess, if any, of the Collateral
Invested Amount over the Required Collateral Invested Amount will
be paid to the Collateral Interest Holder; and]
[(2)] [the balance] [these Available Principal Collections] will
be treated as Shared Principal Collections and applied in
accordance with the Agreement and the Series Supplement.]
(b) on each Distribution Date with respect to the [Controlled
Amortization Period] [Accumulation Period] or the Rapid Amortization
Period, all Available Principal Collections will be distributed [or
deposited] in the following priority:
[(1)] [an amount equal to Class A Monthly Principal, up to the
Class A Adjusted Invested Amount on the Distribution Date will be
distributed to Class A Certificateholders [if the Distribution
Date is a Principal Distribution Date or deposited in the
Principal Funding Account if the Distribution Date is not a
Principal Distribution Date], during the Class A Accumulation
Period, or distributed to the Class A Certificateholders, during
the Rapid Amortization Period[; and]]
[(2) for each Distribution Date after the Class A Adjusted
Invested Amount has been paid in full, an amount equal to Class B
Monthly Principal, up to the Class B Adjusted Invested Amount on
the Distribution Date, will be distributed to Class B
Certificateholders if the Distribution Date is a Principal
Distribution Date or deposited in the Principal Funding Account
if the Distribution Date is not a Principal Distribution Date,
during the Class B Accumulation Period, or distributed to the
Class B Certificateholders, during the Rapid Amortization
Period;]
[(c)] [an amount equal to Class A Monthly Principal, up to the Class A
Adjusted Invested Amount on the Distribution Date will be deposited in
the Principal Funding Account, during the Class A Accumulation Period,
or distributed to the Class A Certificateholders, during the Rapid
Amortization Period;]
[(d)] [for each Distribution Date beginning on the Class B Principal
Commencement Date, an amount equal to Class B Monthly Principal for
the Distribution Date, up to the Class B Adjusted Invested Amount on
that Distribution Date, will be deposited in the Principal Funding
Account, during the Class B Accumulation Period, or distributed to the
Class B Certificateholders, during the Rapid Amortization Period;]
(e) for each Distribution Date with respect to the Rapid Amortization
Period, beginning with the Distribution Date on which the Invested
Amount is paid in full, an amount equal to the balance, if any, of the
Available Principal Collections then on deposit in the Collection
Account, to the extent of the Collateral Invested Amount, if any,
shall be distributed to the Collateral Interest Holder for application
in accordance with the [Loan] Agreement; and
(f) for each Distribution Date, after giving effect to paragraphs (c),
(d) and (e) above, an amount equal to the balance, if any, of the
Available Principal Collections will be allocated to Shared Principal
Collections and applied in accordance with the Agreement.
"Class A Monthly Principal" with respect to any Distribution Date
relating to the Class A [Controlled Amortization Period] [Accumulation Period]
or the Rapid Amortization Period will equal the lesser of:
(a) the Available Principal Collections on deposit in the Collection
Account with respect to the Distribution Date,
(b) for each Distribution Date with respect to the Class A [Controlled
Amortization Period] [Accumulation Period], [and on or prior to the
Class A Expected Final Payment Date,] the [Controlled Distribution
Amount] [Controlled Deposit Amount] for the Distribution Date, and
(c) the Class A Adjusted Invested Amount on that Distribution Date.
["Class B Monthly Principal" with respect to any Distribution Date
relating to the Class B [Controlled Amortization Period] [Accumulation Period]
or the Rapid Amortization Period, after the Class A Certificates have been paid
in full, will equal the lesser of:
(a) the Available Principal Collections on deposit in the Collection
Account with respect to the Distribution Date, minus the portion of
the Available Principal Collections applied to Class A Monthly
Principal on the Distribution Date,
(b) for each Distribution Date with respect to the Class B [Controlled
Amortization Period] [Accumulation Period], [and on or prior to the
Class B Expected Final Payment Date,] the [Controlled Distribution
Amount] [Controlled Deposit Amount] for the Distribution Date, and
(c) the Class B Adjusted Invested Amount on the Distribution Date.]
["Controlled Accumulation [Amortization] Amount" means:
[(a)] for any Distribution Date with respect to the Class A
Accumulation Period, $ [ ] ; provided, however, that, if the commencement of the
Class A Accumulation Period is delayed as described above under "--Principal
Payments", the Accumulation Amount for each Distribution Date may be different
for each Distribution Date with respect to the Class A Accumulation Period and
will be determined by the [Seller] [Servicer] [Depositor] in accordance with the
[Agreement] [and the Series Supplement] based on the principal payment rates for
the Accounts and on the Invested Amounts of other Principal Sharing Series that
are scheduled to be in their revolving periods and then scheduled to create
Shared Principal Collections during the Class A Accumulation Period[; and
(b) for any Distribution Date with respect to the Class B Accumulation
Period, an amount equal to $ [ ] [the Class B Invested Amount] as of the Class B
Principal Commencement Date].]
["Deficit Controlled Accumulation Amount" means:
(a) on the first Distribution Date with respect to the Class A
Accumulation Period [or the Class B Accumulation Period,] the excess, if any, of
the Controlled Accumulation Amount for the Distribution Date over the amount
[deposited in the Principal Funding Account on the Distribution Date]
[distributed from the Collection Account as Class A Monthly Principal [or Class
B Monthly Principal, as the case may be,] for the Distribution Date, and
(b) on each subsequent Distribution Date with respect to the Class A
Accumulation Period [or the Class B Accumulation Period,] the excess, if any, of
the Controlled Deposit Amount for a subsequent Distribution Date plus any
Deficit Controlled Accumulation Amount for the prior Distribution Date over the
amount [deposited in the Principal Funding Account on the Distribution Date]
[distributed from the Collection Account as Class A Monthly Principal [or Class
B Monthly Principal, as the case may be,] for the subsequent Distribution
Date].]]
"Controlled Distribution Amount") is equal to the sum of the
Controlled Amortization Amount and any existing Deficit Controlled Amortization
Amount.
["Controlled Deposit Amount" means, for any Distribution Date with
respect to the Accumulation Period, an amount equal to the sum of:
(a) the Controlled Accumulation Amount for the Distribution Date, and
(b) any Deficit Controlled Accumulation Amount for the immediately
preceding Distribution Date.]
["Shared Principal Collections" means, Collections of Principal
Receivables and certain other amounts otherwise allocable to other Series, to
the extent such collections are not needed to make payments to or deposits for
the benefit of the certificateholders of such other Series, [will] [may] be
applied to cover principal payments due to or for the benefit of the holders of
the Certificates.]
[Cash Collateral Account]
[The Trust will have the benefit of the Cash Collateral Account for
the benefit of the Certificateholders [and the Collateral Interest Holder], as
their interests appear in the Series Supplement, and in the case of the
Collateral Interest Holder, in the [Loan] Agreement, which interest, in the case
of the Collateral Interest Holder, will be subordinated to the interests of the
Certificateholders as provided in the Series Supplement. The "Cash Collateral
Account" will be one or more Eligible Deposit Accounts. Funds on deposit in the
Cash Collateral Account will be invested in specified Eligible Investments that
mature on or before the business day immediately preceding the next
Distribution[, accrued since the preceding Distribution Date on funds on deposit
in the Cash Collateral Account shall be paid to the Collateral Interest Holder
for application in accordance with the [Loan] Agreement].]
[The Cash Collateral Account will be funded on the Issuance Date in
the amount of $[ ] (the "Initial Cash Collateral Amount"), [of which not less
than $[ ] (the "Initial Shared Collateral Amount") will be for the benefit of
both the Class A Certificates and the Class B Certificates and the remaining $[
] (the "Initial Class B Collateral Amount") will be for the exclusive benefit of
the Class B Certificates], which amount will include the proceeds of an advance
to be made by one or more lenders to be selected by the [Depositor] (the lender
or lenders, the "Collateral Interest Holders"). The advance will be repaid
pursuant to the [Loan] Agreement. The Cash Collateral Account will be terminated
following the earliest to occur of:
(a) the date on which the Certificates are paid in full,
(b) the date on which the entire Available Cash Collateral Amount is
distributed to the Certificateholders as a result of the occurrence of any Pay
Out Event,
(c) the Termination Date, and
(d) the termination of the Trust pursuant to the Agreement.]
[On each Distribution Date, the amount available to be withdrawn from
the Cash Collateral Account (the "Available Cash Collateral Amount") will be
equal to the lesser of the amount on deposit in the Cash Collateral Account,
before giving effect to any deposit to be made to, or withdrawal from, the Cash
Collateral Account on the related Distribution Date, or the Required Cash
Collateral Amount.]
[The "Required Cash Collateral Amount" means, with respect to any
Distribution Date, the lesser of:
(a) [the sum of] [the Required Shared Collateral Amount] [and] [the
Initial Class B Collateral Amount] as of the Distribution Date, and
(b) the adjusted Invested Amount as of the Distribution Date.]
[The "Required Shared Collateral Amount means, with respect to any
Distribution Date, the product of:
(a) the Adjusted Invested Amount as of the Distribution Date after
taking into account distributions made on that date, and
(b) [ ]% or any higher percentage specified by each Rating Agency;
provided, however, that:
(1) if there are any withdrawals from the Cash Collateral
Account to fund the Class A Required Amount [or the Class B
Required Amount,] or a Pay Out Event occurs with respect to
Series 200[ ]- [ ], then the Required Shared Collateral Amount
for any Distribution Date shall equal the Required Shared
Collateral Amount on the Distribution Date immediately preceding
a withdrawal from the Cash Collateral Account or Pay Out Event,
and
(2) notwithstanding the foregoing, the Required Shared
Collateral Amount with respect to any Distribution Date will not
be less than $[ ].]
[The Required Shared Collateral Amount [and the Initial Class B
Collateral Amount] may be reduced without the consent of the Certificateholders,
if the [Depositor] [Seller] shall have received written notice from each Rating
Agency that the reduction will not have a Ratings Effect and the [Depositor]
[Seller] shall have delivered to the Trustee a certificate of an authorized
officer to the effect that, based on the facts known to the officer at the time,
in the reasonable belief of the [Depositor] [Seller], the reduction will not
cause a Pay Out Event or an event that, after the giving of notice of the lapse
of time, would constitute a Pay Out Event, to occur with respect to Series 200[
]- [ ].]
[On each Distribution Date, one or more withdrawals will be made from
the Cash Collateral Account in an amount up to the Available Shared Collateral
Amount, to fund the following amounts in the following priority:]
[(a)] the excess, if any, of the Class A Required Amount with
respect to the related Distribution Date over the amount of Excess
Spread and Excess Finance Charges allocated to Series 200[ ]- [ ] and
available to fund the Class A Required Amount will be used first to
fund any deficiency in current Class A Monthly Interest, overdue Class
A Monthly Interest and any current or overdue Class A Additional
Interest, second to fund any deficiency in the Class A Servicing Fee
and any overdue Class A Servicing Fee and third to pay the Class A
Default Amount, if any, for the Distribution Date[; and]
[(b) the excess, if any, of the Class B Required Amount with
respect to the related Distribution Date over the amount of Excess
Spread and Excess Finance Charges allocated to Series 200[ ]- [ ] and
available to fund the Class B Required Amount will be used first to
fund any deficiency in current Class B Monthly Interest, overdue Class
B Monthly Interest and any current or overdue Class B Additional
Interest, second to fund any deficiency in the Class B Servicing Fee
and any overdue Class B Servicing Fee, and third to pay the Class B
Default Amount, if any, for the Distribution Date.]
On each Distribution Date, the "Available Shared Collateral Amount"
shall equal the lesser of:
(a) the Required Shared Collateral Amount, and
(b) the excess, if any, of the amount on deposit in the Cash
Collateral Account for the relevant Distribution Date over the Initial
Class B Collateral Amount.
On the first Special Payment Date following a Pay Out Event described
in clause (e) under "--Pay Out Events" after giving effect to any payment of
principal on the date described under "--Application of Collections - --
Payments of Principal", the Available Shared Collateral Amount, after giving
effect to any withdrawal from the Cash Collateral Account on the date to fund
the Required Amount, will be applied to pay principal of the Class A
Certificates [and the remainder of the Available Cash Collateral Amount will be
applied to pay principal of the Class B Certificates].
[On each Distribution Date commencing with the Class B Principal
Commencement Date, unless a Pay Out Event has occurred, a withdrawal will be
made from the Cash Collateral Account, to the extent of the Available Cash
Collateral Amount, in an amount equal to the excess, if any, of the Class B
Initial Invested Amount, minus the sum of the aggregate amount of principal
payments previously deposited to the Principal Funding Account or distributed in
respect of the Class B Certificates, over the Class B Invested Amount on the
last day of the related Monthly Period, determined after giving effect to any
changes to be made in the Class B Invested Amount pursuant to clauses (c), (d),
(e) or (f) of the definition of "Class B Invested Amount" under "--Allocation
Percentages" on the following Distribution Date.]
[In the event of:
(a) a sale of the Receivables and an early termination of the Trust
due to an Insolvency event,
(b) an optional repurchase of the Certificateholders' Interest by the
[Depositor] [Seller] [Servicer],
(c) a sale of a portion of the Receivables in connection with the
Termination Date,
(d) a repurchase or sale of the Certificateholders' Interest and the
certificateholders' interest of all other Series in connection with a Servicer
Default, or,
(e) a reassignment of the Certificateholders' Interest and the
certificateholders' interest of all other Series in connection with a breach by
the [Seller] [Depositor] [Servicer] of related representations and warranties,
any Available Cash Collateral Amount on the related Distribution Date, after
giving effect to all other withdrawals from the Cash Collateral Account on the
Distribution Date as described above, will be withdrawn from the Cash Collateral
Account and the proceeds withdrawn from the Cash Collateral Account will be
distributed to Class B Certificateholders to the extent of all previous
reductions of the Class B Invested Amount pursuant to clauses (c), (d) or (e) of
the definition of "Class B Invested Amount" under "--Allocation Percentages"
above.]
On each Distribution Date, the [Seller] [Servicer] or the Trustee,
acting pursuant to the [Seller's] [Servicer's] instructions, will apply Excess
Spread and Excess Finance Charges allocated to Series 200[ ]- [ ] (to the extent
described above under "--Application of Collections -- Excess Spread; Excess
Finance Charges") to increase the amount on deposit in the Cash Collateral
Account to the extent that amount is less than the Required Cash Collateral
Amount. In addition, if on any Distribution Date the amount on deposit in the
Cash Collateral Account exceeds the Required Cash Collateral Amount, this excess
will be withdrawn and paid to the Collateral Interest Holder for application in
accordance with the [Loan] Agreement.
Defaulted Receivables Charge-Offs
On each Determination Date, the Servicer will calculate the Investor
Default Amount for the preceding Monthly Period. The term "Investor Default
Amount" means, for any Monthly Period, the product of:
(a) the Floating Allocation Percentage with respect to the related
Monthly Period, and
(b) the Defaulted Amount for that Monthly Period.
[A portion of the Investor Default Amount will be allocated to the Class A
Certificateholders (the "Class A Default Amount") on each Distribution Date in
an amount equal to the product of the Class A Floating Percentage applicable
during the related Monthly Period and the Investor Default Amount for that
Monthly Period.
A portion of the Investor Default Amount will be allocated to the Class B
Certificateholders (the "Class B Default Amount") in an amount equal to the
product of the Class B Floating Percentage applicable during the related Monthly
Period and the Investor Default Amount for that Monthly Period. An amount equal
to the Class A Default Amount for each Monthly Period will be paid from Class A
Available Funds, Excess Spread and Excess Finance Charges allocated to Series
200[ ]- [ ] or from amounts available under the Cash Collateral Account and
Reallocated Principal Receivables and applied as described above in
"--Application of Collections -- Payment of Interest, Fees and Other Items" and
"--Reallocation of Cash Flows; Class B Invested Amount". An amount equal to the
Class B Default Amount for each Monthly Period will be paid from Excess Spread
and Excess Finance Charges allocated to Series 200[ ]- [ ] or from amounts, if
any, available under the Cash Collateral Account and applied as described above
in "--Application of Collections -- Payment of Interest, Fees and Other Items".]
On each Distribution Date, if the Class A Required Amount for that
Distribution Date exceeds the sum of Excess Spread and Excess Finance Charges
allocable to Series 200[ ]- [ ], then amounts, if any, on deposit in the Cash
Collateral Account up to the Available Shared Collateral Amount and Reallocated
Principal Receivables, the Collateral Invested Amount, if any, will be reduced
by the amount of the excess, but not by more than the Class A Default Amount for
the related Distribution Date. [In the event that a reduction would cause the
Collateral Invested Amount to be a negative number, the Collateral Invested
Amount will be reduced to zero, and the Class B Invested Amount will be reduced
by the amount by which the Collateral Invested Amount would have been reduced
below zero, but not by more than the excess, if any, of the Class A Default
Amount for the Distribution Date over the amount of the reduction, if any, of
the Collateral Invested Amount with respect to the Distribution Date. In the
event that a reduction would cause the Class B Invested Amount to be a negative
number, the Class B Invested Amount will be reduced to zero, and the Class A
Invested Amount will be reduced by the amount by which the Class B Invested
Amount would have been reduced below zero, but not by more than the excess, if
any, of the Class A Default Amount for the Distribution Date over the amount of
the reductions, if any, of the Collateral Invested Amount and the Class B
Invested Amount with respect to the Distribution Date as described above (a
"Class A Charge-Off"),] which will have the effect of slowing or reducing the
return of principal to the Class A Certificateholders.] If the Class A Invested
Amount has been reduced by the amount of any Class A Charge-Offs, it will
subsequently be increased on any Distribution Date, but not by an amount in
excess of the aggregate Class A Charge-Offs, by the amount of Excess Spread and
Excess Finance Charges allocated to Series 200[ ]- [ ] and available for that
purpose.
[On each Distribution Date, if the Class B Required Amount for that
Distribution Date exceeds the sum of Excess Spread and Excess Finance Charges
allocable to Series 200[ ]- [ ] and not required to pay the Class A Required
Amount and amounts, if any, on deposit in the Cash Collateral Account which are
allocated and available to fund the amount, then the Collateral Invested Amount,
if any, will be reduced by the amount of any excess. In the event that a
reduction would cause the Collateral Invested Amount to be a negative number,
the Collateral Invested Amount will be reduced to zero, and the Class B Invested
Amount will be reduced by the amount by which the Collateral Invested Amount
would have been reduced below zero, but not by more than the excess, if any, of
the Class B Default Amount for the relevant Distribution Date over the amount of
the reduction, if any, of the Collateral Invested Amount with respect to the
Distribution Date.]
[If on any Distribution Date Reallocated Principal Receivables for
that Distribution Date are applied to fund the Required Amount, the Collateral
Invested Amount, if any, will be reduced by the amount of the Reallocated
Principal Receivables. In the event the reductions would cause the Collateral
Investment Amount to be a negative number, the Collateral Invested Amount shall
be reduced to zero, and the Class B Invested Amount will be reduced by the
amount by which the Collateral Invested Amount would have been reduced below
zero.]
[The Class B Invested Amount will subsequently be reimbursed, but not
in excess of the aggregate unreimbursed Class B Charge-Offs, on any Distribution
Date by the amount of Excess Spread and Excess Finance Charges allocated to
Series 200[ ]- [ ] and available for that purpose.]
[Any reductions of the Collateral Invested Amount shall subsequently
be reimbursed and the Collateral Invested Amount increased, but not by any
amount in excess of the aggregate reductions of the Collateral Invested Amount,
on any Distribution Date by the amount of Excess Spread and Excess Finance
Charges allocated to Series 200[ ]- [ ] and available for that purpose as
described under "--Application of Collections -- Payment of Interest, Fees and
Other Items".]
Issuance of Additional Certificates
The Series Supplement provides that from time to time during the
Revolving Period, the [Depositor] [Seller] may, subject to specific conditions
described below, cause the Trustee to issue additional Certificates, each an
"Issuance". When issued, the additional Certificates [of each class] will be
identical in all respects to the other outstanding Certificates [of that class]
and will be equally and ratably entitled to the benefits of the Agreement and
the Series Supplement without preference, priority or distinction.
In connection with each additional Issuance, the outstanding principal
amounts of the Class A Certificates [and the Class B Certificates] and the
aggregate amount of Credit Enhancement will all be increased pro rata. The
additional Credit Enhancement provided in connection with an additional Issuance
may take the form of an increase in the Required Cash Collateral Amount or
another form of Credit Enhancement, provided that the form and amount of
additional Credit Enhancement will not cause a Ratings Effect.
Following an additional Issuance, the [Controlled Amortization Amount]
[Controlled Accumulation Amounts] of each Class will be increased
proportionately to reflect the principal amount of additional Certificates.
Additional Certificates may be issued only upon the satisfaction of
specific conditions provided in the Series Supplement, including the following:
(a) on or before the fifth business day immediately preceding the date
on which the additional Certificates are to be issued, the [Depositor] [Seller]
shall have given the Trustee, [the Seller,] [the Servicer,] each Rating Agency
and any provider of Credit Enhancement written notice of the issuance and the
date upon which it is to occur;
(b) after giving effect to the additional Issuance, the total amount
of Principal Receivables shall be at least equal to the Required Principal
Balance;
(c) the [Depositor] [Seller] shall have delivered to the Trustee an
amended Series Supplement, executed by each of the parties to the agreement;
(d) the [Depositor] [Seller] shall have received written notice from
each Rating Agency that this additional Issuance will not have a Ratings Effect;
(e) the [Depositor] [Seller] shall have delivered to the Trustee a
certificate of an authorized officer to the effect that, based on the facts
known to the officer at the time, in the reasonable belief of the [Depositor]
[Seller], the additional Issuance will not cause a Pay Out Event or an event
that, after the giving of notice or the lapse of time, would constitute a Pay
Out Event, to occur with respect to Series 200[ ]- [ ];
(f) as of the date of the additional Issuance and taking the
additional Issuance into account, the amount of Credit Enhancement with respect
to Series 200[ ]- [ ], together with any additional Credit Enhancement, shall
not be less than the amount required so that the additional issuance will not
result in a Ratings Effect;
(g) as of the date of the additional Issuance, all amounts due and
owing to the holders of Certificates shall have been paid, and there shall not
be any unreimbursed Class A Charge-Offs [or Class B Charge-Offs];
(h) the excess of the principal amount of the additional Certificates
over their issue price shall not exceed the maximum amount permitted under the
Code without the creation of original issue discount;
(i) the [Seller's] remaining interest in Principal Receivables shall
not be less than [ ]% of the total amount of Principal Receivables, in each case
as of the date upon which the additional Issuance is to occur after giving
effect to the issuance;
(j) the [Depositor] [Seller] shall have delivered to the Trustee, each
Rating Agency and any provider of Credit Enhancement, a Tax opinion with respect
to the additional Issuance;
(k) the [Depositor] [Seller] shall have obtained additional Credit
Enhancement for the benefit of the holders of Certificates, provided that the
ratio of the sum of the Required Cash Collateral Amount and the amount of the
additional Credit Enhancement to the Invested Amount, after giving effect to the
additional Issuance, shall be greater than or equal to the ratio of the Required
Cash Collateral Amount to the Invested Amount, before giving effect to the
additional Issuance;
(l) the [Depositor] [Seller] shall have delivered to each Rating
Agency:
(1) an opinion of counsel to the effect that the Issuance will
not violate applicable Federal Securities laws, and
(2) any other documents as the Rating Agencies may request; and
(m) the ratio of the [Controlled Amortization Amount] [Controlled
Accumulation Amount], after giving effect to the Additional Issuance, to the
Invested Amount, after giving effect to the Additional Issuance, shall be equal
to the ratio of the [Controlled Amortization Amount] [Controlled Accumulated
Amount], before giving effect to the Additional Issuance, to the Invested
Amount, before giving effect to the Additional Issuance.
There are no restrictions on the time or amount of any Additional
Issuance, provided that the conditions described above are met. As of the date
of any Additional Issuance, the Class A Invested Amount [and the Class B
Invested Amount] will be increased to reflect the initial principal balance of
the Additional Certificates of the respective classes.
[Paired Series]
[The Series 200[ ]- [ ] Certificates may be paired with one or more
other Series (each a "Paired Series"). Each Paired Series either will be
prefunded with an initial deposit to a prefunding account in an amount up to the
initial principal balance of each Paired Series and primarily from the proceeds
of the sale of the Paired Series or will have a variable principal amount. Any
prefunding account will be held for the benefit of the Paired Series and not for
the benefit of Certificateholders. As funds are accumulated in the Principal
Funding Account, either:
(a) in the case of a prefunded Paired Series, an equal amount of
funds on deposit in any prefunding account for that prefunded Paired
Series will be released, which funds will be distributed to the
Seller, or
(b) in the case of a Paired Series having a variable principal
amount, an interest in that variable Paired Series, in an equal or
lesser amount may be sold by the Trust, and the proceeds distributed
to the Seller, and, in either case, the Invested Amount in the Trust
of the Paired Series will increase by up to a corresponding amount.
Upon payment in full of Series 200[ ]- [ ], assuming that there have been no
unreimbursed charge-offs with respect to any related Paired Series, the
aggregate Invested Amount of the related Paired Series will have been increased
by an amount up to an aggregate amount equal to the Series 200[ ]- [ ] Invested
Amount paid to the Certificateholders. There can be no assurance, however, that
the terms of any Paired Series might not have an impact on the timing or amount
of payments received by Certificateholders. See "Maturity Considerations" in
this prospectus supplement.]
Required Principal Balance; Addition to Accounts
The obligation of the Trustee to authenticate certificates of a new
Series and to execute and deliver the related Series Supplement shall be subject
to the conditions described in the Prospectus and to the additional condition
that, as of the Series Issuance Date and after giving effect to the issuance,
the aggregate amount of Principal Receivables in the Trust equals or exceeds the
Required Principal Balance. The "Required Principal Balance means, as of any
date of determination, the sum of:
(a) the initial Invested Amount (see the relevant Supplement) of
each Series outstanding on that date, other than any Series or portion
of a Series (an "Excluded Series") which is designated in the relevant
Supplement as then being an Excluded Series, minus
(b) the principal amount on deposit in the Excess Funding Account
on that date;
provided, however, that if at any time the only Series outstanding are Excluded
Series and a Pay Out Event has occurred with respect to one or more Series, the
Required Principal Balance shall mean the sum of:
(a) the "Invested Amount" (see the relevant Supplement) of each
Excluded Series as of the earliest date on which any Pay Out Event is
deemed to have occurred, minus
(b) the principal amount on deposit in the Excess Funding
Account;
and provided further that the Required Principal Balance may be reduced to a
lesser amount without the consent of the Certificateholders, if the [Depositor]
[Seller] shall have received written notice from each Rating Agency that the
reduction will not have a Ratings Effect.
If, as of the close of business on the last business day of any
Monthly Period, the aggregate amount of Principal Receivables in the Trust is
less than the Required Principal Balance on that date, the [Depositor] [Seller]
shall on or before the [ ] business day following that day, unless the amount of
Principal Receivables in the Trust equals or exceeds the Required Principal
Balance as of the close of business on any day after the last business day of
the Monthly Period and prior to the tenth business day, make an addition to the
Trust so that, after giving effect to the addition, the amount of Principal
Receivables in the Trust is at least equal to the Required Principal Balance.
Pay Out Events
The "Pay Out Events" with respect to the Certificates will include
each of the events specified in the Prospectus and the following:
(a) failure on the part of the [Depositor] [Seller] [Servicer],
(1) to make any payment or deposit required by it under the
Agreement or the Series Supplement within [ ] business days after
the day a payment or deposit is required to be made; or
(2) to observe or perform any of its other covenants or
agreements set forth in the Agreement or the Series Supplement,
which failure has a material adverse effect on the Series 200[ ]-
[ ] Certificateholders and which continues unremedied for a
period of [ ] days, or for a longer period, not in excess of [ ]
days, as may be reasonably necessary to remedy the failure;
provided that the failure is capable of remedy within [ ] days or
less and the [Seller] [Servicer] [Depositor] delivers an
officer's certificate to the effect that the [Seller] [Servicer]
[Depositor] has commenced, or will promptly commence and
diligently pursue, all reasonable efforts to remedy the failure,
after the earlier to occur of the discovery of the failure by the
[Seller] [Servicer] [Depositor] or written notice;
(b) any representation or warranty made by [Seller] [Servicer]
[Depositor] in the Agreement or the Series Supplement or any
information required to be given by the [Depositor] [Seller]
[Servicer] to the Trustee to identify the Accounts proves to have been
incorrect in any material respect when made and continues to be
incorrect in any material respect for a period of [ ] days, or for a
longer period, not in excess of [ ] days, as may be reasonably
necessary to remedy the breach; provided that the misrepresentation is
capable of remedy within [ ] days or less and the [Seller] [Servicer]
[Depositor] delivers an officer's certificate to the effect that the
[Seller] [Servicer] [Depositor] has commenced or will promptly
commence and diligently pursue, all reasonable efforts to remedy the
misrepresentation, after the earlier to occur of discovery of the
breach by the [Seller] [Servicer] [Depositor] or written notice and as
a result of which the interests of the Certificateholders are
materially and adversely affected; provided, however, that a Pay Out
Event shall not be deemed to occur if the [Seller] [Servicer]
[Depositor] has repurchased the related Receivables or all
Receivables, if applicable, during the period in accordance with the
provisions of the Agreement;
(c) a failure by the [Depositor] [Seller] to make an addition to
the Trust within five business days after the day on which it is
required to make an addition pursuant to the Agreement or the Series
Supplement;
(d) the occurrence of any Servicer Default with respect to the
Certificates;
(e) the average Portfolio Yield for any three consecutive Monthly
Periods is less than the average of the Base Rates with respect to
Series 200[ ]- [ ] for the Monthly Periods;
(f) the failure to pay in full the Class A Invested Amount on the
Class A Expected Final Payment Date[, or the Class B Invested Amount
on the Class B Expected Final Payment Date]; and
(g) the [Depositor] [Seller] is unable for any reason to transfer
Receivables to the Trust in accordance with the Agreement or the
Series Supplement.
Then, in the case of any event described in subparagraph (a), (b) or
(d), after the applicable grace period, if any, set forth in those
subparagraphs, either the Trustee or the holders of Certificates evidencing more
than 50% of the aggregate unpaid principal amount of Series 200[ ]- [ ] by
notice then given in writing to the [Seller] [Servicer] [Depositor], and to the
Trustee if given by the Certificateholders, may declare that a Pay Out Event has
occurred with respect to Series 200[ ]- [ ] as of the date of notice, and, in
the case of any event described in subparagraph (c), (e), (f) or (g), a Pay Out
Event shall occur with respect to Series 200[ ]- [ ], without any notice or
other action on the part of the Trustee immediately upon the occurrence of the
event.
For purposes of the Pay Out Event described in clause (e) above, the
terms "Base Rate" and "Portfolio Yield" will be defined as follows with respect
to the Certificates:
"Base Rate" means, with respect to any Monthly Period, the annualized
percentage equivalent of a fraction, the numerator of which is equal to the sum
of Class A Monthly Interest, [Class B Monthly Interest] and the Monthly
Servicing Fee with respect to Series 200[ ]- [ ] for the related Distribution
Date and the denominator of which is the Invested Amount as of the last day of
the preceding Monthly Period.
"Portfolio Yield" means, with respect to any Monthly Period, the
annualized percentage equivalent of a fraction, the numerator of which is equal
to:
(a) the Floating Allocation Percentage of collections of Finance
Charge Receivables, including any investment earnings and other
amounts that are to be treated as Finance Charge Receivables in
accordance with the Agreement, for the Monthly Period calculated on a
billed basis, plus
(b) the amount of Principal Funding Investment Proceeds for the
related Distribution Date, plus
(c) the amount of funds withdrawn from the Reserve Account and
which are required to be included as Class A Available Funds [or Class
B Available Funds], in each case for the Distribution Date with
respect to the relevant Monthly Period, minus
(d) the Investor Default Amount for the Distribution Date with
respect to the Monthly Period, and the denominator of which is the
Invested Amount as of the last day of the preceding Monthly Period.
If the proceeds of any sale of the Receivables following the
occurrence of an Insolvency event with respect to the [Depositor] [Seller]
[Servicer] allocated to the Class A Invested Amount and the proceeds of any
collections on the Receivables in the Collection Account are not sufficient to
pay in full the remaining amount due on the Class A Certificates, then the Class
A Certificateholders will suffer a corresponding loss [and no proceeds will be
available to the Class B Certificateholders].
Servicing Compensation and Payment of Expenses
The share of the Servicing Fee allocable to Series 200[ ]- [ ] with
respect to any Distribution Date (the "Monthly Servicing Fee") shall be equal to
one twelfth of the product of:
(a) [ ]% (the "Servicing Fee Rate"), and
(b) the sum of the Adjusted Invested Amount and the Collateral
Invested Amount, if any, as of the last day of the Monthly Period
preceding the Distribution Date (the amount calculated pursuant to
this clause (b) is referred to as the "Servicing Base Amount");
provided, however, that the Monthly Servicing Fee with respect to the first
Distribution Date will be $[ ] [equal to the Servicing Fee accrued on the
Initial Invested Amount at the Servicing Fee Rate for the period from the
Issuance Date to but excluding the first Distribution Date calculated on the
basis of the actual number of days in the period from the Issuance Date to the
first Distribution Date and a 360-day year]. On each Distribution Date, but only
if [ ] or the Trustee is the Servicer, Interchange with respect to the related
Monthly Period that is on deposit in the Collection Account shall be withdrawn
from the Collection Account and paid to the Servicer as payment of a portion of
the Monthly Servicing Fee with respect to the Monthly Period. The "Servicer
Interchange" for any Monthly Period for which [ ] or the Trustee is the Servicer
will be equal to the product of:
(a) the Floating Allocation Percentage for the Monthly Period,
and
(b) the portion of Finance Charge Receivables allocated to the
Trust with respect to the Monthly Period that is attributed to
Interchange; provided, however, that Servicer Interchange for a
Monthly Period shall not exceed one twelfth of the product of:
(1) the sum of the Invested Amount and the Collateral
Investment amount, if any, as of the last day of the Monthly
Period, and
(2) [ ]%.
In the case of any insufficiency of Servicer Interchange on deposit in the
Collection Account, a portion of the Monthly Servicing Fee with respect to the
Monthly Period will not be paid to the extent of that insufficiency and in no
event shall the Trust, the Trustee or the Certificateholders be liable for the
share of the Servicing Fee to be paid out of the Servicer Interchange.
[The share of the Monthly Servicing Fee allocable to the Class A
Certificateholders, after giving effect to the distribution of any Servicer
Interchange to the Servicer, with respect to any Distribution Date (the "Class A
Servicing Fee") shall be equal to one twelfth of the product of:
(a) the Class A Floating Percentage,
(b) [ ]%, or if [ ] or the Trustee is not the Servicer, [ ]% (the
"Net Servicing Fee Rate"), and
(c) the Servicing Base Amount;
provided, however, with respect to the first Distribution Date, the Class A
Servicing Fee shall be equal to the Class A Certificateholders' share of the
Monthly Servicing Fee for the period from the Issuance Date to but excluding the
first Distribution Date.
[The share of the Monthly Servicing Fee allocable to the Class B
Certificateholders, after giving effect to any distribution of Servicer
Interchange to the Servicer, with respect to any Distribution Date (the "Class B
Servicing Fee", and together with the Class A Servicing Fee, the "Servicing
Fee") shall be equal to one twelfth of the product of:
(a) the Class B Floating Percentage,
(b) the Net Servicing Fee Rate, and
(c) the Servicing Base Amount;
provided, however, with respect to the first Distribution Date, the Class B
Servicing Fee shall be equal to the Class B Certificateholders' share of the
Monthly Servicing Fee for the period from the Series Issuance Date to but
excluding the first Distribution Date.
The remainder of the Servicing Fee shall be paid by the [Depositor] [Seller] or
the certificateholders of other Series, as provided in the related Supplements,
or, to the extent of any insufficiency of the Servicer Interchange as described
above, not be paid and in no event shall the Trust, the Trustee or the
Certificateholders be liable for the share of the Servicing Fee to be paid by
the [Depositor] [the Seller] or the Certificateholders of any other Series or to
be paid out of the Servicer Interchange. The Class A Servicing Fee and the Class
B Servicing Fee shall be payable to the Servicer solely to the extent amounts
are available for distribution of the servicing fees.]
Series Termination
If on the Distribution Date which is two months prior to the
Termination Date, the Invested Amount or the Collateral Invested Amount, if any,
in each case after giving effect to all changes in these amounts on that date,
exceeds zero, the Servicer will, within the 40-day period beginning on that
date, solicit bids for the sale of interests in the Principal Receivables or
particular Principal Receivables, together in each case with the related Finance
Charge Receivables, in an amount equal to the sum of the Invested Amount and the
Collateral Invested Amount, if any, at the close of business on the last day of
the Monthly Period preceding the Termination Date, after giving effect to all
distributions required to be made on the Termination Date. The [Depositor]
[Seller], provided that the sum of the Invested Amount and the Collateral
Invested Amount, if any, is less than or equal to [ ]% of the Initial Invested
Amount, and the Collateral Interest Holder will be entitled to participate in,
and to receive notice of each bid submitted in connection with, the bidding.
Upon the expiration of the 40-day period, the Trustee will determine:
o which bid is the highest cash purchase offer (the "Highest Bid"),
and
o the amount (the "Available Final Distribution Amount") which
otherwise would be available in the Collection Account on the
Termination Date for distribution to the Certificateholders and the
Collateral Interest Holder.
The Servicer will sell the Receivables on the Termination Date to the bidder who
provided the Highest Bid and will deposit the proceeds of the sale in the
Collection Account for allocation, together with the Available Final
Distribution Amount, to the Certificateholders' Interest.
Reports
No later than the third business day prior to each Distribution Date,
the Servicer will forward to the Trustee, [the Collateral Interest Holder] [the
Cash Collateral Depositor] [the Depositor] the Paying Agent and each Rating
Agency a statement (the "Monthly Report") prepared by the Servicer setting forth
information with respect to the Trust and the Certificates, including:
(a) the aggregate amount of Principal Receivables and Finance
Charge Receivables in the Trust as of the end of the Monthly Period;
(b) the Class A Invested Amount [and] [the Class B Invested
Amount] [and] [the Collateral Invested Amount] at the close of
business on the last day of the preceding Monthly Period;
(c) the Floating Allocation Percentage and, during the
[Controlled Amortization Period] [Accumulation Period] or Rapid
Amortization Period with respect to the Series, the Principal
Allocation Percentage with respect to the Certificates;
(d) the amount of collections of Principal Receivables and
Finance Charge Receivables processed during the related Monthly Period
and the portion of these Receivables allocated to the
Certificateholders' Interest;
(e) the aggregate outstanding balance of Accounts which were 30,
60, and 90 days or more delinquent as of the end of the Monthly
Period;
(f) the Defaulted Amount with respect to the Monthly Period and
the portion of this Defaulted Amount allocated to the
Certificateholders' Interest [and the Collateral Interest Holder];
(g) the amount, if any, of Class A Charge-Offs [and Class B
Charge-Offs];
(h) the Monthly Servicing Fees;
(i) the Portfolio Yield for the Monthly Period;
(j) the amount to be withdrawn from the Cash Collateral Account,
if any, to fund the Class A Required Amount [or the Class B Required
Amount] for the Distribution Date;
(k) the Available Cash Collateral Amount, the Available Shared
Collateral Amount and the Required Cash Collateral with respect to
Series 200[ ]- [ ], and
(l) Reallocated Principal Receivables.
ERISA CONSIDERATIONS
Employee benefit plans and other retirement arrangements (including
individual retirement accounts) which are subject to Title I of the Employee
Retirement Income Security Act of 1974, as amended, or Section 4975 of the Code
may not purchase the Certificates.
LEGAL INVESTMENT CONSIDERATIONS
The appropriate characterization of the Securities under various legal
investment restrictions, and thus the ability of investors subject to these
restrictions to purchase Securities, may be subject to significant interpretive
uncertainties. All investors whose investment authority is subject to legal
restrictions should consult their own legal advisors to determine whether, and
to what extent, the Securities will constitute legal investments for them.
UNDERWRITING
Subject to the terms and conditions set forth in the "Underwriting
Agreement" between the Depositor and the underwriters named below (the
"Underwriters"), the Depositor has agreed to sell to the Underwriters, and each
of the Underwriters has severally agreed to purchase, the principal amount of
the Class A Certificates [and Class B Certificates] set forth opposite its name
(the "Underwritten Certificates"):
Principal Amount of Principal Amount of
Underwriter Class A Certificates Class B Certificates
- ----------- -------------------- --------------------
Deutsche Banc Alex. Brown......
[Other underwriter]............
Total..........................
The Underwriting Agreement provides that the obligations of the
Underwriters to pay for and accept delivery of the Underwritten Certificates are
subject to the approval of related legal matters by their counsel and to other
conditions. All of the Certificates offered by this prospectus supplement will
be issued if any are issued. Under the terms and conditions of the Underwriting
Agreement, the Underwriters are committed to take and pay for all the
Underwritten Certificates offered by this prospectus supplement, if any are
taken.
The Underwriters propose initially to offer the Class A Certificates
to the public at the price set forth on the cover page of this prospectus
supplement and to some dealers at price less concessions not in excess of [ ] %
of the principal amount of the Class A Certificates. The Underwriters may allow,
and dealers may reallow, concessions not in excess of [ ] % of the principal
amount of the Class A Certificates to specific brokers and dealers. After the
initial public offering, the public offering price and other selling terms may
be changed by the Underwriters.
[The Underwriters propose initially to offer the Class B Certificates
to the public at the price set forth on the cover page of this prospectus
supplement and to some dealers at price less concessions not in excess of [ ]%
of the principal amount of the Class B Certificates. The Underwriters may allow,
and dealers may reallow, concessions not in excess of [ ]% of the principal
amount of the Class B Certificates to some brokers and dealers. After the
initial public offering, the public offering price and other selling terms may
be changed by the Underwriters.]
The Depositor will indemnify the Underwriters against specific
liabilities, including liabilities under the Securities Act of 1933, or
contribute to payments the Underwriters may be required to make.
In the ordinary course of their respective businesses, the
Underwriters and their respective affiliates have engaged and may engage in
investment banking and/or commercial banking transactions with the Depositor and
its affiliates.
If and to the extent required by applicable law or regulation, this
prospectus supplement and the Prospectus will also be used by the Underwriter
after the completion of the offering in connection with offers and sales related
to market-making transactions in the offered Certificates in which the
Underwriter acts as principal. Sales will be made at negotiated prices
determined at the time of sale.
LEGAL MATTERS
Some related legal matters with respect to the Certificates will be
passed upon by [ ], New York, New York.
RATINGS
It is a condition to issuance that the Class A Certificates be rated
in the highest rating category by [Standard & Poor's Rating Services, a division
of The McGraw-Hill Companies, Inc.] [Moody's Investors Service, Inc.], referred
to as the "Rating Agencies". [It is a condition to issuance that the Class B
Certificates be rated in one of the three highest rating categories by a Rating
Agency.]
A securities rating addresses the likelihood of the receipt by
Certificateholders of distributions on the Securities. The rating takes into
consideration the characteristics of the Securities and the structural, legal
and tax aspects associated with the Certificates. The ratings on the
Certificates do not, however constitute statements regarding the possibility
that Certificateholders might realize a lower than anticipated yield.
A securities rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each securities rating should be evaluated
independently of similar ratings on different securities.
Index of Defined Terms
Accumulation Period.........................................................S-27
Accumulation Period Length..................................................S-30
Adjusted Invested Amount....................................................S-36
Agreement...................................................................S-13
Available Cash Collateral Amount............................................S-50
Available Final Distribution Amount.........................................S-64
Available Funds.............................................................S-27
Available Principal Collections.............................................S-30
Available Reserve Account Amount............................................S-40
Available Shared Collateral Amount..........................................S-52
Base Rate...................................................................S-61
Cash Collateral Account.....................................................S-50
Cash Collateral Depositor...................................................S-46
Cash Collateral Fee.........................................................S-46
Certificateholders..........................................................S-13
Certificates................................................................S-24
Class A Accumulation Period.................................................S-29
Class A Additional Interest.................................................S-43
Class A Adjusted Invested Amount............................................S-35
Class A Available Funds.....................................................S-26
Class A Certificate Rate....................................................S-25
Class A Certificateholders..................................................S-13
Class A Certificates........................................................S-24
Class A Charge-Off..........................................................S-54
Class A Default Amount......................................................S-54
Class A Floating Percentage.................................................S-33
Class A Initial Invested Amount.............................................S-34
Class A Invested Amount.....................................................S-35
Class A Investor Charge-Offs................................................S-35
Class A Monthly Interest....................................................S-44
Class A Monthly Principal...................................................S-48
Class A Principal Percentage................................................S-34
Class A Required Amount.....................................................S-41
Class A Servicing Fee.......................................................S-62
Class B Accumulation Period.................................................S-29
Class B Additional Interest.................................................S-44
Class B Adjusted Invested Amount............................................S-36
Class B Available Funds.....................................................S-27
Class B Certificate Rate....................................................S-25
Class B Certificateholders..................................................S-13
Class B Certificates........................................................S-24
Class B Charge-Off..........................................................S-42
Class B Default Amount......................................................S-54
Class B Floating Percentage.................................................S-33
Class B Initial Invested Amount.............................................S-31
Class B Invested Amount.....................................................S-35
Class B Monthly Interest....................................................S-44
Class B Monthly Principal...................................................S-48
Class B Principal Commencement Date.........................................S-31
Class B Principal Percentage................................................S-34
Class B Required Amount.....................................................S-42
Class B Servicing Fee.......................................................S-63
Collateral Defaulted Amount.................................................S-36
Collateral Indebtedness Amount..............................................S-36
Collateral Interest Holders.................................................S-50
Collateral Invested Amount..................................................S-37
Collection Account..........................................................S-37
Controlled Accumulation [Amortization] Amount...............................S-49
Controlled Amortization Period..............................................S-28
Controlled Deposit Amount...................................................S-49
Controlled Distribution Amount..............................................S-49
Covered Amount..............................................................S-38
Cut-Off Date................................................................S-27
Deficit Controlled Accumulation Amount......................................S-49
Distribution Date.......................................................S-13, 25
Eligible Investments........................................................S-38
Excess Funding Account......................................................S-32
Excess Spread...............................................................S-45
Excluded Series.............................................................S-58
Finance Charge Receivables..................................................S-17
Floating Allocation Percentage..............................................S-32
Highest Bid.................................................................S-64
Identified Pool.............................................................S-18
Initial Cash Collateral Amount..............................................S-50
Initial Class B Collateral Amount...........................................S-50
Initial Shared Collateral Amount............................................S-50
Interest Funding Account....................................................S-25
Interest Payment Date.......................................................S-25
Interest Period.............................................................S-25
Invested Amount.............................................................S-37
Investor Default Amount.....................................................S-53
Issuance....................................................................S-55
Monthly Period..............................................................S-13
Monthly Report..............................................................S-64
Monthly Servicing Fee.......................................................S-61
Net Servicing Fee Rate......................................................S-62
Paired Series...............................................................S-57
Pay Out Events..............................................................S-59
Portfolio Yield.............................................................S-61
Principal Allocation Percentage.............................................S-33
Principal Funding Account...................................................S-28
Principal Funding Account Balance...........................................S-38
Principal Funding Investment Proceeds.......................................S-38
Rating Agencies.............................................................S-66
Ratings Effect..............................................................S-17
Reallocated Principal Receivables...........................................S-41
Record Date.................................................................S-25
Required Amount.............................................................S-42
Required Cash Collateral Amount.............................................S-51
Required Principal Balance..................................................S-58
Required Reserve Account Amount.............................................S-39
Required Share Collateral Account...........................................S-51
Reserve Account.............................................................S-39
Reserve Account Factor......................................................S-39
Reserve Account Funding Date................................................S-39
Revolving Period............................................................S-27
Securities..................................................................S-24
Seller......................................................................S-23
Series......................................................................S-24
Series Enhancement..........................................................S-16
Series Supplement...........................................................S-13
Servicer....................................................................S-24
Servicing Base Amount.......................................................S-62
Servicing Fee...............................................................S-63
Servicing Fee Rate..........................................................S-61
Special Payment Date........................................................S-13
Supplement..................................................................S-13
Termination Date............................................................S-13
Trust.......................................................................S-24
Trust Portfolio.............................................................S-18
Trustee.....................................................................S-25
Underwriters................................................................S-65
Underwriting Agreement......................................................S-65
Underwritten Certificates...................................................S-65
====================================== ========================================
$[ ]
CARD ACCOUNT
RECEIVABLES TRUSTS
$[ ] [ ]% Floating Rate
Adjustable Rate Variable Rate
Asset Backed Certificates, Class A
$[ ] [ ]% Floating Rate
Adjustable Rate Variable Rate
Asset Backed Certificates, Class B
ACE SECURITIES CORP.
(DEPOSITOR)
PROSPECTUS SUPPLEMENT
[ ]
DEUTSCHE BANC ALEX. BROWN
====================================== ========================================
The information in this prospectus supplement is not complete and may be
changed. We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This prospectus
supplement is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
SUBJECT TO COMPLETION, [ ]
PROSPECTUS
CARD RECEIVABLE
ASSET-BACKED CERTIFICATES AND ASSET-BACKED NOTES
(ISSUABLE IN SERIES)
ACE SECURITIES CORP.
DEPOSITOR
THE TRUSTS:
Each trust will be established to hold assets transferred to it by ACE
Securities Corp. The assets in each trust will generally consist of one or more
of the following:
1. One or more pools of:
o receivables arising from time to time in the ordinary course of
business in one or more portfolios of credit card, charge card or
other types of accounts,
o participation certificates evidencing participation interests in one
or more portfolios of credit card, charge card or other types of
accounts,
o government securities,
o private securities evidencing ownership interests in or secured by one
or more portfolios of credit card, charge card or other types of
accounts;
2. All monies due under the above assets (which may be net of amounts payable
to the servicer); and
3. Funds or accounts established for the related trust or one or more forms of
enhancement.
The assets in your trust are specified in the prospectus supplement for
that particular trust, while the types of assets that may be included in a
trust, whether or not in your trust, are described in greater detail in this
prospectus.
THE SECURITIES:
ACE Securities Corp. will sell the securities pursuant to a prospectus
supplement. The securities will be grouped into one or more series, each having
its own distinct designation. Each series will be issued in one or more classes
and will evidence beneficial ownership of, or be secured by, the assets in the
trust that the series relates to. A prospectus supplement for a series will
specify all of the terms of the series and of each of the classes in the series.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED
THE OFFERED SECURITIES OR DETERMINED IF THIS PROSPECTUS IS ACCURATE OR COMPLETE.
MAKING ANY CONTRARY REPRESENTATION IS A CRIMINAL OFFENSE.
The date of this Prospectus is [ ]
TABLE OF CONTENTS
PAGE
Risk Factors................................................................
The Trusts..................................................................
Trust Assets................................................................
Series Enhancement..........................................................
Servicing of Receivables....................................................
Certain Matters Regarding the Servicer......................................
Description of the Notes....................................................
Description of the Certificates.............................................
Certain Information Regarding the Securities................................
Description of the Trust Agreements or Pooling and Servicing Agreements.....
Certain Legal Aspects of the Receivables....................................
The Depositor...............................................................
Use of Proceeds.............................................................
Material Federal Income Tax Consequences....................................
Owner Trusts................................................................
Grantor Trusts..............................................................
Master Trust................................................................
Certain State and Local Tax Considerations..................................
ERISA Considerations........................................................
Plan of Distribution........................................................
Legal Matters...............................................................
Index of Defined Terms......................................................
Annex I; Global Clearance, Settlement and Tax Documentation Procedures......
RISK FACTORS
THE FOLLOWING INFORMATION, WHICH YOU SHOULD CAREFULLY CONSIDER,
IDENTIFIES CERTAIN SIGNIFICANT SOURCES OF RISK ASSOCIATED WITH AN INVESTMENT IN
THE CERTIFICATES. YOU SHOULD ALSO CAREFULLY CONSIDER THE INFORMATION SET FORTH
UNDER "RISK FACTORS" IN THE PROSPECTUS SUPPLEMENT.
LIMITED LIQUIDITY MAY
RESULT IN DELAYS IN YOUR
ABILITY TO SELL SECURITIES
OR LOWER RETURNS There will be no market for the securities of
any series prior to their issuance, and there
can be no assurance that a secondary market
will develop. If a secondary market does
develop, there can be no assurance that it
will provide holders with liquidity of
investment or that the market will continue
for the life of the securities of the related
series. Deutsche Banc Alex. Brown presently
expects to make a secondary market in the
securities, but has no obligation to do so.
Absent a secondary market for the securities
you may experience a delay if you choose to
sell your securities or the price you receive
may be less than you would receive for a
comparable liquid security.
LIMITED ASSETS FOR
PAYMENTS - NO RECOURSE TO
DEPOSITOR, SELLER OR
SERVICER The depositor does not have, nor is it
expected to have, any significant assets. The
securities of a series will be payable solely
from the assets of the trust for that series.
Except for any related insurance policies or
credit support, there will be no recourse to
the depositor or any other person for any
default on the notes or any failure to
receive distributions on the certificates
with respect to any series. Consequently,
holders of securities of each series must
rely solely upon payments with respect to the
assets constituting the trust fund for a
series of securities, including, if
applicable, any amounts available pursuant to
any enhancement for that series, for the
payment of principal of and interest on the
securities of that series.
The only obligations, if any, of the
depositor with respect to the securities of
any series will be with respect to its breach
of specific representations and warranties.
The depositor does not have, and is not
expected in the future to have, any
significant assets with which to meet any
obligation to repurchase assets with respect
to which there has been a breach of any
representation or warranty. If, for example,
the depositor were required to repurchase a
receivable, its only sources of funds to make
the repurchase would be from funds obtained
from the enforcement of a corresponding
obligation, if any, on the part of the
originator of the receivable, the servicer or
the seller, as the case may be, or from a
reserve fund established to provide funds for
repurchases. If the depositor does not have
sufficient assets and no other party is
obligated to repurchase defective assets, you
may experience a loss.
LIMITS ON ENHANCEMENT MAY
RESULT IN LOSSES TO YOU Although we intend the enhancement for the
securities to reduce the risk of delinquent
payments or losses to holders of a series of
securities entitled to the benefit of the
enhancement, the amount of the enhancement
will be limited, as set forth in the related
prospectus supplement. In addition, the
amount available will decline and could be
depleted prior to the payment in full of the
related series of securities, and losses on
the primary assets could result in losses to
holders of those securities.
TIMING AND RATE OF
PREPAYMENTS MAY RESULT IN
LOWER YIELD The yield to maturity experienced by a holder
of securities may be affected by the rate and
timing of payments of principal of the
receivables or of the underlying receivables
relating to the private securities. The
receivables or underlying receivables may be
paid at any time and we can not assure you
that there will be new receivables created in
the related accounts or that new receivables
will be added to the related trust or
underlying trust. The rate and timing of
principal payments of the securities of a
series will be affected by a number of
factors, including the following:
o the extent of repayments,
o the manner of allocating principal payments
among the classes of securities of a series
as specified in the related prospectus
supplement, and
o the exercise of any right of optional
termination.
Prepayments may also result from repurchases
of receivables or underlying receivables, as
applicable, due to material breaches of the
seller's or the depositor's representations
or warranties.
Interest payable on the securities of a
series on a distribution date will include
all interest accrued during the period
specified in the related prospectus
supplement. In the event interest accrues
during the calendar month prior to a
distribution date, the effective yield to
holders will be reduced from the yield that
would otherwise be obtainable if interest
payable on the security were to accrue
through the day immediately preceding each
distribution date, and the effective yield at
par to holders will be less than the
indicated coupon rate.
RISK OF EARLY AMORTIZATION The continuation of the revolving period for
any series will depend on the continued
generation of new receivable for the related
trust. A decline in the amount of receivables
may result in the commencement of a rapid
amortization period with respect to the
related series. Receivables are generally
prepaid upon the retail sale of the
underlying consumer or commercial product. In
these events, you would bear the risk of
reinvestment of the principal amount of your
securities. The seller's or depositor's
interest will need to be maintained at a
minimum level equal to an amount specified in
the related prospectus supplement. If it
falls below the minimum level, the seller or
depositor will be required to transfer
additional accounts to the Trust. In
addition, subject to some exceptions, which
if applicable, will be set forth in the
related prospectus supplement, a rapid
amortization period will commence if the
seller or depositor fails to transfer these
additional accounts to the trust.
POSSIBLE ADVERSE IMPACT OF
FUTURE SERIES Each trust that is a master trust may issue
new series from time to time. The terms of
any new series will not be subject to your
prior review or consent. The terms may
include methods for determining applicable
investor percentages and allocating
collections, provisions creating different or
additional security or other series
enhancements, provisions subordinating the
series to other series or subordinating other
series if the supplement relating to this
series so permits) to the new series, and any
other amendment or supplement to the
transaction documents which is made
applicable only to the new series. The
obligation of the trustee to issue any new
series is subject to the condition that the
issuance will not result in any rating agency
reducing or withdrawing its then existing
rating of your securities. You can not be
certain, however, that the issuance of any
other series, from time to time, might not
have an impact on the timing or amount of
payments received by you.
RISKS OF SUBORDINATED SECURITIES To the extent specified in the applicable
prospectus supplement, distributions of
interest on and principal of one or more
classes of securities of a series may be
subordinated in priority of payment to
interest and principal due on one or more
other classes of securities of the related
series. Any subordinated securities will be
affected to a greater degree by any losses on
the underlying loans relating to the private
securities.
BOOK-ENTRY REGISTRATION--
BENEFICIAL OWNERS NOT
RECOGNIZED BY TRUST Issuance of the securities in book-entry form
may reduce the liquidity of these securities
in the secondary trading market since
investors may be unwilling to purchase
securities for which they cannot obtain
physical certificates. Since transactions in
the securities can be effected only through
The Depository Trust Company and any other
entities set forth in the related prospectus
supplement, your ability to pledge a security
to persons or entities that do not
participate in The Depository Trust Company
or any other entities or otherwise to take
actions in respect of the related securities
may be limited due to lack of a physical
certificate representing the securities.
You may experience some delay in the receipt
of distributions of interest and principal on
the securities since the distributions will
be forwarded by the trustee to The Depository
Trust Company and The Depository Trust
Company will credit the distributions to the
accounts of its participants which will then
credit them to your account either directly
or indirectly through indirect participants.
THE TRUSTS
ACE Securities Corp., a Delaware corporation (the "Depositor") will
establish a trust or master trust (the "Trust") pursuant to a Trust Agreement or
a Master Trust Agreement (a "Trust Agreement"). The Trustee of each Trust will
be a commercial bank, savings and loan association or trust company identified
as the Trustee (the "Trustee") in the related prospectus supplement. The
property of the Trust will include Base Assets and may also include Series
Enhancements and other assets specified in the related prospectus supplement.
Each Trust will issue one or more series (each, a "Series") of asset
backed notes (the "Notes") or asset backed certificates (the "Certificates", and
together with the Notes, the "Securities"), that will include one or more
Classes of Certificates or one or more Classes of Notes (each, a "Class"). Any
Notes included in a Series will be issued pursuant to an indenture (the
"Indenture") entered into between the related Trust and an indenture trustee
(the "Indenture Trustee"). The Indenture Trustee will also be a commercial bank,
savings and loan association or trust company identified as the Indenture
Trustee in the related prospectus supplement.
A form of Trust Agreement, a form of the Pooling and Servicing
Agreement and a form of the Series Supplement to the Pooling and Servicing
Agreement and a form of Indenture have each been filed as an exhibit to the
Registration Statement of which this Prospectus forms a part. If applicable, the
Trust Agreement, the Pooling and Servicing Agreement, the Series Supplement and
the Indenture (collectively the "Agreements"), relating to a particular Series
of Notes or Certificates, as applicable, will be filed as an exhibit to a report
on Form 8-K to be filed with the Securities and Exchange Commission (the
"Commission") within 15 days following the issuance of this Series of Notes or
Certificates, as applicable.
TRUST ASSETS
The assets of the Trust for a Series of Certificates will include some
or all of the Base Assets described below and may include Series Enhancements
with respect to these Series and other assets described in the related
prospectus supplement.
The "Base Assets" for a Series will consist of one or more of the
following types of assets; provided that each Series will contain the assets
described in clause (a) or (b) below:
(a) receivables arising from time to time in the ordinary course of
business in one or more portfolios of credit card, charge card or other
types of accounts (the "Receivables") and/or participations
("Participations") in Receivables,
(b) securities backed by Receivables ("CRB Securities"),
(c) Government Securities; and
(d) Private Label Custody Receipt Securities.
The Base Assets for a Series may be purchased by the Depositor from the Seller
identified in the related prospectus supplement or, with respect to CRB
Securities, may be purchased by the Depositor in the open market or in privately
negotiated transactions, which may include transactions with affiliates of the
Depositor, and then, in each case, will be transferred by the Depositor to the
Trust in exchange for Notes or Certificates, as applicable, issued by the Trust.
Alternatively, the Trust may purchase some or all of the Base Assets in the open
market or in privately negotiated transactions with cash obtained by the Trust
in exchange for the issuance of Notes or Certificates, as applicable, of the
Trust to the Depositor.
If so specified in the related prospectus supplement, the assets of
the Trust for a Series may include monies or government securities on deposit in
a Pre-Funding Account" established with the Trustee, or the Indenture Trustee,
which monies or government securities are to be used for the purchase of
additional Base Assets during a funding period specified in the related
prospectus supplement.
The following is a brief description of the Base Assets expected to be
included in Trusts. Specific information regarding the Base Assets with respect
to a Series of Notes or Certificates, as applicable, will be provided in the
related prospectus supplement and, to the extent not contained in the related
prospectus supplement, in a report on Form 8-K to be filed with the Commission
within 15 days after the initial issuance of the Notes or Certificates, as
applicable.
Receivables and Participations
The Base Assets for a Series may consist, in whole or in part, of
Receivables arising from time to time in the ordinary course of business in a
portfolio of consumer, corporate, revolving, credit card, charge and or debit
card accounts (collectively, the "Accounts"). The Receivables may be payable in
U.S. dollars or in any other foreign currency. The Accounts will consist of the
initial accounts (the "Initial Accounts") described below, as well as any
additional accounts (the "Additional Accounts") added to the Trust from time to
time as provided below, but will not include any Receivables in particular
Accounts removed from the Trusts (the "Removed Accounts") as provided below.
A seller or sellers designated in the related prospectus supplement
(collectively, the "Seller") will initially convey to the related Trust, or will
convey to the Depositor, which will promptly reconvey to the Trust all
Receivables existing on the series cut-off date specified in the related
prospectus supplement (the "Series Cut-Off Date") in the Initial Accounts,
together with all Receivables arising in these Initial Accounts from time to
time after the Series Cut-Off Date until the termination of the Trust. After the
Series Cut-Off Date, a Seller may convey to the related Trust, which conveyance
may be through the Depositor, Receivables arising in Additional Accounts, in
each case in accordance with the provisions of the applicable Pooling and
Servicing Agreement. In addition, pursuant to the related Pooling and Servicing
Agreement, a Seller in some circumstances will be obligated to designate
Additional Accounts, together with the Receivables arising in these Additional
Accounts, to convey to the related Trust. The Seller will convey to the Trust
all Receivables arising in any of the Additional Accounts, whether the
Receivables are then existing or later created. The addition to a Trust of
Receivables arising in Additional Accounts or Participations will be subject to
conditions set forth in the applicable Pooling and Servicing Agreement. Pursuant
to the related Pooling and Servicing Agreement and Series Supplement, the
Depositor will also have the right, subject to specified limitations and
conditions, but not the obligation, to remove the Receivables in any Account
that becomes a Removed Account. The amount of Receivables in a Trust will
fluctuate from day to day as new Receivables are generated or added to the Trust
and as existing Receivables are collected, charged-off as uncollectible, removed
or otherwise adjusted. If so specified in the related prospectus supplement, a
Seller will be able to include Participations in the related Trust in lieu of or
in addition to Receivables.
CREDIT CARD ACCOUNTS AND RECEIVABLES. "Credit Card Receivables" are
Receivables arising under credit card accounts ("Credit Card Accounts"),
including Finance Charge Receivables and Principal Receivables. In addition,
certain Interchange attributed to cardholder charges for merchandise and
services in the Accounts may be treated as Finance Charge Receivables.
Recoveries of charged-off Finance Charge Receivables will be treated as
collections of Finance Charge Receivables and recoveries of charged-off
Principal Receivables will be applied against charge-offs of Principal
Receivables. From time to time, subject to certain conditions, certain of the
amounts described above which are included in Principal Receivables may be
treated as Finance Charge Receivables. "Interchange" consists of certain fees
received by a credit card issuer from the VISA and MasterCard International
associations as partial compensation for taking credit risk, absorbing fraud
losses and funding receivables for a limited period prior to initial billing.
Under the VISA and MasterCard International systems, a portion of the
Interchange in connection with cardholder charges for merchandise and services
is passed from banks which clear the transactions for merchants to credit
card-issuing banks. VISA and MasterCard International may from time to time
change the amount of Interchange reimbursed to banks issuing their credit cards.
CHARGE CARD ACCOUNTS AND RECEIVABLES. "Charge Card Receivables" are
receivables arising under customer charge accounts ("Charge Card Accounts"), and
generally represent amounts charged on designated Accounts for merchandise and
services, and all annual membership fees and certain other administrative fees
billed to the designated Accounts. Receivables arising under Charge Card
Accounts are generally not subject to monthly finance charges.
There are distinctions between Credit Card Accounts and Charge Card
Accounts. Credit Card Accounts offer revolving credit plans to customers. Charge
Card Accounts generally have no pre-set spending limit and are designed for use
as a convenient method of payment for the purchase of merchandise and services.
Charge Card Accounts generally cannot be used as a means of financing such
purchases. Accordingly, the full balance of a month's purchases is billed to
cardmembers and is due upon receipt of the billing statement. By contrast,
revolving credit plans allow customers to make a minimum monthly payment and to
borrow the remaining outstanding balance from the credit card issuer up to a
predetermined limit. As a result of these payment requirement differences, the
Charge Card Accounts have a high monthly payment rate and balances which turn
over rapidly relative to their charge volume when compared to Credit Card
Accounts.
Another distinction between Charge Card Accounts and Credit Card
Accounts is that Charge Card Account balances are generally not subject to
monthly finance charges. As described above, the full Account balance is billed
monthly and is due upon receipt of the billing statement. Cardmembers do not
have the option of using their Charge Card Accounts to extend payment and to pay
a finance charge on the remaining outstanding balance. Credit Card Accounts, by
contrast, do allow customers to pay a specified minimum portion of an
outstanding amount and to finance the balance at a finance charge rate
determined by the credit card issuer. (Because Charge Card Account balances are
not assessed finance charges, for the purpose of providing yield to the Trust, a
portion of Collections on Receivables in Charge Card Accounts received in any
Monthly Period equal to the product of Collections and a yield factor which may
be specified in the related Prospectus Supplement (the "Yield Factor") will
generally be treated as Yield Collections). Each related Prospectus Supplement,
where applicable, will describe the Yield Calculation for a specific portfolio
of Charge Card Accounts.
Additional Information Relating to Receivables
The related prospectus supplement for each Series will provide
information with respect to any Receivables that constitute Base Assets as of
the Series Cut-off Date, including, among other things, the aggregate principal
balance of the Receivables and whether the Receivables are Credit Card
Receivables or Charge Card Receivables.
The eligibility criteria which shall apply with respect to the
inclusion of Receivables in the Base Assets for a Series will be specified in
the related prospectus supplement. The information provided in the related
prospectus supplement with respect to the Receivables will include, among other
things:
(a) underwriting criteria;
(b) the loss and delinquency experience for the portfolio of
Receivables;
(c) the composition of the portfolio by account balance; and
(d) the geographic distribution of Accounts and Receivables.
The related prospectus supplement will also specify any other limitations on the
types or characteristics of Receivables included in the Base Assets for a
Series.
If information of the nature described above respecting the
Receivables included in the Base Assets of a Series is not known to the Seller
at the time the Notes or Certificates, as applicable, of the Series are
initially offered, approximate or more general information of the nature
described above will be provided in the related prospectus supplement and
additional information will be set forth in a Current Report on Form 8-K to be
available to investors on the date of issuance of the related Notes or
Certificates, as applicable, and to be filed with the Commission within 15 days
after the initial issuance of these Notes or Certificates, as applicable.
CRB Securities
Base Assets for a Series may consist, in whole or in part, of
receivables backed securities consisting of Certificates evidencing an undivided
interest in, or Notes or loans secured by, Receivables generated in Accounts.
These certificates, notes or loans will have previously been offered and
distributed to the public pursuant to an effective registration statement
registered under the Securities Act of 1933, as amended (the "Securities Act"),
or will be so registered, offered and distributed concurrently with the offering
of the related Series of Notes or Certificates, as applicable. CRB Securities
will have been issued pursuant to a pooling and servicing agreement, a master
pooling and servicing agreement, a sale and servicing agreement, a trust
agreement, indenture or similar agreement (a "CRB Agreement"). The CRB
Securities represent an undivided interest in or obligation of a trust formed
pursuant to a CRB Agreement (a "CRB Trust"). The seller/servicer of the
underlying Receivables will have entered into the CRB Agreement with the trustee
under this CRB Agreement (the "CRB Trustee"). Receivables underlying a CRB
Security will be serviced by a servicer (the "CRB Servicer") directly or by one
or more sub-servicers who may be subject to the supervision of the CRB Servicer.
The issuer of the CRB Securities (the "CRB Issuer") will be a
financial institution, corporation or other entity engaged generally in the
business of issuing credit or charge cards; any form of store, merchandiser or
service provider that issues credit or charge card; or a limited purpose
corporation organized for the purpose of, among other things, establishing
trusts and acquiring and selling receivables to these trusts, and selling
beneficial interests in these trusts, or one of these trusts. If so specified in
the related prospectus supplement, the CRB Issuer may be an affiliate of the
Depositor. The obligations of the CRB Issuer will generally be limited to
representations and warranties with respect to the assets conveyed by it to the
related trust. The CRB Issuer will not have guaranteed any of the assets
conveyed to the related trust or any of the CRB Securities issued under the CRB
Agreement.
Distributions of principal and interest will be made on the CRB
Securities on the dates specified in the related prospectus supplement. The CRB
Securities may be entitled to receive nominal or no principal distributions or
nominal or no interest distributions. Principal and interest distributions will
be made on the CRB Securities by the CRB Trustee or the CRB Servicer. The CRB
Issuer or the CRB Servicer may have the right to repurchase assets underlying
the CRB Securities after a specified date or under other circumstances specified
in the related prospectus supplement.
UNDERLYING RECEIVABLES. The Receivables underlying the CRB Securities
will consist of Credit Card Receivables, Charge Card Receivables or other
specified types of Receivables.
CREDIT ENHANCEMENT RELATING TO CRB SECURITIES. Credit Enhancement in
the form of reserve funds, subordination of other CRB Securities, guarantees,
letters of credit, cash collateral accounts, insurance policies or other types
of Credit Enhancement may be provided with respect to the Receivables underlying
the CRB Securities or with respect to the CRB Securities themselves. The type,
characteristics and amount of Credit Enhancement will be a function of
characteristics of the Receivables and other factors and will have been
established for the CRB Securities on the basis of requirements of the
applicable Rating Agencies.
ADDITIONAL INFORMATION. The related prospectus supplement for a Series
whose Base Assets include CRB Securities will specify, to the extent relevant
and to the extent information is reasonably available to the Depositor, and to
the extent the Depositor reasonably believes the information to be reliable:
(a) the aggregate approximate principal amount and type of the CRB
Securities to be included in the Base Assets;
(b) characteristics of the Receivables which comprise the underlying
assets for the CRB Securities,
o whether the Receivables are Credit Card Receivables or other
types of Receivables,
o the fees and charges associated with the Receivables, and
o the servicing fee or range of servicing fees with respect to
the Receivables;
(c) the expected and final maturity of the CRB Securities;
(d) the interest rate of the CRB Securities;
(e) the CRB Issuer, the CRB Servicer, if other than the CRB Issuer,
and the CRB Trustee for the CRB Securities;
(f) characteristics of the credit enhancement, if any, relating to
the Receivables underlying the CRB Securities or relating to the
CRB Securities themselves;
(g) the terms on which the underlying Receivables for the CRB
Securities may be, or are required to be, purchased prior to
their stated maturity or the stated maturity of the CRB
Securities; and
(h) the terms on which Receivables may be substituted for those
originally underlying the CRB Securities.
If information of the nature described above representing the CRB
Securities is not known to the Depositor at the time the related Series of Notes
or Certificates, as applicable, are initially offered, approximate or more
general information of the nature described above will be provided in the
related prospectus supplement and the additional information, to the extent
available, will be set forth in a Current Report on Form 8-K to be available to
investors on the date of issuance of the related Series of Notes or
Certificates, as applicable, and to be filed with the Commission within 15 days
of the initial issuance of the Notes or Certificates, as applicable.
As a general rule, each CRB Issuer will be subject to the information
requirements of the Securities Exchange Act of 1934 (the "Exchange Act") and in
accordance with the Exchange Act, will file reports and other information with
the Commission. Reports and other information filed with the Commission can be
inspected and copied at the public reference facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the Commission's regional offices at Citicorp Center, 500 West Madison
Street, 14th Floor, Chicago, Illinois 60661 and Seven World Trade Center, Suite
1300, New York, New York 10048. Copies of the material can be obtained from the
Public Reference Section of the Commission at Judiciary Plaza, Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. The Commission maintains a
Web site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission.
The address of this site is (http://www.sec.gov). In the event that any CRB
Issuer is not subject to the information requirements of the Exchange Act on the
date of issuance of the Certificates of the related Series or ceases to be
subject to the information requirements after that date, the Depositor or the
Trustee will provide, or cause to be provided, or make available, or cause to be
made available, to holders of the Notes or Certificates, as applicable, upon
request, the information contained in all periodic trustee reports, or similar
reports, that are received by the Trustee with respect to the related CRB
Securities where the CRB Securities represent 20% or more of the aggregate
principal balance of the related Base Assets.
Government Securities
If so specified in the applicable prospectus supplement, the Base
Assets for a Series may include any combination of:
o receipts or other instruments created under the Department of the
Treasury's Separate Trading of Registered Interest and Principal
of Securities, or STRIPS, program ("Treasury Strips"), which
interest and/or principal strips evidence ownership of specific
interest and/or principal payments to be made on specified United
States Treasury Bonds ("Treasury Bonds");
o Treasury Bonds; and
o other debt securities ("GSE Bonds") of United States government
sponsored enterprises ("GSEs", and together with Treasury Strips
and Treasury Bonds, the "Government Securities").
The Government Securities, if any, included in a Trust are intended to assure
investors that funds will be available to make suggested payments of principal
and/or interest due on the related Notes or Certificates, as applicable.
Accordingly, the Government Securities, if any, included in a Trust are intended
both to:
o support the ratings assigned to the related Notes or
Certificates, as applicable, and
o perform a function similar to that described in this Prospectus
under "Series Enhancement".
A description of the respective general features of Treasury Bonds, Treasury
Strips and GSE Bonds is set forth below. The specific terms of the Government
Securities, if any, and the private label custody receipt securities, if any,
included in Base Assets will be set forth in the applicable prospectus
supplement.
Private Label Custody
RECEIPT SECURITIES. Private Label Custody Receipt Securities will
consist of any combination of:
o receipts or other instruments, other than Treasury Strips,
evidencing ownership of specific interest and/or principal
payments to be made on Treasury Bonds held by a custodian
("Private Label Custody Strips"), and
o receipts or other instruments evidencing ownership of specific
interest and/or principal payments to be made on Resolution
Funding Corporation ("REFCO") bonds ("REFCO Strips"; and together
with Private Label Custody Strips, "Private Label Custody Receipt
Securities", also referred to as "Receivables Pooling
Certificates").
The specific terms of the Private Label Custody Receipt Securities, if any,
included in a Trust will be set forth in the applicable prospectus supplement.
The prospectus supplement for each Series of Notes or Certificates, as
applicable, the Base Assets of which include Government Securities will contain
information as to:
(a) the title and series, the aggregate principal amount, denomination
and form of each Government Security;
(b) the limit, if any, upon the aggregate principal amount of the
related Government Security;
(c) the dates on which, or the range of dates within which, the
principal of, and premium, if any, on, the related Government Security will be
payable;
(d) the rate or rates, or the method of determination of the rate or
rates, at which the related Government Security will be payable;
(e) the date or dates from which interest will accrue, and the dates
on which interest will be payable;
(f) whether the related Government Security was issued at a price
lower than the principal amount of that Government Security;
(g) material events of default or restrictive covenants provided for
with respect to the related Government Security;
(h) the rating of the Government Security, if any;
(i) the issuer of each Government Security;
(j) the material risks, if any, posed by the related Government
Securities and the issuers of those Government Securities, which risks, if
appropriate, will be described in the "Risk Factors" section of the related
prospectus supplements; and
(k) any other material terms of the related Government Security.
With respect to Base Assets which include a pool of Government Securities, the
related prospectus supplement will, to the extent applicable, describe the
composition of the Government Securities' pool, material events of default or
restrictive covenants common to the Government Securities, and, on an aggregate,
percentage or weighted average basis, as applicable, the characteristics of the
pool with respect to the terms set forth in (d), (e), and (f) of the preceding
sentence and any other material terms regarding the related pool.
The Government Securities included in a Trust will be senior
unsecured, nonredeemable obligations of the issuer of the Government Securities,
will be denominated in United States dollars and, if rated, will be rated at
least investment grade by at least one nationally recognized rating agency (a
"Rating Agency"). In addition, the inclusion of Government Securities in the
Base Assets of a Series of Notes or Certificates, as applicable, is conditioned
upon their characteristics being in form and substance satisfactory to the
Rating Agency rating the related series of Notes or Certificates, as
applicable.
TREASURY BONDS. Treasury Bonds are issued by and are the obligations
of The United States of America. Accordingly, the payment of principal and
interest on each Treasury Bond will be guaranteed by the full faith and credit
of the United States of America. Interest is typically payable on the Bonds
semiannually. Treasury Bonds are issued in registered form in denominations of
$1,000, $5,000, $10,000, $100,000 and $1,000,000 and in book-entry form in
integral multiples of these amounts.
TREASURY STRIPS. In general, Treasury Strips are created by
separating, or "stripping", the principal and interest components of Treasury
Bonds that have an original maturity of 10 or more years from the date of issue.
A particular Treasury Strip evidences ownership of the principal payment or one
of the periodic interest payments, generally semiannual, due on the Treasury
Bond to which the Treasury Strip relates.
In 1985 the Department of the Treasury, announced that all new issues
of Treasury Bonds with maturities of 10 years or more would be transferable in
their component pieces on the Federal Reserve wire system. In so doing, the
Treasury created a generic, book-entry Treasury Strip named STRIPS (Separate
Trading of Registered Interest and Principal of Securities) which, unlike
private label Treasury Strips, can be issued without the need for a custodial
arrangement. The STRIPS program has eclipsed the private sector programs (which
are described below under - "Private Label Custody Receipt Securities"), and
investment banks no longer sponsor new issues of custodial receipts.
Treasury Strips may be either "serial" or "callable". A serial
treasury strip (a "Serial Treasury Strip") evidences ownership of one of the
periodic interest payments to be made on a Treasury Bond. No payments are made
on the Treasury Strip, nor is it redeemable, prior to its maturity, at which
time the holder becomes entitled to receive a single payment of the face amount
of the Treasury Strip . Callable Treasury Strips relate to payments scheduled to
be made after the related Treasury Bonds have become subject to redemption.
Callable Treasury Strips (the "Callable Treasury Strips") evidence ownership of
both principal of the related Treasury Bonds and each of the related interest
payments commencing, typically, on the first interest payment date following the
first optional redemption date. If the underlying Treasury Bonds are actually
redeemed, holders of callable Treasury Strips generally receive a payment equal
to the principal portion of the total face amount of these Treasury Strips plus
the interest payment represented by the Treasury Strips maturing on the
redemption date. No callable Treasury Strips will be included in a Trust. The
face amount of any Treasury Strip is the aggregate of all payments scheduled to
be received on that Treasury Strip. Treasury Strips are available in registered
form and generally may be transferred and exchanged by the holders of the
Treasury Strips in accordance with procedures applicable to the particular issue
of the applicable Treasury Strips.
GSE BONDS. As specified in the applicable prospectus supplement, the
obligations of one or more of the following GSEs may be included in Base Assets:
The Federal National Mortgage Association ("Fannie Mae"), The Federal Home Loan
Mortgage Association ("Freddie Mac"), The Student Loan Marketing Association
("Sallie Mae"), REFCO, Tennessee Valley Authority ("TVA"), The Federal Home Loan
Banks ("FHLB"), to the extent the obligations represent the joint and several
obligations of the twelve Federal Home Loan Banks, and The Federal Farm Credit
Banks ("FFCB"). GSE debt securities are exempt from registration under the
Securities Act pursuant to Section 3(a)(2) of the Securities Act ,or are deemed
by statute to be so exempt, and are not required to be registered under the
Exchange Act. The securities of any GSE will be included in Base Assets only to
the extent that:
o its obligations are supported by the full faith and credit of the
United States government, or
o the organization makes publicly available its annual report which
shall include financial statements or similar financial
information with respect to the organization (a "GSE Issuer").
Unless otherwise specified in the related prospectus supplement, the GSE Bonds
will not be guaranteed by the United States and do not constitute a debt or
obligation of the United States or of any agency or instrumentality of the
United States other than the related GSE.
Unless otherwise specified in the related prospectus supplement, none
of the GSE Bonds will have been issued pursuant to an indenture, and no trustee
is provided for with respect to any GSE Bonds. There will generally be a fiscal
agent ("Fiscal Agent") for an issuer of GSE Bonds whose actions will be governed
by a fiscal agency agreement. A Fiscal Agent is not a trustee for the holders of
the GSE Bonds and does not have the same responsibilities or duties to act for
the holders as would a trustee.
GSE Bonds may be subject to contractual and statutory restrictions
which may provide some protection to securityholders against the occurrence or
effects of specified events. Unless otherwise specified in the related
prospectus supplement, each GSE is limited to activities that will promote its
statutory purposes as set forth in the publicly available information with
respect to the issuer. A GSE's promotion of its statutory purposes, as well as
its statutory, structural and regulatory relationships with the federal
government, may cause or require a GSE to conduct its business in a manner that
differs from what an enterprise which is not a GSE might employ.
THE FEDERAL NATIONAL MORTGAGE ASSOCIATION. Fannie Mae is a federally
chartered and stockholder owned corporation organized and existing under the
Federal National Mortgage Association Charter Act. It is the largest investor in
home mortgage loans in the United States. Fannie Mae originally was established
in 1938 as a corporation wholly owned by the United States government to provide
supplemental liquidity to the mortgage market and was transformed into a
stockholder owned and privately managed corporation by legislation enacted in
1968 and 1970. Fannie Mae provides funds to the mortgage market by purchasing
mortgage loans from lenders, thus replenishing their funds for additional
lending.
Fannie Mae acquires funds to purchase loans from many capital market
investors that ordinarily may not invest in mortgage loans, consequently
expanding the total amount of funds available for housing. Operating nationwide,
Fannie Mae helps to redistribute mortgage funds from capital-surplus to
capital-short areas. Fannie Mae also issues mortgage-backed securities ("MBS").
Fannie Mae receives guaranty fees for its guaranty of timely payment of
principal of and interest on MBS. Fannie Mae issues MBS primarily in exchange
for pools of mortgage loans from lenders. The issuance of MBS enables Fannie Mae
to further its statutory purpose of increasing the liquidity of residential
mortgage loans.
Fannie Mae prepares an Information Statement annually which describes
Fannie Mae, its business and operations and contains Fannie Mae's audited
financial statements. From time to time Fannie Mae prepares supplements to its
Information Statement which include unaudited financial data and other
information concerning the business and operations of Fannie Mae. Unless
otherwise specified in the applicable prospectus supplement, these documents can
be obtained without charge from the Office of Investor Relations, Fannie Mae,
3900 Wisconsin Avenue, N.W., Washington, D.C. 20016; telephone (202)752-7115.
Fannie Mae is not subject to the periodic reporting requirements of the Exchange
Act.
THE FEDERAL HOME LOAN MORTGAGE CORPORATION. Freddie Mac is a publicly
held government-sponsored enterprise created on July 24, 1970 pursuant to the
Federal Home Loan Mortgage Corporation Act, Title III of the Emergency Home
Finance Act of 1970, as amended (the "FHLMC Act"). Freddie Mac's statutory
mission is to provide stability in the secondary market for home mortgages, to
respond appropriately to the private capital market and to provide ongoing
assistance to the secondary market for home mortgages, including mortgages
secured by housing for low- and moderate-income families involving a reasonable
economic return to Freddie Mac, by increasing the liquidity of mortgage
investments and improving the distribution of investment capital available for
home mortgage financing. The principal activity of Freddie Mac consists of the
purchase of conventional residential mortgages and participation interests in
conventional residential mortgages from mortgage lending institutions and the
sale of guaranteed mortgage securities backed by the mortgages so purchased.
Freddie Mac generally matches and finances its purchases of mortgages with sales
of guaranteed securities. Mortgages retained by Freddie Mac are financed with
short- and long-term debt, cash temporarily held pending disbursement to
security holders, and equity capital.
Freddie Mac prepares an Information Statement annually which describes
Freddie Mac, its business and operations and contains Freddie Mac's audited
financial statements. From time to time Freddie Mac prepares supplements to its
Information Statement which include unaudited financial data and other
information concerning the business and operations of Freddie Mac. Unless
otherwise specified in the applicable prospectus supplement, these documents can
be obtained from Freddie Mac by writing or calling Freddie Mac's Investor
Inquiry Department at 8200 Jones Branch Drive, McLean, Virginia, 22102; outside
Washington, D.C. metropolitan area, telephone (800) 336-3672; within Washington,
D.C. metropolitan area, telephone (703)759-8160. Freddie Mac is not subject to
the periodic reporting requirements of the Exchange Act.
THE STUDENT LOAN MARKETING ASSOCIATION. Sallie Mae is a
stockholder-owned corporation established by the 1972 amendments to the Higher
Education Act of 1965, as amended, to provide liquidity, primarily through
secondary market and warehousing activities, for lenders participating in
federally sponsored student loan programs, primarily the Federal Family
Education Loan ("FFEL") program and the Health Education Assistance Loan
Program. Under the Higher Education Act, Sallie Mae is authorized to purchase,
warehouse, sell and offer participations or pooled interests in, or otherwise
deal in, student loans, including, but not limited to, loans insured under the
FFEL program, and to make commitments for any of the foregoing. Sallie Mae is
also authorized to buy, sell, hold, underwrite and otherwise deal in obligations
of eligible lenders, if these obligations are issued by the eligible lenders for
the purpose of making or purchasing federally guaranteed student loans under the
Higher Education Act. As a federally chartered corporation, Sallie Mae's
structure and operational authorities are subject to revision by amendments to
the Higher Education Act or other federal enactments.
Sallie Mae prepares an Information Statement annually which describes
Sallie Mae, its business and operations and contains Sallie Mae's audited
financial statements. From time to time Sallie Mae prepares supplements to its
Information Statement which include unaudited financial data and other
information concerning the business and operations of Sallie Mae. Unless
otherwise specified in the applicable prospectus supplement, these documents can
be obtained without charge upon written request to the Corporate and Investor
Relations Division of Sallie Mae at 1050 Thomas Jefferson Street, N.W.,
Washington, D.C. 20007; telephone (202) 298-3010. Sallie Mae is not subject to
the periodic reporting requirements of the Exchange Act.
THE RESOLUTION FUNDING CORPORATION. REFCO is a mixed-ownership
government corporation established by Title V of the Financial Institutions
Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"). The sole purpose of
REFCO is to provide financing for the Resolution Trust Corporation (the "RTC").
REFCO is to be dissolved, as soon as practicable, after the maturity and full
payment of all obligations issued by it. REFCO is subject to the general
oversight and direction of the Oversight Board, which is comprised of the
Secretary of the Treasury, the Chairman of the Board of Governors of the Federal
Reserve System, the Secretary of Housing and Urban Development and two
independent members to be appointed by the President with the advice and consent
of the Senate. The day-to-day operations of REFCO are under the management of a
three-member Directorate comprised of the Director of the Office of Finance of
the FHLB and two members selected by the Oversight Board from among the
presidents of the twelve FHLB.
The RTC was established by FIRREA to manage and resolve cases involving
failed savings and loan institutions pursuant to policies established by the
Oversight Board. The RTC was granted authority to issue nonvoting capital
certificates to REFCO in exchange for the funds transferred from REFCO to the
RTC. Pursuant to FIRREA, the net proceeds of these obligations are used to
purchase nonvoting capital certificates issued by the RTC or to retire
previously issued REFCO obligations.
Information concerning REFCO may be obtained from the
Secretary/Treasurer, Resolution Funding Corporation, Suite 1000, 11921 Freedom
Drive, Reston, Virginia 22090; telephone (703) 487-9517. REFCO is not subject to
the periodic reporting requirements of the Exchange Act.
THE FEDERAL HOME LOAN BANKS. The Federal Home Loan Banks constitute a
system of twelve federally chartered corporations, each wholly owned by its
member institutions. The mission of the FHLB is to enhance the availability of
residential mortgage credit by providing a readily available, low-cost source of
funds to their member institutions. A primary source of funds for the FHLB is
the proceeds from the sale to the public of debt instruments issued as
consolidated obligations, which are the joint and several obligations of all the
FHLB. The FHLB are supervised and regulated by the Federal Housing Finance
Board, which is an independent federal agency in the executive branch of the
United States government, but obligations of the FHLB are not obligations of the
United States government.
The Federal Home Loan Bank System produces annual and quarterly
financial reports in connection with the original offering and issuance by the
Federal Housing Finance Board of consolidated bonds and consolidated notes of
the FHLB. Unless otherwise specified in the applicable prospectus supplement,
questions regarding these financial reports should be directed to the Deputy
Director, Financial Reporting and Operations Division, Federal Housing Finance
Board, 1777 F Street, N.W., Washington, D.C. 20006; telephone (202) 408-2901.
Unless otherwise specified in the applicable prospectus supplement, copies of
these reports may be obtained by written request to Capital Markets Division,
Office of Finance, Federal Home Loan Banks, Suite 1000, 11921 Freedom Drive,
Reston, Virginia 22090, telephone (703) 487-9500. The FHLB are not subject to
the periodic reporting requirements of the Exchange Act.
TENNESSEE VALLEY AUTHORITY. TVA is a wholly owned corporate agency and
instrumentality of the United States of America established pursuant to the
Tennessee Valley Authority Act of 1933, as amended (the "TVA Act"). TVA's
objective is to develop the resources of the Tennessee Valley region in order to
strengthen the regional and national economy and the national defense. The
programs of TVA consist of power and nonpower programs. For the fiscal year
ending September 30, 1995, TVA received $139 million in congressional
appropriations from the federal government for the nonpower programs. The power
program is required to be self-supporting from revenues it produces. The TVA Act
authorizes TVA to issue evidences of indebtedness that may be serviced only from
proceeds of its power program. TVA bonds are not obligations of or guaranteed by
the United States government.
TVA prepares an Information Statement annually which describes TVA,
its business and operations and contains TVA's audited financial statements.
From time to time TVA prepares supplements to its Information Statement which
include unaudited financial data and other information concerning the business
and operations of TVA. Unless otherwise specified in the applicable prospectus
supplement, these documents can be obtained by writing or calling Tennessee
Valley Authority, 400 West Summit Hill Drive, Knoxville, Tennessee 37902-1499,
Attention: Vice President and Treasurer; telephone (423) 632-3366. TVA is not
subject to the periodic reporting requirements of the Exchange Act.
FEDERAL FARM CREDIT BANKS. The Farm Credit System is a nationwide
system of lending institutions and affiliated service and other entities (the
"System"). Through its Banks ("FCBs") and related associations, the System
provides credit and related services to farmers, ranchers, producers and
harvesters of aquatic products, rural homeowners, some farm-related businesses,
agricultural and aquatic cooperatives and rural utilities. System institutions
are federally chartered under the Farm Credit Act of 1971, as amended (the "Farm
Credit Act"), and are subject to regulation by a Federal agency, the Farm Credit
Administration (the "FCA"). The FCBs and associations are not commonly owned or
controlled. They are cooperatively owned, directly or indirectly, by their
respective borrowers. Unlike commercial banks and other financial institutions
that lend to the agricultural sector in addition to other sectors of the
economy, under the Farm Credit Act the System institutions are restricted solely
to making loans to qualified borrowers in the agricultural sector, to some
related businesses and to rural homeowners. Moreover, the System is required to
make credit and other services available in all areas of the nation. In order to
fulfill its broad statutory mandate, the System maintains lending units in all
50 states and the Commonwealth of Puerto Rico.
The System obtains funds for its lending operations primarily from the
sale of debt securities issued under Section 4.2(d) of the Farm Credit Act
("Systemwide Debt Securities"). The FCBs are jointly and severally liable on all
Systemwide Debt Securities. Systemwide Debt Securities are issued by the FCBs
through the Federal Farm Credit Banks Funding Corporation, as agent for the FCBs
(the "Funding Corporation").
Information regarding the FCBs and the Farm Credit System, including
combined financial information, is contained in disclosure information made
available by the Funding Corporation. This information consists of the most
recent Farm Credit System Annual Information Statement and any Quarterly
Information Statements issued subsequent to the most recently issued annual
statement and press releases issued from time to time by the Funding
Corporation. Unless otherwise specified in the applicable prospectus supplement,
this information and the Farm Credit System Annual Report to Investors for the
current and two preceding fiscal years are available for inspection at the
Federal Farm Credit Banks Funding Corporation, Investment Banking Services
Department, 10 Exchange Place, Suite 1401, Jersey City, New Jersey 07302;
telephone (201) 200-8000. Upon request, the Funding Corporation will furnish,
without charge, copies of the above information. The FCBs are not subject to the
periodic reporting requirements of the Exchange Act.
Private Label Custody Receipt Securities
If so specified in the applicable prospectus supplement, the Trust for
a Series may include any combination of Private Label Custody Strips and Private
Label Custody Receipt Securities. The Private Label Custody Receipt Securities,
if any, included in a Trust are intended to assure investors that funds are
available to make specified payments of principal and/or interest due on the
related Notes or Certificates, as applicable. Accordingly, the Private Label
Custody Receipt Securities, if any, included in a Trust are intended both to:
o support the ratings assigned to the relevant Notes or
Certificates, as applicable, and
o perform a function similar to that described in this Prospectus
under "Series Enhancement".
A description of the respective general features of Private Label Custody Strips
and REFCO Strips is set forth below.
The prospectus supplement, for each Series of Notes or Certificates,
as applicable, of the Trust with respect to which contains Private Label Custody
Receipt Securities, will contain information as to:
(a) the title and series of each relevant Private Label Custody
Receipt Security, the aggregate principal amount, denomination and form of that
Private Label Custody Receipt Security;
(b) the limit, if any, upon the aggregate principal amount of the
relevant Private Label Custody Receipt Security;
(c) the dates on which, or the range of dates within which, the
principal of, and premium, if any, on, the relevant Private Label Custody
Receipt Security will be payable;
(d) the rate or rates, or the method of determination of the rate or
rates, at which the relevant Private Label Custody Receipt Security will bear
interest, if any, the date or dates from which the relevant interest will
accrue; and the dates on which the relevant interest will be payable;
(e) whether the relevant Private Label Custody Receipt Security was
issued at a price lower than the principal amount of that Private Label Custody
Receipt Security;
(f) material events of default or restrictive covenants provided for
with respect to the relevant Private Label Custody Receipt Security;
(g) the rating of the Private Label Custody Receipt Security, if any;
(h) the issuer of the relevant Private Label Custody Receipt Security;
(i) the material risks, if any, posed by the Private Label Custody
Receipt Security and the issuer of the Private Label Custody Receipt Security,
which risks, if appropriate, will be described in the "Risk Factors" section of
the related prospectus supplement; and
(j) any other material terms of the relevant Private Label Custody
Receipt Security.
With respect to a Trust which includes a pool of Private Label Custody Receipt
Securities, the related prospectus supplement will, to the extent applicable,
describe the composition of the Private Label Custody Receipt Securities' pool,
material events of default or restrictive covenants common to the Private Label
Custody Receipt Securities, and, on an aggregate, percentage or weighted average
basis, as applicable, the characteristics of the pool with respect to the terms
set forth in (c), (d) and (e) of the preceding sentence and any other material
terms regarding the pool.
The Private Label Custody Receipt Securities included in a Trust will
be senior, unsecured, nonredeemable obligations of the issuers of the Private
Label Custody Receipt Securities, will be denominated in United States dollars
and, if rated, will be rated at least investment grade by at least one
nationally recognized rating agency. In addition, the inclusion of Private Label
Custody Receipt Securities in a Trust with respect to a Series of Notes or
Certificates, as applicable, is conditioned upon their characteristics being in
form and substance satisfactory to the Rating Agency rating the related Series
of Notes or Certificates, as applicable. Each Trust which includes Private
Label Custody Securities will be provided with an opinion of Stroock & Stroock &
Lavan LLP or other counsel specified in the related prospectus supplement to the
effect that the Private Label Custody Receipt Securities included in the Trust
are exempt from the registration requirements of the Securities Act. A copy of
the related opinion will be filed with the SEC in a Current Report on Form 8-K
or in a post-effective amendment to the Registration Statement.
PRIVATE LABEL CUSTODY STRIPS. The first "stripping" of Treasury Bonds
occurred in the 1970s when government securities dealers physically separated
coupons from definitive certificates (the "Definitive Certificates ") and
offered them to investors as tax-deferred investments. Investors were able to
purchase the "strip" at a deep discount and pay no federal income tax until
resale or maturity. This tax treatment was limited in 1982 by the Tax Equity and
Fiscal Responsibility Act ("TEFRA") which required holders of these strips to
accrue a portion of the discount toward par annually and report the accrual,
even though unrealized, as taxable income. TEFRA also required that all new
Treasury issues be made available only in book-entry form.
The shift to "book-entry only" Treasury Bonds created a shortage of
the physical certificates needed for stripping. In response, various dealers
created custodial receipt programs in which Treasury Bonds in book-entry form
were deposited with custodians who would then issue certificates evidencing
rights in principal and interest payments. Some of the better known programs
first came to market in 1982 and 1983. Although available eventually in
denominations as small as $1,000, these custodial receipts lacked the liquidity
of the physical strips. While physical strips had multiple market-makers,
custodial receipts were proprietary and, accordingly, the sole market-maker
would usually be an affiliate of the program's sponsor. As a result, the market
that developed for custodial receipts was segmented.
In early 1984, a group of dealers sought to enhance the liquidity of
custodial receipts by developing a generic, multiple market-maker security known
as a TR (Treasury Receipt). A large secondary market quickly developed in these
generic Treasury Strips.
Treasury Receipts, physical strips and the proprietary receipts trade
at varying discounts from STRIPS which reflect, among other things, lower levels
of liquidity and the structuring difference discussed above.
A holder of a Private Label Custody Strip, as opposed to a STRIP,
cannot enforce payment on a Treasury Strip against the Treasury; instead, the
holder must look to the custodian for payment. The custodian and the holder of a
Private Label Custody Strip that obtains ownership of the underlying Treasury
Bond can enforce payment of the underlying Treasury Bond against the Treasury.
In the event any Private Label Custody Strips are included in a Trust with
respect to any Series of Notes or Certificates, as applicable, the prospectus
supplement for that Series will include the identity and a brief description of
each custodian that issued the related Private Label Custody Strips. In the
event the Company knows that the depositor of the Treasury Bonds underlying the
related Private Label Custody Strips is the Company or any of its affiliates,
the Company will disclose this fact in the applicable prospectus supplement.
REFCO STRIPS. A REFCO Bond may be divided into its separate
components, consisting of:
o each future semi-annual interest distribution (an "Interest
Component"); and
o the principal payment (the "Principal Component") (each component
individually referred to as a "REFCO Strip").
REFCO Strips are not created by REFCO; instead, third parties such as investment
banking firms create them. Each REFCO Strip has an identifying designation and
CUSIP number. REFCO Strips generally trade in the market for Treasury Strips at
yields of a few basis points over Treasury Strips of similar maturities. REFCO
Strips are viewed generally by the market as liquid investments.
For a REFCO Bond to be separated into its components, the par amount
of the REFCO Bond must be in an amount which, based on the stated interest rate
of the REFCO Bond, will produce a semi-annual interest payment of $1,000 or an
integral multiple of $1,000. REFCO Bonds may be separated into their components
at any time from the issue date until maturity. Once created, REFCO Strips are
maintained and transferred in integral multiples of $1,000.
A holder of a REFCO Strip cannot enforce payment on that REFCO Strip
against REFCO; instead, the holder must look to the custodian for payment . This
custodian and the holder of a REFCO Strip who obtains ownership of the
underlying REFCO Bond can enforce payment of the underlying REFCO Bond against
REFCO. The identity and a brief description of each custodian that has issued
any REFCO Strip included in a Trust will be set forth in the related prospectus
supplement. In the event the Company knows that the depositor of the REFCO Bonds
underlying the REFCO Strips included in the Trust is the Company or any of its
affiliates, the Company will disclose this fact in the related prospectus
supplement.
Collection and Payment Accounts
A separate Collection Account will be established by the Trustee, or,
in the case of a Series that includes Notes, the Indenture Trustee, or by the
Servicer in the name of the Trustee, or the Indenture Trustee, for each Series
of Notes or Certificates, as applicable, for receipt of the amount of cash, if
any, specified in the related prospectus supplement to be initially deposited in
the same Collection Account by the Depositor, all amounts received on or with
respect to the Base Assets and, to the extent specified in the related
prospectus supplement, any income earned on the Collection Account. Specified
amounts on deposit in the Collection Account and specified amounts available
pursuant to any Series Enhancement, as provided in the related prospectus
supplement, will be deposited in one or more related payment accounts (the
"Payment Accounts "), which will also be established by the Trustee, or the
Indenture Trustee, for the related Series of Notes or Certificates, as
applicable, for payment to the related holders of these Notes or Certificates,
as applicable. The Trustee, or Indenture Trustee, will invest the funds in the
Collection and Payment Accounts in Eligible Investments maturing, with some
exceptions, in the case of funds in the Collection Account, not later than the
day preceding the date the related funds are due to be deposited in the
applicable Payment Account or otherwise paid, and in the case of funds in a
Payment Account, not later than the day preceding the next Payment Date for the
related Class or Classes of Notes or Certificates, as applicable. Eligible
Investments include among other investments, obligations of the United States
and some agencies of the United States, federal funds, certificates of deposits,
commercial paper, demand and time deposits and banker's acceptances, specified
repurchase agreements of United States government securities and specified
guaranteed investment contracts, in each case, acceptable to the applicable
Rating Agencies.
From time to time, various other accounts, which may include a
Pre-Funding Account may be created under the terms of the documents related to a
specific Series.
SERIES ENHANCEMENT
For any Series of Notes or Certificates, as applicable, "Series
Enhancement" may be provided with respect to one or more Classes of the related
Series of Notes or Certificates, as applicable. Series Enhancement may consist
of Credit Enhancement, Ancillary Arrangements, or both.
Credit Enhancement
"Credit Enhancement" with respect to a Series of Notes or
Certificates, as applicable, or one or more specific Classes of a Series may
take the form of the subordination of one or more Classes of Notes or
Certificates, as applicable, to other Classes of the same Series, a letter of
credit, the establishment of a cash collateral guaranty or account, a surety
bond, insurance, the use of cross support features or another method of Credit
Enhancement described in the related prospectus supplement, or any combination
of the foregoing. If so specified in the related prospectus supplement, any form
of Credit Enhancement may be structured so as to be drawn upon by more than one
Class of Notes or Certificates, as applicable, of a Series to the extent
described in the applicable prospectus supplement.
Credit Enhancement will not provide protection against all risks of
loss and will not guarantee repayment of the entire principal balance of the
Notes or Certificates, as applicable, and interest on the Notes or Certificates,
as applicable. If losses occur which exceed the amount covered by the Credit
Enhancement or which are not covered by the Credit Enhancement, holders of Notes
or Certificates, as applicable, will bear their allocable share of deficiencies.
If Credit Enhancement is provided with respect to a Series, the
related prospectus supplement will include a description of:
o the amount payable under Credit Enhancement,
o any conditions to payment under the related prospectus supplement
not described in this Prospectus,
o the conditions, if any under which the amount payable under
Credit Enhancement may be reduced and under which Credit
Enhancement may be terminated or replaced, and
o any material provisions of any agreement relating to Credit
Enhancement.
Additionally, the related prospectus supplement may set forth specific
information with respect to the issuer of any third-party Credit Enhancement,
including:
o a brief description of its principal business activities,
o its principal place of business, place of incorporation and the
jurisdiction under which it is chartered or licensed to do
business,
o if applicable, the identity of regulatory agencies which exercise
primary jurisdiction over the conduct of its business, and
o its total assets and its stockholders' or policyholders' surplus,
if applicable, as of the date specified in the related prospectus
supplement.
If so specified in the related prospectus supplement, the issuer of a
third party Credit Enhancement may have a subordinated interest in the Trust,
the Receivables or cash flows in respect of the Receivables to the extent
described in the related prospectus supplement (the "Enhancement Invested
Amount").
Subordination
If so specified in the related prospectus supplement, one or more
Series of Notes or Certificates, as applicable, or one or more Classes of Notes
or Certificates, as applicable, of a Series or one or more classes of other
certificated or uncertificated interests in the assets of the related Trust
("Collateral Indebtedness Interests") may be subordinated to one or more other
Series or one or more Classes of a Series. If so specified in the related
prospectus supplement, the rights of holders of the subordinate Notes or
Certificates, as applicable, or Collateral Indebtedness Interests to receive
distributions of principal and/or interest on any Payment Date will be
subordinated to the rights of the holders of the Notes or Certificates, as
applicable, which are senior to the subordinate Notes or Certificates, as
applicable, or Collateral Indebtedness Interests to the extent set forth in the
related prospectus supplement. The related prospectus supplement will also set
forth information concerning the amount of subordination of a Series or Class of
subordinate Notes or Certificates, as applicable, or Collateral Indebtedness
Interests, the circumstances in which this subordination will be applicable, the
manner, if any, in which the amount of subordination will decrease over time and
the conditions under which amounts available from payments that would otherwise
be made to holders of subordinate Notes or Certificates, as applicable, or
Collateral Indebtedness Interests will be distributed to holders of Notes or
Certificates, as applicable, which are senior to the subordinate Notes or
Certificates, as applicable, or Collateral Indebtedness Interests. The amount of
subordination will decrease whenever amounts otherwise payable to the holders of
subordinate Notes or Certificates, as applicable, or Collateral Indebtedness
Interests are paid to the holders of the Notes or Certificates, as applicable,
which are senior to these subordinated Notes or Certificates, as applicable, or
Collateral Indebtedness Interests. If so specified in the related prospectus
supplement, subordination may apply only in the event of specific types of
losses not covered by another Credit Enhancement.
Letter of Credit
If so specified in the related prospectus supplement, support for a
Series of Notes or Certificates, as applicable, or one or more Classes of a
Series may be provided by one or more letters of credit. A letter of credit may
provide limited protection against specific losses in addition to or in lieu of
another form of Credit Enhancement. The issuer of the letter of credit named in
the related prospectus supplement (the "L/C Bank") will be obligated to honor
demands with respect to the letter of credit, to the extent of the amount
available under the letter of credit, to provide funds under the circumstances
and subject to conditions specified in the related prospectus supplement. The
liability of the L/C Bank under its letter of credit may be reduced by the
amount of unreimbursed payments under that same letter of credit.
The maximum liability of a L/C Bank under its letter of credit will
generally be an amount equal to a percentage specified in the related prospectus
supplement of the initial principal amount of a Series of Notes or Certificates,
as applicable, or a Class of a Series. The maximum amount available at any time
to be paid under a letter of credit will be determined in the manner specified
in the letter of credit and in the related prospectus supplement.
Cash Collateral Guaranty or Cash Collateral Account
If so specified in the related prospectus supplement, support for a
Series of Notes or Certificates, as applicable, or one or more Classes of a
Series may be provided by a guaranty (a "Cash Collateral Guaranty") secured by
the deposit of cash, government securities or other permitted investments in an
account (a "Cash Collateral Account") reserved for the beneficiaries of the Cash
Collateral Guaranty, or by a Cash Collateral Account alone. A Cash Collateral
Account will generally take the form of a cash collateral trust formed pursuant
to a trust agreement involving a cash collateral depositor and a cash collateral
trustee. The Cash Collateral Guaranty will generally be an obligation of the
cash collateral trust and not of the cash collateral depositor, the cash
collateral trustee, except to the extent of amounts on deposit in the Cash
Collateral Account, or the related Trustee, Indenture Trustee, Seller, Servicer
or the Depositor. The amount available pursuant to a Cash Collateral Guaranty or
a Cash Collateral Account will be the lesser of the amount on deposit in the
Cash Collateral Account and an amount specified in the related prospectus
supplement. The related prospectus supplement will set forth the circumstances
under which payments will be made to beneficiaries of a Cash Collateral Guaranty
from the related Cash Collateral Account or from the Cash Collateral Account
directly.
Reserve Account
If so specified in the related prospectus supplement, the Depositor
may deposit cash, a letter or letters of credit, short-term investments,
government securities or other instruments acceptable to the applicable Rating
Agency or Rating Agencies in one or more reserve accounts (each, a "Reserve
Account") to be established in the name of the Trustee, or the Indenture
Trustee. A Reserve Account will be used, as specified in the related prospectus
supplement, by the Trustee, or the Indenture Trustee, to make required payments
of principal of or interest on the Notes or Certificates, as applicable, of the
related Series or one or more Classes of the Series, to make adequate provision
for future payments on one or more Classes of the Notes or Certificates, as
applicable, or for any other purpose specified in the applicable Agreement with
respect to the Series, to the extent that funds are not otherwise available for
that purpose. In the alternative or in addition to a deposit, a Reserve Account
for a Series may be funded through application of all or a portion of the excess
cash flow from the Base Assets for the Series, to the extent described in the
related prospectus supplement. If applicable, the initial amount of the Reserve
Account and the Reserve Account maintenance requirements for a Series will be
described in the related prospectus supplement. Amounts deposited in a Reserve
Account will be invested by the Trustee, or the Indenture Trustee, in Eligible
Investments meeting specified maturity criteria.
Surety Bond or Insurance Policy
If so specified in the related prospectus supplement, Credit
Enhancement for a Series or one or more Classes of Notes or Certificates, as
applicable, of a Series may be provided by the issuance of insurance by one or
more insurance companies. The insurance will guarantee distributions of interest
or principal on the affected Notes or Certificates, as applicable, in the manner
and amount specified in the related prospectus supplement.
If so specified in the related prospectus supplement, Credit
Enhancement for a Series or one or more Classes of Notes or Certificates, as
applicable, of a Series may take the form of a surety bond purchased for the
benefit of the holders of the related Notes or Certificates, as applicable, to
assure distributions of interest or principal with respect to the related Notes
or Certificates, as applicable, in the manner and amount specified in the
related prospectus supplement.
Spread Account
If so specified in the related prospectus supplement, support for a
Series or one or more Classes of Notes or Certificates, as applicable, of a
Series may be provided by the periodic deposit of available excess cash flow
from the Trust assets into an account (the "Spread Account") intended to assure
the subsequent distribution of interest and principal on the related Notes or
Certificates, as applicable, in the manner specified in the prospectus
supplement.
Ancillary Arrangements
If so specified in the related prospectus supplement, the Trust may
enter into one or more derivative arrangements that are related to or incidental
to one or more of the Base Assets for a Series ("Ancillary Arrangements").
Ancillary Arrangements may take the form of guaranteed rate agreements, maturity
liquidity facilities, tax protection agreements, interest rate caps, floor or
collar agreements, interest rate or currency swap agreements or other similar
arrangements. If so specified in the related prospectus supplement, Ancillary
Arrangements may be entered into with the Depositor or an affiliate of the
Depositor. The related prospectus supplement will to the extent appropriate
contain analogous disclosure with respect to any Ancillary Arrangements as is
set forth in this Prospectus or in the related prospectus supplement with
respect to the Base Assets.
SERVICING OF RECEIVABLES
Customary servicing functions with respect to any Receivables included
in the Base Assets for a Series or underlying any Participations included in the
Base Assets will be provided by the Servicer named in the related prospectus
supplement pursuant to the related Pooling and Servicing Agreement. In general,
comparable servicing functions will be performed by the CRB Servicer with
respect to the Receivables underlying any CRB Securities included in the Base
Assets.
Collection Procedures
The Servicer will make reasonable efforts to collect all payments
required to be made under the Accounts and will, consistent with the terms of
the related Pooling and Servicing Agreement for a Series and any applicable
Credit Enhancement, follow the same collection procedures as it follows with
respect to comparable receivables held in its own portfolio.
Deposits to the Collection Account
The Servicer will deposit, subject to some exceptions which, if
applicable, will be specified in the related prospectus supplement, any
collections on the Receivables in a monthly period (the "Monthly Period"), which
period will be defined for each Servicer in the related prospectus supplement,
into the Collection Account within two business days of the Date of Processing,
or, in the case of interchange, on each Distribution Date, to the extent the
collections are allocable among the Certificateholders of the Series (the
"Investor Certificateholders' Interest ") of any Series and are required to be
deposited into an account for the benefit of, or distributed to, the Investor
Certificateholders of any Series or the issuer of any Series Enhancement. In
limited circumstances, the Servicer will not be required to segregate, and will
be permitted to use for its own benefit collections on the Receivables received
by it during each Monthly Period until the related Distribution Date. The
"Distribution Date" for each calendar month will be specified in the prospectus
supplement. To the extent and in the manner specified in the related prospectus
supplement and subject to specific exceptions that will be described in the
applicable prospectus supplement, on the earlier of:
o the second business day following the Date of Processing, and
o the day on which the Servicer deposits any collections into the
Collection Account.
The Servicer will pay to the holder of the Depositor Certificate its allocable
portion of any collections then held by the Servicer. The "Date of Processing"
will generally be the business day on which a record of any transaction is first
recorded on the Servicer's computer file of consumer revolving accounts, without
regard to the effective date of recordation.
To the extent and in the manner specified in the related prospectus
supplement, the Servicer will establish the Collection Account in the name of
the Trustee or, for a Series that includes Notes, the Indenture Trustee. To the
extent and in the manner indicated in the related prospectus supplement, the
Collection Account will be an account maintained:
o at a depository institution, the long-term unsecured debt
obligations of which at the time of any deposit in the depository
institution are rated as described in the related prospectus
supplement and as specified by the Rating Agencies rating the
Notes or Certificates, as applicable, of the Series, or
o in an account or accounts the deposits in which are insured to
the maximum extent available by the Federal Deposit Insurance
Corporation (the "FDIC") or which are secured in a manner meeting
requirements established by the Rating Agencies.
To the extent and in the manner specified in the related prospectus
supplement, the funds held in the Collection Account may be invested, pending
remittance to the Trustee, or the Indenture Trustee, in Eligible Investments. If
so specified in the related prospectus supplement, the Servicer will be entitled
to receive as additional compensation any interest or other income earned on
funds in the Collection Account. The related prospectus supplement will describe
the obligations of the Servicer, if different from those described above, the
Seller, the Trustee, the Indenture Trustee and/or the Depositor to deposit
payments and/or collections received by them in respect of the Trust assets into
the Collection Account. In addition, to the extent so provided in the related
prospectus supplement, if the Servicer deposits in the Collection Account for a
Series any amount not required to be deposited in the Collection Account, it
may, at any time, withdraw that amount from the related Collection Account.
Servicing Compensation and Payment of Expenses
The related prospectus supplement may provide that the Servicer will
be entitled to receive a servicing fee in an amount to be determined as
specified in the related prospectus supplement (the "Servicing Fee"). The
Servicing Fee may be fixed or variable, as specified in the related prospectus
supplement.
As specified in the related prospectus supplement, the Servicer may be
required to pay expenses incurred in connection with the servicing of the
Receivables including, without limitation, the payment of the fees and expenses
of the Trustee, and Indenture Trustee, and independent accountants, payment of
the cost of any Series Enhancement and payment of expenses incurred in
preparation of reports to holders of Notes or Certificates, as applicable. To
the extent specified in the related prospectus supplement, the rights of the
Servicer to receive funds from the Collection Account for a Series, whether as
the Servicing Fee or other compensation, or for the reimbursement of expenses or
otherwise, may be subordinated to the rights of holders of the Notes or
Certificates, as applicable, of the related Series.
Evidence as to Compliance
The Pooling and Servicing Agreement for a Series may provide that,
each year, a firm of independent public accountants will furnish a statement to
the Trustee to the effect that the firm has examined specific documents and
records relating to the servicing of the Receivables by the Servicer and that,
on the basis of this examination, the firm is of the opinion that the servicing
has been conducted in compliance with the Pooling and Servicing Agreement,
except for:
o exceptions the firm believes to be immaterial, and
o other exceptions set forth in a related statement.
The Pooling and Servicing Agreement for a Series will provide for delivery to
the Trustee for the Series of an annual statement signed by an officer of the
Servicer to the effect that the Servicer has fulfilled its obligations under the
Pooling and Servicing Agreement throughout the preceding calendar year.
Comparable statements and reports may be required to be delivered to the
Indenture Trustee pursuant to any Indenture relating to this Series.
CERTAIN MATTERS REGARDING THE SERVICER
Any Servicer for a Series will be identified in the related prospectus
supplement. The Servicer may be an affiliate of the Seller or the Depositor and
may have other business relationships with the Seller, the Depositor or their
respective affiliates.
If specific events (each a "Servicer Default") occur with respect to
the Servicer under an applicable Agreement, the related Trustee, or a specified
percentage of the holders of Notes or Certificates, as applicable, or of each
Class of Notes or Certificates, as applicable, as set forth in the related
prospectus supplement may terminate the Servicer, in which case the Trustee will
appoint a successor Servicer. Servicer Defaults and the rights of the Trustee
and the holders of Notes or Certificates, as applicable, upon the occurrence of
a Servicer Default under the applicable Agreement for a Series will be
substantially similar to those described under "Description of the Trust
Agreements or Pooling and Servicing Agreements-- Servicer Defaults" and "--
Rights upon Servicer Defaults" or will be as described in the related prospectus
supplement.
The Servicer generally may not resign from its obligations and duties
under the applicable Agreement, except:
(a) upon determination that,
(1) the performance of its duties under the Pooling and
Servicing Agreement is no longer permissible under
applicable law, and
(2) there is no reasonable action which the Servicer could take
to make the performance of its duties under the applicable
Agreement permissible under applicable law,
(b) in connection with a conveyance, consolidation or merger by the
Servicer with any corporation, or conveyance or transfer of its properties or
assets substantially as an entirety to any other person permitted under the
applicable Agreement, or
(c) upon the satisfaction of the following conditions:
(1) the acceptance and assumption, by agreement supplemental to
the applicable Agreement, executed and delivered to the
Trustee, in form satisfactory to the Trustee, of the
obligations and duties of the Servicer under the related
supplemental agreement by a proposed successor Servicer,
(2) the Servicer having given written notice to each applicable
Rating Agency of a transfer and each Rating Agency having
notified the Servicer in writing to the effect that its then
current rating of the Notes or Certificates, as applicable,
of any Series will not be reduced or withdrawn as a result
of the transfer,
(3) the provider of Credit Enhancement, if any, having consented
in writing to a transfer consent not to be unreasonably
withheld, and
(4) the proposed successor Servicer being an Eligible Servicer.
Notwithstanding anything in the Pooling and Servicing Agreement to the contrary,
any successor Servicer appointed under clause (c) will be deemed to be a
successor Servicer. Any determination permitting the resignation of the Servicer
will be evidenced as to clause (a) above by an opinion of counsel to that effect
delivered to the Trustee. No resignation will become effective until the Trustee
or a successor Servicer shall have assumed the responsibilities and obligations
of the Servicer in accordance with the Pooling and Servicing Agreement.
"Eligible Servicer" means the Trustee, or the Indenture Trustee, or an
entity which, at the time of its appointment as Servicer:
(a) is an established financial institution having capital or a net
worth of not less than $100,000,000,
(b) is servicing a portfolio of consumer credit card or charge card
accounts,
(c) is legally qualified and has the capacity to service the
Accounts,
(d) has demonstrated the ability to professionally and completely
service a portfolio of similar accounts in accordance with
standards of skill and care customary in the industry, and
(e) is qualified to use the software that is then currently being
used to service the Accounts or obtains the right to use or has
its own software which is adequate to perform its duties under
the Pooling and Servicing Agreement.
Indemnification
Except to the extent otherwise provided in the Pooling and Servicing
Agreement, each Pooling and Servicing Agreement will provide that the Servicer
will indemnify the Trust, the Trustee and the holders of all Notes or
Certificates, as applicable, of a Series from and against any loss, liability,
expense, damage or injury suffered or sustained by reason of any acts, omissions
or alleged acts or omissions arising out of activities of the Servicer with
respect to the Trust or the Trustee or any co-trustee pursuant to the Pooling
and Servicing Agreement, including those arising from acts or omissions of the
Servicer pursuant to the Pooling and Servicing Agreement, including but not
limited to any judgment, award, settlement, reasonable attorneys' fees and other
costs or expenses incurred in connection with the defense of any actual or
threatened action, proceeding or claim; provided, however, that the Servicer
shall not indemnify:
o the Trust or the Trustee if any acts, omissions or alleged acts
or omissions constitute fraud, gross negligence, breach of
fiduciary duty or misconduct by the Trustee;
o the Trust, the Trustee or the holders of Notes or Certificates,
as applicable, for any liability, cost or expense of the Trust
with respect to any action taken by the Trust at the request of
the holders in accordance with the Pooling and Servicing
Agreement or with respect to any Federal, state or local income
or franchise taxes, or any interest or penalties with respect to
state or local income or franchise taxes required to be paid by
the Trust or by holders to any taxing authority; or
o the Trust or the holders for any losses incurred by any of them
as a result of defaulted Receivables or Receivables which are
written off as uncollectible unless the write-off is caused by a
breach of the Pooling and Servicing Agreement by the Servicer.
Subject to exceptions in the Pooling and Servicing Agreement, any
indemnification pursuant to the Pooling and Servicing Agreement will be only
from the assets of the Servicer.
DESCRIPTION OF THE NOTES
The following summaries describe the material provisions of the
Indentures which are anticipated to be common to any Notes included in a Series
of Notes or Certificates, as applicable. The summaries do not purport to be
complete and are subject to, and are qualified in their entirety by reference
to, the provisions of the related Notes and the Indenture. Where particular
provisions or terms used in the Notes or Indentures are referred to in this
Prospectus, the actual provisions, including definitions of terms, are
incorporated in this Prospectus by reference as part of the summaries. The Notes
included in any Series will be issued in one or more Classes. The Notes will
only be issued in fully registered form, without coupons, in the authorized
denominations for each Class specified in the related prospectus supplement.
Upon satisfaction of the conditions, if any, applicable to a Class of Notes of a
Series, as described in the related prospectus supplement, the transfer of the
Notes may be registered, and the instruments evidencing the Notes may be
exchanged, at the office of the registrar, which may be the Indenture Trustee,
appointed from time to time pursuant to the Indenture (the "Registrar") without
the payment of any service charge other than any tax or governmental charge
payable in connection with the registration of transfer or exchange. If
specified in the related prospectus supplement, one or more Classes of Notes of
a Series may be available in book-entry form only.
Payments of principal of and interest, if any, on the Notes of a
Series will be made on the dates specified in the related prospectus supplement
(the "Payment Dates") by check mailed to holders of these Notes, registered at
the close of business on the record date applicable to the Payment Dates at
their addresses appearing on the register of Notes for the related Series or in
any other manner specified in the related prospectus supplement, except that:
o payments may be made by wire transfer, at the expense of the
Noteholder requesting payment by wire transfer, in specific
circumstances described in the related prospectus supplement, and
o final payments of principal in retirement of any Note will be
made only upon presentation and surrender of the Note at the
office of the Indenture Trustee specified in the related
prospectus supplement.
Notice of the final payment on a Note will be mailed to the holder of the Note
before the Payment Date on which the final principal payment on any Note is
expected to be made to the holder of that Note.
Payments of principal of and interest on the Notes will be made by the
Indenture Trustee, or a paying agent provided for under the Indenture, as
specified in the related prospectus supplement.
Payments of Interest and Principal
Each Class of Notes of a Series will have a stated principal amount,
notional amount or no principal amount and will bear interest at a specified
"Note Interest Rate " or will not bear interest. Each Class of Notes may have a
different Note Interest Rate, which may be fixed, variable or an adjustable Note
Interest Rate, or any combination of the foregoing. The Notes included in any
Series may include one or more Classes of Notes entitled to:
o principal payments with disproportionate, nominal or no interest
payments, or
o interest payments with disproportionate, nominal or no principal
payments.
The related prospectus supplement will specify the Note Interest Rate for each
Class of Notes or the method for determining the Note Interest Rate. The right
of holders of any Class of Notes to receive payments of principal and interest
may be senior or subordinate to the rights of holders of one or more other Class
or Classes of Notes of the related Series, as described in the related
prospectus supplement. The prospectus supplement may specify that payments of
interest, if any, on Notes will be made prior to payments of principal on the
Notes or any other order or priority as shall be specified in the related
prospectus supplement.
One or more Classes of Notes of a Series may be redeemable in whole or
in part under the circumstances specified in the related prospectus supplement,
including as the result of the exercise by the Servicer, the Seller or the
Depositor of any option that it may have to purchase the Base Assets of the
related Trust. To the extent specified in the related prospectus supplement, one
or more Classes of Notes of a Series may have fixed principal payment schedules
as set forth in the prospectus supplement. Holders of Notes will have the right
to receive payments of principal on any given Payment Date in the applicable
amount set forth in the related schedule with respect to the Notes. Notes may
also be subject to prepayment of principal to the extent set forth in the
related prospectus supplement.
With respect to a Series that includes two or more Classes of Notes,
each Class may differ as to the timing and priority of payments, seniority,
allocations of losses, Note Interest Rates or amount of payments of principal or
interest, and payments of principal or interest in respect of any related Class
or Classes may be subject to the occurrence of specified events or may be made
on the basis of collections from designated portions of the Base Assets. If
specified in the related prospectus supplement, one or more Classes of Notes
("Strip Notes") may be entitled to:
o principal payments with disproportionate, nominal or no interest
payments, or
o interest payments with disproportionate, nominal or no principal
payments.
Provisions of the Indenture
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT. "Events of Default"
in respect of a Series of Notes under the related Indenture will consist of
events specified in the related prospectus supplement, which events will
include:
(a) a default for five days or more in the payment of any interest on
any Note;
(b) a default in the payment of the principal of, or any installment
of the principal of, any Note when the same becomes due and payable;
(c) a default by the related Trust in the observance or performance in
any material respect of any covenant or an applicable agreement made in the
related Indenture and the continuation of any default for a period of 30 days
after notice of default is given to the related Trust by the applicable
Indenture Trustee or to the related Trust and the related Indenture Trustee by
the holders of 25% of the aggregate outstanding principal amount of the Notes;
(d) any representation or warranty made by the related Trust in the
related Indenture or in any certificate delivered pursuant to the related
Indenture or in connection with the related Indenture having been incorrect in
any material respect as of the time made, if the breach is not cured within 30
days after notice of the breach is given to the related Trust by the applicable
Indenture Trustee or to the related Trust and the related Indenture Trustee by
the holders of 25% of the aggregate outstanding principal amount of the Notes;
(e) events of bankruptcy, insolvency, receivership or liquidation with
respect to the Trust; or
(f) any other events as shall be specified in the related prospectus
supplement.
The amount of principal required to be paid to Noteholders of each Series under
the related Indenture on any Payment Date generally will be limited to amounts
available to be deposited in the applicable Payment 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 applicable final scheduled Payment
Date for the related Class of Notes.
If an Event of Default should occur and be continuing with respect to
the Notes of any Series, the related Indenture Trustee or holders of a majority
in principal amount of the Notes may declare the principal of the Notes to be
immediately due and payable. A declaration may, under some circumstances, be
rescinded by the holders of a majority in principal amount of the Notes then
outstanding. If the Notes of any Series are declared due and payable following
an Event of Default, the related Indenture Trustee may institute proceedings to
collect amounts due on the Notes, foreclose on the property of the Trust,
exercise remedies as a secured party, sell the related Base Assets or elect to
have the applicable Trust maintain possession of the related Base Assets and
continue to apply collections on these Base Assets as if there had been no
declaration of acceleration. The Indenture Trustee, however, will be prohibited
from selling the Base Assets following an Event of Default, other than a default
in the payment of any principal of, or a default for five days or more in the
payment of any interest on, any Note of the related Series, unless one of the
conditions specified in the related prospectus supplement are met, which
conditions generally will include:
(a) the holders of all outstanding Notes consent to the sale,
(b) the proceeds of the sale are sufficient to pay in full the
principal of and the accrued and unpaid interest on related outstanding Notes at
the date of the sale, or
(c) the related Indenture Trustee determines that the proceeds of the
Base Assets would not be sufficient on an ongoing basis to make all payments on
the Notes as payments would become due if the obligations had not been declared
due and payable, and the related Indenture Trustee obtains the consent of the
holders of 66 2/3% of the aggregate outstanding principal amount of the Notes.
Subject to the provisions of the applicable Indenture relating to the
duties of the related Indenture Trustee, if an Event of Default occurs and is
continuing with respect to a Series of Notes, the related Indenture Trustee will
be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the holders of the related Notes
if it reasonably believes it will not be adequately indemnified against the
costs, expenses and liabilities that might be incurred by it in complying with
the request. Subject to the provisions for indemnification and limitations
contained in the related Indenture, the holders of a majority of the aggregate
outstanding principal amount of the Notes of a Series will have the right to
direct the time, method and place of conducting any proceeding or exercising any
remedy available to the related Indenture Trustee; in addition, the holders of
Notes representing a majority of the aggregate outstanding principal amount of
the related Notes may, in some cases, waive any default with respect to the
related Notes, except a default in the payment of principal of or interest on
any Note or a default in respect of a covenant or provision of the related
Indenture that cannot be modified or amended without the waiver or consent of
the holders of all the outstanding Notes of the Series.
No holder of a Note will have the right to institute any proceeding
with respect to the related Indenture, unless specified conditions in the
Indenture have been satisfied, which conditions generally will include:
(a) the holder previously has given to the applicable Indenture
Trustee written notice of a continuing Event of Default;
(b) the holders of not less than 25% of the outstanding principal
amount of the Notes have made written request to the related Indenture Trustee
to so institute the proceeding in its own name as Indenture Trustee;
(c) the holder or holders have offered the related Indenture Trustee
reasonable indemnity;
(d) the related Indenture Trustee has for 60 days failed to institute
the proceeding; and
(e) no direction inconsistent with the written request has been given
to the related Indenture Trustee during the 60-day period by the holders of a
majority of the outstanding principal amount of the Notes of the Series.
With respect to any Series of Notes or Certificates, as applicable,
that includes Notes, none of the related Indenture Trustee in its individual
capacity, the related Trustee in its individual capacity, any holder of a
Certificate representing an ownership interest in the related Trust or any other
holder of an interest in the related Trust, or any of their respective
beneficiaries, agents, officers, directors, employees, affiliates, successors or
assigns will, in the absence of a related express agreement to the contrary, be
personally liable for the payment of the principal of or interest on the related
Notes or for the applicable agreements of Trust contained in the related
Indenture.
No Trust may engage in any activity other than as described in this
Prospectus or in the related prospectus supplement. Except as and to the extent
provided in the related prospectus supplement, no Trust will incur, assume or
guarantee any indebtedness other than indebtedness incurred pursuant to the
related Notes and the related Indenture.
COVENANTS. Each Indenture will provide that the related Trust may not
consolidate with or merge into any other entity, unless specific conditions,
which shall be specified in the related Indenture shall be satisfied, which
conditions generally will include:
(a) the entity formed by or surviving consolidation or merger is
organized under the laws of the United States, any state of the United
States or the District of Columbia;
(b) the entity expressly assumes the related Trust's obligation to
make due and punctual payments upon the Notes of the related Series and to
perform or observe every applicable agreement and covenant of the related
Trust under the Indenture;
(c) no Event of Default shall have occurred and be continuing
immediately after merger or consolidation;
(d) the Trust has been advised by each Rating Agency that merger or
consolidation will not result in the qualification, reduction or withdrawal
of its then-current rating of any Class of the Notes or Certificates of the
Series;
(e) the related Trust has received an opinion of counsel to the effect
that consolidation or merger would have no material adverse tax consequence
to the Trust or to any related Noteholder or Certificateholder;
(f) any action that is necessary to maintain the lien and security
interest created by this Indenture will have been taken; and
(g) the Trust will have delivered to the Indenture Trustee an
officer's certificate and an opinion of counsel each stating that
consolidation or merger and supplemental indenture comply with the
covenants of the Indenture and that all conditions precedent provided for
in the Indenture relating to the transaction have been complied with.
No Trust relating to a Series of Notes or Certificates, as applicable,
that includes Notes will:
(a) except as expressly permitted by the applicable Indenture, the
applicable Trust Agreement or Pooling and Servicing Agreement or other
documents with respect to the related Trust (the "Related Documents"),
sell, transfer, exchange or otherwise dispose of any of the assets of the
related Trust;
(b) claim any credit on or make any deduction from principal and
interest payments in respect of the related Notes, other than amounts
withheld under the Code or applicable state tax laws or assert any claim
against any present or former holder of the related Notes because of the
payment of taxes levied or assessed upon the related Trust;
(c) dissolve or liquidate in whole or in part;
(d) permit the validity or effectiveness of the related Indenture to
be impaired or permit any person to be released from any covenants or
obligations with respect to the related Notes under the related Indenture
except as may be expressly permitted by the related Indenture;
(e) 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 related Trust or any part of the
related Trust, or any interest in the related Trust or the proceeds; or
(f) permit the lien of the related Indenture not to constitute a valid
first priority security interest, other than with respect to a tax,
mechanics' or similar lien, in the assets of the related Trust.
Each Indenture Trustee and the related Noteholders, by accepting the
related Notes, will covenant that they will not at any time institute against
the applicable Trust any bankruptcy, reorganization or other proceeding under
any federal or state bankruptcy or similar law.
MODIFICATION OF INDENTURE. The Trust and the related Indenture Trustee
may, with the consent of the holders of a majority of the aggregate outstanding
principal amount of the Notes of the related Series, execute a supplemental
indenture to add provisions to, change in any manner or eliminate any provisions
of, the related Indenture, or modify, except as provided below, in any manner
the rights of the related Noteholders, provided that, subject to exceptions
which, if applicable, will be specified in the related prospectus supplement,
without the consent of the holder of each outstanding Note affected by the
related Indenture, no supplemental indenture will:
(a) change the due date of any installment of principal of or interest
on any related Note or reduce the principal amount of any related Note, the
interest rate specified on the related Note or the redemption price with
respect to the related Note or change any place of payment where or the
coin or currency in which any related Note or any interest on the related
Note is payable;
(b) impair the right to institute suit for the enforcement of specific
provisions of the related Indenture regarding payment;
(c) reduce the percentage of the aggregate amount of the outstanding
Notes of the related Series, the consent of the holders of which is
required for any supplemental indenture or for any waiver of compliance
with specific provisions of the related Indenture or of specific defaults
under the related Indenture and their consequences as provided for in the
related Indenture;
(d) modify or alter the provisions of the related Indenture regarding
the voting of Notes held by the applicable Trust, any other obligor on the
related Notes, the Seller or an affiliate of any of them;
(e) reduce the percentage of the aggregate outstanding amount of the
related Notes, the consent of the holders of which is required to direct
the related Indenture Trustee to sell or liquidate the Base Assets in the
Trust if the proceeds of the sale would be insufficient to pay the
principal amount and accrued and unpaid interest on the outstanding Notes
of the related Series;
(f) decrease the percentage of the aggregate principal amount of the
related Notes required to amend the sections of the related Indenture that
specify the percentage of the aggregate principal amount of the Notes of
the Series necessary to amend the related Indenture or other related
Agreements; or
(g) permit the creation of any lien ranking prior to or on a parity
with the lien of the related Indenture with respect to any of the
collateral for the related Notes or, except as otherwise permitted or
contemplated in the related Indenture, terminate the lien of the related
Indenture on any related collateral or deprive the holder of any the
related Note of the security afforded by the lien of the related Indenture.
The Trust and the related Indenture Trustee may also enter into
supplemental indentures, without obtaining the consent of the Noteholders of the
related Series, for the purpose of, among other things, adding any provisions to
or changing in any manner or eliminating any of the provisions of the related
Indenture or of modifying in any manner the rights of the Noteholders; provided
that this action will not materially and adversely affect the interest of any
related Noteholder.
ANNUAL COMPLIANCE STATEMENT. Each Trust for a Series of Notes or
Certificates, as applicable, that includes Notes will be required to file
annually with the related Indenture Trustee a written statement as to the
fulfillment of its obligations under the related Indenture.
INDENTURE TRUSTEE'S ANNUAL REPORT. The Indenture Trustee for each
Trust for a Series of Notes or Certificates, as applicable, that includes Notes
will be required to mail each year to all related Noteholders a brief report
relating to its eligibility and qualification to continue as Indenture Trustee
under the related Indenture, any amounts advanced by it under the Indenture, the
amount, interest rate and maturity date of indebtedness owing by the related
Trust to the applicable Indenture Trustee in its individual capacity, the
property and funds physically held by the related Indenture Trustee as such and
any action taken by it that materially affects the related Notes that has not
been previously reported.
SATISFACTION AND DISCHARGE OF INDENTURE. Each Indenture will be
discharged with respect to the collateral securing the related Notes upon the
delivery to the related Indenture Trustee for cancellation of all related Notes
or, with limitations, upon deposit with the related Indenture Trustee of funds
sufficient for the payment in full of all related Notes.
The Indenture Trustee
The Indenture Trustee for a Series of Notes will be specified in the
related prospectus supplement. The Indenture Trustee for any Series may resign
at any time, in which event the related Trust will be obligated to appoint a
successor indenture trustee for the related Series. The Trust may also remove
the related Indenture Trustee if the related Indenture Trustee ceases to be
eligible to continue as Indenture Trustee under the related Indenture or if the
related Indenture Trustee becomes insolvent. In these circumstances, the related
Trust will be obligated to appoint a successor indenture trustee for the
applicable Series of Notes. No resignation or removal of the Indenture Trustee
and appointment of a successor indenture trustee for a Series of Notes will
become effective until the acceptance of the appointment by the successor
indenture trustee for the related Series.
DESCRIPTION OF THE CERTIFICATES
The following summaries describe the material provisions in the
applicable Agreements which generally are anticipated to be common to the Trust
Agreements and to the Pooling and Servicing Agreement. The summaries do not
purport to be complete and are subject to, and are qualified in their entirety
by reference to, the provisions of the prospectus supplement and Agreement
relating to each Series of Certificates. Where particular provisions or terms
used in the related Certificates or Agreements are referred to in this
Prospectus, the actual provisions, including definitions of terms, are
incorporated in this Prospectus by reference as part of the summaries.
The related prospectus supplement will provide that each Class of
Certificates will have an original principal amount, no principal amount or
notional amount and will accrue interest on the original principal amount or
notional amount at a specified Certificate Interest Rate or will not bear
interest. Each Class of Certificates may have a different Certificate Interest
Rate, which may be a fixed, variable or adjustable Certificate Interest Rate, or
any combination of the foregoing. The related prospectus supplement will specify
the Certificate Interest Rate, or the method for determining the applicable
Certificate Interest Rate, for each Class of Certificates.
A Series of Notes or Certificates, as applicable, may include two or
more Classes of Certificates that differ as to timing and priority of
distributions, seniority, allocations of losses, Certificate Interest Rate or
amount of distributions in respect of principal or interest. Additionally,
distributions in respect of principal or interest in respect of any Class or
Classes may or may not be made upon the occurrence of specified events or on the
basis of collections from designated portions of the related Base Assets. If
specified in the related prospectus supplement, one or more Classes of
Certificates may be Strip Certificates. If a Series of Notes or Certificates, as
applicable, includes Classes of Notes, distributions in respect of the
Certificates may be subordinated in priority of payment to payments on the Notes
to the extent specified in the related prospectus supplement.
Certificates will be available for purchase in a minimum denomination
of $100,000 or other minimum denominations as the prospectus supplement shall
provide and in integral multiples of $1,000 in excess of the minimum
denominations and will be available in book-entry form or if provided in the
related prospectus supplement, as Definitive Certificates. If the Certificates
will be available in book-entry form only, the related prospectus supplement
will provide that Certificateholders will be able to receive Definitive
Certificates only in the limited circumstances described in this Prospectus or
in the related prospectus supplement. The Certificates of each Series will be
issued only in fully registered form, without coupons, in the authorized
denominations for each Class specified in the related prospectus supplement.
Upon satisfaction of the conditions, if any, applicable to a Class of
Certificates of a Series, as described in the related prospectus supplement, the
transfer of the Certificates may be registered and the Certificates may be
exchanged at the office of the Trustee specified in the related prospectus
supplement without the payment of any service charge other than any tax or
governmental charge payable in connection with the registration of transfer or
exchange.
Payments of principal of and interest, if any, on the Certificates of
a Series will be made on the dates specified in the related prospectus
supplement by check mailed to Certificateholders of the related Series,
registered as Certificateholders of the Series at the close of business on the
record date applicable to each Payment Date at their addresses appearing on the
register of Certificates for the related Series or in any other manner as shall
be specified in the related prospectus supplement, except that:
o payments may be made by wire transfer, at the expense of the
Certificateholder requesting payment by wire transfer, in
circumstances described in the related prospectus supplement, and
o final payments of principal in retirement of any Certificate will
be made only upon presentation and surrender of the related
Certificate at the office of the Trustee specified in the related
prospectus supplement.
Notice of the final payment on a Certificate will be mailed to the holder of the
Certificate before the Payment Date on which the final principal payment on any
Certificate is expected to be made to the holder of that Certificate.
Payments of principal of and interest, if any, on the Certificates
will be made by the Trustee, or a paying agent on behalf of the Trustee, as
specified in the related prospectus supplement. All payments with respect to the
Base Assets for a Series, together with reinvestment income on these payments,
amounts withdrawn from any Reserve Account and amounts available pursuant to any
other Series Enhancement generally will be deposited directly into the
Collection Account net, if and as provided in the related prospectus supplement,
of amounts payable to the Servicer under the related Agreement and specified in
the related prospectus supplement, and will then be deposited into the
applicable Payment Accounts and be available to make payments on Certificates of
the related Series on the next Payment Date, as the case may be. See "The Trust
Assets --Collection and Payment Accounts" .
Payments of Interest
The Certificates of each Class which by their terms are entitled to
receive interest will bear interest, calculated on the basis of a 360-day year
of twelve 30-day months or any other basis as is specified in the related
prospectus supplement, from the date and at the rate per annum specified, or
calculated in the method described, in the related prospectus supplement.
Interest on the Certificates of a Series will be payable on the Payment Dates
specified in the related prospectus supplement. The rate of interest on one or
more Classes of Certificates of a Series may be fixed, floating, variable or
adjustable. A Class of Certificates may by its terms be "Principal Only
Certificates", which may not be entitled to receive any interest distributions
or may be entitled to receive only nominal interest distributions. A Class of
Certificates may by its terms be "Zero Coupon Certificates", the interest on
which is not paid on the related Payment Date, but will accrue and be added to
the principal of the Certificates on the related Payment Date.
Interest payable on the Certificates on a Payment Date will include
all interest accrued during the related period specified in the related
prospectus supplement. In the event interest accrues during the calendar month
preceding a Payment Date, the effective yield to Certificateholders will be
reduced from the yield that would otherwise be obtainable if interest payable on
the Certificates were to accrue through the day immediately preceding the
related Payment Date.
Payments of Principal
On each Payment Date for Certificates of a Series, principal payments
will be made to the holders of the related Certificates on which principal is
then payable, to the extent set forth in the related prospectus supplement. The
payments will be made in an aggregate amount determined as specified in the
related prospectus supplement and will be allocated among the respective Classes
of a Series in the manner, at the times and in the priority, which may, in some
cases, include allocation by random lot, set forth in the related prospectus
supplement.
With respect to each Class of Certificates not issued pursuant to a
Pooling and Servicing Agreement, a "Final Scheduled Payment Date" will be
specified in the related prospectus supplement, which will be the date,
calculated on the basis of the assumptions applicable to the Series described in
the related prospectus supplement, on which the entire aggregate principal
balance of the related Class is expected to be reduced to zero. Because payments
received on the Base Assets will generally be used to make distributions in
reduction of the outstanding principal amounts of the Certificates, it is likely
that the final principal payment with respect to a Class of Certificates will
occur earlier, and may occur substantially earlier than its Final Scheduled
Payment Date.
Receivables Pooling Certificates
INVESTOR CERTIFICATEHOLDERS' INTEREST; DEPOSITOR'S INTEREST. In the
case of a Series of Receivables Pooling Certificates, a portion of the assets of
the related Trust will be allocated among the Investor Certificateholders'
Interest and the remainder will be allocated to the depositor's interest (the
"Depositor's Interest") and as provided in the related prospectus supplement.
The Depositor's Interest represents the rights to the assets of the Trust not
allocated to the Investor Certificateholders' Interest of any Series or any
interests in the Trust issued as Series Enhancement. In the case of a Master
Trust, the related Seller may cause the issuance of additional Series of
Certificates from time to time and this issuance will have the effect of
decreasing the Depositor's Interest. The Depositor's Interest may be evidenced
by an exchangeable certificate that is subject to specific transfer
restrictions. The aggregate principal amount of the Investor Certificateholders'
Interest will, except as provided in this Prospectus or in the related
prospectus supplement, remain fixed at the aggregate initial principal amount of
the Certificates of the related Series and the principal amount of the
Depositor's Interest will fluctuate as the amount of the "Principal
Receivables", as defined in the related prospectus supplement, Government
Securities, if any, and Private Label Custody Receipt Securities, if any, held
by the Trust changes from time to time. If so provided in the related prospectus
supplement, in some circumstances, interests in the assets of a Trust may be
allocated to a credit enhancer, and in the case of a Master Trust, interests in
the assets of the Trust may be allocated to the Investor Certificateholders of
more than one Series.
EFFECT OF ISSUANCE OF ADDITIONAL SERIES. In the case of a Master
Trust, the Pooling and Servicing Agreement may provide that, pursuant to any one
or more supplements to the related Pooling and Servicing Agreement (each, a
"Supplement"), the Depositor may direct the Trustee to authenticate from time to
time new Series, subject to the conditions described below (each issuance, a
"New Issuance"). Each New Issuance will have the effect of decreasing the
Depositor's Interest to the extent of the initial Invested Amount of a Series.
Under the Pooling and Servicing Agreement, the Depositor may designate, with
respect to any newly issued Series:
(a) its name or designation;
(b) its initial principal amount or method for calculating its amount,
and its Invested Amount in the Trust which is generally based on the aggregate
amount of Principal Receivables, Government Securities, if any, and Private
Label Custody Receipt Securities, if any, in the Trust allocated to the related
Series, and its Series Invested amount;
(c) its certificate rate, or formula for the determination of the
certificate rate;
(d) the interest payment date or dates and the dates from which
interest shall accrue;
(e) the method for allocating collections to Certificateholders of the
Series;
(f) any bank accounts to be used by the related Series and the terms
governing the operation of these bank accounts;
(g) the percentage used to calculate the Monthly Servicing Fee;
(h) the provider and terms of any form of Series Enhancement with
respect to any newly issued Series;
(i) the terms on which the Certificates of the Series may be
repurchased or remarketed to other investors;
(j) the Series Termination Date;
(k) the number of Classes of Certificates of the Series, and if the
Series consists of more than one Class, the rights and priorities of each
related Class;
(l) the extent to which the Certificates of the Series will be
issuable in temporary or permanent global form, and, in this case, the
depositary for these global certificate or certificates, the terms and
conditions, if any, upon which these global certificate or certificates may be
exchanged, in whole or in part, for definitive certificates, and the manner in
which any interest payable on this global certificate or certificates will be
paid;
(m) whether the Certificates of the Series may be issued in bearer
form and any limitations imposed on the Certificates;
(n) the priority of the Series with respect to any other Series; and
(o) any other relevant terms (all relevant terms, the "Principal
Terms" of the related Series).
None of the Depositor, the Servicer, the Trustee or the Trust is required or
intends to obtain the consent of any Certificateholder of any outstanding Series
to issue any additional Series.
The Pooling and Servicing Agreement may provide that the Depositor may
designate Principal Terms so that each Series has a Controlled Accumulation
Period or a Controlled Amortization Period that may have a different length and
begin on a different date than the Controlled Accumulation Periods or the
Controlled Amortization Periods for any other Series. Further, one or more
Series may be in their Controlled Accumulation Period or Controlled Amortization
Period while other Series are not. Moreover, each Series may have the benefits
of Series Enhancement issued by enhancement providers different from the
providers of Series Enhancement with respect to any other Series. Under the
Pooling and Servicing Agreement, the Trustee shall hold any Series Enhancement
only on behalf of the Certificateholders of the Series to which the Series
Enhancement relates. With respect to each Series Enhancement, the Depositor also
has the option under the Pooling and Servicing Agreement to vary among Series
the terms upon which a Series may be repurchased by the Depositor or remarketed
to other investors. There is no limit to the number of New Issuances the
Depositor may cause under the Pooling and Servicing Agreement. The Trust will
terminate only as provided in the Pooling and Servicing Agreement. There can be
no assurance that the terms of any Series might not have an impact on the timing
and amount of payments received by a Certificateholder of another Series.
Under the Pooling and Servicing Agreement and pursuant to a
Supplement, a New Issuance may only occur upon the satisfaction of conditions
provided in the Pooling and Servicing Agreement. The obligation of the Trustee
to authenticate the Certificates of a new Series and to execute and deliver the
related Series Supplement is subject to the satisfaction of the following
conditions:
(a) on or before the fifth day immediately preceding the date upon
which the New Issuance is to occur, the Depositor shall have given the Trustee,
the Servicer, each Rating Agency and any Series Enhancer so entitled pursuant to
the relevant Supplement, written notice of the New Issuance and the date upon
which the New Issuance is to occur;
(b) the Depositor shall have delivered to the Trustee the related
Supplement, in form satisfactory to the Trustee, executed by each party to the
Pooling and Servicing Agreement other than the Trustee;
(c) the Depositor shall have delivered to the Trustee any related
Series Enhancement agreement executed by each of the parties to the applicable
Agreement;
(d) the Depositor shall have received notice from each Rating Agency
that the New Issuance shall not cause the Rating Agency to reduce or withdraw
the then current rating of the Certificates of any outstanding Series or Class;
(e) the Depositor shall have delivered to the Trustee and providers of
Series Enhancement a certificate of an authorized representative, dated the date
upon which the New Issuance is to occur, to the effect that the Depositor
reasonably believes that the issuance will not, based on the facts known to the
representative at the time of certification, cause a Pay Out Event; and
(f) the Depositor shall have delivered to the Trustee, each Rating
Agency and providers of Series Enhancement an opinion of counsel acceptable to
the Trustee that for federal income tax purposes:
(1) following a New Issuance the Trust will not be deemed to be
an association, or publicly traded partnership taxable as a
corporation,
(2) a New Issuance will not adversely affect the tax
characterization as debt of Certificates of any outstanding Series or
Class that were characterized as debt at the time of their issuance,
(3) a New Issuance will not cause or constitute an event in which
gain or loss would be recognized by any Certificateholders, and
(4) except as is otherwise provided in a Supplement with respect
to any Series, the Certificates of the related Series will be properly
characterized as debt.
Upon satisfaction of the above conditions, the Trustee shall execute the
Supplement and issue to the Depositor the Certificates of the new Series for
execution and redelivery to the Trustee for authentication.
ALLOCATION PERCENTAGE. Pursuant to the Pooling and Servicing
Agreement, all amounts collected with respect to:
(a) finance charge receivables (as defined in the related prospectus
supplement, the "Finance Charge Receivables") and Principal Receivables and the
Defaulted Amount,
(b) the Government Securities, if any, and
(c) the Private Label Custody Receipt Securities, if any, with respect
to any Monthly Period will be allocated among the Investor Certificateholders'
Interest of each Series, the Depositor's Interest and in some circumstances to
the provider of Series Enhancement, and all Adjustment Payments and Deposit
Amounts deposited in the Collection Account (collectively, "Miscellaneous
Payments") with respect to any Monthly Period will be allocated among the
Investor Certificateholders' Interest of each Series, as follows:
(1) collections of:
(A) Finance Charge Receivables and the Defaulted Amount,
(B) interest on the Government Securities, if any, and
(C) interest on the Private Label Custody Receipt
Securities, if any, will at all times be allocated to the
Investor Certificateholders' Interest of a Series based on the
Floating Allocation Percentage of the related Series;
(2) collections of:
(A) Principal Receivables;
(B) principal of the Government Securities, if any, and
(C) principal of the Private Label Custody Receipt
Securities, if any, will at all times be allocated to the
Investor Certificateholders' Interest of a Series based on the
Principal Allocation Percentage of the related Series; and
(3) miscellaneous Payments will at all times be allocated among
the Investor Certificateholder's Interest of each Series based on
their respective Invested amounts.
The "Floating Allocation Percentage" and the "Principal Allocation Percentage"
with respect to any Series will be determined as set forth in the related
Supplement and, with respect to each Series offered by this Prospectus, in the
related prospectus supplement. Amounts not allocated to the Investor
Certificateholders' Interest of any Series as described above will be allocated
to the Depositor's Interest.
COLLECTIONS. All collections in respect of Receivables and
Participations with respect to a given Trust will be allocated by the related
Servicer or Trustee as amounts collected on Principal Receivables and on Finance
Charge Receivables. The Servicer will allocate between the Investor
Certificateholders' Interest of each Series, if more than one, of the related
Trust and the Depositor's Interest all amounts collected with respect to:
o Finance Charge Receivables and Principal Receivables and the
Defaulted Amount,
o the Government Securities, if any, and
o Private Label Custody Receipt Securities, if any.
The "Defaulted Amount" for any Monthly Period will be an amount, not less than
zero, equal to:
(a) the amount of Principal Receivables which were charged off as
uncollectible in the Monthly Period in accordance with the Servicer's customary
and usual servicing procedures ("Defaulted Receivables") for the Monthly Period,
minus
(b) the sum of:
(1) the amount of any Defaulted Receivables of which either the
Depositor or the Servicer becomes obligated to accept
reassignment or assignment during the Monthly Period, unless
an Insolvency Event shall have occurred with respect to the
Depositor, the Seller or the Servicer, in which event the
amount of the Defaulted Receivables will not be added to the
sum so subtracted,
(2) the aggregate amount of recoveries, net of collection
expenses, received in the Monthly Period with respect to
both Finance Charge Receivables and Principal Receivables
previously charged off as uncollectible, and
(3) the excess, if any, for the immediately preceding Monthly
Period of the sum computed pursuant to this clause (b) for
the Monthly Period over the amount of Principal Receivables
which became Defaulted Receivables in the Monthly Period.
Collections of:
o Finance Charge Receivables and the Defaulted Amount,
o interest on the Government Securities, if any, and
o interest on the Private Label Custody Receipt Securities, if any,
will be allocated to each Series at all times based upon its
Floating Allocation Percentage.
Collections of:
o Principal Receivables,
o principal of the Government Securities, if any, and
o principal of the Private Label Custody Receipt Securities, if
any, will be allocated to each related Series at all times based
upon its Principal Allocation Percentage.
The Floating Allocation Percentage and the Principal Allocation Percentage with
respect to each related Series will be determined as set forth in the related
Supplement and, with respect to each Series offered by this Prospectus, in the
related prospectus supplement. Collections will be deposited in the related
Collection Account and invested in the manner described under "Servicing of
Receivables -- Deposits in the Collection Account".
INTEREST. Interest will accrue on the Invested amount of the
Receivables Pooling Certificates of a Series or Class (the "Invested Amount" of
the Series or Class) offered by this Prospectus at the per annum rate either
specified, or determined in the manner specified, in the related prospectus
supplement (the "Certificate Interest Rate "). If the prospectus supplement for
a Series of Receivables Pooling Certificates so provides, the interest rate and
interest payment dates applicable to each Class of Certificates of that Series
may be subject to adjustment from time to time. Any interest rate adjustment
would be determined by reference to one or more indices or by a remarketing
firm, in each case as described in the prospectus supplement for the related
Series. To the extent provided in this Prospectus or in the related prospectus
supplement, collections of Finance Charge Receivables and other amounts
allocable to the Investor Certificateholders' Interest of a Series offered by
this Prospectus will be used to make interest payments to Certificateholders of
the related Series on each Interest Payment Date with respect to these
collections, provided that if a rapid amortization period commences with respect
to the related Series, interest will then be distributed to these
Certificateholders monthly on each Special Payment Date. If the Interest Payment
Dates for a Series or Class occur less frequently than monthly, collections or
other amounts, or the portion allocable to the related Class, will be deposited
in one or more trust accounts (in the case of the deposit of interest, an
"Interest Funding Account") and used to make interest payments to
Certificateholders of the related Series or Class on the following Interest
Payment Date with respect to the related Series or Class. If a Series has more
than one Class of Receivables Pooling Certificates, each related Class may have
a separate Interest Funding Account.
PRINCIPAL. The principal of any Receivables Pooling Certificates will
be scheduled to be paid either in full on an expected date specified in the
related prospectus supplement (the "Expected Final Payment Date "), in which
case the related Series will have an accumulation period, as described below
under " -- Accumulation Period", or in installments commencing on a date
specified in the related prospectus supplement (the "Principal Commencement Date
"), in which case the Receivables Pooling Certificates will have a Controlled
Amortization Period as described below under " -- Controlled Amortization
Period". If the related Series has more than one Class of Certificates, a
different method of paying principal, Expected Final Payment Date and/or
Principal Commencement Date may be assigned to each Class. The principal with
respect to the Certificates of the related Series or Class may be made or
commence earlier than the applicable Expected Final Payment Date or Principal
Commencement Date, as the case may be, and the final principal payment with
respect to the Certificates of the related Series or Class may be made earlier
or later than the applicable Expected Final Payment Date or Principal
Commencement Date, if a Pay Out Event occurs with respect to the related Series
or Class or under other circumstances described in this Prospectus or in the
related prospectus supplement.
REVOLVING PERIOD. Receivables Pooling Certificates will have a
"Revolving Period", which will commence on the date specified in the related
prospectus supplement as the Series Cut-Off Date and continue until the earliest
to occur of:
o the commencement of the Rapid Amortization Period with respect to
the Series, and
o the date specified in the related prospectus supplement as the
last day of the Revolving Period with respect to the Series.
During the Revolving Period with respect to the Series, collections of Principal
Receivables, collections of principal of the Government Securities, if any,
collections of principal of the Private Label Custody Receipt Securities, if
any, and other amounts otherwise allocable to the Investor Certificateholders'
Interest of the Series will be distributed to or for the benefit of the
Certificateholders of other Series, if so provided in the related prospectus
supplement or the Seller or the Depositor in respect of the Depositor's
Interest.
CONTROLLED ACCUMULATION PERIOD. If so specified by the related
prospectus supplement in the case of a Series of Receivables Pooling
Certificates, and unless a Rapid Amortization Period commences with respect to
the related Series, one or more Classes of Certificates of the Series will have
a Controlled Accumulation Period. The controlled accumulation period (the
"Controlled Accumulation Period") will commence on the close of business on the
date specified, or determined in the manner specified, in the related prospectus
supplement and will continue until the earliest to occur of:
o the commencement of a Rapid Amortization Period with respect to
the Series,
o payment in full of the Invested Amount of the Certificates of the
Series, or
o the Series Termination Date with respect to the Series.
During the Controlled Accumulation Period with respect to a Series of
Receivables Pooling Certificates, collections of Principal Receivables,
principal of the Government Securities, if any, principal of the Private Label
Custody Receipt Securities, if any, and other amounts allocable to the Investor
Certificateholders' Interest of the Series will be deposited on each
Distribution Date in a trust account established for the benefit of the Investor
Certificateholders of the Series (the "Principal Funding Account") and used to
make principal distributions to the Certificateholders when due. The amount to
be deposited in the Principal Funding Account on the applicable Distribution
Date may, but will not necessarily, be limited to the "Controlled Deposit Amount
" equal to the "Controlled Accumulation Amount" specified in the related
prospectus supplement plus any existing deficit with respect to the Controlled
Accumulation Amount arising from prior Distribution Dates (the "Deficit
Controlled Accumulation Amount "). If a Series of Receivables Pooling
Certificates has more than one Class, each Class may have a separate Principal
Funding Account and Controlled Accumulation Amount. In addition, the related
prospectus supplement may describe priorities among Classes with respect to
deposits of principal into Principal Funding Accounts. In general, unless a Pay
Out Event shall have occurred prior to the Expected Final Payment Date for a
Series, on the Expected Final Payment Date for a particular Series or Class, all
amounts accumulated in the Principal Funding Account with respect to the Series
or Class during the Controlled Accumulation Period will be distributed as a
single repayment of principal with respect to the Series or Class.
RAPID ACCUMULATION PERIOD. If so specified and under the conditions
set forth in the prospectus supplement relating to a Series having a Controlled
Accumulation Period, during the period (the "Rapid Accumulation Period" and
together with the Controlled Accumulation Period, each an "Accumulation Period")
from the day on which a Pay Out Event has occurred until the earliest of:
o the commencement of the Rapid Amortization Period,
o payment in full of the Investor Interest of the Certificates of
the Series and, if so specified in the related prospectus
supplement, of the Collateral Interest, if any, with respect to
the Series, and
o the related Series Termination Date,
collections of Principal Receivables allocable to the Investor Interest of the
Series, and other amounts if so specified in the related prospectus supplement,
will be deposited on each Transfer Date in the Principal Funding Account and
used to make distributions of principal to the Certificateholders of the Series
or Class on the Scheduled Payment Date.
The amount to be deposited in the Principal Funding Account during the
Rapid Accumulation Period will not be limited to the Controlled Deposit Amount.
During the Rapid Accumulation Period, funds on deposit in any
Principal Funding Account may be invested in permitted investments or subject to
a guaranteed rate or investment contract or other arrangement intended to assure
a minimum return on the investment of the funds. Investment earnings on the
funds may be applied to pay interest on the related Series of Certificates or
make other payments as specified in the related prospectus supplement. In order
to enhance the likelihood of payment in full of principal at the end of the
Rapid Accumulation Period with respect to a Series of Certificate, the Series
may be subject to a principal guaranty or other similar agreement.
CONTROLLED AMORTIZATION PERIOD. If the related prospectus supplement
so specifies with respect to a Series of Receivables Pooling Certificates,
unless a Rapid Amortization Period commences with respect to a Series, one or
more Classes of Certificates of the Series will have a Controlled Amortization
Period. The controlled amortization period (the "Controlled Amortization
Period") will commence at the close of business on the date specified or
determined in the manner specified in the related prospectus supplement and will
continue until the earliest to occur of:
o the commencement of the Rapid Amortization Period with respect to
a Series,
o payment in full of the Invested Amount of the Certificates of a
Series, or
o the Series Termination Date with respect to a Series.
During the Controlled Amortization Period with respect to a Series, collections
of Principal Receivables, principal of the Government Securities, if any,
principal of the Private Label Custody Receipt Securities, if any, and other
amounts allocable to the Investor Certificateholders' Interest of a Series will
be used on each Distribution Date to make principal distributions to
Certificateholders of the Series or any Class of the Series then scheduled to
receive the related distributions. The amount to be distributed to
Certificateholders of any Series on any Distribution Date may, but will not
necessarily, be limited to an amount (the "Controlled Distribution Amount")
which will be equal to the "Controlled Amortization Amount" specified in the
related prospectus supplement plus any existing deficit with respect to the
Controlled Amortization Amount arising from prior Distribution Dates (the
"Deficit Controlled Amortization Amount". If a Series of Receivables Pooling
Certificates has more than one Class, each Class may have a separate Controlled
Amortization Amount. In addition, the related prospectus supplement may describe
priorities among the Classes with respect to these distributions.
RAPID AMORTIZATION PERIOD. During the Rapid Amortization Period,
collections of Principal Receivables and other amounts allocable to the Investor
Certificateholders' Interest of the Series will be distributed as principal
payments to the Investor Certificateholders of the Series monthly on each
Distribution Date beginning with the first Special Payment Date with respect to
the Series. The "Rapid Amortization Period" will commence and end on the dates
set forth in the related prospectus supplement. During the Rapid Amortization
Period with respect to a Series, distributions of principal to Investor
Certificateholders will not be subject to any Controlled Deposit Amount or
Controlled Distribution Amount. In addition, upon the commencement of the Rapid
Amortization Period with respect to a Series, any funds on deposit in a
Principal Funding Account with respect to a Series will be paid to the
Certificateholders of the relevant Class or Series on the first Special Payment
Date with respect to the related Series. See "Description of the Certificates --
Pay Out Events" below for a discussion of the events which might lead to the
commencement of the Rapid Amortization Period with respect to a Series.
PAY OUT EVENTS. As described above, the Revolving Period with respect
to a Series of Receivables Pooling Certificates will commence on the Series
Cut-Off Date and continue until the commencement of the Controlled Accumulation
Period or the Controlled Amortization Period, unless a Pay Out Event occurs with
respect to the Series prior to any of these dates. A "Pay Out Event" with
respect to the Series refers to any events specified in the related prospectus
supplement, which events may include:
o the occurrence of an "Insolvency Event", which shall mean the
appointment of the FDIC as receiver of the Depositor or the
Seller or another person specified in the related prospectus
supplement, or other events relating to the bankruptcy,
insolvency or receivership of the Depositor or the Seller, or
another person specified in the related prospectus supplement; or
o the Trust becoming an investment company within the meaning of
the Investment Company Act of 1940 (the "Investment Company
Act").
In the case of any event described above, a Pay Out Event with respect
to the affected Series will be deemed to have occurred without any notice or
other action on the part of the Trustee or the Investor Certificateholders of
the affected Series immediately upon the occurrence of this event. The Rapid
Amortization Period with respect to a Series will commence at the close of
business on the day immediately preceding the day on which a Pay Out Event
occurs with respect to the related Series. Distributions of principal to the
Investor Certificateholders of the related Series will begin on the Distribution
Date next following the month during which the Pay Out Event occurs (the
Distribution Date and each following Distribution Date with respect to the
related Series, a "Special Payment Date"). Any amounts on deposit in a Principal
Funding Account or an Interest Funding Account with respect to the related
Series at that time will be distributed on the first Special Payment Date to the
Investor Certificateholders of the Series. If a Series has more than one Class
of Certificates, each Class may have different Pay Out Events which, in the case
of any Series of Certificates offered by this Prospectus, will be described in
the related prospectus supplement.
In addition to the consequences of a Pay Out Event discussed above, if
any Insolvency Event occurs with respect to the Depositor or the Seller,
pursuant to the Pooling and Servicing Agreement and the Receivables Purchase
Agreement, on the day of the Insolvency Event, the Depositor or the Seller will
immediately cease to transfer Principal Receivables directly or indirectly to
the Trust and promptly give notice to the Trustee of the Insolvency Event. Under
the terms of the Pooling and Servicing Agreement and the Receivables Purchase
Agreement applicable to the Series, within 15 days the Trustee will publish a
notice of the occurrence of the Insolvency Event stating that the Trustee
intends to sell, dispose of or otherwise liquidate the Receivables, Government
Securities, if any, and Private Label Custody Receipt Securities, if any, in a
commercially reasonable manner and on commercially reasonable terms unless
within 90 days from the date notice is published the holders of Certificates of
each Series or, if a Series includes more than one Class, each Class of the
related Series evidencing more than 50% of the aggregate unpaid principal amount
of each related Series or Class and other interested parties specified in the
related prospectus supplement instruct the Trustee not to dispose of or
liquidate the Receivables, Government Securities, if any, and Private Label
Custody Receipt Securities, if any, and to continue transferring Principal
Receivables as before the Insolvency Event. The proceeds from any sale,
disposition or liquidation of the Receivables, Government Securities, if any,
and Private Label Custody Receipt Securities, if any, will be deposited in the
Collection Account and allocated as described in the applicable Pooling and
Servicing Agreement and the related prospectus supplement. If the sum of:
o the portion of the proceeds allocated to the Investor
Certificateholders' Interest of any Series, and
o the proceeds of any collections of the Receivables, Government
Securities, if any, and Private Label Custody Receipt Securities,
if any, in the Collection Account allocated to the Investor
Certificateholders' Interest of the related Series, together with
any related rights under any applicable Series Enhancement,
is not sufficient to pay the Invested Amount of the Certificates of the related
Series in full, the Investor Certificateholders will incur a loss.
PAIRED SERIES. If so provided in the related prospectus supplement,
one or more Series or a portion of one or more Series previously issued by a
Trust (a "Prior Series ") may be paired with one or more other series (a "Paired
Series ") issued by the Trust. As the Invested Amount of the Prior Series is
reduced, the Invested Amount in the Trust of the Paired Series will increase by
an equal amount. Upon payment in full of the Prior Series, the Invested Amount
of the Paired Series will be equal to the Invested Amount paid to
Certificateholders of the Prior Series. If a Pay Out Event occurs with respect
to the Prior Series or with respect to the Paired Series when the Prior Series
is in a Controlled Amortization Period or Controlled Accumulation Period, the
Series Allocation Percentage and the Principal Allocation Percentage for the
Prior Series and the Series Allocation Percentage and the Principal Allocation
Percentage for the Paired Series will be reset as provided in the related
prospectus supplement and the Early Amortization Period or Early Accumulation
Period for the related Series could be lengthened. It shall be a condition to
the issuance of a Paired Series that this issuance shall not result in the
reduction by any Rating Agency of the rating of the Prior Series.
OPTIONAL TERMINATION; FINAL PAYMENT OF PRINCIPAL. If specified in the
prospectus supplement, subject to any conditions described in the prospectus
supplement, on any day occurring on or after the day that the principal amount
of the Certificates of a Series and the Enhancement Invested Amount, if any,
with respect to the Series is reduced to a percentage of the initial outstanding
aggregate principal amount of the Certificates of the related Series set forth
in the related prospectus supplement, the Depositor will have the option to
repurchase the Investor Certificateholders' Interest of the related Series. The
purchase price will be equal to the sum of the principal amount of the Series,
less the amount, if any, on deposit in any Principal Funding Account with
respect to the related Series, plus the Enhancement Invested Amount, if any,
with respect to the related Series, plus accrued and unpaid interest on the
unpaid principal amount of the Certificates, including the Collateral
Indebtedness Interests, if any, and, if applicable, on the Enhancement Invested
Amount, and accrued and unpaid interest with respect to interest amounts that
were due but not paid on a prior Payment Date, through:
o if the day on which the repurchase occurs is a Distribution Date,
the day preceding this Distribution Date, or
o if the day on which the repurchase occurs is not a Distribution
Date, the day preceding the Distribution Date following that day,
at the applicable Certificate Interest Rate.
Following any repurchase and the deposit of the aggregate purchase price into
the Collection Account, the Investor Certificateholders of the related Series
will have no further rights with respect to the Receivables. In the event that
the Depositor shall fail for any reason to deposit the aggregate purchase price
for the Investor Certificateholders' Interest of a Series, payments would
continue to be made to the Investor Certificateholders of the related Series as
described in this Prospectus and in the related prospectus supplement.
In any event, the last payment of principal and interest on the Notes
or Certificates, as applicable, of a Series will be due and payable not later
than the date (the "Series Termination Date") specified in the related
prospectus supplement. In the event that the principal amount of the Notes or
Certificates, as applicable, of any related Series or the Enhancement Invested
Amount is greater than zero on the Series Termination Date, the Trustee will
sell or cause to be sold interests in the Receivables, Government Securities, if
any, and Private Label Custody Receipt Securities, if any, of the related Trust,
as specified in the Pooling and Servicing Agreement, in an amount equal to the
sum of the principal amount of the outstanding Notes or Certificates, as
applicable, and the Enhancement Invested Amount, if any, with respect to the
related Series at the close of business on the Series Termination Date. The net
proceeds of the sale will be deposited in the Collection Account and allocated
to the Certificateholders of the related Series or the holder of the Enhancement
Invested Amount after the Certificateholders are paid in full, as provided in
the Pooling and Servicing Agreement with respect to the Series.
The Depositor may, at its option, purchase a Class of Certificates of
any Series, on any Distribution Date under the circumstances, if any, specified
in the prospectus supplement relating to that Series. Alternatively, if so
specified in the related prospectus supplement for a Series of Certificates, the
Depositor, the Servicer, or another entity designated in the related prospectus
supplement may, at its option, cause an early termination of a Trust by
repurchasing all of the Receivables, Government Securities, if any, and Private
Label Custody Receipt Securities, if any, from the Trust on or after a date
specified in the related prospectus supplement, or on or after that time as the
aggregate outstanding principal amount of the Certificates or Receivables,
Government Securities, if any, and Private Label Custody Receipt Securities, if
any, as specified in the related prospectus supplement, is less than the amount
or percentage specified in the related prospectus supplement. Notice of a
purchase or termination must be given by the Depositor, the Servicer or the
Trustee prior to the related date. The purchase or repurchase price will be set
forth in the related prospectus supplement.
In addition, the related prospectus supplement may provide other
circumstances under which holders of Certificates of a Series could be fully
paid significantly earlier than would otherwise be the case as a result of the
occurrence of a Rapid Amortization Event.
CERTAIN INFORMATION REGARDING THE SECURITIES
Book-Entry Registration
If so specified in the related prospectus supplement, holders of Notes
or Certificates, as applicable, may hold their Notes or Certificates, as
applicable, through the Depository Trust Company ("DTC" in the United States) or
Clearstream Luxembourg or Euroclear (in Europe) if they are participants of
these systems, or indirectly through organizations which are participants in
these systems.
Cede & Co. ("Cede"), as nominee for DTC, will hold one or more global
Notes or Certificates, as applicable. Unless and until definitive securities
are issued in fully registered, certified form ("Definitive Notes" or
"Definitive Certificates," and collectively, "Definitive Securities ") under the
limited circumstances described in the related prospectus supplement, all
references in this Prospectus or in the related prospectus supplement to actions
by holders of Notes or Certificates, as applicable, shall refer to actions taken
by DTC upon instructions from its participating organizations (the
"Participants") and all references in this Prospectus to distributions, notices,
reports and statements to holders of Notes or Certificates, as applicable, shall
refer to distributions, notices, reports and statements to DTC or Cede, as the
registered holder of the Notes or Certificates, as applicable, as the case may
be, for distribution to the beneficial owners of the related Notes or
Certificates, as applicable, in accordance with DTC procedures.
Clearstream Luxembourg and Euroclear will hold omnibus positions on
behalf of their participants through customers' securities accounts in
Clearstream Luxembourg's and Euroclear's names on the books of their respective
Depositaries which in turn will hold these positions in customers' securities
accounts in the Depositaries' names on the books of DTC. Citibank, N.A. will act
as depositary for Clearstream Luxembourg and Morgan Guaranty Trust Company of
New York will act as depositary for Euroclear (in these capacities, the
"Depositaries").
Transfers between DTC Participants will occur in the ordinary way in
accordance with DTC rules. Transfers among Clearstream Luxembourg Participants
or Euroclear Participants will occur in the ordinary way in accordance with the
applicable rules and operating procedures of Clearstream Luxembourg and
Euroclear.
Cross-market transfers between persons holding directly or indirectly
through DTC on the one hand, and directly or indirectly through Clearstream
Luxembourg or Euroclear, on the other, will be effected in DTC in accordance
with DTC rules on behalf of the relevant European international clearing system
by its Depositary; however, these cross-market transactions will require
delivery of instructions to the relevant European international clearing system
by the counterparty in the clearing system in accordance with its rules and
procedures and within its established deadlines (European time). The relevant
European international clearing system will, if the transaction meets its
settlement requirements, deliver instructions to its Depositary to take action
to effect final settlement on its behalf by delivering or receiving securities
in DTC, and making or receiving payment in accordance with normal procedures for
same-day funds settlement applicable to DTC. Clearstream Luxembourg Participants
and Euroclear Participants may not deliver instructions directly to the
Depositaries.
Because of time-zone differences, credits of securities received in
Clearstream Luxembourg or Euroclear as a result of a transaction with a DTC
Participant will be made during subsequent securities settlement processing and
dated the business day following the DTC settlement date. These credits or any
transactions in the securities settled during processing will be reported to the
relevant Euroclear Participant or Clearstream Luxembourg Participant on that
business day. Cash received in Clearstream Luxembourg or Euroclear as a result
of sales of securities by or through a Clearstream Luxembourg Participant or a
Euroclear Participant to a DTC Participant will be received with value on the
DTC settlement date but will be available in the relevant Clearstream Luxembourg
or Euroclear cash account only as of the business day following settlement in
DTC. For additional information regarding clearance and settlement procedures
for the Notes or Certificates, as applicable, see Annex I to this Prospectus
and for information with respect to tax documentation procedures relating to the
Notes or Certificates, as applicable, see Annex I to this Prospectus and
"Certain Federal Income Tax Consequences -- Foreign Investors."
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York UCC, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
was created to hold securities for its Participants and facilitate the clearance
and settlement of securities transactions between Participants through
electronic book-entry changes in accounts of its Participants, thus eliminating
the need for physical movement of certificates. Participants include securities
brokers and dealers, banks, trust companies and clearing corporations and may
include other organizations, including the Underwriters. Indirect access to the
DTC System also is available to others such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly (the "Indirect Participants").
Holders of Notes or Certificates, as applicable, that are not
Participants or Indirect Participants but desire to purchase, sell or otherwise
transfer ownership of, or other interests in, Notes or Certificates, as
applicable, may do so only through Participants and Indirect Participants. In
addition, holders of Notes or Certificates, as applicable, will receive all
distributions of principal of and interest on the Notes or Certificates, as
applicable, from the Trustee, or the Indenture Trustee, as paying agent, or its
successor in this capacity (the "Paying Agent"), through the Participants who in
turn will receive them from DTC. Under a book-entry format, holders of Notes or
Certificates, as applicable, may experience some delay in their receipt of
payments, since these payments will be forwarded by the Paying Agent to Cede, as
nominee for DTC. DTC will forward these payments to its Participants which will
then forward them to Indirect Participants or holders of Notes or Certificates,
as applicable. It is anticipated that the only holder of the Certificates (the
"Certificateholder"), holder of the Note (the "Noteholder" and together with the
Certificateholder, the "Securityholder") for a Series will be Cede, as nominee
of DTC. Holders of Notes or Certificates, as applicable, would not then be
recognized by the Trustee as "Certificateholders", "Noteholders" or
"Securityholders", as these terms are used in the related Agreement, and holders
of Notes or Certificates, as applicable, would only be permitted to exercise the
rights of a "Certificateholder", "Noteholder" or "Securityholder" indirectly
through the Participant who in turn will exercise those rights through DTC.
Under the rules, regulations and procedures creating and affecting DTC
and its operations, DTC is required to make book-entry transfers among
Participants on whose behalf it acts with respect to the Notes or Certificates,
as applicable, and is required to receive and transmit distributions of
principal of and interest on the Notes or Certificates, as applicable.
Participants and Indirect Participants with which holders of Notes or
Certificates, as applicable, have accounts with respect to the Notes or
Certificates, as applicable, similarly are required to make book-entry transfers
and receive and transmit payments on behalf of their respective holders of Notes
or Certificates, as applicable. Accordingly, although holders of Notes or
Certificates, as applicable, will not possess Notes or Certificates, as
applicable, holders of Notes or Certificates, as applicable, will receive
payments and will be able to transfer their interests.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants, the ability of a holder of Notes or
Certificates, as applicable, to pledge Notes or Certificates, as applicable, to
persons or entities that do not participate in the DTC system, or otherwise take
actions in respect of the Notes or Certificates, as applicable, may be limited
due to the lack of a physical certificate or instrument for the Notes or
Certificates, as applicable.
DTC will take any action permitted to be taken by a
"Certificateholder", "Noteholder" or "Securityholder" under the applicable
Agreement or Indenture only at the direction of one or more Participants to
whose account with DTC the relevant Notes or Certificates, as applicable, are
credited. Additionally, DTC will take these actions with respect to specified
percentages of the Certificateholders', Noteholders' or Securityholders'
interests only at the direction of and on behalf of Participants whose holdings
include undivided interests that satisfy the specified percentages. DTC may take
conflicting actions with respect to other undivided interests to the extent that
these actions are taken on behalf of Participants whose holdings include these
undivided interests.
Clearstream Banking, societe anonyme, 67 Bd Grande-Duchesse Charlotte,
L-2967 Luxembourg ("Clearstream, Luxembourg"), was incorporated in 1970 as
"Cedel S.A.", a company with limited liability under Luxembourg law (a societe
anonyme). Cedel S.A. subsequently changed its name to Cedelbank. On January 10,
2000, Cedelbank's parent company, Cedel International, societe anonyme ("CI")
merged its clearing, settlement and custody business with that of Deutsche Borse
Clearing AG ("DBC"). The merger involved the transfer by CI of substantially all
of its assets and liabilities (including its shares in CB) to a new Luxembourg
company, New Cedel International, societe anonyme ("New CI"), which is 50% owned
by CI and 50% owned by DBC's parent company Deutsche Borse AG. The shareholders
of these two entities are banks, securities dealers and financial institutions.
Cedel International currently has 92 shareholders, including U.S. financial
institutions or their subsidiaries. No single entity may own more than 5 percent
of Cedel International's stock.
Further to the merger, the Board of Directors of New Cedel
International decided to rename the companies in the group in order to give them
a cohesive brand name. The new brand name that was chosen is "Clearstream". With
effect from January 14, 2000 New CI has been renamed "Clearstream International,
societe anonyme". On January 18, 2000, Cedelbank was renamed "Clearstream
Banking, societe anonyme", and Cedel Global Services was renamed "Clearstream
Services, societe anonyme".
On January 17, 2000 DBC was renamed "Clearstream Banking AG". This
means that there are now two entities in the corporate group headed by
Clearstream International which share the name "Clearstream Banking", the entity
previously named "Cedelbank" and the entity previously named "Deutsche Brse
Clearing AG".
Clearstream, Luxembourg holds securities for its customers
("Clearstream, Luxembourg Participants") and facilitates the clearance and
settlement of securities transactions between Clearstream, Luxembourg customers
through electronic book-entry changes in accounts of Clearstream, Luxembourg
customers, thereby eliminating the need for physical movement of certificates.
Transactions may be settled by Clearstream, Luxembourg in any of 36 currencies,
including United States Dollars. Clearstream, Luxembourg provides to its
customers, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Clearstream, Luxembourg also deals with domestic
securities markets in over 30 countries through established depository and
custodial relationships. Clearstream, Luxembourg is registered as a bank in
Luxembourg, and as such is subject to regulation by the Commission de
Surveillance du Secteur Financier, "CSSF", which supervises Luxembourg banks.
Clearstream, Luxembourg's customers are world-wide financial institutions
including underwriters, securities brokers and dealers, banks, trust companies
and clearing corporations. Clearstream, Luxembourg's U.S. customers are limited
to securities brokers and dealers, and banks. Currently, Clearstream, Luxembourg
has approximately 2,000 customers located in over 80 countries, including all
major European countries, Canada, and the United States. Indirect access to
Clearstream, Luxembourg is available to other institutions that clear through or
maintain a custodial relationship with an account holder of Clearstream,
Luxembourg. Clearstream, Luxembourg has established an electronic bridge with
Morgan Guaranty Trust Company of New York as the Operator of the Euroclear
System (MGT/EOC) in Brussels to facilitate settlement of trades between
Clearstream, Luxembourg and MGT/EOC.
The Euroclear System ("Euroclear") was created in 1968 to hold
securities for its participants ("Euroclear Participants") and to clear and
settle transactions between Euroclear Participants through simultaneous
electronic book-entry delivery against payment, thus eliminating both the need
for physical movement of certificates and the risk resulting from transfers of
securities and cash that are not simultaneous.
The Euroclear System has subsequently been extended to clear and
settle transactions between Euroclear Participants counterparties both in
Clearstream Luxembourg and in many domestic securities markets. Transactions may
be settled in any of 32 settlement currencies, including United States dollars.
In addition to safekeeping (custody) and securities clearance and settlement,
the Euroclear System includes securities lending and borrowing and money
transfer services. The Euroclear System is operated by the Brussels, Belgium
office of Morgan Guaranty Trust Company of New York (the "Euroclear Operator"),
under contract with Euroclear Clearance System S.C., a Belgian cooperative
corporation that establishes policy on behalf of Euroclear Participants. The
Euroclear Operator is the Belgian branch of a New York banking corporation which
is a member bank of the Federal Reserve System. Accordingly, it is regulated and
examined by the Board of Governors of the Federal Reserve System and the New
York State Banking Department, as well as the Belgian Banking Commission.
All operations are conducted by the Euroclear Operator and all
Euroclear securities clearance accounts and cash accounts are accounts with the
Euroclear Operator. They 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 all transfers of securities and cash, both within the
Euroclear System and receipts and withdrawals of securities and cash. All
securities in the Euroclear System are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
Euroclear Participants include banks, including central banks,
securities brokers and dealers and other professional financial intermediaries
and may include the Underwriters. Indirect access to the Euroclear System is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly. The
Euroclear Operator 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 or Certificates, as applicable,
held through Clearstream Luxembourg or Euroclear will be credited to the cash
accounts of Clearstream Luxembourg Participants or Euroclear Participants in
accordance with the relevant system's rules and procedures, to the extent
received by its Depositary. These distributions will be subject to tax reporting
in accordance with relevant United States tax laws and regulations. See "Certain
Federal Income Tax Consequences". Clearstream Luxembourg or the Euroclear
Operator, as the case may be, will take any other action permitted to be taken
by a Certificateholder, Noteholder or Securityholder under the applicable
Agreement or Indenture on behalf of a Clearstream Luxembourg Participant or
Euroclear Participant only in accordance with its relevant rules and procedures
and subject to its Depositary's ability to effect these actions on its behalf
through DTC.
Although DTC, Clearstream Luxembourg and Euroclear have agreed to the
foregoing procedures in order to facilitate transfers of Notes or Certificates,
as applicable, among participants of DTC, Clearstream Luxembourg and Euroclear,
they are under no obligation to perform or continue to perform the procedures
and these procedures may be discontinued at any time.
Definitive Securities
If the Notes or Certificates, as applicable, of any Series will be
available in book entry form, the related Notes or Certificates, as applicable,
will be issued as Definitive Notes or Definitive Certificates, as applicable,
rather than to DTC or its nominee, only under circumstances specified in the
related prospectus supplement, which circumstances may include that,
o the Depositor advises the Trustee, and any Indenture Trustee, in
writing that DTC is no longer willing or able to discharge
properly its responsibilities as depository with respect to the
Notes or Certificates, as applicable, and the Trustee, or the
Indenture Trustee, or the Depositor are unable to locate a
qualified successor,
o the Depositor, at its option, elects to terminate the book-entry
system through DTC, or
o after the occurrence of a Servicer Default, holders of Notes or
Certificates, as applicable, of the related Series evidencing not
less than 50% of the aggregate unpaid principal amount of the
Notes or Certificates, as applicable, advise the Trustee and DTC
through Participants in writing that the continuation of a
book-entry system through DTC, or a successor to DTC, is no
longer in the best interests of the holders of the Notes or
Certificates, as applicable.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, DTC is required to notify all Participants of the
availability through DTC of Definitive Notes or Certificates, as applicable.
Upon surrender by DTC of the physical certificates or notes held by Cede that
represent the Notes or Certificates, as applicable, and instructions for
registration, the Trustee, or the Indenture Trustee, will issue the related
Notes or Certificates, as applicable, in the form of Definitive Notes or
Definitive Certificates, as applicable, and the Trustee, or the Indenture
Trustee, will then recognize the holders of these Definitive Notes or Definitive
Certificates, as applicable, as holders of Notes or Certificates, as
applicable, under the applicable Agreement or Indenture and the related
prospectus supplement ("Holders").
If Definitive Notes or Definitive Certificates, as applicable, are
issued, distribution of principal and interest on the Definitive Notes or
Definitive Certificates, as applicable, will be made by the Paying Agent or the
Trustee, or the Indenture Trustee, directly to the Holders in whose names the
Definitive Notes or Definitive Certificates, as applicable, were registered on
the related Record Date in accordance with the procedures set forth in this
Prospectus and in the related Agreement, Indenture and prospectus supplement.
Distributions will be made by check mailed to the address of each Holder as it
appears on the register maintained by the Trustee, or the Indenture Trustee,
except that the final payment on any Definitive Note or Definitive Certificate,
as applicable, will be made only upon presentation and surrender of the
Definitive Note or Definitive Certificate, as applicable, on the date for final
payment at the office or agency as is specified in the notice of final
distribution to Holders. The Trustee, or the Indenture Trustee, will provide
notice to Holders not later than the date specified in the related prospectus
supplement.
Definitive Notes or Definitive Certificates, as applicable, will be
transferable and exchangeable at the offices of the Transfer Agent specified
pursuant to the applicable Agreement or Indenture (the "Transfer Agent") and the
Registrar. No service charge will be imposed for any registration of transfer or
exchange, but the Transfer Agent and Registrar may require payment of a sum
sufficient to cover any tax or other governmental charge imposed in connection
with the registration of transfer or exchange.
DESCRIPTION OF THE TRUST AGREEMENTS
OR THE POOLING AND SERVICING AGREEMENTS
The following summaries describe the material provisions of the Trust
Agreements and Pooling and Servicing Agreements which are anticipated to be
common to any Series of Notes or Certificates, as applicable. The summaries do
not purport to be complete and are subject to, and are qualified in their
entirety by reference to, the provisions of the related Agreement. Where
particular provisions or terms used in a related Agreement are referred to in
this Prospectus, the actual provisions, including definitions of terms, are
incorporated in this Prospectus by reference as part of the summaries.
Assignment of Base Assets to the Trust
ASSIGNMENT OF RECEIVABLES; PRE-FUNDING ACCOUNT. For any Series of
Receivables Pooling Certificates, pursuant to the related Pooling and Servicing
Agreement and Receivables Purchase Agreement, the Seller will sell and assign to
the related Trust on the Closing Date specified in the related prospectus
supplement (the "Closing Date"), either directly or by assignment to the
Depositor and reassignment by the Depositor to the Trust, without recourse to
the Seller, or the Depositor, all Receivables in the Initial Accounts
outstanding as of the Series Cut-Off Date, and will similarly sell and assign to
the Trust all Receivables in the Additional Accounts as of the applicable
additional cut-off dates and all Receivables later created under the Initial
Accounts or the Additional Accounts, other than the Removed Accounts, any
Participations added to the Trust and the proceeds of all of the foregoing. To
the extent specified in the related prospectus supplement, a portion of the
proceeds from the sale of the Notes or Certificates, as applicable, of a Series
may be applied by the Depositor to the deposit of an amount on deposit in a
Pre-Funding Account (the "Pre-Funded Amount"). If a Pre-Funding Account is
provided for, the related prospectus supplement will specify the terms,
conditions and manner under which additional Receivables will be purchased by
the Trust from time to time during the funding period provided for in the
related prospectus supplement.
In connection with any transfer of any Receivables, the Seller will
annotate and indicate in its computer files that these Receivables have been
conveyed to the Trust. In addition, the Seller will provide to the Trustee a
computer file or a microfiche list containing a true and complete list showing
each Account, the Receivables of which have been designated for inclusion in the
Trust, identified by account number, collection status, the amount of
Receivables outstanding and the amount of Principal Receivables as of the
initial Series Cut-Off Date, or additional Cut-Off Date. The Seller will not
deliver to the Trustee any other records or agreements relating to these
Accounts or the Receivables. The records and agreements relating to these
Accounts and the Receivables maintained by the Seller or the Servicer will not
be segregated by the Seller or the Servicer from other documents and agreements
relating to other accounts and receivables and will not be stamped or marked to
reflect the transfer of the Receivables to the Trust. Each Seller will file the
UCC financing statements meeting the requirements of applicable state law with
respect to the Receivables. See "Risk Factors - Certain Legal Aspects --
Transfer of Receivables" and "Risk Factors-- Risk of Commingling" and "Certain
Legal Aspects of the Receivables".
ASSIGNMENT OF CRB SECURITIES; PRE-FUNDING ACCOUNT. All or a portion of
the net proceeds received from the sale of the Notes or Certificates, as
applicable, of a Series, the Base Assets of which consist entirely or in part of
CRB Securities, will be applied to the purchase of the related CRB Securities
from the Depositor or other Seller on the Closing Date and, to the deposit of a
Pre-Funded Amount into a Pre-Funding Account, if and to the extent specified in
the related prospectus supplement. If a Pre-Funding Account is provided for, the
related prospectus supplement will specify the terms, conditions and manner
under which additional CRB Securities will be purchased by the Trust from time
to time during the funding period provided for in the related prospectus
supplement. The Trustee will cause any CRB Securities purchased by the Trust to
be registered in the name of the Trustee, or its nominee or correspondent, or,
where applicable, the Indenture Trustee, and the Trustee, or its agent or
correspondent, or the Indenture Trustee will have possession of any certificated
CRB Securities. The Trustee will not be in possession of or be assignee of
record of any underlying assets for a CRB Security. See "The Trust Assets -- CRB
Securities".
Each CRB Security to be transferred to the Trust will be identified in
a schedule appearing as an exhibit to the related Trust Agreement (the "CRB
Schedule"), which will specify the original principal amount, outstanding
principal balance as of the Cut-off Date, or subsequent cut-off date, annual
Certificate Interest Rate or interest rate and maturity date for each CRB
Security. In the Trust Agreement, to the extent that any CRB Securities are
purchased from the Depositor, the Depositor will represent and warrant to the
Trustee regarding the CRB Securities:
(a) that the information contained in the CRB Schedule is true and
correct in all material respects;
(b) that, immediately prior to the conveyance of the CRB Securities,
the Depositor had good title to, and was the sole owner of the CRB Securities;
(c) that there has been no other sale by it of the CRB Securities; and
(d) that there is no existing lien, charge, security interest or other
encumbrance on the CRB Securities.
ASSIGNMENT OF GOVERNMENT SECURITIES; PRE-FUNDING ACCOUNT. A portion of
the net proceeds received from the sale of the Notes or Certificates, as
applicable, of a Series, the Base Assets of which consist in part of Government
Securities, will be applied to the purchase of the related Government Securities
from the Depositor or other Seller on the Closing Date and, to the deposit of a
Pre-Funded Amount into a Pre- Funding Account, if and to the extent specified in
the related prospectus supplement. If a Pre-Funding Account is provided for, the
related prospectus supplement will specify the terms, conditions and manner
under which additional Government Securities will be purchased by the Trust from
time to time during the funding period provided for in the related prospectus
supplement. The Trustee will cause any Government Securities purchased by the
Trust to be registered in the name of the Trustee, or its nominee or
correspondent, or, where applicable, the Indenture Trustee, and the Trustee, or
its agent or correspondent, or the related Indenture Trustee will have
possession of any certificated Government Securities. The Trustee will not be in
possession of or be assignee of record of any underlying assets for a Government
Security. See "The Trust Assets -- Government Securities".
Each Government Security to be transferred to the Trust will be
identified in a schedule appearing as an exhibit to the related Trust Agreement
(the "Government Security Schedule"), which will specify the original principal
amount, outstanding principal balance as of the Cut-off Date, or subsequent
cut-off date, annual interest rate and maturity date for each Government
Security. In the Trust Agreement, to the extent that any Government Securities
are purchased from the Depositor, the Depositor will represent and warrant to
the Trustee regarding the Government Securities:
(a) that the information contained in the Government Schedule is true
and correct in all material respects;
(b) that immediately prior to the conveyance of the Government
Securities, the Depositor had good title to and was the sole owner of the
Government Securities;
(c) that there has been no other sale by it of Government Securities;
and
(d) that there is no existing lien, charge, security interest or other
encumbrance on the Government Securities.
ASSIGNMENT OF PRIVATE LABEL CUSTODY RECEIPT SECURITIES; PRE-FUNDING
ACCOUNT. A portion of the net proceeds received from the sale of the Notes or
Certificates, as applicable, of a Series, the Base Assets of which consist in
part of Private Label Custody Receipt Securities, will be applied to the
purchase of the related Private Label Custody Receipt Securities from the
Depositor or other Seller on the Closing Date and, to the deposit of a
Pre-Funded Amount into a Pre-Funding Account, if and to the extent specified in
the related prospectus supplement. If a Pre-Funding Account is provided for, the
related prospectus supplement will specify the terms, conditions and manner
under which additional Private Label Custody Receipt Securities will be
purchased by the Trust from time to time during the funding period provided for
in the related prospectus supplement. The Trustee will cause any Private Label
Custody Receipt Securities purchased by the Trust to be registered in the name
of the Trustee, or its nominee or correspondent, or, where applicable, the
Indenture Trustee, and the Trustee, or its agent or correspondent, or the
Indenture Trustee will have possession of any certificated Private Label Custody
Receipt Securities. The Trustee will not be in possession of or be assignee of
record of any underlying assets for a Private Label Custody Receipt Security.
See "The Trust Assets -- Government Securities".
Each Private Label Custody Receipt Security to be transferred to the
Trust will be identified in a schedule appearing as an exhibit to the related
Trust Agreement (the "Private Label Custody Receipt Security Schedule"), which
will specify the original principal amount, outstanding principal balance as of
the Cut-off Date, or subsequent cut-off date, annual interest rate and maturity
date for each Private Label Custody Receipt Security. In the Trust Agreement, to
the extent that any Private Label Custody Receipt Securities are purchased from
the Depositor, the Depositor will represent and warrant to the Trustee regarding
the Private Label Custody Receipt Securities:
(a) that the information contained in the Private Label Custody
Receipt Schedule is true and correct in all material respects;
(b) that immediately prior to the conveyance of the Private Label
Custody Receipt Securities, the Depositor had good title to and was the sole
owner of the Private Label Custody Receipt Securities;
(c) that there has been no other sale by it of the related Private
Label Custody Receipt Securities; and
(d) that there is no existing lien, charge, security interest or other
encumbrance on the related Private Label Custody Receipt Securities.
Repurchase and Substitution of Non-Conforming Base Assets
In general, the Depositor and/or the Seller or another entity will
make specific representations and warranties to the Trust regarding the Base
Assets to be purchased by the Trust. To the extent described in the related
prospectus supplement, the applicable Agreement will provide that if the
Depositor, the Seller or another entity cannot cure a breach of representations
and warranties in all material respects within the time period specified in the
related prospectus supplement after notification by the Trustee of the breach,
and if the breach is of a nature that materially and adversely affects the value
of a Base Asset, then the Depositor, the Seller or another entity will be
required to repurchase the affected Base Assets on the terms and conditions and
in the manner described in the related prospectus supplement. If provided in the
related prospectus supplement, the Depositor, the Seller or another entity may,
rather than repurchase a Base Asset as described above, remove the affected Base
Asset from the Trust (the "Removed Base Asset") and substitute in its place one
or more other Base Assets meeting the qualifications described in the related
prospectus supplement each, a "Qualifying Substitute Base Asset". The
above-described cure, repurchase or substitution obligations, subject to
specific exceptions which, if applicable, will be specified in the related
prospectus supplement, shall constitute the sole remedies available to holders
of Notes or Certificates, as applicable, or the Trustee, or Indenture Trustee,
for a breach of a representation or warranty in respect of a Base Asset. Where
Base Assets are purchased by a Depositor from a Seller and reconveyed to the
Trustee, the Depositor's only source of funds to effect any cure, repurchase or
substitution generally will be through the enforcement of the corresponding
obligations of the Seller to the Depositor.
Trust Accounts
With respect to any Series of Notes or Certificates, as applicable,
that includes Notes, the Owner Trustee will establish and maintain with the
related Indenture Trustee:
o one or more accounts, in the name of the Indenture Trustee on
behalf of the related Securityholders, into which all payments
made on or in respect of the related Base Assets will be
deposited (the "Collection Account"), and
o one or more accounts, in the name of the Indenture Trustee on
behalf of the Noteholders, into which amounts released from the
Collection Account and any Reserve Account or other form of
Series Enhancement for payment to the Noteholders will be
deposited and from which all payments to these Noteholders will
be made (the "Note Payment Account").
With respect to each Trust, the Trustee will establish and maintain one or more
accounts with the related Trustee, in the name of that Trustee on behalf of the
Certificateholders, into which amounts released from the Collection Account and
any Reserve Account or other form of Series Enhancement for distribution to the
Certificateholders will be deposited and from which all distributions to the
Certificateholders will be made (the "Certificate Payment Account "). With
respect to any Series that does not include Notes, the Trustee will also
establish and maintain the Collection Account and any other account in the name
of the related Trustee on behalf of the related Certificateholders.
For each Series of Notes or Certificates, as applicable, funds in the
Collection Account, Note Payment Account and Certificate Payment Account and any
Reserve Account or other accounts, identified in the related prospectus
supplement (collectively, the "Trust Accounts") will be invested as provided in
the related Agreement or Indenture in Eligible Investments. "Eligible
Investments" will generally be limited to investments acceptable to the Rating
Agencies as being consistent with the rating of the related Notes or
Certificates, as applicable. Except as described in this Prospectus or in the
related prospectus supplement, Eligible Investments will be limited to
obligations or securities that mature on or before the date of the next
scheduled distribution to Securityholders of the related Series. However, to the
extent permitted by the Rating Agencies, funds in any Reserve Account may be
invested in securities that will not mature prior to the date of the next
scheduled distribution with respect to the Notes or Certificates and will not be
sold prior to maturity to meet any shortfalls. Thus, the amount of available
funds on deposit in a Reserve Account at any time may be less than the balance
of the Reserve Account. If the amount required to be withdrawn from a Reserve
Account to cover shortfalls in collections with respect to the related Base
Assets, as provided in the related prospectus supplement, exceeds the amount of
available funds on deposit in the Reserve Account, a temporary shortfall in the
amounts distributed to the related Noteholders or Certificateholders could
result, which could, in turn, increase the average life of the related Notes or
Certificates. The related prospectus supplement may provide that investment
earnings on funds deposited in the Trust Accounts, net of losses and investment
expenses (collectively, "Investment Earnings"), will be treated as collections
of interest on the related Base Assets.
The Trust Accounts will be maintained as Eligible Deposit Accounts.
"Eligible Deposit Account" means either:
o a segregated account with an Eligible Institution, or
o 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 of the United States
of America 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 the segregated trust account, so
long as any of the securities of the depository institution have
a credit rating from each Rating Agency in one of its generic
rating categories that signifies investment grade.
"Eligible Institution" means, with respect to a Trust:
(a) the corporate trust department of the related Indenture Trustee or
Trustee, as applicable, or
(b) a depository institution organized under the laws of the United
States of America or any one of the states of the United States of America or
the District of Columbia, or any domestic branch of a foreign bank,
(1) that has either,
(A) a long-term unsecured debt rating acceptable to the
Rating Agencies, or
(B) a short-term unsecured debt rating or certificate of
deposit rating acceptable to the Rating Agencies, and
(2) whose deposits are insured by the FDIC.
Reports to Certificateholders
The Trustee will prepare and forward to each Certificateholder on each
Distribution Date, or as soon after each Distribution Date as is practicable, a
statement setting forth, to the extent applicable to any Series, the information
specified in the related prospectus supplement for the related Series. In
addition, within a reasonable period of time after the end of each calendar
year, the Trustee will be required to furnish to each holder of record at any
time during the calendar year a statement setting forth the information
specified in the related prospectus supplement, which will include information
intended to enable holders of Certificates to prepare their tax returns.
Information in the Distribution Date reports and the annual reports provided to
the holders will not have been examined and reported upon by an independent
public accountant. However, any Servicer will provide to the Trustee an annual
report by independent public accountants with respect to the Servicer's
servicing of the Receivables. See "Servicing of Receivables -- Evidence as to
Compliance".
Servicer Defaults
With respect to a Series of Receivables Pooling Certificates,
"Servicer Defaults" under the Pooling and Servicing Agreement for a Series
generally include:
(a) any failure by the Servicer to deposit amounts in the Collection
Account and any Payment Account to enable the Trustee to distribute to
Certificateholders of the Series any required payment, which failure continues
unremedied for five days after the giving of written notice of failure to the
Servicer by the Trustee for the Series, or to the Servicer and the Trustee by
the holders of the required percentage of any Class of Notes or Certificates, as
applicable, of the related Series specified in the related prospectus
supplement,
(b) any failure by the Servicer duly to observe or perform in any
material respect any other of its covenants or agreements in the Pooling and
Servicing Agreement which continues unremedied for 30 days after the giving of
written notice of the failure to the Servicer by the Trustee, or to the Servicer
and the Trustee by the holders of the required percentage of any Class of Notes
or Certificates, as applicable, of the related Series,
(c) events of insolvency, readjustment of debt, marshalling of assets
and liabilities or similar proceedings and specific actions by the Servicer
indicating its insolvency, reorganization or inability to pay its obligations,
and
(d) other events that shall be specified in the related prospectus
supplement.
Rights Upon Servicer Defaults
With respect to a Series of Receivables Pooling Certificates, so long
as a Servicer Default remains unremedied under the Pooling and Servicing
Agreement for a Series, and subject to any right of any Indenture Trustee, the
Trustee for the Series or holders of the required percentage of any Class of
Notes or Certificates, as applicable, specified in the related prospectus
supplement may terminate all of the rights and obligations of the Servicer as
servicer under the Pooling and Servicing Agreement in and to the Receivables,
whereupon the Trustee will succeed to all the responsibilities, duties and
liabilities of the Servicer under the Pooling and Servicing Agreement and will
be entitled to reasonable servicing compensation not to exceed the applicable
Servicing Fee, together with other servicing compensation in the form of
assumption fees, late payment charges or as otherwise provided in the Pooling
and Servicing Agreement.
In the event that the Trustee is unwilling or unable so to act, it may
select, or petition a court of competent jurisdiction to appoint, a financial
institution, bank or loan servicing institution with a net worth of at least
$15,000,000 to act as successor Servicer under the provisions of the Pooling and
Servicing Agreement relating to the servicing of the Receivables. The successor
Servicer would be entitled to reasonable servicing compensation in an amount not
to exceed the Servicing Fee as set forth in the related prospectus supplement,
together with the other servicing compensation in the form of assumption fees,
late payment charges or otherwise, as provided in the Pooling and Servicing
Agreement.
During the continuance of any Servicer Default under the Pooling and
Servicing Agreement for a Series, the Trustee for the Series will have the right
to take action to enforce its rights and remedies and to protect and enforce the
rights and remedies of the Certificateholders of the Series, and holders of the
required percentages of the Certificates specified in the related prospectus
supplement may direct the time, method and place of conducting any proceeding
for any remedy available to the Trustee or exercising any trust or power
conferred upon the Trustee. The Trustee, however, will not be under any
obligation to pursue any remedy or to exercise any trusts or powers unless the
Certificateholders have offered the Trustee reasonable security or indemnity
against the costs, expenses and liabilities which may be incurred by the Trustee
in or by pursuit of remedy or exercise of trusts or powers. Also, the Trustee
may decline to follow any direction if the Trustee determines that the action or
proceeding so directed may not lawfully be taken or would involve it in personal
liability or be unjustly prejudicial to the nonassenting Certificateholders.
No Certificateholder of a Series, solely by virtue of the holder's
status as a Certificateholder, will have any right under the Pooling and
Servicing Agreement for the related Series to institute any proceeding with
respect to the Pooling and Servicing Agreement, unless the holder previously has
given to the Trustee for the Series written notice of default and unless the
holders of the required percentages of the outstanding Notes or Certificates, as
applicable, specified in the related prospectus supplement have made written
request upon the Trustee to institute a proceeding in its own name as Trustee
under the Pooling and Servicing Agreement and have offered to the Trustee
reasonable indemnity, and the Trustee for 60 days has neglected or refused to
institute any proceeding.
The Trustee
The identity of the commercial bank, savings and loan association or
trust company named as the Trustee for each Series of Certificates will be set
forth in the related prospectus supplement. The entity serving as Trustee may
have normal banking relationships with the Depositor, the Seller or the
Servicer. In addition, for the purpose of meeting the legal requirements of some
local jurisdictions, the Trustee will have the power to appoint co-trustees or
separate trustees of all or any part of the Trust relating to a Series of Notes
or Certificates, as applicable. In the event of an appointment, all rights,
powers, duties and obligations conferred or imposed upon the Trustee by the
applicable Agreement relating to the Series will be conferred or imposed upon
the Trustee and each separate trustee or co-trustee jointly, or in any
jurisdiction in which the Trustee shall be incompetent or unqualified to perform
specific acts, singly upon the separate trustee or co-trustee who shall exercise
and perform these rights, powers, duties and obligations solely at the direction
of the Trustee. The Trustee may also appoint agents to perform any of the
responsibilities of the Trustee, which agents shall have any or all of the
rights, powers, duties and obligations of the Trustee conferred on them by the
appointment; provided that the Trustee shall continue to be responsible for its
duties and obligations under the applicable Agreement.
Duties of the Trustee
The Trustee will make no representations as to the validity or
sufficiency of the applicable Agreement, the Notes or Certificates, as
applicable, or of any Base Asset, Series Enhancement or related documents. If no
Servicer Default, as defined in the related Pooling and Servicing Agreement, if
applicable, has occurred, the Trustee is required to perform only those duties
specifically required of it under the Agreement. Upon receipt of the various
certificates, statements, reports or other instruments required to be furnished
to it, the Trustee is required to examine them to determine whether they are in
the form required by the related Agreement; however, the Trustee will not be
responsible for the accuracy or content of the documents furnished by it or the
Securityholders to the Servicer under the Agreement.
The Trustee may be held liable for its own negligent action or failure
to act, or for its own misconduct; provided, however, that the Trustee will not
be personally liable with respect to any action taken, suffered or omitted to be
taken by it in good faith in accordance with the direction of the
Securityholders upon a Servicer Default. See "-- Rights Upon Servicer Defaults"
above. The Trustee is not required to expend or risk its own funds or otherwise
incur any financial liability in the performance of any of its duties under an
Agreement, or in the exercise of any of its rights or powers, if it has
reasonable grounds for believing that repayment of funds or adequate indemnity
against risk or liability is not reasonably assured to it.
Replacement of the Trustee
The Trustee may, upon written notice to the Depositor, resign at any
time, in which event the Depositor will be obligated to use its best efforts to
appoint a successor Trustee. If no successor Trustee has been appointed and has
accepted the appointment within 30 days after giving notice of resignation, the
resigning Trustee may petition any court of competent jurisdiction for
appointment of a successor Trustee. The Trustee may also be removed at any time:
o by the Depositor, if the Trustee ceases to be eligible to
continue as under the related Agreement,
o if the Trustee becomes insolvent, or
o by the holders of the required percentages of the outstanding
Notes or Certificates, as applicable, specified in the related
prospectus supplement upon 30 days' advance written notice to the
Trustee and to the Depositor. Any resignation or removal of the
Trustee and appointment of a successor Trustee will not become
effective until acceptance of the appointment by the successor
Trustee.
Amendment of the Agreement
The Agreement for each Series of Notes or Certificates, as applicable,
may be amended by the Depositor and the related Trustee, and where applicable
the Seller and the Servicer, without notice to or consent of the
Securityholders:
(a) to cure any ambiguity,
(b) to correct any defective provisions or to correct or supplement
any provision in the Agreement which may be inconsistent with any other
provision in the Agreement,
(c) to add to the duties of the Depositor, Seller or Servicer,
(d) to add any other provisions with respect to matters or questions
arising under the related Agreement or related Series Enhancement,
(e) to add or amend any provisions of the Agreement as required by a
Rating Agency in order to maintain or improve the rating of any Class of the
Notes or Certificates, as applicable,
(f) to comply with any requirements imposed by the Code, or
(g) to make other amendments as are specified in the related
prospectus supplement;
provided that any amendment pursuant to clause (d) or (g) above will not
adversely affect in any material respect the interests of any Securityholders of
the related Series, as evidenced by an opinion of counsel.
Any amendment except pursuant to clause (f) of the preceding sentence shall be
deemed not to adversely affect in any material respect the interests of any
Securityholder if the Trustee receives written confirmation from each Rating
Agency rating the Notes or Certificates, as applicable, that the amendment will
not cause the Rating Agency to reduce the then current rating of the Notes or
Certificates, as applicable. The Agreement for each Series may also be amended
by the Depositor and the Trustee, and where applicable the Seller and the
Servicer, with the consent of the holders of the required percentages of the
outstanding Notes or Certificates, as applicable, of each Series affected by the
amendment of the Agreement specified in the related prospectus supplement, for
the purpose of adding any provisions to or changing in any manner or eliminating
any of the provisions of the Agreement or modifying in any manner the rights of
Securityholders of the related Series; provided, however, that no amendment may:
o reduce the amount or delay the timing of payments on any Note or
Certificate, as applicable, without the consent of the holder of
that Note or Certificate, as applicable; or
o reduce the aforesaid percentage of aggregate outstanding
principal amount of Notes or Certificates, as applicable, of each
Class, the holders of which are required to consent to any
amendment.
List of Certificateholders
Upon written request of three or more Certificateholders of record of
a Series for purposes of communicating with other Certificateholders with
respect to their rights under the Agreement or under the Certificates for the
Series, which request is accompanied by a copy of the communication which the
Certificateholders propose to transmit, the Trustee will afford these
Certificateholders access during business hours to the most recent list of
Certificateholders of that Series held by the Trustee.
No Agreement will provide for the holding of any annual or other
meeting of Certificateholders.
Termination
The obligations created by the Agreement for a Series will terminate
upon the distribution to Certificateholders of all amounts distributable to them
pursuant to that Agreement after the earliest to occur of:
o the final payment or other liquidation of the last Base Asset
remaining in the Trust for the related Series, or
o the repurchase, as described below, by the Servicer from the
Trustee for the related Series of all Base Assets and other
property at that time subject to the Agreement.
The Agreement for each Series will permit, but will not require, the Servicer,
the Seller and/or the Depositor to repurchase from the Trust for the Series all
remaining Base Assets at a price equal to 100% of the aggregate principal amount
of the Base Assets plus, with respect to any property acquired in respect of a
Base Asset, if any, the outstanding principal amount of the related Base Asset,
and unreimbursed expenses, that are reimbursable pursuant to the terms of the
Agreement, plus accrued interest on the unreimbursed expenses at the weighted
average rate on the related Base Assets through the last day of the Monthly
Period in which the repurchase occurs. The exercise of this right will effect
early retirement of the Certificates of the Series, but the Servicer's right to
so purchase is subject to the aggregate principal balance of the Base Assets at
the time of repurchase being less than a fixed percentage, to be set forth in
the related prospectus supplement, of the Cut-off Date aggregate principal
balance. In no event, however, will the trust created by the Agreement continue
beyond the expiration of 21 years from the death of the last survivor of persons
identified in the related prospectus supplement. For each Series, the Servicer
or the Trustee, as applicable, will give written notice of termination of the
Agreement to each Certificateholder, and the final distribution will be made
only upon surrender and cancellation of the Certificates at an office or agency
specified in the notice of termination. If so provided in the related prospectus
supplement for a Series, the Depositor or another entity may effect an optional
termination of the Trust under the circumstances described in the related
prospectus supplement. See "Description of the Certificates-- Receivables
Pooling Certificates -- Optional Termination; Final Payment of Principal".
Payment in Full of the Notes
With respect to any Series of Notes or Certificates, as applicable,
that includes Notes, the Trust Agreement will provide that upon the payment in
full of all outstanding Notes of a given Series and the satisfaction and
discharge of the related Indenture, the related Trustee will succeed to all the
rights of the Indenture Trustee, and the Certificateholders of the Series will
succeed to all the rights of the Noteholders of the Series under the related
Trust Agreement, to the extent and in the matter provided in the Trust
Agreement.
CERTAIN LEGAL ASPECTS OF THE RECEIVABLES
The following discussion contains summaries of some legal aspects of
credit, charge and debit card receivables which are general in nature. As a
consequence, investors should consider the issues raised by the following
discussion as relevant in connection with both the Receivables and the
Receivables underlying the CRB Securities. Because some legal aspects are
governed by applicable state law, which laws may differ substantially, the
summaries do not purport to be complete nor purport to reflect the laws of any
particular state, nor purport to encompass the laws of all states in which
Receivables, or the Receivables underlying the CRB Securities, originate. The
summaries are qualified in their entirety by reference to the applicable federal
and state laws governing the Receivables, and the Receivables underlying the CRB
Securities.
Transfer of Receivables
With respect to each transfer of Receivables to a Trust, the Seller
and/or the Depositor will warrant in the applicable Agreement that the transfer
constitutes either a valid transfer and assignment to the Trust of all right,
title and interest of the Seller, and/or the Depositor, in and to the
Receivables free and clear from liens arising from or through the Seller, or the
Depositor, except, to the extent specified in the related prospectus supplement,
for potential tax liens, any interest of the Seller or the Depositor as holder
of the Depositor's Interest and the Servicer's right to receive interest and
investment earnings ,net of losses and investment expenses, in respect of the
Collection Account, or a valid grant to the Trust of a security interest in the
Receivables. The Seller and/or the Depositor will also warrant in the Agreement
that, in the event that the transfer of the Receivables to the Trust is deemed
to create a security interest under the Uniform Commercial Code (the "UCC") as
in effect in the state in which its principal office is located, there will
exist a valid, subsisting and enforceable first priority perfected security
interest in the Receivables in favor of the Trust and a valid, subsisting and
enforceable first priority perfected security interest in the Receivables later
created in the relevant Accounts in favor of the Trust upon their creation
except for specific liens as described in the Agreement.
The Receivables are generally considered to be "general intangibles"
or "accounts" for purposes of the UCC. Both the transfer of accounts and the
transfer of accounts as security for an obligation are treated under Article 9
of the UCC as creating a security interest in the Receivables and are subject to
its provisions, and the filing of appropriate financing statements is required
to perfect the security interest of the Trust. Financing statements covering the
Receivables will be filed with the appropriate governmental authority to protect
the interest of the Depositor and the Trust.
There are limited circumstances under the UCC in which a prior or
subsequent transferee of Receivables coming into existence after the date on
which the Receivables are transferred to the Trust could have an interest in
these Receivables with priority over the Trust's interest. Under the Pooling and
Servicing Agreement, however, the Seller and/or the Depositor will warrant that
the Receivables have been transferred to the Trust free and clear of the lien of
any third party, except for some tax and other governmental liens. In addition,
the Seller and the Depositor will each covenant that, except as permitted by the
Pooling and Servicing Agreement, it will not sell, pledge, assign, transfer or
grant any lien on any Receivables, or any interest in the Receivables, other
than to the Trust. A tax or other government lien on property of the Seller or
the Depositor arising prior to the time a Receivable comes into existence may
also have priority over the interest of the Trust in the Receivables. In
addition, if a Seller is a Bank, if the FDIC were appointed as receiver of the
Bank, some administrative expenses of the receiver may also have priority over
the interest of the Trust in these Receivables.
A case decided by the United States Court of Appeals for the Tenth
Circuit contains language to the effect that accounts sold by an entity which
subsequently became bankrupt remained property of the debtor's bankruptcy
estate. If a Seller were to become a debtor under the federal bankruptcy code
and a court were to follow the reasoning of the Tenth Circuit, Securityholders
could experience a delay or reduction in distributions.
Certain Matters Relating to Receivership
It is likely that the Sellers of Receivables to a Trust or the sellers
of Receivables to CRB Trusts will be banking institutions. FIRREA, which became
effective August 9, 1989, sets forth certain powers that the FDIC could exercise
if it were appointed as receiver of a Seller which is a national bank.
Subject to clarification by FDIC regulations or interpretations, it
would appear from the positions taken by the FDIC before the passage of FIRREA
that the FDIC in its capacity as receiver for a Seller would not interfere with
the timely transfer to the Trust or to a CRB Trust of payments collected on the
Receivables or interfere with the timely liquidation of Receivables as described
below. To the extent that a Seller granted a security interest in the
Receivables to the related Trust (or granted such a security interest to the
Depositor which was then assigned the related Trust) or to a CRB Trust, and that
interest was validly perfected before the Seller's insolvency and was not taken
or granted in contemplation of insolvency or with the intent to hinder, delay or
defraud the Seller or its creditors, that security interest should not be
subject to avoidance, and payments to the Trust or to a CRB Trust with respect
to Receivables should not be subject to recovery by the FDIC as receiver of the
Seller. If, however, the FDIC were to assert a contrary position, or were to
require the related Trustee or CRB Trustee to establish its right to those
payments by submitting to and completing the administrative claims procedure
established under FIRREA, delays in payments on the Notes or Certificates, as
applicable, of any Series relating to such Seller (or delays in payments on CRB
Securities relating to a similarly insolvent seller) outstanding at such time
and possible reductions in the amount of those payments could occur.
Each Pooling and Servicing Agreement and Receivables Purchase
Agreement as to which a banking institution is the Seller will provide that,
upon the appointment of a receiver for the Seller, the Seller will promptly give
notice thereof to the Depositor, and a Pay Out Event will occur. Under the
Pooling and Servicing Agreement, no new Principal Receivables will be
transferred to the Trust and, unless otherwise instructed within a specified
period by the holders of the required percentages of outstanding Notes or
Certificates, as applicable, specified in the related Prospectus Supplement or
unless otherwise prohibited by law, the Trustee will proceed to sell, dispose of
or otherwise liquidate the Receivables in a commercially reasonable manner and
on commercially reasonable terms. The proceeds from the sale of the Receivables
would then be treated by the Trustee as collections on the Receivables. This
procedure could by delayed as described above. The net proceeds of any such sale
will first be treated by the Trustee as collections on the Finance Charge
Receivables, if any. Upon the occurrence of a Pay Out Event, if a conservator or
receiver is appointed for the Seller or the Depositor and no Pay Out Event other
than such conservatorship or receivership or insolvency of the Seller or the
Depositor exists, the conservator or receiver may have the power to prevent the
early sale, liquidation or disposition of the Receivables and the commencement
of a Rapid Amortization Period with respect to any outstanding Series. In
addition, a conservator or receiver for the Seller or the Depositor may have the
power to cause early payment of the Certificates.
If a Seller that is a banking institution is servicing its Receivables
and a conservator or receiver is appointed for the Servicer, and no Servicer
Default other than such conservatorship or receivership or insolvency of the
Servicer exist, the conservator or receiver may have the power to prevent either
the Trustee or the Certificateholders from effecting a transfer of servicing to
a successor Servicer.
Consumer Protection Laws
The relationship of cardholder and card issuer is extensively
regulated by Federal and state consumer protection laws. The most significant of
these laws include the Federal Truth-in-Lending Act, Equal Credit Opportunity
Act, Fair Credit Reporting Act, Electronic Funds Transfer Act and, to the extent
that the Seller is a national banking association, the National Bank Act, as
well as the banking statutes of the state in which the bank is located, and
comparable statutes in the states in which cardholders reside. These statutes
impose disclosure requirements when an account is advertised, when it is opened,
at the end of monthly billing cycles, upon account renewal for accounts on which
annual fees are assessed, and at year end and, in addition, limit cardholder
liability for unauthorized use, prohibit certain discriminatory practices in
extending credit, and impose certain limitations on the type of account-related
charges that may be assessed. Newly adopted Federal legislation requires card
issuers to disclose to consumers the interest rates, annual cardholder fees,
grace periods, and balance calculation methods associated with their accounts.
Cardholders are entitled under current law to have payments and credits applied
to the account promptly, to receive prescribed notices and to have billing
errors resolved promptly.
Various proposed laws and amendments to existing laws have been
introduced in Congress and certain state and local legislatures that, if
enacted, would further regulate the credit card industry. Certain such laws
would, among other things, impose a ceiling on the rate at which a financial
institution may assess finance charges on credit card accounts that would be
substantially below the rates of the finance charges currently assessed by most
Sellers on their accounts. A proposed bill of this nature was defeated in the
United States House of Representatives in 1987, and on November 14, 1991, the
United States Senate approved by a vote of 74 to 19 a measure which could have
established, if it were enacted as law, a ceiling on credit card interest rates
of 4% above the rate that the IRS charges on the underpayment of taxes. Such a
law would, in effect, reduce all interest rates on credit cards to 14% per annum
until the IRS calculates the new rate, which is currently done on a quarterly
basis. Although this proposed legislation was not passed by Congress, the issue
of federal regulation of interest rates on credit cards continues to be debated,
and there can be no assurance that such a bill will not become law in the
future. The potential effect of any legislation which limits the amount of
finance charges that may be charged on credit cards could be to reduce the Net
Portfolio Yield of each Series. If such Net Portfolio Yield of a Series is
reduced, a Pay Out Event for such Series may occur, and the Rapid Amortization
Period for such Series would commence.
Since October 1991, a number of lawsuits and administrative actions
have been filed in several states against out-of-state banks (both federally
insured state-chartered banks and federally insured national banks) which issue
cards. These actions challenge various fees and charges (such as late fees,
overlimit fees, returned payment check fees and annual membership fees) assessed
against residents of the states in which such suits were filed, based on
restrictions or prohibitions under such states' laws alleged to be applicable to
the out-of-state card issuers. In October 1991, the United States District Court
for the State of Massachusetts held that Greenwood Trust Company (a
federally-insured, Delaware-charted bank that issues the Discover credit card)
was prohibited by Massachusetts law from assessing late charges on credit card
accounts of Massachusetts residents. On August 6, 1992, the decision was
reversed by the United States Court of Appeals for the First Circuit, which held
that the Massachusetts law was preempted by federal law permitting the charges
in question. In November 1992, the Commonwealth of Massachusetts petitioned the
United States Supreme Court to accept the case. On January 11, 1993, the U.S.
Supreme Court denied the petition of the Commonwealth to review the decision of
the First Circuit. The California Supreme Court in March 1992 refused to review
a lower court's determination that the practice by Wells Fargo Bank of charging
its cardholders over-the-limit and late payment fees violated California laws
that require banks to limit such charges to their costs. On November 29, 1995,
the Supreme Court of New Jersey ruled that a national bank that issued credit
cards in New Jersey but is located in another state, and that is entitled under
the National Bank Act to charge borrowers interest at a rate allowed by the laws
of the state where the bank is located, was not entitled to charge New Jersey
cardholders certain late payment fees, notwithstanding the fact that the state
in which the bank is located permits such late payment fees, because late
payment fees are not defined as interest within the meaning of the National Bank
Act and because New Jersey state law forbade the charging of such late payment
fees. On June 3, 1996, the U.S. Supreme Court upheld regulations issued by the
U.S. Comptroller of the Currency that characterize late fees as interest and
that therefore entitle a national bank to charge late fees if the state in which
such national bank is located allows such late fees. Although the U.S. Supreme
Court resolved certain conflicts of interpretation among the states, such
actions and similar actions which may be brought in other states as a result of
such actions, if resolved adversely to card issuers, could have the effect of
limiting certain charges, other than periodic finance charges, that could be
assessed on accounts of residents of such states and could require card issuers
to pay refunds and civil penalties with respect to charges previously imposed on
cardholders in such states.
The Trust may be liable for certain violations of consumer protection
laws that apply to the Receivables, either as assignee of the Seller with
respect to obligations arising before transfer of the Receivables to the Trust
or as a party directly responsible for obligations arising after the transfer.
In addition, a cardholder may be entitled to assert such violations by way of
set-off against his obligation to pay the amount of Receivables owing. Each
Seller will covenant in the Agreement to accept the retransfer of all
Receivables in an Account if any Receivable in such Account has not been created
in compliance with the requirements of such laws.
Application of Federal and state bankruptcy and debtor relief laws
would adversely affect the interests of the Certificateholders if such laws
result in any Receivables being written off as uncollectible.
THE DEPOSITOR
ACE Securities Corp., the depositor, is a special purpose corporation
incorporated in the State of Delaware on June 3, 1998. The principal executive
offices of the depositor are located at 6525 Morrison Boulevard, Suite 318,
Charlotte, North Carolina 28211. Its telephone number is (704) 365-0569. The
depositor does not have, nor is it expected in the future to have, any
significant assets.
The limited purposes of the depositor are, in general, to acquire, own
and sell mortgage loans and financial assets; to issue, acquire, own, hold and
sell securities and notes secured by or representing ownership interests in
mortgage loans and other financial assets, collections on the mortgage loans and
related assets; and to engage in any acts that are incidental to, or necessary,
suitable or convenient to accomplish, these purposes.
All of the shares of capital stock of the depositor are held by
Altamont Holdings Corp., a Delaware corporation.
USE OF PROCEEDS
The Depositor will use the net proceeds from the sale of each Series
of Notes or Certificates, as applicable, for one or more of the following
purposes:
(a) to purchase the related Base Assets and/or Series Enhancement,
(b) to repay indebtedness which has been incurred to obtain funds to
acquire the related Base Assets and/or Series Enhancement,
(c) to fund the purchase of the related Base Assets and/or Series
Enhancement by the related Trust on the Closing Date or to establish a
Pre-Funding Account for the Series,
(d) to establish any Reserve Account or Cash Collateral Accounts
described in the related prospectus supplement, or
(e) to pay costs of structuring and issuing the Notes or Certificates,
as applicable.
If so specified in the related prospectus supplement, the purchase of the Base
Assets for a Series may be effected in whole or in part by an exchange of Notes
or Certificates, as applicable, with the Seller of the related Base Assets.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the anticipated material
United States federal income tax consequences of the purchase, ownership and
disposition of securities. The summary does not purport to deal with federal
income tax consequences applicable to all categories of holders, some of which
may be subject to special rules. For example, it does not discuss the tax
treatment of beneficial owners of notes ("Note Owners") or certificates
("Certificate Owners") that are insurance companies, regulated investment
companies or dealers in securities. Moreover, there are no cases or Internal
Revenue Service ("IRS") rulings on similar transactions involving both debt and
equity interests issued by a trust with terms similar to those of the notes and
the certificates. As a result, the IRS might disagree with all or part of the
discussion below. Prospective investors are urged to consult their own tax
advisors in determining the federal, state, local, foreign and any other tax
consequences to them of the purchase, ownership and disposition of the notes and
the certificates.
The following summary is based upon current provisions of the Internal
Revenue Code of 1986, as amended (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. Each Trust will be provided
with an opinion of tax counsel specified in the related prospectus supplement
("Federal Tax Counsel") regarding some related federal income tax matters
discussed below. An opinion of Federal 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. The opinion of Federal Tax Counsel specifically addresses
only those issues specificially identified below as being covered by that
opinion; however, the opinion also states that the additional discussion set
forth below accurately sets forth the advidce of Federal Tax Counsel wtih
respect to material federal income tax issues. For purposes of the following
summary, references to the Trust, the notes, the certificates and related terms,
parties and documents shall be deemed to refer, unless otherwise specified in
this prospectus, to each Trust and the notes, certificates and related terms,
parties and documents applicable to the Trust.
TRUSTS WHICH ARE NOT TREATED AS GRANTOR
TAX CHARACTERIZATION OF THE TRUSTS
In the case of a Trust which is not intended to be treated as a
grantor turst (an "owner trust"), Federal Tax Counsel will deliver its opinion
that the Trust will not be an association, or publicly traded partnership,
taxable as a corporation for federal income tax purposes. The opinion of Federal
Tax Counsel will be based on the assumption that the terms of the Trust
Agreement and related documents will be complied with, and on the Federal Tax
counsel's conclusions that the nature of the income of the Trust, or the
restrictions, if any, on transfers of the certificates, will exempt the Trust
from the rule that some publicly traded partnerships are taxable as
corporations.
If a Trust were taxable as a corporation for federal income tax
purposes, the Trust would be subject to corporate income tax on its taxable
income. The Trust's taxable income would include all of its income on the
related Base Assets, which might be reduced by its interest expense on the
notes. Any corporate income tax could materially reduce cash available to make
payments on the notes and distributions on the certificates, and Certificate
Owners, and possibly Note Owners could be liable for any resulting corporate
income tax that is unpaid by the Trust.
TAX CONSEQUENCES TO NOTE OWNERS
Treatment of the Notes as Indebtedness. The Trust will agree, and the
Note Owners will agree by their purchase of notes, to treat the notes as debt
for federal tax purposes. Federal Tax Counsel will, subject to exceptions which,
if applicable, will be specified in the related prospectus supplement, advise
the owner trust that the notes will be classified as debt for federal income tax
purposes, or classified in any other manner as shall be provided in the related
prospectus supplement. If, contrary to the opinion of Federal Tax Counsel, the
IRS successfully asserted that one or more of the notes did not represent debt
for federal income tax purposes, the notes might be treated as equity interests
in the Trust. If so treated, the Trust might be treated as a publicly traded
partnership that would be taxable as a corporation unless it met particular
qualifying income tests, and the resulting taxable corporation would not be able
to reduce its taxable income by deductions for interest expense on notes
recharacterized as equity. Treatment of the notes as equity interests in a
partnership could have adverse tax consequences to some holders, even if the
Trust were not treated as a publicly traded partnership taxable as a
corporation. For example, income allocable to foreign holders might be subject
to United States tax and United States tax return filing and withholding
requirements, income allocable to tax-exempt holders might constitute "unrelated
business taxable income" (if some, but not all, of the notes were
recharacterized as equity in a partnership), individual holders might be subject
to limitations on their ability to deduct their share of Trust expenses, and
income from the Trust's assets would be taxable to Note Owners without regard to
whether cash distributions are made to such Note Owners and without regard to
the Note Owners' method of tax accounting. The discussion below assumes that the
Notes will be characterized as debt for federal income tax purposes.
Interest Income on the Notes - General. Except as discussed below,
interest on a note generally is includable in a Note Owner's income as ordinary
interest income when actually or constructively received, if the Note Owner uses
the cash method of accounting for federal income tax purposes, or when accrued,
if the Note Owner uses an accrual method of accounting for federal income tax
purposes.
Original Issue Discount. Notes of certain series may be issued with
"original issue discount" within the meaning of Section 1273(a) of the Code.
Holders of notes issued with original issue discount generally must include
original issue discount in gross income for federal income tax purposes as it
accrues, in advance of receipt of the cash attributable to such income, under a
method that takes account of the compounding interest. The Code requires that
information with respect to the original issue discount accruing on any note be
reported periodically to the IRS and to certain categories of Note Owners.
Each Trust will report original issue discount, if any, to the Note
Owners based on the Treasury regulations relating to original issue discount
(the "OID Regulations"). The OID Regulations concerning contingent payment debt
instruments do not apply to the prepayable debt instruments, such as the notes.
The OID Regulations provide that, in the case of debt instruments such
as the notes, (i) the amount and rate of accrual of original issue discount will
be calculated based on a reasonable assumed prepayment rate (the "Prepayment
Assumption"), and (ii) adjustments will be made in the amount and rate of
accrual of such discount to reflect differences between the actual prepayment
rate and the Prepayment Assumption. The method for determining the appropriate
assumed prepayment rate will eventually be set forth in Treasury regulations,
but those regulations have not yet been issued. The applicable legislative
history indicates, however, that such regulations will provide that the assumed
prepayment rate for securities such as the notes will be the rate used in
pricing the initial offering of those securities. If the notes of a series are
issued with original issue discount, the Prospectus Supplement for that series
of notes will specify the Prepayment Assumption. However, no representation is
made that the notes of that series will, in fact, prepay at a rate based on the
Prepayment Assumption or at any other rate.
In general, a note will be considered to be issued with original issue
discount if its stated redemption price at maturity exceeds its issue price.
Except as discussed below under "--Payment Lag Notes; Initial Period
Considerations," and "--Qualified Stated Interest," and in the case of certain
Variable Rate Notes (as defined below) and accrual notes, the stated redemption
price at maturity of a note is its principal amount. The issue price of a note
is the initial offering price to the public (excluding bond houses and brokers)
at which a substantial amount of the class of notes is sold. Notwithstanding the
general definition of original issue discount, such discount will be considered
to be zero for any note on which such discount is less than 0.25% of its stated
redemption price at maturity multiplied by its weighted average life. The
weighted average life of a note apparently is computed for purposes of this de
minimis rule as the sum, for all distributions included in the stated redemption
price at maturity of the note, of the amounts determined by multiplying (i) the
number of complete years (rounding down for partial years) from the applicable
closing date to the date on which each such distribution is expected to be made,
determined under the Prepayment Assumption, by (ii) a fraction, the numerator of
which is the amount of such distribution and the denominator of which is the
note's stated redemption price at maturity. The OID Regulations provide that
holders will include any de minimis original issue discount ratably as payments
of stated principal are made on the notes.
The Note Owner of a note issued with original issue discount must
include in gross income the sum of the "daily portions" of such original issue
discount for each day during its taxable year on which it held such note. In the
case of an original Note Owner, the daily portions of original issue discount
are determined first by calculating the portion of the original issue discount
that accrued during each period (an "accrual period") that begins on the day
following a Distribution Date (or in the case of the first such period, begins
on the applicable closing date) and ends on the next succeeding Distribution
Date. The original issue discount accruing during each accrual period is then
allocated ratably to each day during such period to determine the daily portion
of original issue discount for that day.
The portion of the original issue discount that accrues in any accrual
period will equal the excess, if any, of (i) the sum of (A) the present value,
as of the end of the accrual period, of all of the distributions to be made on
the note, if any, in future periods and (B) the distributions made on the note
during the accrual period that are included in such note's stated redemption
price at maturity, over (ii) the adjusted issue price of such note at the
beginning of the accrual period. The present value of the remaining
distributions referred to in the preceding sentence will be calculated (i)
assuming that the notes will be prepaid in future periods at a rate computed in
accordance with the Prepayment Assumption and (ii) using a discount rate equal
to the original yield to maturity of the notes. For these purposes, the original
yield to maturity of the notes will be calculated based on their issue price and
assuming that the notes will be prepaid in accordance with the Prepayment
Assumption. The adjusted issue price of a note at the beginning of any accrual
period will equal the issue price of such note, increased by the portion of the
original issue discount that has accrued during prior accrual periods, and
reduced by the amount of any distributions made on such note in prior accrual
periods that were included in such note's stated redemption price at maturity.
The daily portions of original issue discount may increase or decrease
depending on the extent to which the actual rate of prepayments diverges from
the Prepayment Assumption. If original issue discount accruing during any
accrual period computed as described above is negative, a Note Owner may only be
entitled to offset such amount against positive original issue discount accruing
on such note in future accrual periods. Such a Note Owner may be entitled to
deduct a loss to the extent that its remaining basis would exceed the maximum
amount of future payments to which such Note Owner is entitled. However,
Treasury regulations do not address this issue.
A subsequent Note Owner that purchases a note issued with original
issue discount at a cost that is less than its remaining stated redemption price
at maturity will also generally be required to include in gross income, for each
day on which it holds such note, the daily portions of original issue discount
with respect to the note, calculated as described above. However, if (i) the
excess of the remaining stated redemption price at maturity over such cost is
less than (ii) the aggregate amount of such daily portions for all days after
the date of purchase until final retirement of such note, then such daily
portions will be reduced proportionately in determining the income of such Note
Owner.
QUALIFIED STATED INTEREST. Interest payable on a note which qualifies
as "qualified stated interest" for purposes of the OID Regulations will not be
includable in the stated redemption price at maturity of the note. Conversely,
if the interest on a note does not constitute "qualified stated interest," such
interest will be includable in the stated redemption price at maturity of the
note and the note, consequently, will have original issue discount. Interest
payments will not qualify as qualified stated interest unless the interest
payments are "unconditionally payable." The OID Regulations state that interest
is unconditionally payable if reasonable legal remedies exist to compel timely
payment, or the debt instrument otherwise provides terms and conditions that
make the likelihood of late payment (other than a late payment that occurs
within a reasonable grace period) or nonpayment of interest a remote
contingency, as defined in the OID Regulations. Any terms or conditions that do
not reflect arm's length dealing or that the Note Owner does not intend to
enforce are not considered.
PREMIUM. A purchaser of a note that purchases such note at a cost
greater than its remaining stated redemption price at maturity will be
considered to have purchased such note at a premium, and may, under Section 171
of the Code, elect to amortize such premium under a constant yield method over
the life of the note. The Prepayment Assumption is probably taken into account
in determining the life of the note for this purpose. Except as provided in
regulations, amortizable premium will be treated as an offset to interest income
on the note.
PAYMENT LAG NOTES; INITIAL PERIOD CONSIDERATIONS. Certain notes may
provide for distributions of interest based on a period that is the same length
as the interval between Distribution Dates but ends prior to each Distribution
Date. Any interest that accrues prior to the applicable closing date may be
treated under the OID Regulations either (i) as part of the issue price and the
stated redemption price at maturity of the notes or (ii) as not included in the
issue price or the stated redemption price. The OID Regulations provide a
special application of the DE MINIMIS rule for debt instruments with long first
accrual periods where the interest payable for the first period is at a rate
which is effectively less than that which applies in all other periods. In such
cases, for the sole purpose of determining whether original issue discount is DE
MINIMIS, the OID Regulations provide that the stated redemption price is equal
to the instrument's issue price plus the greater of the amount of foregone
interest or the excess (if any) of the instrument's stated principal amount over
its issue price.
VARIABLE RATE NOTES. Under the OID Regulations, notes paying interest
at a variable rate (each, a "Variable Rate Note") are subject to special rules.
A Variable Rate Note will qualify as a "variable rate debt instrument" if (i)
its issue price does not exceed the total noncontingent principal payments due
under the Variable Rate Note by more than a specified DE MINIMIS amount; (ii) it
provides for stated interest, paid or compounded at least annually, at a current
value of (a) one or more qualified floating rates, (b) a single fixed rate and
one or more qualified floating rates, (c) a single objective rate or (d) a
single fixed rate and a single objective rate that is a qualified inverse
floating rate; and (iii) it does not provide for any principal payments that are
contingent, as defined in the OID Regulations, except as provided in (i), above.
Because the OID Regulations relating to contingent payment debt instruments do
not apply to prepayable debt instruments, such as the notes, principal payments
on the notes should not be considered contingent for this purpose.
A "qualified floating rate" is any variable rate where variations in
the value of such rate can reasonably be expected to measure contemporaneous
variations in the cost of newly borrowed funds in the currency in which the
Variable Rate Note is denominated. A multiple of a qualified floating rate will
generally not itself constitute a qualified floating rate for purposes of the
OID Regulations. However, a variable rate equal to (i) the product of a
qualified floating rate and a fixed multiple that is greater than 0.65 but not
more than 1.35 or (ii) the product of a qualified floating rate and a fixed
multiple that is greater than 0.65 but not more than 1.35, increased or
decreased by a fixed rate will constitute a qualified floating rate for purposes
of the OID Regulations. In addition, under the OID Regulations, two or more
qualified floating rates that can reasonably be expected to have approximately
the same values throughout the term of the Variable Rate Note will be treated as
a single qualified floating rate (a "Presumed Single Qualified Floating Rate").
Two or more qualified floating rates with values within 25 basis points of each
other as determined on the Variable Rate Note's issue date will be conclusively
presumed to be a Presumed Single Qualified Floating Rate. Notwithstanding the
foregoing, a variable rate that would otherwise constitute a qualified floating
rate, but which is subject to one or more restrictions such as a cap or floor,
will not be a qualified floating rate for purposes of the OID Regulations unless
the restriction is fixed throughout the term of the Variable Rate Note or the
restriction is not reasonably expected as of the issue date to significantly
affect the yield of the Variable Rate Note.
An "objective rate" is a rate that is not itself a qualified floating
rate but which is determined using a single fixed formula and which is based
upon objective financial or economic information. The OID Regulations also
provide that other variable rates may be treated as objective rates if so
designated by the IRS in the future. Despite the foregoing, a variable rate of
interest on a Variable Rate Note will not constitute an objective rate if it is
reasonably expected that the average value of such rate during the first half of
the Variable Rate Note's term will be either significantly less than or
significantly greater than the average value of the rate during the final half
of the Variable Rate Note's term. Further, an objective rate does not include a
rate that is based on information that is within the control of the issuer (or a
party related to the issuer) or that is unique to the circumstances of the
issuer (or a party related to the issuer). An objective rate will qualify as a
"qualified inverse floating rate" if such rate is equal to a fixed rate minus a
qualified floating rate and variations in the rate can reasonably be expected to
inversely reflect contemporaneous variations in the qualified floating rate. The
OID Regulations also provide that if a Variable Rate Note provides for stated
interest at a fixed rate for an initial period of less than one year followed by
a variable rate that is either a qualified floating rate or an objective rate
and if the variable rate on the Variable Rate Note's issue date is intended to
approximate the fixed rate, then the fixed rate and the variable rate together
will constitute either a single qualified floating rate or objective rate, as
the case may be (a "Presumed Single Variable Rate"). If the value of the
variable rate and the initial fixed rate are within 25 basis points of each
other as determined on the Variable Rate Note's issue date, the variable rate
will be conclusively presumed to approximate the fixed rate.
For Variable Rate Notes that qualify as "variable rate debt
instruments" under the OID Regulations and provide for interest at either a
single qualified floating rate, a single objective rate, a Presumed Single
Qualified Floating Rate or a Presumed Single Variable Rate throughout the term
(a "Single Variable Rate Note"), original issue discount is computed as
described above in "--Interest Income on the Notes--Original Issue Discount"
based on the following: (i) stated interest on the Single Variable Rate Note
which is unconditionally payable in cash or property (other than debt
instruments of the issuer) at least annually will constitute qualified stated
interest; (ii) by assuming that the variable rate on the Single Variable Rate
Note is a fixed rate equal to: (a) in the case of a Single Variable Rate Note
with a qualified floating rate or a qualified inverse floating rate, the value,
as of the issue date, of the qualified floating rate or the qualified inverse
floating rate or (b) in the case of a Single Variable Rate Note with an
objective rate (other than a qualified inverse floating rate), a fixed rate
which reflects the reasonably expected yield for such Single Variable Rate Note;
and (iii) the qualified stated interest allocable to an accrual period is
increased (or decreased) if the interest actually paid during an accrual period
exceeds (or is less than) the interest assumed to be paid under the assumed
fixed rate described in (ii), above.
In general, any Variable Rate Note other than a Single Variable Rate
Note (a "Multiple Variable Rate Note") that qualifies as a "variable rate debt
instrument" will be converted into an "equivalent" fixed rate debt instrument
for purposes of determining the amount and accrual of original issue discount
and qualified stated interest on the Multiple Variable Rate Note. The OID
Regulations generally require that such a Multiple Variable Rate Note be
converted into an "equivalent" fixed rate debt instrument by substituting any
qualified floating rate or qualified inverse floating rate provided for under
the terms of the Multiple Variable Rate Note with a fixed rate equal to the
value of the qualified floating rate or qualified inverse floating rate, as the
case may be, as of the Multiple Variable Rate Note's issue date. Any objective
rate (other than a qualified inverse floating rate) provided for under the terms
of the Multiple Variable Rate Note is converted into a fixed rate that reflects
the yield that is reasonably expected for the Multiple Variable Rate Note. (A
Multiple Variable Rate Note may not bear more than one objective rate.) In the
case of a Multiple Variable Rate Note that qualifies as a "variable rate debt
instrument" and provides for stated interest at a fixed rate in addition to
either one or more qualified floating rates or a qualified inverse floating
rate, the fixed rate is initially converted into a qualified floating rate (or a
qualified inverse floating rate, if the Multiple Variable Rate Note provides for
a qualified inverse floating rate). Under such circumstances, the qualified
floating rate or qualified inverse floating rate that replaces the fixed rate
must be such that the fair market value of the Multiple Variable Rate Note as of
the Multiple Variable Rate Note's issue date is approximately the same as the
fair market value of an otherwise identical debt instrument that provides for
either the qualified floating rate or qualified inverse floating rate rather
than the fixed rate. Subsequent to converting the fixed rate into either a
qualified floating rate or a qualified inverse floating rate, the Multiple
Variable Rate Note is then converted into an "equivalent" fixed rate debt
instrument in the manner described above.
Once the Multiple Variable Rate Note is converted into an "equivalent"
fixed rate debt instrument pursuant to the foregoing rules, the amounts of
original issue discount and qualified stated interest, if any, are determined
for the "equivalent" fixed rate debt instrument by applying the original issue
discount rules to the "equivalent" fixed rate debt instrument in the manner
described above in "--Interest Income on the Notes--Original Issue Discount." A
holder of the Multiple Variable Rate Note will account for such original issue
discount and qualified stated interest as if the holder held the "equivalent"
fixed rate debt instrument. In each accrual period, appropriate adjustments will
be made to the amount of qualified stated interest or original issue discount
assumed to have been accrued or paid with respect to the "equivalent" fixed rate
debt instrument in the event that such amounts differ from the actual amount of
interest accrued or paid on the Multiple Variable Rate Note during the accrual
period.
If a Variable Rate Note does not qualify as a "variable rate debt
instrument" under the OID Regulations, then the Variable Rate Note would be
treated as a contingent payment debt obligation. The manner in which a Variable
Rate Note would be taxed if such note were treated as a contingent payment debt
obligation is not governed by the OID Regulations relating to contingent payment
debt obligations which do not apply to prepayable debt instruments, such as the
notes, and Treasury regulations do not otherwise address this point.
MARKET DISCOUNT. A Note Owner that acquires a note at a market
discount (that is, a discount that exceeds any unaccrued original issue
discount) will recognize gain upon receipt of a principal distribution,
regardless of whether the distribution is scheduled or is a prepayment. In
particular, the Note Owner will be required to allocate that principal
distribution first to the portion of the market discount on such note that has
accrued but has not previously been includable in income, and will recognize
ordinary income to that extent. In general terms, unless Treasury regulations
when issued provide otherwise, market discount on a note may be treated, at the
election of the holder of the note, as accruing either (i) under a constant
yield method, taking into account the Prepayment Assumption, or (ii) in
proportion to accruals of original issue discount (or, if there is no original
issue discount, in proportion to stated interest on the note).
In addition, a Note Owner may be required to defer deductions for a
portion of the Note Owner's interest expense on any debt incurred or continued
to purchase or carry a note purchased with market discount. The deferred portion
of any interest deduction would not exceed the portion of the market discount on
the note that accrues during the taxable year in which such interest would
otherwise be deductible and, in general, would be deductible when such market
discount is included in income upon receipt of a principal distribution on, or
upon the sale of, the note. The Code requires that information necessary to
compute accruals of market discount be reported periodically to the IRS and to
certain categories of Note Owners.
Notwithstanding the above rules, market discount on a note will be
considered to be zero if such discount is less than 0.25% of the remaining
stated redemption price at maturity of such note multiplied by its weighted
average remaining life. Weighted average remaining life presumably is calculated
in a manner similar to weighted average life (described above under "--Interest
Income on the Notes--Original Issue Discount"), taking into account
distributions (including prepayments) prior to the date of acquisition of such
note by the subsequent purchaser. If market discount on a note is treated as
zero under this rule, the actual amount of such discount must be allocated to
the remaining principal distributions on such note in proportion to the amounts
of such principal distributions, and when each such distribution is made, gain
equal to the discount, if any, allocated to the distribution will be recognized.
ELECTION TO TREAT ALL INTEREST UNDER THE CONSTANT YIELD RULES. The OID
Regulations provide that the holder of a debt instrument issued after April 4,
1994 may elect to include in gross income all interest that accrues on such debt
instrument using the constant yield method. For purposes of this election,
interest includes stated interest, original issue discount, and market discount,
as adjusted to account for any premium. Note Owners should consult their own tax
advisors regarding the availability or advisability of such an election.
SALES OF NOTES. If a note is sold, the seller will recognize gain or
loss equal to the difference between the amount realized on the sale and its
adjusted basis in the note. A holder's adjusted basis in a note generally equals
the cost of the note to the holder, increased by income reported by the holder
with respect to the note and reduced (but not below zero) by distributions on
the note (other than qualified stated interest) received by the holder and by
amortized premium. While any such gain or loss generally will be capital gain or
loss provided the Note is held as a capital asset, gain recognized on the sale
of a note by a seller who purchased the note at a market discount would be
taxable as ordinary income in an amount not exceeding the portion of such
discount that accrued during the period the note was held by such seller,
reduced by any market discount includable in income under the rules described
above under "--Interest Income on the Notes--Market Discount." Further, the
notes will be "evidences of indebtedness" within the meaning of Section
582(c)(1) of the Code, so that gain or loss recognized from a sale of a note by
a bank or other financial institution to which such section applies would be
ordinary income or loss.
Short-Term Notes. In the case of a note with a maturity of one year or
less from its issue date (a "Short-Term Note"), no interest is treated as
qualified stated interest, and therefore all interest is included in original
issue discount. Note Owners that report income for federal income tax purposes
on an accrual method and some other Note Owners, including banks and certain
dealers in securities, (collectively, "Short-Term Accruers") are required to
include original issue discount in income on these Short-Term Notes on a
straight-line basis, unless an election is made to accrue the original issue
discount according to a constant yield method based on daily compounding.
Any other Note Owner of a Short-Term Note is not required to accrue
original issue discount for federal income tax purposes, unless it elects to do
so. In the case of a Note Owner that is not required, and does not elect, to
include original issue discount in income currently, any gain realized on the
sale, exchange or retirement of a Short-Term Note is ordinary income to the
extent of the original issue discount accrued on a straight-line basis, or, if
elected, according to a constant yield method based on daily compounding,
through the date of sale, exchange or retirement. In addition, Note Owners that
are not required, and do not elect, to include original issue discount in income
currently are required to defer deductions for any interest paid on indebtedness
incurred or continued to purchase or carry a Short-Term Note in an amount not
exceeding the deferred interest income with respect to the Short-Term Note,
which includes both the accrued original issue discount and accrued interest
that are payable but that have not been included in gross income, until the
deferred interest income is realized. A Note Owner may elect to apply the
foregoing rules, except for the rule characterizing gain on sale, exchange or
retirement as ordinary, with respect to "acquisition discount" rather than
original issue discount. Acquisition discount is the excess of the stated
redemption price at maturity of the Short-Term Note over the Note Owner's basis
in the Short-Term Note. This election applies to all obligations acquired by the
taxpayer on or after the first day of the first taxable year to which the
election applies, unless revoked with the consent of the IRS. A Note Owner's tax
basis in a Short-Term Note is increased by the amount included in the Note
Owner's income with respect to the Note.
FOREIGN INVESTORS IN NOTES. Except as discussed below, a Note Owner
that is not a "United States person" (as defined below) generally will not be
subject to United States income or withholding tax in respect of a distribution
on a note provided that (i) the holder complies to the extent necessary with
certain certification requirements, which generally relate to the identity of
the beneficial owner and the status of the beneficial owner as a person that is
not a United States person (as defined below), (ii) the holder is not a
"10-percent shareholder" within the meaning of Section 871(h)(3)(B) of the Code,
which could be interpreted to include a person that directly or indirectly owns
10% or more of the certificates in the Trust, (iii) the holder is not a
"controlled foreign corporation" (as defined in the Code) related to the Trust
or related to a 10 percent holder of certificates in the Trust, and (iv) the
holder is not engaged in a United States trade or business, or otherwise subject
to federal income tax as a result of any direct or indirect connection to the
United States other than through its ownership of a note. For these purposes,
the term "United States person" means (i) a citizen or resident of the United
States, (ii) a corporation or partnership (or other entity properly treated as a
corporation or partnership for federal income tax purposes) created or organized
in or under the laws of the United States or any political subdivision thereof,
(iii) an estate whose income is includable in gross income for United States
federal income taxation regardless of its source, and (iv) a trust for which one
or more United States fiduciaries have the authority to control all substantial
decisions and for which a court of the United States can exercise primary
supervision over the trust's administration. A "Foreign Person" is any person
that is not a United States person. Each Note Owner should consult its tax
advisors regarding the tax documentation and certifications that must be
provided to secure the exemption from United States withholding taxes.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a note by a Foreign Person generally will be exempt from
United States federal income and withholding tax, provided that (i) such gain is
not effectively connected with the conduct of a trade or business in the United
States by the Foreign Person and (ii) in the case of an individual Foreign
Person, the Foreign Person is not present in the United States for 183 days or
more in the taxable year.
If the interest, gain or income on a note held by a Foreign Person is
effectively connected with the conduct of a trade or business in the United
States by the Foreign Person (although exempt from the withholding tax
previously discussed if the holder provides an appropriate statement
establishing that such income is so effectively connected), the holder generally
will be subject to United States federal income tax on the interest, gain or
income at regular federal income tax rates. In addition, if the Foreign Person
is a foreign corporation, it may be subject to a branch profits tax equal to 30%
of its "effectively connected earnings and profits," within the meaning of the
Code, for the taxable year, as adjusted for certain items, unless it qualifies
for a lower rate under an applicable tax treaty (as modified by the branch
profits tax rules).
BACKUP WITHHOLDING ON NOTES. Distributions made on the notes and
proceeds from the sale of notes to or through certain brokers may be subject to
a "backup" withholding tax of 31 percent of "reportable payments" (including
interest accruals, original issue discount, and, under certain circumstances,
distributions in reduction of principal amount) if the holder of the notes fails
to comply with certain identification procedures, unless the Note Owner is an
exempt recipient under applicable provisions of the Code and, if necessary,
demonstrates such status. Any amounts so withheld from distributions on the
notes would be refunded by the IRS or allowable as a credit against the Note
Owner's federal income tax.
TAX CONSEQUENCES TO CERTIFICATE OWNERS OF OWNER TRUST
TREATMENT OF THE TRUST AS A PARTNERSHIP. Except to the extent a series
of certificates is intended to be treated as indebtedness, as described below
under "Certain Certificates Treated as Indebtedness," the Trust will agree, and
the related Certificate Owners will agree by their purchase of certificates, if
there is more than one Certificate Owner, to treat the Trust as a partnership
for purposes of federal and state income tax, franchise tax and any other tax
measured in whole or in part by income, with the assets of the partnership being
the assets held by the Trust, the partners of the partnership being the
Certificate Owners, including, to the extent relevant, the seller in its
capacity as recipient of distributions from any reserve fund, and the notes
being debt of the partnership, and if there is one Certificate Owner, to treat
the Certificate Owner as the owner of the assets of the Trust and to treat the
Trust as a disregarded entity. However, the proper characterization of the
arrangement involving the Trust, the certificates, the notes, the seller, the
company and the servicer is not certain because there is no authority on
transactions closely comparable to that contemplated in this prospectus.
A variety of alternative characterizations are possible. For example,
because the certificates have certain features characteristic of debt, the
certificates might be considered debt of the Trust. Generally, provided such
certificates are issued at or close to face value, any such characterization
would not result in materially adverse tax consequences to holders of
Certificates as compared to the consequences from treatment of the certificates
as equity in a partnership, described below. The following discussion assumes
that the certificates represent equity interests in a partnership. The following
discussion also assumes that all payments on the certificates are denominated in
U.S. dollars, none of the Certificates have interest rates which would qualify
as contingent interest under the Treasury regulations relating to original issue
discount, and that a series of securities includes a single class of
certificates. If these conditions are not satisfied with respect to any given
series of certificates, additional tax considerations with respect to such
certificates will be disclosed in the applicable Prospectus Supplement.
The following discussion assumes that the certificates represent
equity interests in a partnership. The following discussion also assumes that
all payments on the certificates are denominated in U.S. dollars, none of the
Certificates, have interest rates which would quality as contingent interest
under the Treasury regulations relating to original issue discount, and that a
series of securities includes a single class of certificates. If these
conditions are not satisfied with respect to any given series of certificates,
additional tax considerations with respect to the certificates will be disclosed
in the related applicable Prospectus Supplement.
Partnership Taxation. As a partnership, the Trust will not be subject
to federal income tax. Rather, each Certificate Owner will be required to take
into account separately the Certificate Owner's allocable share of income,
gains, losses, deductions and credits of the Trust, whether or not there is a
corresponding cash distribution. Thus, cash basis holders will in effect be
required to report income from the certificates on the accrual basis and
Certificate Owners may become liable for taxes on Trust income even if they have
not received cash from the Trust to pay the taxes. The Trust's income will
consist primarily of interest and finance charges earned on the related Base
Assets, including appropriate adjustments for market discount, original issue
discount and bond premium, and any gain upon collection or disposition of the
related Base Assets. The Trust's deductions will consist primarily of interest
accruing with respect to the Notes to the extent the Notes are properly
characterized as debt, as discussed above under "--Tax Consequences to Note
Owners", servicing and other fees, and losses or deductions upon collection or
disposition of Base Assets.
The Trust's deductions will consist primarily of interest accruing with
respect to the notes, servicing and other fees, and losses or deductions upon
collection or disposition of Base Assets.
Any collateral certificates held by the Owner Trustee will be subject
to the federal income tax treatment described in this Prospectus depending on
the terms of the collateral certificates and their characterization (for
example, as indebtedness) for federal income tax purposes.
The federal income tax treatment of any Collateral Certificates held
by the Trust will depend on the terms of the Collateral Certificates and their
characterization (for example, as indebtedness) for federal income tax purposes.
o the interest or other income that accrues on the certificates in
accordance with their terms for the relevant month including, as
applicable, interest accruing at the related certificate
pass-through month and interest on amounts previously due on the
Certificates but not yet distributed;
o any Trust income attributable to discount on the related Base
Assets that corresponds to any excess of the principal amount of
the certificates over their initial issue price;
o any prepayment premium payable to the Certificate Owners for the
applicable month; and
o any other amounts of income payable to the Certificate Owners for
the applicable month.
The allocation will be reduced by any amortization by the Trust of premium on
Base Assets that corresponds to any excess of the issue price of certificates
over their principal amount. Losses will generally be allocated in the manner in
which they are borne.
Based on the economic arrangement of the parties, the foregoing
approach for allocating Trust income should be permissible under applicable
Treasury regulations, although no assurance can be given that the IRS would not
require a greater amount of income to be allocated to Certificate Owners.
Moreover, even under the foregoing method of allocation, Certificate Owners may
be allocated income equal to the entire certificate pass-through rate plus the
other items described above, even though the Trust might not have sufficient
cash to make current cash distributions of that amount. In addition, because tax
allocations and tax reporting will be done on a uniform basis for all
Certificate Owners, but Certificate Owners may be purchasing certificates at
different times and at different prices, Certificate Owners may be required to
report on their tax returns taxable income that is greater or less than the
amount reported to them by the Trust.
Assuming notes are also issued, all or substantially all of the
taxable income allocated to a Certificate Owner that is a pension, profit
sharing or employee benefit plan or other tax-exempt entity, including an
individual retirement account, will generally constitute "unrelated business
taxable income" generally taxable to the holder under the Code.
An individual taxpayer's share of expenses of the Trust, including
fees to the servicer, but not interest expense, would be miscellaneous itemized
deductions and thus deductible only to the extent such expenses plus all other
miscellaneous itemized deductions exceeds two percent of the individual's
adjusted gross income. An individual taxpayer will be allowed no deduction for
his share of expenses of the Trust, other than interest, in determining his
liability for alternative minimum tax. In addition, Section 68 of the Code
provides that the amount of itemized deductions otherwise allowable for the
taxable year for an individual whose adjusted gross income exceeds a prescribed
threshold amount will be reduced by the lesser of (1) 3% of the excess of
adjusted gross income over the specified threshold amount or (2) 80% of the
amount of itemized deductions otherwise allowable for the applicable taxable
year. Accordingly, deductions might be disallowed to the individual in whole or
in part and might result in the Certificate Owner being taxed on an amount of
income that exceeds the amount of cash actually distributed to the holder over
the life of the Trust. In the case of a partnership that has 100 or more
partners and elects to be treated as an "electing large partnership," 70% of
that partnership's miscellaneous itemized deductions will be disallowed,
although the remaining deductions will generally be allowed at the partnership
level and will not be subject to the 2% floor that would otherwise be applicable
to individual partners.
Accordingly, deductions might be disallowed to an individual in whole or in part
and might result in the Certificate Owner being taxed on an amount of income
that exceeds the amount of cash actually distributed to the holder over the life
of the Trust. For taxable years beginning after December 31, 1997 in the case of
a partnership that has 100 or more partners and elects to be treated as an
"electing large partnership" 70% of the partnership miscellaneous itemized
deductions will be disallowed, although the remaining deductions will generally
be allowed at the partnership level and will not be subject to the 2% floor that
would otherwise be applicable to individual partners.
The Trust intends to make all tax calculations relating to income and
allocations to Certificate Owners on an aggregate basis to the extent relevant.
If the IRS were to require that the calculations be made separately for each
Base Asset, the calculations may result in timing and character differences
under some circumstances.
DISCOUNT AND PREMIUM. The purchase price paid by the Trust for the
related Base Assets may be greater or less than the remaining principal balance
of the Base Assets at the time of purchase. If so, the Base Assets will have
been acquired at a premium or market discount, as the case may be. See "Tax
Consequences to Note Owners--Premium" and "-- Market Discount" above. As
indicated above, the Trust will make this calculation on an aggregate basis, but
it is possible that the IRS might require that it be recomputed on a Base
Asset-by-Base Asset basis. Further, to the extent a Base Asset is a Treasury
Strip, Private Label Custody Strip, REFCO Strip or other instrument evidencing
ownership of specific interest and/or principal of a particular bond, it will be
subject to the rules relating to original issue discount (in lieu of the rules
relating to market discount). See " Tax Consequences to Note Owners--Original
Issue Discount" above.
If the Trust acquires the Base Assets at a market discount or premium,
the Trust will elect to include any market discount in income currently as it
accrues over the life of the Base Assets or to offset any premium against
interest income on the Base Assets. As indicated above, a portion of the market
discount income or premium deduction may be allocated to Certificate Owners.
SECTION 708 TERMINATION. Under Section 708 of the Code, the Trust will
be deemed to terminate for federal income tax purposes if 50% or more of the
capital and profits interests in the Trust are sold or exchanged within a
12-month period. If a termination occurs under Section 708 of the Code, the
Trust will be considered to contribute its assets to a new Trust, which would be
treated as a new partnership, in exchange for certificates in the new Trust. The
original Trust will then be deemed to distribute the certificates in the new
Trust to each of the owners of certificates in the original Trust in liquidation
of the original Trust. The Trust will not comply with particular technical
requirements that might apply when a constructive termination occurs. As a
result, the Trust may be subject to some tax penalties and may incur additional
expenses if it is required to comply with those requirements. Furthermore, the
Trust might not be able to comply with these requirements due to lack of data.
DISPOSITION OF CERTIFICATES. Generally, capital gain or loss will be
recognized on a sale of certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the certificates sold.
Any gain or loss would be long-term capital gain or loss if the Certificate
Owner's holding period exceeded one year. A Certificate Owner's tax basis in a
Certificate will generally equal its cost, increased by its share of Trust
income allocable to the Certificate Owner and decreased by any distributions
received or losses allocated with respect to the certificate. In addition, both
the tax basis in the certificates and the amount realized on a sale of a
certificate would include the Certificate Owner's share, determined under
Treasury Regulations, of the notes and other liabilities of the Trust. A
Certificate Owner acquiring certificates at different prices will generally be
required to maintain a single aggregate adjusted tax basis in the certificates
and, upon a sale or other disposition of some of the certificates, allocate a
portion of the aggregate tax basis to the certificates sold, rather than
maintaining a separate tax basis in each certificate for purposes of computing
gain or loss on a sale of that certificate.
If a Certificate Owner is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the certificates that exceeds the aggregate
cash distributions with respect to the certificates, the excess will generally
give rise to a capital loss upon the retirement of the certificates.
ALLOCATIONS BETWEEN TRANSFERORS AND TRANSFEREES. In general, the
Trust's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the Certificate Owners
in proportion to the principal amount of certificates owned by them as of the
close of the last day of the applicable month. As a result, a Certificate Owner
purchasing certificates may be allocated tax items, which will affect the
purchaser's tax liability and tax basis, attributable to periods before the
actual transaction.
The use of a monthly convention may not be permitted by existing
Treasury regulations. If a monthly convention is not allowed, or only applies to
transfers of less than all of the partner's interest, taxable income or losses
of the Trust might be reallocated among the Certificate Owners. The Trust's
method of allocation between transferors and transferees may be revised to
conform to a method permitted by future laws, regulations or other IRS guidance.
SECTION 731 DISTRIBUTIONS. In the case of any distribution to a
Certificate Owner, no gain will be recognized to that Certificate Owner to the
extent that the amount of any money distributed for that Certificate exceeds the
adjusted basis of that Certificate Owner's interest in the Certificate. To the
extent that the amount of money distributed exceeds that Certificate Owner's
adjusted basis, gain will be currently recognized. In the case of any
distribution to a Certificate Owner, no loss will be recognized except upon a
distribution in liquidation of a Certificate Owner's interest. Any gain or loss
recognized by a Certificate Owner generally will be capital gain or loss.
SECTION 754 ELECTION. In the event that a Certificate Owner sells its
certificates at a profit (or loss), the purchasing Certificate Owner will have a
higher (or lower) basis in the certificates than the selling Certificate Owner
had. The tax basis of the Trust's assets will not be adjusted to reflect that
higher (or lower) basis unless the Trust were to file an election under Section
754 of the Code. In order to avoid the administrative complexities that would be
involved in keeping accurate accounting records, as well as potentially onerous
information reporting requirements, the Trust current does not intend to make an
election under Section 754 of the Code. As a result, Certificate Owners might be
allocated a greater or lesser amount of Trust income than would be appropriate
based on their own purchase price for certificates.
ADMINISTRATIVE MATTERS. The trustee is required to keep or cause to be
kept complete and accurate books of the Trust. The trustee will file a
partnership information return (IRS Form 1065) with the IRS for each taxable
year of the Trust and will report each Certificate Owner's allocable share of
items of Trust income and expense to Certificate Owners and the IRS on Schedule
K-1. The Trust will provide the Schedule K-1 information to nominees that fail
to provide the Trust with the information statement described below and the
nominees will be required to forward this information to the beneficial owners
of the certificates. Generally, holders must timely file tax returns that are
consistent with the information return filed by the Trust or be subject to
penalties unless the holder notifies the IRS of all the inconsistencies.
Under Section 6031 of the Code, any person that holds certificates as
a nominee at any time during a calendar year is required to furnish the Trust
with a statement containing specific information on the nominee, the beneficial
owners and the certificates so held. The information includes:
(1) the name, address and taxpayer identification number of the
nominee, and
(2) as to each beneficial owner:
o the name, address and identification number of such person,
o whether such person is a United States person, a tax-exempt
entity or a foreign government, an international
organization, or any wholly owned agency, or instrumentality
of either of the foregoing, and
o partaiciular information on certificates that were held,
bought or sold on behalf of the person throughout the year.
In addition, brokers and financial institutions that hold certificates through a
nominee are required to furnish directly to the Trust information as to
themselves and their ownership of certificates. A clearing agency registered
under Section 17A of the Exchange Act is not required to furnish any information
statement to the Trust. The information referred to above for any calendar year
must be furnished to the Trust on or before the following January 31. Nominees,
brokers and financial institutions that fail to provide the Trust with the
information described above may be subject to penalties.
The company ordinarily will be designated as the tax matters partner
for each Trust in the related Trust Agreement and, as the tax matters partner,
will be responsible for representing the Certificate Owners in some specific
disputes with the IRS. The Code provides for administrative examination of a
partnership as if the partnership were a separate and distinct taxpayer.
Generally, the statute of limitations for partnership items does not expire
before the later of three years after the date on which the partnership
information return is filed or the last day for filing the return for the
applicable year, determined without regard to extensions. Any adverse
determination following an audit of the return of the Trust by the appropriate
taxing authorities could result in an adjustment of the returns of the
Certificate Owners, and, under some circumstances, a Certificate Owner may be
precluded from separately litigating a proposed adjustment to the items of the
Trust. An adjustment could also result in an audit of a Certificate Owner's
returns and adjustments of items not related to the income and losses of the
Trust.
A special audit system exists for qualifying large partnerships that
have elected to apply a simplified flow-through reporting system under Sections
771 through 777 of the Code. Unless otherwise specified in the applicable
Prospectus Supplement, a Trust will not elect to apply the simplified
flow-through reporting system.
TAXATION OF CERTAIN FOREIGN CERTIFICATE OWNERS. As used below, the
term "Non-United States Owner" means a Certificate Owner that is not a United
States person, as defined under "Tax Consequences to Note Owners--Foreign
Investors in Notes," above.
It is not clear whether the Trust would be considered to be engaged in
a trade or business in the United States for purposes of federal withholding
taxes with respect to Non-United States Owners because there is no clear
authority dealing with that issue under facts substantially similar to those
described in this Prospectus. Although it is not expected that the Trust would
be engaged in a trade or business in the United States for these purposes, the
Trust will withhold as if it were so engaged in order to protect the Trust from
possible adverse consequences of a failure to withhold. The Trust expects to
withhold on the portion of its taxable income that is allocable to Non-United
States Owners pursuant to Section 1446 of the Code, as if the income were
effectively connected to a U.S. trade or business, at a rate of 35% for
Non-United States Owners that are taxable as corporations and 39.6% for all
other Non-United States Owners.
Subsequent adoption of Treasury regulations or the issuance of other
administrative pronouncements may require the Trust to change its withholding
procedures.
Each Non-United States Owner might be required to file a U.S.
individual or corporate income tax return on its share of the Trust's income
including, in the case of a corporation, a return in respect of the branch
profits tax. Assuming the Trust is not engaged in a U.S. trade or business, a
Non-United States Owner would be entitled to a refund with respect to all or a
portion of taxes withheld by the Trust if, in particular, the Owner's allocable
share of interest from the Trust constituted "portfolio interest" under the
Code.
The interest, however, may not constitute "portfolio interest" if,
among other reasons, the underlying obligation is not in registered form or if
the interest is determined without regard to the income of the Trust, in the
later case, the interest being properly characterized as a guaranteed payment
under Section 707(c) of the Code. If this were the case, Non-United States
Owners would be subject to a United States federal income and withholding tax at
a rate of 30 percent on the Trust's gross income, without any deductions or
other allowances for costs and expenses incurred in producing the income, unless
reduced or eliminated pursuant to an applicable treaty. In this case, a
Non-United States Owner would only be entitled to a refund for that portion of
the taxes, if any, in excess of the taxes that should have been withheld with
respect to the interest.
BACKUP WITHHOLDING. Distributions made on the certificates and
proceeds from the sale of the certificates will be subject to a "backup"
withholding tax of 31% if, in general, the Certificate Owner fails to comply
with particular identification procedures, unless the holder is an exempt
recipient under applicable provisions of the Code and, if necessary,
demonstrates such status. Any amounts so withheld would be refunded by the IRS
or allowable as a credit against the Non-United States Owner's federal income
tax.
GRANTOR TRUSTS
TAX CHARACTERIZATION OF THE GRANTOR TRUSTS
CHARACTERIZATION. In the case of a grantor trust, Federal Tax Counsel
will deliver its opinion that the Trust will not be classified as an association
taxable as a corporation and that the Trust will be classified as a grantor
trust under subpart E, Part I of subchapter J of the Code. In this case,
beneficial owners of certificates (referred to in this Prospectus as "grantor
trust certificateholders") will be treated for federal income tax purposes as
owners of a portion of the Trust's assets as described below. The certificates
issued by a Trust that is treated as a grantor trust are referred to in this
Prospectus as "grantor trust certificates".
TAXATION OF GRANTOR TRUST CERTIFICATEHOLDERS. Subject to the
discussion below under "Stripped Certificates" and "Subordinated Certificates,"
each grantor trust certificateholder will be treated as the owner of a pro rata
undivided interest in the Base Assets and other assets of the Trust.
Accordingly, and subject to the discussion below of the recharacterization of
the Servicing Fee, each grantor trust certificateholder must include in income
its pro rata share of the interest and other income from the Base Assets,
including any interest, original issue discount, market discount, prepayment
fees, assumption fees, and late payment charges with respect to the assets, and,
subject to limitations discussed below, may deduct its pro rata share of the
fees and other deductible expenses paid by the Trust, at the same time and to
the same extent as these items would be included or deducted by the grantor
trust certificateholder if the grantor trust certificateholder held directly a
pro rata interest in the assets of the Trust and received and paid directly the
amounts received and paid by the Trust. Any amounts received by a grantor trust
certificateholder in lieu of amounts due with respect to any Base Asset because
of a default or delinquency in payment will be treated for federal income tax
purposes as having the same character as the payments they replace.
Each grantor trust certificateholder will be entitled to deduct its
pro rata share of servicing fees, prepayment fees, assumption fees, any loss
recognized upon an assumption and late payment charges retained by the servicer,
provided that these amounts are reasonable compensation for services rendered to
the Trust. Grantor trust certificateholders that are individuals, estates or
trusts will be entitled to deduct their share of expenses only to the extent
these expenses plus all other miscellaneous itemized deductions exceed two
percent of the grantor trust certificateholder's adjusted gross income, and will
be allowed no deduction for these expenses in determining their liabilities for
alternative minimum tax. In addition, Section 68 of the Code provides that the
amount of itemized deductions otherwise allowable for the taxable year for an
individual whose adjusted gross income exceeds a prescribed threshold amount
will be reduced by the lesser of (1) 3% of the excess of adjusted gross income
over the specified threshold amount or (2) 80% of the amount of itemized
deductions otherwise allowable for the applicable taxable year. In the case of a
partnership that has 100 or more partners and elects to be treated as an
"electing large partnership," 70% of the partnership's miscellaneous itemized
deductions will be disallowed, although the remaining deductions will generally
be allowed at the partnership level and will not be subject to the 2% floor that
would otherwise be applicable to individual partners.
(1) 3% of the excess of adjusted gross income over the specified
threshold amount, or
(2) 80% of the amount of itemized deductions otherwise allowable for
the applicable year.
In the case of a partnership that has 100 or more partners and elects to be
treated as an "electing large partnership," 70% of the partnership's
miscellaneous itemized deductions will be disallowed, although the remaining
deductions will generally be allowed at the partnership level and will not be
subject to the 2% floor that would otherwise be applicable to individual
partners.
The servicing compensation to be received by the servicer may be
questioned by the IRS as exceeding a reasonable fee for the services being
performed in exchange for the servicing compensation, and a portion of the
servicing compensation could be recharacterized as an ownership interest
retained by the servicer or other party in a portion of the interest payments to
be made with respect to the Trust's assets. In this event, a certificate might
be treated as a Stripped Certificate subject to the stripped bond rules of
Section 1286 of the Code and the original issue discount provisions rather than
to the market discount and premium rules. See the discussion below under
"--Stripped Certificates". Except as discussed below under "Stripped
Certificates" or "--Subordinated Certificates," this discussion assumes that the
servicing fees paid to the servicer do not exceed reasonable servicing
compensation.
A purchaser of a grantor trust certificate will be treated as
purchasing an interest in each Base Asset in the Trust at a price determined by
allocating the purchase price paid for the certificate among all Base Assets in
proportion to their fair market values at the time of the purchase of the
certificate. To the extent that the portion of the purchase price of a grantor
trust certificate allocated to a Base Asset is less than or greater than the
portion of the stated redemption price at maturity of the Base Asset, the
interest in the Base Asset will have been acquired at a discount or premium. See
"--Market Discount" and "--Premium," below.
The treatment of any discount on a Base Asset will depend on whether
the discount represents original issue discount or market discount. Except as
indicated otherwise in the applicable Prospectus Supplement, it is not expected
that any Base Asset (other than a Base Asset that is a Treasury Strip, Private
Label Custody Strip, REFCO Strip or other instrument evidencing ownership of
specific interest and/or principal of a particular bond) will have original
issue discount (except as discussed below under "Stripped Certificates" or
"Subordinated Certificates"). For the rules governing original issue discount,
see "Trusts Which Are Not Treated as Grantor Trusts--Tax Consequences to Note
Owners--Original Issue Discount" above. However, in the case of Base Assets that
constitute short-term Government Securities the rules set out above dealing with
short-term obligations (see "Trusts Which Are Not Treated as Grantor Trusts--Tax
Consequences to Note Owners-- Short-Term Notes" above) are applied with
reference to acquisition discount rather than original issue discount, if the
obligations constitute "short-term Government obligations" within the meaning of
Section 1271(a)(3)(B) of the Code. Further, if 20 percent or more of the grantor
trust certificateholders are Short-Term Accruers, all holders of grantor trust
certificates may be required to accrue acquisition discount or original issue
discount, as the case may be, with respect to short-term obligations held by the
Trust in the same manner as a Short-Term Accruer would accrue such discount. See
"Trusts Which Are Not Treated As Grantor Trusts--Tax Consequences to Note
Owners-- Short-Term Notes" above.
The information provided to grantor trust certificateholders will not
include information necessary to compute the amount of discount or premium, if
any, at which an interest in each Base Asset is acquired.
MARKET DISCOUNT. A grantor trust certificateholder that acquires an
undivided interest in Base Assets may be subject to the market discount rules of
Sections 1276 through 1278 to the extent an undivided interest in a Base Asset
is considered to have been purchased at a "market discount". For a discussion of
the market discount rules under the Code, see "Trusts Which Are Not Treated as
Grantor Trusts --Tax Consequences to Note Owners--Market Discount" above. As
discussed above, to the extent a Base Asset is a Treasury Strip, Private Label
Custody Strip, REFCO Strip or other instrument evidencing ownership of specific
interest and/or principal of a particular bond, it will be subject to the rules
relating to original issue discount (in lieu of the rules relating to market
discount). See " Tax Consequences to Note Owners--Original Issue Discount"
above.
PREMIUM. To the extent a grantor trust certificateholder is considered
to have purchased an undivided interest in a Base Asset for an amount that is
greater than the stated redemption price at maturity of the interest, the
grantor trust certificateholder will be considered to have purchased the
interest in the Base Asset with "amortizable bond premium" equal in amount to
the excess. For a discussion of the rules applicable to amortizable bond
premium, see "Trusts Which Are Not Treated as Grantor Trusts --Tax Consequences
to Note Owners--Premium" above.
STRIPPED CERTIFICATES. Some classes of certificates may be subject to
the stripped bond rules of Section 1286 of the Code and for purposes of this
discussion will be referred to as "Stripped Certificates." In general, a
Stripped Certificate will be subject to the stripped bond rules where there has
been a separation of ownership of the right to receive some or all of the
principal payments on a Base Asset from ownership of the right to receive some
or all of the related interest payments. In general, where a separation has
occurred, under the stripped bond rules of Section 1286 of the Code, the holder
of a right to receive a principal or interest payment on the bond is required to
accrue into income, on a constant yield basis under rules governing original
issue discount (see "Trusts Which Are Not Treated As Grantor Trusts--Tax
Consequences to Note Owners--Original Issue Discount"), the difference between
the holder's initial purchase price for the right to receive and the principal
or interest payment to be received with respect to that right.
Certificates will constitute Stripped Certificates and will be subject
to these rules under various circumstances, including the following:
o if any servicing compensation is deemed to exceed a reasonable
amount (see "--Taxation of Grantor Trust Certificateholders",
above);
o if the company or any other party retains a retained yield with
respect to the Base Assets held by the Trust;
o if two or more classes of certificates are issued representing
the right to non-pro rata percentages of the interest or
principal payments on the Trust's assets; or
o if certificates are issued which represent the right to
interest-only payments or principal-only payments.
The tax treatment of the Stripped Certificates with respect to the
application of the original issue discount provisions of the Code is currently
unclear. However, the trustee intends to treat each Stripped Certificate as a
single debt instrument issued on the day it is purchased for purposes of
calculating any original issue discount. Original issue discount with respect to
a Stripped Certificate must be included in ordinary gross income for federal
income tax purposes as it accrues in accordance with the constant yield method
that takes into account the compounding of interest and this accrual of income
may be in advance of the receipt of any cash attributable to that income. See
"Trusts Which Are Not Treated As Grantor Trusts--Tax Consequences to Note
Owners--Original Issue Discount" above. For purposes of applying the original
issue discount provisions of the Code, the issue price of a Stripped Certificate
will be the purchase price paid by each holder of the Stripped Certificate and
the stated redemption price at maturity may include the aggregate amount of all
payments to be made with respect to the Stripped Certificate whether or not
denominated as interest. The amount of original issue discount with respect to a
Stripped Certificate may be treated as zero under the original issue discount DE
MINIMIS rules described above.
SUBORDINATED CERTIFICATES. In the event the Trust issues two classes
of grantor trust certificates that are identical except that one class is a
subordinate class, with a relatively high certificate pass-through rate, and the
other is a senior class, with a relatively low certificate pass-through rate
(referred to in this Prospectus as the "Subordinate Certificates" and "Senior
Certificates", respectively), the grantor trust certificateholders in the
aggregate will be deemed to have acquired the following assets: (1) the
principal portion of each Base Asset plus a portion of the interest due on each
Base Asset (the "Trust Stripped Bond"), and (2) a portion of the interest due on
each Base Asset equal to the difference between the certificate pass-through
rate on the Subordinate Certificates and the certificate pass-through rate on
the Senior Certificates, if any, which difference is then multiplied by the
Subordinate Class Percentage (the "Trust Stripped Coupon"). The "Subordinate
Class Percentage" equals the initial aggregate principal amount of the
Subordinate Certificates divided by the sum of the initial aggregate principal
amount of the Subordinate Certificates and the Senior Certificates. The "Senior
Class Percentage" equals the initial aggregate principal amount of the Senior
Certificates divided by the sum of the initial aggregate principal amount of the
Subordinate Certificates and the Senior Certificates.
The Senior Certificateholders in the aggregate will own the Senior
Class Percentage of the Trust Stripped Bond and accordingly each Senior
Certificateholder will be treated as owning its pro rata share of such asset.
The Senior Certificateholders will not own any portion of the Trust Stripped
Coupon. The Subordinate Certificateholders in the aggregate own both the
Subordinate Class Percentage of the Trust Stripped Bond plus 100% of the Trust
Stripped Coupon, if any, and accordingly each Subordinate Certificateholder will
be treated as owning its pro rata share in both assets. The Trust Stripped Bond
will be treated as a "stripped bond" and the Trust Stripped Coupon will be
treated as "stripped coupons" within the meaning of Section 1286 of the Code.
Although not entirely clear, the interest income on the Subordinate
Certificates and the portion of the Servicing Fee allocable to such certificates
that does not constitute excess servicing will be treated by the Trust as
qualified stated interest, assuming the interest with respect to the Base Assets
would otherwise qualify as qualified stated interest. Accordingly, except to the
extent modified below, the income of the Subordinate Certificates will be
reported in the same manner as described generally above for holders of Senior
Certificates.
Income of the holder of the Trust Stripped Coupon will be reported by
treating the Trust Stripped Coupon as a single debt instrument with original
issue discount equal to the excess of the total amount payable with respect to
the Trust Stripped Coupon, based on the prepayment assumption used in pricing
the certificates, over the portion of the purchase price allocated to the Trust
Stripped Coupon. The sum of the daily portions of original issue discount on the
Trust Stripped Coupon for each day during a year in which the Subordinate
Certificateholder holds the Trust Stripped Coupon will be included in the
Subordinate Certificateholder's income.
If the Subordinate Certificateholders receive distribution of less
than their share of the Trust's receipts of principal or interest (the
"Shortfall Amount") because of the subordination of the Subordinate
Certificates, holders of Subordinate Certificates would probably be treated for
federal income tax purposes as if they had.
o received as distributions their full share of receipts;
o paid over to the Senior Certificateholders an amount equal to the
Shortfall Amount; and
o retained the right to reimbursement of the relevant amounts to
the extent these amounts are otherwise available as a result of
collections on the Base Assets or amounts available from a
reserve account or other form of credit enhancement, if any.
Under this analysis,
o Subordinate Certificateholders would be required to accrue as
current income any interest income, original issue discount, or
(to the extent paid on assets of the Trust) accrued market
discount of the Trust that was a component of the Shortfall
Amount, even though that amount was in fact paid to the Senior
Certificateholders;
o a loss would only be allowed to the Subordinate
Certificateholders when their right to receive reimbursement of
the Shortfall Amount became worthless (i.e., when it becomes
clear that the amount will not be available from any source to
reimburse the loss); and
o reimbursement of the Shortfall Amount prior to a claim of
worthlessness would not be taxable income to Subordinate
Certificateholders because the amount was previously included in
income.
Those results should not significantly affect the inclusion of income for
Subordinate Certificateholders on the accrual method of accounting, but could
accelerate inclusion of income to Subordinate Certificateholders on the cash
method of accounting by, in effect, placing them on the accrual method.
Moreover, the character and timing of loss deductions are unclear. Subordinate
Certificateholders are strongly urged to consult their own tax advisors
regarding the appropriate timing, amount and character of any losses sustained
with respect to the Subordinate Certificates including any loss resulting from
the failure to recover previously accrued interest or discount income.
Election to Treat All Interest as Original Issue Discount. The
Treasury Regulations relating to original issue discount permt a grantor trust
certificateholder to elect to accrue all interest, discount, including de
minimis market or original issue discount, reduced by any premium, in income as
interest, based on a constant yield method. If an election were to be made with
respect to an interest in a Base Asset with market discount, the Certificate
Owner would be deemed to have made an election to include in income currently
market discount with respect to all other debt instruments having market
discount that the grantor trust certificateholder acquires during the year of
the election or afterward. See "--Market Discount" above. Similarly, a grantor
trust certificateholder that makes this election for an interest in a Base Asset
that is acquired at a premium will be deemed to have made an election to
amortize bond premium with respect to all debt instruments having amortizable
bond premium that the grantor trust certificateholder owns at the beginning of
the first taxable year to which the election applies or acquires afterward. See
"Premium" above. The election to accrue interest, discount and premium on a
constant yield method with respect to a grantor trust certificate is
irrevocable.
Prepayments. The Taxpayer Relief Act of 1997 (the "1997 Act") contains
a provision requiring original issue discount on any pool of debt instruments
the yield on which may be affected by reason of prepayments to be calculated
taking into account the Prepayment Assumption and requiring the discount to be
taken into income on the basis of a constant yield to assumed maturity taking
account of actual prepayments. The legislative history to the 1986 Act states
that similar rules apply with respect to market discount and amortizable bond
premium on debt instruments.
Sale or Exchange of a Grantor Trust Certificate. Sale or exchange of a
grantor trust certificate prior to its maturity will result in gain or loss
equal to the difference, if any, between the amount realized, exclusive of
amounts attributable to accrued and unpaid interest, which will be treated as
ordinary income, allocable to the Base Asset and the owner's adjusted basis in
the grantor trust certificate. The adjusted basis generally will equal the
seller's cost for the grantor trust certificate, increased by the original issue
discount and any market discount included in the seller's gross income with
respect to the grantor trust certificate, and reduced, but not below zero, by
any premium amortized by the seller and by principal payments on the grantor
trust certificate previously received by the seller. The gain or loss will,
except as discussed below, be capital gain or loss to an owner for which the
Base Assets represented by a grantor trust certificate are "capital assets"
within the meaning of Section 1221. A capital gain or loss will be long-term or
short-term depending on whether or not the grantor trust certificate has been
owned for the long-term capital gain holding period, currently more than one
year.
Notwithstanding the foregoing, any gain realized on the sale or
exchange of a grantor trust certificate will be ordinary income to the extent of
the seller's interest in accrued market discount on Base Assets not previously
taken into income. See "--Market Discount," above. Further, grantor trust
certificates will be "evidences of indebtedness" within the meaning of Section
582(c)(1), so that gain or loss recognized from the sale of a grantor trust
certificate by a bank or thrift institution to which such section applied will
be treated as ordinary gain or loss.
FOREIGN INVESTORS IN GRANTOR TRUST CERTIFICATES. A holder of grantor
trust certificate who is not a "United States person" (as defined above at
"Trusts Which Are Not Treated As Grantor Trusts--Tax Consequences to Note
Owners--Foreign Investors in Notes") and is not subject to federal income tax as
a result of any direct or indirect connection to the United States other than
its ownership of a grantor trust certificate generally will not be subject to
United States income or withholding tax in respect of payments of interest or
original issue discount on its grantor trust certificate to the extent
attributable to debt obligations held by the Trust that were originated after
July 18, 1984, provided that the grantor trust certificateholder complies to the
extent necessary with certain certification requirements which generally relate
to the identity of the beneficial owner and the status of the beneficial owner
as a person that is not a United States person. Interest or original issue
discount on a grantor trust certificate attributable to debt obligations held by
the Trust that were originated prior to July 19, 1984 will be subject to a 30%
withholding tax (unless such tax is reduced or eliminated by an applicable tax
treaty). All holders of grantor trust certificates should consult their tax
advisors regarding the tax documentation and certifications that must be
provided to secure any applicable exemptions from United States withholding
taxes.
Any capital gain realized on the sale or other taxable disposition of
a grantor trust certificate by a Foreign Person (as defined above at "Trusts
Which Are Not Treated As Grantor Trusts--Tax Consequences to Note
Owners--Foreign Investors in Notes") generally will be exempt from United States
federal income and withholding tax, provided that (i) such gain is not
effectively connected with the conduct of a trade or business in the United
States by the Foreign Person and (ii) in the case of an individual Foreign
Person, the Foreign Person is not present in the United States for 183 days or
more in the taxable year.
If the interest, gain or income with respect to a grantor trust
certificate held by a Foreign Person is effectively connected with the conduct
of a trade or business in the United States by the Foreign Person (although
exempt from the withholding tax previously discussed if the holder provides an
appropriate statement establishing that such income is so effectively
connected), the holder generally will be subject to United States federal income
tax on the interest, gain or income at regular federal income tax rates. In
addition, if the Foreign Person is a foreign corporation, it may be subject to a
branch profits tax equal to 30% of its "effectively connected earnings and
profits," within the meaning of the Code, for the taxable year, as adjusted for
certain items, unless it qualifies for a lower rate under an applicable tax
treaty (as modified by the branch profits tax rules).
BACKUP WITHHOLDING. Distributions made on the grantor trust
certificates and proceeds from the sale of the grantor trust certificates will
be subject to a "backup" withholding tax of 31% if, in general, the grantor
trust certificateholder fails to comply with particular identification
procedures, unless the holder is an exempt recipient under applicable provisions
of the Code and, if necessary, demonstrates such status. Any amounts so withheld
would be refunded by the IRS or allowable as a credit against the grantor trust
certificateholder's federal income tax.
CERTAIN CERTIFICATES TREATED AS INDEBTEDNESS
Upon the issuance of certificates that are intended to be treated as
indebtedness for federal income tax purposes, Federal Tax Counsel will opine
that based upon its analysis of the factors discussed below and certain
assumptions and qualifications, the certificates will be properly classified as
indebtedness for federal income tax purposes. However, opinions of counsel are
not binding on the IRS and there can be no assurance that the IRS could not
successfully challenge this conclusion. Such certificates that are intended to
be treated as indebtedness are herein referred to as "Debt Certificates" and
holders of such certificates are herein referred to as "Debt
Certificateholders."
The Depositor, or the Seller, will express in the Agreements its
intent that for federal, state and local income and franchise tax purposes, the
Debt Certificates will be indebtedness secured by the Base Assets. The Seller
agrees and each Debt Certificateholder, by acquiring an interest in a Debt
Certificate, agrees or will be deemed to agree to treat the Debt Certificates as
indebtedness for federal, state and local income or franchise tax purposes.
However, because different criteria are used to determine the non-tax accounting
characterization of the transactions contemplated by the Agreements, the Seller
expects to treat such transactions for financial accounting purposes, as a sale
of ownership interests in the Base Assets and not as debt obligations.
In general, whether for federal income tax purposes a transaction
constitutes a sale of property or a loan the repayment of which is secured by
the property, is a question of fact, the resolution of which is based upon the
economic substance of the transaction. The form of a transaction, while a
relevant factor, is not conclusive evidence of its economic substance. In
appropriate circumstances, the courts have allowed taxpayers, as well as the
IRS, to treat a transaction in accordance with its economic substance, as
determined under federal income tax laws, notwithstanding that the participants
characterize the transaction differently for non-tax purposes. In some
instances, however, courts have held that a taxpayer is bound by a particular
form it has chosen for a transaction, even if the substance of the transaction
does not accord with its form. It is expected that Federal Tax Counsel will
advise that the rationale of those cases will not apply to the transactions
evidenced by a series of Debt Certificates.
While the IRS and the courts have set forth several factors to be
taken into account in determining whether the substance of a transaction is a
sale of property or a secured indebtedness for federal income tax purposes, the
primary factor in making this determination is whether the transferee has
assumed the risk of loss or other economic burdens relating to the property and
has obtained the economic benefits of ownership thereof. Federal Tax Counsel
will analyze and rely on several factors in reaching its opinion that the weight
of the benefits and burdens of ownership of the Base Assets has not been
transferred to the Debt Certificateholders and that the Debt Certificates are
properly characterized as indebtedness for federal income tax purposes. Contrary
characterizations that could be asserted by the IRS are described below under
"--Possible Classification of the Transaction as a Partnership or as an
Association Taxable as a Corporation."
TAXATION OF INCOME OF DEBT CERTIFICATEHOLDERS.
As set forth above, it is expected that Federal Tax Counsel will
advise the Seller and/or the Depositor that the Debt Certificates will
constitute indebtedness for federal income tax purposes, and accordingly,
holders of Debt Certificates generally will be taxed in the manner described
above in "Trusts Which Are Not Treated As Grantor Trusts--Tax Consequences to
Note Owners."
If the Debt Certificates are issued with OID that is more than a DE
MINIMIS amount as defined in the Code and Treasury regulations (see "Trusts
Which Are Not Treated As Grantor Trusts--Tax Consequences to Note Owners") a
United States holder of a Debt Certificate (including a cash basis holder)
generally would be required to accrue the OID on its interest in a Debt
Certificate in income for federal income tax purposes on a constant yield basis,
resulting in the inclusion of OID in income in advance of the receipt of cash
attributable to that income. Under Section 1272(a)(6) of the Code, special
provisions apply to debt instruments on which payments may be accelerated due to
prepayments of other obligations securing those debt instruments. However, no
regulations have been issued interpreting those provisions, and the manner in
which those provisions would apply to the Debt Certificates is unclear.
Additionally, the IRS could take the position based on Treasury regulations that
none of the interest payable on a Debt Certificate is "unconditionally payable"
and hence that all of such interest should be included in the Debt Certificate's
stated redemption price at maturity. Accordingly, Federal Tax Counsel is unable
to opine as to whether interest payable on a Debt Certificates constitutes
"qualified stated interest" that is not included in a Debt Certificate's stated
redemption price at maturity. Consequently, prospective investors in Debt
Certificates should consult their own tax advisors concerning the impact to them
in their particular circumstances. The Prospectus Supplement will indicate
whether the Trust expects to treat a Debt Certificate as having been issued with
OID.
TAX CHARACTERIZATION OF THE TRUST.
Consistent with the treatment of the Debt Certificates as
indebtedness, the Trust will be treated as a security device to hold Base Assets
securing the repayment of the Debt Certificates. In connection with the issuance
of Debt Certificates of any series, Federal Tax Counsel will render an opinion
that, based on the assumptions and qualifications set forth therein, under then
current law, the applicable Trust will not be characterized for federal income
tax purposes as an association (or publicly traded partnership) taxable as a
corporation.
POSSIBLE CLASSIFICATION OF THE TRANSACTION AS A PARTNERSHIP OR AS AN ASSOCIATION
TAXABLE AS A CORPORATION.
The opinion of Federal Tax Counsel with respect to Debt Certificates
will not be binding on the courts or the IRS. It is possible that the IRS could
assert that, for federal income tax purposes, the transactions contemplated
constitute a sale of the Base Assets (or an interest therein) to the Debt
Certificateholders and that the proper classification of the legal relationship
between the Seller, the Depositor, and some or all of the Debt
Certificateholders resulting from the transactions is that of a partnership
(including a publicly traded partnership), a publicly traded partnership taxable
as a corporation, or an association taxable as a corporation. Neither the
Seller, nor the Depositor, currently intends to comply with the federal income
tax reporting requirements that would apply if any Classes of Debt Certificates
were treated as interests in a partnership or corporation.
If a transaction were treated as creating a partnership between the
Seller and/or the Depositor and the Debt Certificateholders, the partnership
itself would not be subject to federal income tax (unless it were characterized
as a publicly traded partnership taxable as a corporation); rather, the partners
of such partnership, including the Debt Certificateholders, would be taxed
individually on their respective distributive shares of the partnership's
income, gain, loss, deductions and credits. The amount and timing of items of
income and deductions of a Debt Certificate could differ if the Debt
Certificates were held to constitute partnership interests, rather than
indebtedness. Moreover, unless the partnership were treated as engaged in a
trade or business, an individual's share of expenses of the partnership would be
miscellaneous itemized deductions that, in the aggregate, are allowed as
deductions only to the extent they exceed two percent of the individual's
adjusted gross income, and would be subject to reduction under Section 68 of the
Code if the individual's adjusted gross income exceeded certain limits. As a
result, the individual might be taxed on a greater amount of income than the
stated rate on the Debt Certificates. Finally, all or a portion of any taxable
income allocated to a Debt Certificateholder that is a pension, profit-sharing
or employee benefit plan or other tax-exempt entity (including an individual
retirement account) may, under certain circumstances, constitute "unrelated
business taxable income" which generally would be taxable to the holder under
the Code.
If it were determined that a transaction created an entity classified
as an association or as a publicly traded partnership taxable as a corporation,
the Trust would be subject to federal income tax at corporate income tax rates
on the income it derives from the Base Assets, which would reduce the amounts
available for distribution to the Debt Certificateholders. Such classification
may also have adverse state and local tax consequences that would reduce amounts
available for distribution to Debt Certificateholders. Moreover, distributions
on Debt Certificates that are recharacterized as equity in an entity taxable as
a corporation would not be deductible in computing the entity's taxable income,
and cash distributions on such Debt Certificates generally would be treated as
dividends for tax purposes to the extent of such deemed corporation's earnings
and profits.
FOREIGN INVESTORS IN DEBT CERTIFICATES.
As set forth above, it is expected that Federal Tax Counsel will
advise the Seller and/or the Depositor that the Debt Certificates will
constitute indebtedness for federal income tax purposes. Accordingly, Foreign
Persons, as defined in the section above entitled "Trusts Which Are Not Treated
As Grantor Trusts--Tax Consequences to Note Owners--Foreign Investors in Notes,"
that hold Debt Certificates generally will be taxed in the manner described in
that section.
If the IRS were to contend successfully that the Debt Certificates are
interests in a partnership and if such partnership were considered to be engaged
in a trade or business in the United States, the partnership would be subject to
a withholding tax on income of the Trust that is allocable to a Foreign Person
and such Foreign Person would be credited for his or her share of the
withholding tax paid by the partnership. In such case, the Foreign Person
generally would be subject to United States federal income tax at regular income
tax rates, and possibly a branch profits tax in the case of a corporate holder.
Alternatively, although there may be arguments to the contrary, if
such partnership is not considered to be engaged in a trade or business within
the United States and if income with respect to the Debt Certificates is not
otherwise effectively connected with the conduct of a trade or business in the
United States by the Foreign Person, the Foreign Person would be subject to
United States income tax and withholding at a rate of 30% (unless reduced by an
applicable tax treaty) on the holder's distributive share of the partnership's
interest income. See "Trusts Which Are Not Treated As Grantor Trusts--Tax
Consequences to Certificate Owners of Owner Trust--Taxation of Certain Foreign
Certificate Owners" for a general discussion of the consequences of an equity
investment by a Foreign Person in an entity characterized as a partnership.
If the Trust were recharacterized as an association or publicly traded
partnership taxable as a corporation, distribution to Certificate Owners that
are Foreign Persons, to the extent treated as dividends, would generally be
subject to withholding at the rate of 30%, unless such rate were reduced or
eliminated by an applicable income tax treaty. If such dividend were effectively
connected with the Foreign Person's United States trade or business (and, if
necessary, the Foreign Person establishes that it is so effectively connected)
the dividend would not be subject to withholding tax, but would be subject to
United States federal income tax at regular federal income tax rates, and if the
holder is a corporation, might be subject to a branch profits tax.
STATE AND LOCAL TAX CONSIDERATIONS
The discussion above does not address the tax consequences of
purchase, ownership or disposition of certificates or notes under any state or
local tax laws. We recommend that investors consult their own tax advisors
regarding state and local tax consequences.
* * *
THE TAX DISCUSSIONS SET FORTH ABOVE ARE INCLUDED FOR GENERAL INFORMATION ONLY
AND MAY NOT BE APPLICABLE DEPENDING UPON A NOTE OWNER'S OR CERTIFICATE OWNER'S
PARTICULAR TAX SITUATION. PROSPECTIVE PURCHASERS OF NOTES OR CERTIFICATES SHOULD
CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE
PURCHASE, OWNERSHIP AND DISPOSITION OF NOTES AND CERTIFICATES, INCLUDING THE TAX
CONSEQUENCES UNDER STATE, LOCAL AND FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE
EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX LAWS.
ERISA CONSIDERATIONS
Set forth below are some consequences under the Employee Retirement
Income Security Act of 1974, as amended ("ERISA") and the Code that a fiduciary
(a "Plan Fiduciary") of an "employee benefit plan" (as defined in and subject to
ERISA) or of a "plan" (as defined in Section 4975 of the Code) who has
investment discretion should consider before deciding to invest the plan's
assets in Notes or Certificates, as applicable. The following summary is
intended to be a summary of relevant ERISA issues and does not purport to
address all ERISA considerations that may be applicable to a particular plan.
In general, the terms "employee benefit plan" as defined in ERISA and
"plan" as defined in Section 4975 of the Code (a "Plan") refer to any plan or
account of various types which provide retirement benefits or welfare benefits
to an individual or to an employer's employees and their beneficiaries. Plans
include corporate pension and profit-sharing plans, "simplified employee pension
plans", Keogh plans for self-employed individuals, including partners in a
partnership, individual retirement accounts described in Section 408 of the Code
and medical benefit plans.
Each Plan Fiduciary must give appropriate consideration to the facts
and circumstances that are relevant to an investment in the Notes or
Certificates, as applicable, including the role that an investment in the Notes
or Certificates, as applicable, plays in the Plan's investment portfolio. Each
Plan Fiduciary, before deciding to invest in the Notes or Certificates, as
applicable, must be satisfied that investment in the Notes or Certificates, as
applicable, is a prudent investment for the Plan, that the investments of the
Plan, including the investment in the Notes or Certificates, as applicable, are
diversified so as to minimize the risks of large losses and that an investment
in the Notes or Certificates, as applicable, complies with the Plan and related
trust documents.
Each Plan considering acquiring a Note or Certificate, as applicable,
should consult its own legal and tax advisors before doing so.
Exempt Plans
ERISA and Section 4975 of the Code do not apply to governmental plans
and some church plans, each as defined in Section 3 of ERISA and Section 4975(g)
of the Code. However, fiduciaries with respect to these plans may be subject to
federal, state or other laws similar in effect to ERISA and Section 4975 of the
Code. The discussion below does not purport to address considerations under
federal, state or other laws.
Ineligible Purchasers
Notes or Certificates, as applicable, may not be purchased with the
assets of a Plan that is sponsored by or maintained by the Depositor, the
Trustee, the Issuer, the Servicer or any of their respective affiliates. Notes
or Certificates, as applicable, may not be purchased with the assets of a Plan
if the Depositor, the Trustee, the Issuer, the Servicer or any of their
respective affiliates or any of their employees:
(a) has investment discretion with respect to the investment of the
Plan assets; or
(b) has authority or responsibility to give or regularly gives
investment advice with respect to the Plan assets for a fee,
pursuant to an appropriate agreement or understanding that the
investment advice will serve as a primary basis for investment
decisions with respect to the Plan assets and that the investment
advice will be based on the particular investment needs of the
Plan.
A party that is described in clause (a) or (b) of the preceding sentence is a
fiduciary under ERISA and the Code with respect to the Plan, and any purchase
might result in a "prohibited transaction" under ERISA and the Code.
Plan Assets
It is possible that the purchase of a Note or Certificate, as
applicable, by a Plan will cause, for purposes of Title I of ERISA and Section
4975 of the Code, the related Base Assets to be treated as assets of that Plan.
A regulation (the "DOL Regulation") issued under ERISA by the United States
Department of Labor (the "DOL") contains rules for determining when an
investment by a Plan in an entity will result in the underlying assets of the
entity being plan assets. Those rules provide that the assets of an entity will
not be "plan assets" of a Plan that purchases an interest in those plan assets
if the interest is not an "equity interest". The DOL Regulation defines an
equity interest as an interest other than an instrument that is treated as
indebtedness under applicable local law and that has no substantial equity
features. The DOL Regulation provides, with respect to the purchase of an equity
interest by a Plan, that the assets of an entity will not be plan assets of a
Plan that purchases an interest in those plan assets if specific exceptions
apply including the following:
a) the investment by all "benefit plan investors" is not
"significant"; or
b) the security issued by the entity is a "publicly offered
security".
The prospectus supplement will specify whether any of the exceptions set forth
in the regulation under ERISA may apply with respect to a Series of Notes or
Certificates, as applicable.
With respect to clause (a) of the preceding paragraph, the term
"benefit plan investors" includes all plans and accounts of the types described
above as employee benefit plans and accounts, whether or not subject to ERISA,
as well as entities that hold "plan assets" due to investments made in these
entities by any plans or accounts. Investments by benefit plan investors will be
deemed not significant if benefit plan investors own, in the aggregate, less
than a 25% interest in the entity, determined without regard to the investments
of persons with discretionary authority or control over the assets of the
entity, of any person who provides investment advice for a fee with respect to
the assets and of "affiliates" of the persons, within the meaning of the DOL
Regulation. Because the availability of this exception to any Trust depends upon
the identity of the Certificateholders of the applicable Series at any time,
there can be no assurance that any Series or Class of Certificates will qualify
for this exception.
With respect to clause (b) of the second preceding paragraph, a
publicly offered security is one which is:
(a) "freely transferable",
(b) part of a class of securities that is "widely held", and
(c) either,
(1) part of a class of securities registered under Section 12(b)
or 12(g) of the Exchange Act, or
(2) sold to the Plan as part of a public offering pursuant to an
effective registration statement under the Securities Act
and registered under the Exchange Act within 120 days, or
any later time as may be allowed by the Securities and
Exchange Commission, after the end of the fiscal year of the
issuer in which the offering of the security occurred.
Whether a security is "freely transferable" is based on all relevant facts and
circumstances. A class of securities is "widely held" only if it is of a class
of securities owned by 100 or more investors independent of the issuer and of
each other.
The prospectus supplement will indicate if either of the exceptions
set forth in the DOL Regulation apply. If neither exception is applicable,
Securities which are Certificates will not be eligible to be purchased directly
or indirectly for, or on behalf of, or with the assets of a Plan.
Some transactions involving the purchase of Securities which are Notes
might be deemed to constitute prohibited transactions under ERISA and the Code
if the Base Assets were deemed to be assets of a Plan. Under the DOL Regulation,
the Base Assets would be treated as plan assets of a Plan for the purposes of
ERISA and the Code only if the Plan acquires an equity interest in the Trust and
none of the exceptions contained in the DOL Regulation is applicable. The
prospectus supplement will indicate whether the Notes will be treated as
indebtedness without substantial equity features for purposes of the DOL
Regulation.
Without regard to whether the Notes are characterized as equity
interests, the acquisition, transfer or holding of Notes by or on behalf of a
Plan could be considered to give rise to a prohibited transaction if the Trust,
the Trustee, the Indentive Trustee or any of their respective affiliates is or
becomes a party in interest or a disqualified person with respect to the Plan or
in the event that a Note is purchased in the secondary market and the purchase
constitutes a sale or exchange between a Plan and a party in interest or
disqualified person with respect to the Plan. Some exemptions from the
prohibited transaction rules may be applicable depending on the type and
circumstances of the plan fiduciary making the decision to acquire a Note.
Included among these exemptions are:
(a) Prohibited Transaction Class Exemption ("PTCE") 90-1, regarding
investments by insurance company pooled separate accounts;
(b) PTCE 91-38 regarding investments by bank collective investment
funds;
(c) PTCE 95-60, regarding investments by insurance company general
accounts;
(d) PTCE 96-23, regarding transactions affected by in-house asset
managers; and
(e) PTCE 84-14, regarding transactions effected by "qualified
professional asset managers."
Before purchasing any Notes or Certificates, as applicable, a Plan
Fiduciary should consult with its counsel and determine whether there exists any
prohibition to the acquisition and holding of the Notes or Certificates, as
applicable. In particular, a Plan Fiduciary should determine whether a plan
asset exception or prohibited transaction class exemption is applicable in the
Plan's particular circumstances and whether the exception or exemption covers
all potential prohibited transactions.
Except as otherwise set forth, the foregoing statements regarding the
consequences under ERISA of an investment in Notes or Certificates, as
applicable, are based on the provisions of the Code and ERISA as currently in
effect, and the existing administrative and judicial interpretations under the
Code and ERISA. No assurance can be given that administrative, judicial or
legislative changes will not occur that would not make the foregoing statements
incorrect or incomplete.
ACCEPTANCE OF SUBSCRIPTIONS ON BEHALF OF PLANS IS IN NO RESPECT A
REPRESENTATION BY THE DEPOSITOR THE ISSUER, THE TRUSTEE, THE SERVICER OR ANY
OTHER PARTY THAT THIS INVESTMENT MEETS ALL RELEVANT LEGAL REQUIREMENTS WITH
RESPECT TO INVESTMENTS BY ANY PARTICULAR PLAN OR THAT THE INVESTMENT IS
APPROPRIATE FOR ANY PARTICULAR PLAN. EACH PLAN FIDUCIARY SHOULD CONSULT WITH
ATTORNEYS AND FINANCIAL ADVISORS AS TO THE PROPRIETY OF THIS TYPE OF INVESTMENT
IN LIGHT OF THE CIRCUMSTANCES OF THE PARTICULAR PLAN AND THE RESTRICTIONS OF
ERISA AND SECTION 4975 OF THE CODE.
PLAN OF DISTRIBUTION
On the terms and conditions set forth in an underwriting agreement
with respect to the Notes, if any, of a given Series and an underwriting
agreement with respect to the Certificates of the Series (collectively, the
"Underwriting Agreements"), the Depositor will agree to cause the related Trust
to sell to the underwriters named in the Underwriting Agreements and in the
related prospectus supplement, and each underwriter will severally agree to
purchase, the principal amount of each Class of Notes and Certificates, as the
case may be, of the related Series set forth in the Underwriting Agreements and
in the related prospectus supplement.
In the Underwriting Agreements with respect to any given Series of
Notes or Certificates, as applicable, the several underwriters will agree,
subject to the terms and conditions set forth in the Underwriting Agreements, to
purchase all of the Notes and Certificates, as the case may be, described in the
Underwriting Agreements that are offered by this Prospectus and by the related
prospectus supplement if any Notes and Certificates, as the case may be, are
purchased.
Each prospectus supplement will either:
o set forth the price at which each Class of Notes and Certificates, as
the case may be, being offered by the prospectus supplement will be
offered to the public and any concessions that may be offered to
dealers participating in the offering of the Notes and Certificates,
as the case may be, or
o specify that the related Notes and Certificates, as the case may be,
are to be resold by the underwriters in negotiated transactions at
varying prices to be determined at the time of the sale.
After the initial public offering of any Notes and Certificates, as the case may
be, public offering prices and concessions may be changed.
Each Underwriting Agreement will provide that the related Seller will
indemnify the related underwriters against specified civil liabilities,
including liabilities under the Securities Act, or contribute to payments the
several underwriters may be required to make in respect of these liabilities.
Each Trust may, from time to time, invest the funds in its Trust
Accounts in Eligible Investments acquired from the underwriters.
Pursuant to each of the Underwriting Agreements with respect to a
given Series of Notes or Certificates, as applicable, the closing of the sale
of any Class of Notes or Certificates, as applicable, will be conditioned on the
closing of the sale of all other Classes under the related Underwriting
Agreement.
The place and time of delivery for the Notes and Certificates, as the
case may be, in respect of which this Prospectus is delivered will be set forth
in the related prospectus supplement.
If and to the extent required by applicable law or regulation, this
Prospectus and the applicable prospectus supplements will also be used by the
Underwriter after the completion of the offering in connection with offers and
sales related to market-making transactions in the offered Notes or
Certificates, as applicable, in which the Underwriter acts as principal. Sales
will be made at negotiated prices determined at the time of sale.
LEGAL MATTERS
Some related legal matters relating to the Notes or Certificates, as
applicable, of any Series will be passed upon by Stroock & Stroock & Lavan LLP,
New York, New York or any other counsel set forth in the prospectus supplement.
Some related federal income tax and other matters will be passed upon for each
Trust by Stroock & Stroock & Lavan LLP, New York, New York or any other counsel
set forth in the prospectus supplement.
INDEX OF DEFINED TERMS
1996 Contingent Debt Regulations........................................74
1997 Act................................................................95
1997 Withholding Regulations............................................80
Account Balance.........................................................76
Accounts.................................................................8
Accumulation Period.....................................................47
Acquisition Discount....................................................80
Additional Accounts......................................................8
adjusted issue price....................................................76
Agreements...............................................................7
Ancillary Arrangements..................................................27
Base Assets..............................................................7
benefit plan investors.................................................105
Callable Treasury Strips................................................15
Cash Collateral Account.................................................25
Cash Collateral Guaranty................................................25
Cede....................................................................52
Certificate Interest Rate...............................................45
Certificate Owners......................................................72
Certificate Payment Account.............................................61
Certificateholder.......................................................53
Certificates.............................................................7
Check-the-Box Regulations...............................................84
Class....................................................................7
Closing Date............................................................57
Code....................................................................72
Collateral Indebtedness Interests.......................................24
Collection Account......................................................61
Commission...............................................................7
Controlled Accumulation Amount..........................................47
Controlled Accumulation Period..........................................47
Controlled Amortization Amount..........................................48
Controlled Amortization Period..........................................48
Controlled Deposit Amount...............................................47
Controlled Distribution Amount..........................................48
CRB Agreement...........................................................10
CRB Issuer..............................................................11
CRB Schedule............................................................58
CRB Securities...........................................................7
CRB Servicer............................................................11
CRB Trust...............................................................10
CRB Trustee.............................................................10
Credit Enhancement......................................................23
Date of Processing......................................................28
Defaulted Amount........................................................44
Defaulted Receivables...................................................44
Deficit Controlled Accumulation Amount..................................47
Deficit Controlled Amortization Amount..................................48
Definitive Certificates.................................................21
Definitive Securities...................................................52
Depositaries............................................................52
Depositor................................................................7
Depositor's Interest....................................................40
Distribution Date.......................................................27
DOL....................................................................105
DOL Regulation.........................................................105
DTC.....................................................................52
Eligible Deposit Account................................................62
Eligible Institution....................................................62
Eligible Investments....................................................61
Eligible Servicer.......................................................30
Enhancement Invested Amount.............................................24
ERISA..................................................................103
Euroclear...............................................................55
Euroclear Operator......................................................55
Euroclear Participants..................................................55
Events of Default.......................................................33
Exchange Act............................................................12
Expected Final Payment Date.............................................46
Fannie Mae..............................................................15
Farm Credit Act.........................................................19
FCA.....................................................................19
FCBs....................................................................19
FDIC....................................................................28
Federal Tax Counsel.....................................................72
FFCB....................................................................15
FFEL....................................................................17
FHLB....................................................................15
FHLMC Act...............................................................17
Final Scheduled Payment Date............................................40
Finance Charge Receivables..............................................43
financial institution...................................................81
FIRREA..................................................................18
Fiscal Agent............................................................16
Floating Allocation Percentage..........................................44
Foreign Investors......................................................100
Freddie Mac.............................................................15
freely transferable....................................................106
Funding Corporation.....................................................19
Global Securities......................................................115
Government Securities...................................................13
Government Security Schedule............................................59
Grantor Trust...........................................................90
Grantor Trust Certificateholders........................................90
Grantor Trust Certificates..............................................90
GSE Bonds...............................................................13
GSE Issuer..............................................................16
GSEs....................................................................13
Holders.................................................................57
Indenture................................................................7
Indenture Trustee........................................................7
Indirect Participants...................................................53
Initial Accounts.........................................................8
Insolvency Event........................................................49
Interest Component......................................................22
Interest Funding Account................................................46
intermediary certification..............................................81
Invested Amount.........................................................45
Investment Company Act..................................................49
Investment Earnings.....................................................61
Investor Certificateholders' Interest...................................27
IRS.....................................................................72
issue price.............................................................76
L/C Bank................................................................25
market discount.........................................................77
MBS.....................................................................16
miscellaneous itemized deductions.......................................86
Miscellaneous Payments..................................................43
Monthly Period..........................................................27
New Issuance............................................................41
Non-United States Holder................................................80
Non-United States Owner.................................................89
Non-United States Person................................................80
Note Interest Rate......................................................32
Note Owners.............................................................72
Note Payment Account....................................................61
Noteholder..............................................................53
Notes....................................................................7
objective rate..........................................................74
OID Regulations.........................................................74
original issue discount.................................................75
Paired Series...........................................................50
Participants............................................................52
Participations...........................................................7
Pay Out Event...........................................................49
Paying Agent............................................................53
Payment Accounts........................................................23
Payment Dates...........................................................32
Plan...................................................................103
Plan Fiduciary.........................................................103
Pooling and Servicing Agreement..........................................7
Pre-funded Amount.......................................................58
Pre-Funding Account......................................................8
premium.................................................................92
Prepayment Assumption...................................................76
Principal Allocation Percentage.........................................44
Principal Commencement Date.............................................46
Principal Component.....................................................22
Principal Funding Account...............................................47
Principal Only Certificates.............................................40
Principal Receivables...................................................41
Principal Terms.........................................................42
Prior Series............................................................50
Private Label Custody Receipt Securities................................13
Private Label Custody Receipt Security Schedule.........................60
Private Label Custody Strips............................................13
PTCE...................................................................106
publicly traded partnership.............................................98
qualified floating rate.................................................74
qualified inverse floating rate.........................................74
qualified stated interest...............................................74
qualifying income.......................................................98
Qualifying Substitute Base Asset........................................60
Rapid Accumulation Period...............................................47
Rapid Amortization Period...............................................48
Rating Agency...........................................................14
Receivables..............................................................7
Receivables Pooling Certificates........................................13
REFCO...................................................................13
REFCO Strip.............................................................22
REFCO Strips............................................................13
Registrar...............................................................31
Related Documents.......................................................36
Removed Accounts.........................................................8
Removed Base Asset......................................................60
Reserve Account.........................................................26
Revolving Period........................................................46
RTC.....................................................................18
Sallie Mae..............................................................15
Securities...............................................................7
Securities Act..........................................................10
Security Owners.........................................................72
Securityholder..........................................................53
Seller...................................................................8
Senior Class Percentage.................................................93
Serial Treasury Strip...................................................15
Series...................................................................7
Series Cut-Off Date......................................................8
Series Enhancement......................................................23
Series Termination Date.................................................51
Servicer Defaults.......................................................62
Servicing Fee...........................................................28
Shortfall Amount........................................................94
Short-Term Note.........................................................79
Special Payment Date....................................................49
Spread Account..........................................................26
stated redemption price at maturity.....................................76
Strip Notes.............................................................33
Stripped Certificates...................................................92
stripping...............................................................15
STRIPS..................................................................15
Subordinate Certificates................................................93
Subordinate Class Percentage............................................93
Supplement..............................................................41
System..................................................................19
Systemwide Debt Securities..............................................19
TEFRA...................................................................21
Terms and Conditions....................................................55
TIN.....................................................................82
Transfer Agent..........................................................57
Treasury Bonds..........................................................13
Treasury Strips.........................................................13
Trust....................................................................7
Trust Accounts..........................................................61
Trust Agreement..........................................................7
Trust Stripped Bond.....................................................93
Trust Stripped Coupon...................................................93
Trustee..................................................................7
TVA.....................................................................15
TVA Act.................................................................19
UCC.....................................................................68
unconditionally payable.................................................97
Underwriting Agreements................................................107
United States Person....................................................80
unrelated business taxable income.......................................86
widely held............................................................106
Zero Coupon Certificates................................................40
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in limited circumstances, the globally offered Certificates
(the "Global Securities") will be available only in book entry form. Unless
otherwise specified in a prospectus supplement for a Series, investors in the
Global Securities may hold Global Securities through any of DTC, Clearstream
Luxembourg or Euroclear. The Global Securities will be tradeable as home market
instruments in both the European and U.S. domestic markets. Initial settlement
and all secondary trades will settle in same day funds.
Secondary market trading between investors holding Global Securities
through Clearstream Luxembourg and Euroclear will be conducted in the ordinary
way in accordance with their normal rules and operating procedures and in
accordance with conventional eurobond practice (i.e., seven calendar day
settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations.
Secondary cross-market trading between Clearstream Luxembourg or
Euroclear and DTC participants holding Global Securities will be effected on a
delivery-against-payment basis through Citibank and Morgan as the respective
depositaries of Clearstream Luxembourg and Euroclear and as participants in DTC.
Non-U.S. holders of Global Securities will be exempt from U.S.
withholding taxes, provided that the holders meet particular requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
INITIAL SETTLEMENT
All Global Securities will he held in book-entry form by DTC in the
name of Cede & Co. as nominee of DTC. Investors' interests in the Global
Securities will be represented through financial institutions acting on their
behalf as direct and indirect participants in DTC. As a result, Clearstream
Luxembourg and Euroclear will hold positions on behalf of their participants
through their respective Depositaries, Citibank and Morgan, which in turn will
hold these positions in accounts as participants of DTC.
Investors electing to hold their Global Securities through DTC will
follow the settlement practices applicable to conventional asset-backed
securities. Investor securities custody accounts will be credited with their
holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Clearstream
Luxembourg or Euroclear accounts will follow the settlement procedures
applicable to conventional eurobonds, except that there will be no temporary
global security and no "lock-up" or restricted period. Global Securities will be
credited to the securities custody accounts on the settlement date against
payment in same-day funds.
Secondary Market Trading
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desire value
date.
Trading between DTC participants. Secondary market trading between DTC
participants will be settled using the procedures applicable to conventional
asset-backed securities.
Trading between Clearstream Luxembourg and/or Euroclear Participants.
Secondary market trading between Clearstream Luxembourg Participants or
Euroclear Participants will be settled using the procedures applicable to
conventional eurobonds in same-day funds.
Trading between DTC seller and Clearstream Luxembourg or Euroclear
purchaser. When Global Securities are to be transferred from the account of a
DTC participant to the account of a Clearstream Luxembourg Participant or a
Euroclear Participant, the purchaser will send instructions to Clearstream
Luxembourg or Euroclear through a participant at least one business day prior to
settlement. Clearstream Luxembourg or Euroclear will instruct Citibank or
Morgan, respectively, as the case may be, to receive the Global Securities
against payment. Payment will include interest accrued on the Global Securities
from and including the last coupon payment date to and excluding the settlement
date. Payment will then be made by Citibank or Morgan to the DTC participant's
account against delivery of the Global Securities. After settlement has been
completed, the Global Securities will be credited to the respective clearing
system and by the clearing system, in accordance with its usual procedures, to
the Clearstream Luxembourg Participant's or Euroclear Participant's account. The
Global Securities credit will appear the next day (European time) and the cash
debit will be back-valued to, and the interest on the Global Securities will
accrue from, the value date (which would be the preceding day when settlement
occurred in New York). If settlement is not completed on the intended value date
(i.e., the trade fails), the Clearstream Luxembourg or Euroclear cash debit will
be valued instead as of the actual settlement date.
Clearstream Luxembourg Participants and Euroclear participants will
need to make available to the respective clearing systems the funds necessary to
process same-day funds settlement. The most direct means of doing so is to
preposition funds for settlement, either from cash on hand or existing lines of
credit, as they would for any settlement occurring within Clearstream Luxembourg
or Euroclear. Under this approach, they may take on credit exposure to
Clearstream Luxembourg or Euroclear until the Global Securities are credited to
their accounts one day later.
As an alternative, if Clearstream Luxembourg or Euroclear has extended
a line of credit to them, participants can elect not to preposition funds and
allow that credit line to be drawn upon to finance settlement. Under this
procedure, Clearstream Luxembourg Participants or Euroclear Participants
purchasing Global Securities would incur overdraft charges for one day, assuming
they cleared the overdraft when the Global Securities were credited to their
accounts. However, interest on the Global Securities would accrue from the value
date. Therefore, in many cases, the investment income on the Global Securities
earned during that one-day period may substantially reduce or offset the amount
of overdraft charges, although this result will depend on each participant's
particular cost of funds.
Since the settlement is taking place during New York business hours,
DTC participants can employ their usual procedures for sending Global Securities
to Citibank or Morgan for the benefit of Clearstream Luxembourg Participants or
Euroclear Participants. The sale proceeds will be available to the DTC seller on
the settlement date. Thus, to the DTC participant a cross-market transaction
will settle no differently than a trade between two DTC participants.
Trading between Clearstream Luxembourg or Euroclear seller and DTC
purchaser. Due to time zone differences in their favor, Clearstream Luxembourg
and Euroclear Participants may employ their customary procedures for
transactions in which Global Securities are to be transferred by the respective
clearing system, through Citibank or Morgan, to a DTC participant. The seller
will send instructions to Clearstream Luxembourg or Euroclear through a
participant at least one business day prior to settlement. In these cases,
Clearstream Luxembourg or Euroclear will instruct Citibank or Morgan, as
appropriate, to deliver the Global Securities to the DTC participant's account
against payment. Payment will include interest accrued on the Global Securities
from and including the last coupon payment date to and excluding the settlement
date. The payment will then be reflected in the account of the Clearstream
Luxembourg Participant or Euroclear Participant the following day, and receipt
of the cash proceeds in the Clearstream Luxembourg or Euroclear Participant's
account would be back-valued to the value date, which would be the preceding
day, when settlement occurred in New York. Should the Clearstream Luxembourg or
Euroclear Participant have a line of credit with its respective clearing system
and elect to be in debit in anticipation of receipt of the sale proceeds in its
account, the back-valuation will extinguish any overdraft charges incurred over
that one-day period. If settlement is not completed on the intended value date
(i.e., the trade fails), receipt of the cash proceeds in the Clearstream
Luxembourg or Euroclear Participant's account would instead be valued as of the
actual settlement date.
Finally, day traders that use Clearstream Luxembourg or Euroclear and
that purchase Global Securities from DTC participants for delivery to
Clearstream Luxembourg Participants or Euroclear Participants should note that
these trades would automatically fail on the sale side unless affirmative action
were taken. At least three techniques should be readily available to eliminate
this potential problem:
(1) borrowing through Clearstream Luxembourg or Euroclear for one day,
until the purchase side of the day trade is reflected in their Clearstream
Luxembourg or Euroclear accounts in accordance with the clearing system's
customary procedures;
(2) borrowing the Global Securities in the U.S. from a DTC participant
no later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their Clearstream Luxembourg or
Euroclear account in order to settle the sale side of the trade; or
(3) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC participant is at least one
day prior to the value date for the sale to the Clearstream Luxembourg
Participant or Euroclear Participant.
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Global securities holding securities through
Clearstream, Luxembourg or Euroclear, or through DTC will be subject to the 30%
U.S. withholding tax that generally applies to payments of interest, including
original issue discount, on registered debt issued by U.S. Persons or to 31%
backup withholding, unless (1) each clearing system, bank or other financial
institution that holds customers' securities in the ordinary course of its trade
or business in the chain of intermediaries between the beneficial owner and the
U.S. entity required to withhold tax complies with applicable certification
requirements and (2) the beneficial owner takes one of the following steps to
obtain an exemption or reduced tax rate:
EXEMPTION FOR NON-U.S. PERSONS (FORM W-8BEN). Beneficial owners of
securities that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8BEN (Certificate of Foreign Status of
Beneficial Owner for United States Tax Withholding. If the information shown on
Form W-8 BEN changes, a new Form W-8 must be filed within 30 days of the change.
EXEMPTION FOR NON-U.S. PERSONS WITH EFFECTIVELY CONNECTED INCOME (FORM
W-8ECI). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form W-8ECI (Certificate of Foreign Person's Claim for
Exemption from Withholding on Income Effectively Connected with the Conduct of a
Trade or Business in the United States).
EXEMPTION OR REDUCED RATE FOR NON-U.S. PERSONS RESIDENT IN TREATY
COUNTRIES (FORM W-8BEN). Non-U.S. Persons that are beneficial owners of
securities residing in a country that has a tax treaty with the United States
can obtain an exemption or reduced tax rate, depending on the treaty terms, by
filing Form W-8BEN (including Part II thereof). If the treaty provides only for
a reduced rate, the beneficial owner may still be entitled to complete exemption
from withholding under item (1) above.
EXEMPTION FOR U.S. PERSONS (FORM W-9). U.S. Persons can obtain
complete exemption from the withholding tax by filing Form W-9 (Request for
Taxpayer Identification Number and Certification).
U.S. FEDERAL INCOME TAX REPORTING PROCEDURE. The beneficial owner of a
Global Security files by submitting the appropriate form to the person through
whom it holds, the clearing agency, in the case of persons holding directly on
the books of the clearing agency. Form W-8BEN and Form W-8ECI are generally
effective for three calendar years from the close of the calendar year in which
it is collected.
The term "U.S. Person" means (1) a citizen or resident of the United
States, (2) a corporation or partnership (or other entity properly classified as
a corporation or partnership for U.S. Federal income tax purposes) organized in
or under the laws of the United States or any state or the District of Columbia,
(3) an estate the income of which is includible in gross income for United
States tax purposes, regardless of its source, or (4) a trust if a court within
the United States is able to exercise primary supervision over the
administration of the trust and one or more United States persons have authority
to control all substantial decisions of the trust. Notwithstanding the preceding
sentence, to the extent provided in regulations, trusts in existence on August
20, 1996 and treated as United States persons prior to that date that elect to
continue to be so treated also will be considered U.S. Persons. Treasury
regulations provide certain presumptions regarding the entity classification and
foreign or U.S. status of a holder that a payor generally must apply in the
absence of appropriate documentation from the holder, and provide detailed
documentation and procedures for holders claiming withholding tax exemptions
through intermediaries. Prospective investors are urged to consult their tax
advisors regarding the effect of these regulations on their ability to claim and
the means for claiming exemptions from or reduced rates of U.S. withholding
taxes.
This summary does not deal with all aspects of U.S. Federal income tax
withholding that may be relevant to foreign holders of the Global securities.
Investors are advised to consult their own tax advisers for specific tax advice
concerning their holding and disposing of the Global securities.
The information in this prospectus supplement is not complete and may be
changed. We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This prospectus
supplement is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
SUBJECT COMPLETION, [ ]
PROSPECTUS SUPPLEMENT (to prospectus dated [ ])
ACE SECURITIES CORP.
$[ ] Floating Rate Asset Backed Term Notes, Series [ ]
ACE SECURITIES CORP.
Seller
[ ]
Servicer
- -------------------------------------------------------------------------------
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-[ ] OF THIS PROSPECTUS
SUPPLEMENT AND ON PAGE [ ] OF THE PROSPECTUS.
For a list of capitalized terms used in this prospectus supplement and
the prospectus, see the index of defined terms beginning on page S-[ ] of this
prospectus supplement and on page [ ] of the prospectus.
- -------------------------------------------------------------------------------
The [ ] term notes represent obligations of the trust only and do not
represent obligations of or interests in, and are not guaranteed by, ACE
Securities Corp., Deutsche Banc Alex. Brown or any of their affiliates. The
notes will represent interests in the trust only and will not represent
interests in or obligations of any other entity.
- -------------------------------------------------------------------------------
This prospectus supplement may be used to offer and sell the notes
only if accompanied by the prospectus.
- -------------------------------------------------------------------------------
The trust will issues [ ] term notes to the public:
Final
Principal INTEREST Scheduled Price to Underwriting Proceeds
NOTES BALANCE RATE DATE PUBLIC DISCOUNT FROM SALE
----- ------- ---- ---- ------ -------- ---------
$ % % % $
Credit Enhancement
o Reserve fund, with a deposit of $[ ].
o Cash accumulation reserve fund, with a deposit of $[ ].
o Subordinated certificate class with a certificate balance of $[ ].
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR
DETERMINED IF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO WHICH IT RELATES
IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
DEUTSCHE BANC ALEX. BROWN
The date of this prospectus supplement is [ ]
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS:
We provide information to you about the notes offered by this prospectus
supplement in two separate documents that progressively provide more detail: (1)
the accompanying prospectus, which provides general information, some of which
may not apply to your notes, and (2) this prospectus supplement, which describes
the specific terms of your notes.
IF INFORMATION VARIES BETWEEN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS, YOU SHOULD RELY ON THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT.
You should rely only on the information contained or incorporated by reference
in this prospectus supplement and the accompanying prospectus. We have not
authorized anyone to provide you with different information.
We are not offering the notes in any state where the offer is not permitted. We
do not claim that the information in this prospectus supplement and prospectus
is accurate as of any date other than the dates stated on their respective
covers.
--------------------------
Dealers will deliver a prospectus supplement and prospectus when acting as
underwriters of the notes and with respect to their unsold allotments or
subscriptions. In addition, all dealers selling the notes will be required to
deliver a prospectus supplement and prospectus for ninety days following the
date of this prospectus supplement.
----------------------------
We include cross-references in this prospectus supplement and the accompanying
prospectus to captions in these materials where you can find further related
discussions. The following table of contents and the table of contents included
in the accompanying prospectus provide the pages on which these captions are
located.
TABLE OF CONTENTS
Prospectus Supplement
Summary of Terms........................................
The Trust..............................................
The U.S. Portfolio.....................................
The Pool of Accounts...................................
The Dealer Floorplan Financing
Business.............................................
The [ ] Term Notes....................................
The Revolving Notes....................................
The [ ] Certificates.................................
The Transfer and Servicing Agreements..................
ERISA Considerations...................................
Federal Income Tax Consequences........................
Underwriting...........................................
Legal Opinions.........................................
Glossary of Principal Terms............................
Prospectus
Risk Factors...........................................
The Trusts.............................................
Trust Assets...........................................
Series Enhancement.....................................
Servicing of Receivables...............................
Certain Matters Regarding the Servicer.................
Description of the Notes...............................
Description of the Certificates........................
Certain Information Regarding the
Securities...........................................
Description of the Trust Agreements or
Pooling and Servicing Agreements.....................
Certain Legal Aspects of the
Receivables..........................................
The Depositor..........................................
Use of Proceeds........................................
Material Federal Income Tax
Consequences.........................................
Certain State and Local Tax
Considerations.......................................
ERISA Considerations...................................
Plan of Distribution...................................
Legal Matters..........................................
Index of Defined Terms.................................
Annex I; Global Clearance, Settlement
and Tax Documentation Procedures.....................
SUMMARY OF TERMS
o THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROSPECTUS
SUPPLEMENT AND DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU NEED TO
CONSIDER IN MAKING YOUR INVESTMENT DECISION. TO UNDERSTAND ALL OF THE
TERMS OF THE OFFERING OF THE NOTES, IT IS NECESSARY THAT YOU READ
CAREFULLY THIS ENTIRE PROSPECTUS SUPPLEMENT AND ACCOMPANYING
PROSPECTUS.
o WHILE THIS SUMMARY CONTAINS AN OVERVIEW OF CERTAIN CALCULATIONS, CASH
FLOW PRIORITIES, AND OTHER INFORMATION TO AID YOUR UNDERSTANDING, YOU
SHOULD READ CAREFULLY THE FULL DESCRIPTION OF THESE CALCULATIONS, CASH
FLOW PRIORITIES AND OTHER INFORMATION IN THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS BEFORE MAKING ANY INVESTMENT DECISION.
THE PARTIES
Issuer/Trust
[ ], a Delaware business trust
formed by Ace Securities Corp.
Seller
Ace Securities Corp.
Servicer
[ ].
Indenture Trustee
[ ]
Owner Trustee
[ ].
Capitalization of the Trust
General
On the initial closing date, [ ], the trust will issue the following securities:
o $[ ] Floating Rate Asset Backed Term Notes, Series [ ], which we refer to
as the [ ]term notes. The [] term notes will bear interest, generally
payable quarterly, at a rate equal to USD [three-month LIBOR] plus [ ]
basis points ([]%) annually.
o $[ ] Floating Rate Asset Backed Certificates, Class [ ], which we
refer to as the [ ] certificates.
Only the [........] term notes are offered hereby.
The [ ] term notes will be registered in the name of the nominee for the
Depository Trust Company. You may hold your [ ] term notes through the
book-entry systems of DTC in the United States or Clearstream, Luxembourg or
Euroclear in Europe.
The trust will not issue any revolving notes or any other term notes on the
initial closing date. After the initial closing date, the trust may issue from
time to time revolving notes, additional series of term notes and additional
certificates.
We use the word notes to mean the [ ] term notes, any additional series of term
notes that may be issued and any revolving notes that may be issued. We use the
word securities to mean the notes, the [ ] certificates and any additional
certificates that may be issued.
Subordination
The [ ] certificates will be subordinated to all series of notes. The [ ]
certificates will receive no principal until the notes are fully paid or an
allocation of principal sufficient to fully pay the notes has been made. The
[ ] term notes and each future series of term notes and revolving notes
will generally have equal priority in payments, although the timing of payments
may vary.
Basis Swaps
On the initial closing date, the trust will enter into a basis swap with respect
to the [ ] term notes. The basis swap counterparty, [ ], will pay to the trust
on each distribution date, interest at a per annum rate of USD [three-month
LIBOR] plus [ ]%. The trust will pay the basis swap counterparty interest at a
per annum rate equal to the prime rate. Only the net amount due by the trust or
by the basis swap counterparty, as the case may be, will be remitted. The trust
will enter into a similar basis swap with [ ] with respect to the [ ]
certificates.
PAYMENTS ON THE [ ] TERM NOTES
Interest
o The trust will generally pay interest on the [ ] term notes at a rate equal
to USD [three-month LIBOR] plus [] basis points ([ ]%) annually.
o Except as described in the next bullet point, the trust will pay interest
on the [ ] term notes on the [ ]th day of each [ ], [ ], [ ] and [ ] or on
the next business day, which we refer to as quarterly distribution dates.
The first quarterly distribution date is [ ].
o The trust will pay interest on the [ ] term notes on the [ ]th day of each
month or on the next business day, which we refer to as monthly
distribution dates, following a rapid amortization event or if the [ ] term
notes are not paid by their targeted final payment date. If interest on the
term notes is paid monthly, the interest rate will be USD [one-month LIBOR]
plus [ ] basis points ([]%) annually.
o The prospectus and this prospectus supplement describe how the trust will
allocate available funds to interest payments on the [ ] term notes and
other securities.
o The trust will pay interest on the [ ] term notes based on the actual
number of days elapsed and a 360-day year. Interest will accrue from and
including the initial closing date, or from and including the most recent
distribution date on which the trust has paid interest to but excluding the
current distribution date.
Principal Payments
o We expect that the trust will pay the entire principal balance of the [ ]
term notes on their targeted final payment date, which is the quarterly
distribution date in [ ].
o Starting approximately five months before this targeted final payment date,
the servicer will calculate the number of months in which the trust will
allocate principal collections to the repayment of the [ ] term notes on
the targeted final payment date. We refer to this period as the payment
period. The trust will accumulate the allocated principal collections
during the payment period in a distribution account for the [ ] term notes.
o The trust could make principal payments on the [ ] term notes sooner than
the targeted final payment date if a rapid amortization event occurs. The
rapid amortization events for the [] term notes are:
o [ ], [ ] or the seller becomes insolvent;
o the trust or the seller is required to register under the Investment
Company Act; and
o the balance in the cash accumulation reserve fund declines below $[ ].
On each monthly distribution date after the occurrence of a rapid amortization
event, the trust will apply allocated principal collections and other available
funds to repay principal on the [ ] term notes.
o It is also possible that the trust will not repay the entire principal
balance of the [ ] term notes on or before the targeted final payment date.
If principal collections are slower than anticipated during the payment
period, then the payment of principal on the targeted final payment date
could be insufficient to repay all of the [ ] term notes' principal
balance. In that case, allocable principal collections will be applied to
the repayment of principal on the [ ] term notes on subsequent monthly
distribution dates.
o All unpaid principal on the [ ] term notes will be due on the stated final
payment date, which is the quarterly distribution date in [ ]. If the trust
fails to pay the [ ] term notes in full on the stated final payment date,
this will trigger an event of default.
o The servicer may repurchase all of the remaining receivables when:
o The daily trust balance is equal to or less than 10% of the highest sum, at
any time since the initial closing date, of the daily trust balance plus
cash held by the trust plus deposits in the cash accumulation account and
the note distribution account, and
o either no term notes are outstanding or the wind down period is in effect.
CREDIT ENHANCEMENT AND LIQUIDITY
The trust will repay the [ ] term notes primarily from principal and interest
collections on the receivables. In addition, there are several additional
sources from which funds will be available to pay principal and interest on the
[ ] term notes as well as other payments which the trust must make, including:
o the basis swap for the [ ] term notes;
o advances the servicer makes to the trust in some circumstances;
o subordination of payments on the certificates to payments on the notes;
o monies in the reserve fund; and
o in some circumstances, monies in the cash accumulation reserve fund.
ASSETS OF THE TRUST
The primary asset of the trust will be a revolving pool of receivables. This
pool arises under floor plan financing agreements between [ ] and a group of
retail automotive dealers franchised by [ ]. These agreements are lines of
credit which dealers use to purchase new and used motor vehicles manufactured or
distributed by [ ] and other motor vehicle manufacturers and distributors. We
refer to the dealers' obligations under these agreements as receivables.
The receivables will be sold by [ ] to the seller, and then by the seller to the
trust. The trust will grant a security interest in the receivables and other
trust property to the indenture trustee on behalf of the noteholders. The trust
property will also include: o basis swaps with respect to all securities issued
by the trust;
o security interests in the collateral securing the dealers' obligation to
pay the receivables, which will include vehicles and may include parts
inventory, equipment, fixtures, service accounts, real estate and
guarantees;
o amounts held on deposit in trust accounts maintained for the trust;
o any recourse [ ] has against the dealers under the floor plan financing
agreements;
o some of the rights the seller has under its purchase agreement with [ ];
and
o all rights the trust has under its sale and servicing agreement with the
seller.
Revolving Pool
As new receivables arise, the seller will ordinarily transfer them to the trust
on a daily basis. At the same time, prior to the date on which funds will first
be set aside for principal payments on the [ ] term notes, the trust will
ordinarily use principal collections on the receivables to purchase new
receivables from the seller or, after one or more revolving notes are issued, to
pay down the principal balance on the revolving notes. The trust could also
retain principal collections and invest them in eligible investments, if
sufficient new receivables are not available.
Revolving Period
The revolving period for the trust will begin on the initial cut-off date and
will end on the earlier of (a) the commencement of an early amortization period
and (b) the scheduled revolving period termination date. The scheduled revolving
period termination date will initially be [ ] and will be automatically extended
to the last day of each succeeding month unless the Seller elects, at its
option, to terminate the automatic extension. The scheduled revolving period
termination date may not be extended beyond [ ]. If terminated upon the
commencement of a cash accumulation period, the revolving period may recommence
in certain limited circumstances.
Cash Accumulation
If a cash accumulation event occurs, the trust will retain all of the principal
collections allocable to the [ ] term notes. The trust will then invest them in
eligible investments in a cash accumulation account dedicated to the [ ] term
notes. The trust will continue to invest these funds in eligible investments
until the targeted final payment date for the [ ] term notes, or until the
occurrence of a rapid amortization event. Cash accumulation events generally
occur upon defaults under the underlying transaction agreements and when the
pool of receivables fails to satisfy various performance tests or measurements.
These tests may include:
o the payment rate on the receivables,
o the composition of the receivables pool,
o the characteristics of the receivables, and
o the amount on deposit in the reserve fund.
If the Seller elects to terminate the automatic extension of the revolving
period as described above, a wind down period will commence which constitutes a
cash accumulation event for the [ ] Term Notes.
Each of the early amortization events identified in the prospectus under "The
Transfer and Servicing Agreements-- Early Amortization Events" is a cash
accumulation event, other than those which are rapid amortization events. In
addition, the termination of any basis swap identified in this prospectus
supplement is generally a cash accumulation event.
RESERVE FUNDS
On the closing date, the seller will deposit $[ ] in cash or eligible investment
into the reserve fund.
The trust may experience shortfalls in principal and interest collections on the
receivables and net receipts on the basis swaps. The trust will withdraw cash
from the reserve fund when these shortfalls cause the trust to have insufficient
amounts to:
o pay the monthly servicing fee,
o pay net amounts under the basis swaps, and
o to make required distributions on the notes and the certificates.
On any monthly distribution date, after the trust pays the monthly servicing fee
and makes all deposits or payments due on the securities and any related basis
swaps, the amount in the reserve fund may exceed the specified reserve amount.
If so, the trust will pay the excess to the seller.
On the closing date, the seller will deposit $[ ]in cash or eligible investments
into the cash accumulation reserve fund. This account will supplement the funds
available to pay interest on the [ ] term notes if a cash accumulation event
occurs. Amounts will be added or released on each distribution date to maintain
the balance at a specified reserve amount.
SERVICING FEES
Each month the trust will pay the servicer a servicing fee, based on [ ]% per
annum, as compensation for servicing the receivables.
TAX STATUS
In the opinion of Stroock & Stroock & Lavan LLP, special tax counsel, the [ ]
term notes will be characterized as indebtedness for federal income tax purposes
and the trust will not be classified as an association or a publicly traded
partnership taxable as a corporation for federal income tax purposes.
ERISA CONSIDERATIONS
Although it must consider the factors discussed under "ERISA Considerations", an
employee benefit plan governed by the Employee Retirement Income Security Act of
1974 may generally purchase the [ ] term notes. An employee benefit plan should
consult with its counsel before purchasing the [ ] term notes.
RATINGS
o We will not issue the [ ] term notes unless they are rated in the highest
rating category for long-term obligations (i.e., "AAA") by at least one
nationally recognized rating agency.
o The rating of the [ ] term notes is partially based on the expected
performance of the receivables.
o We cannot assure you that a rating agency will maintain its rating if
circumstances change. If a rating agency changes its rating, no one has an
obligation to provide additional credit enhancement to restore the original
rating.
o A rating is not a recommendation to buy the [ ] term notes. The rating
considers only the likelihood that the trust will pay interest on time and
will ultimately pay principal. The rating does not consider either the [ ]
term notes' price, their suitability to a particular investor or the timing
of principal payments.
You can find definitions of the capitalized terms used in this prospectus
supplement in the "Glossary of Principal Terms" beginning on page S-[ ] of the
prospectus supplement or in the "Index of Defined Terms" beginning on page
[ ] in the prospectus.
THE TRUST
The issuer, [ ], is a business trust formed under the laws of the
State of Delaware. The trust will be established and operated pursuant to a
trust agreement dated on or before [ ], which is the date the trust initially
issues securities, or the initial closing date.
The trust will engage in only the following activities:
o acquire, hold and manage the receivables and other assets of the
trust;
o issue securities;
o make payments on the securities; and
o take any action necessary to fulfill the role of the trust in
connection with the [ ] term notes, the [ ] certificates and any
additional securities issued by the trust.
The trust's principal offices are in [ ], in care of [ ], as owner
trustee, at the address listed under "--The Owner Trustee" below.
Capitalization of the Trust
The following table illustrates the capitalization of the trust as of
the initial closing date:
[ ] term notes................................. $[ ]
[ ] certificates.................................[ ]
Total...................................... $[ ]
=
The [ ] certificates represent the equity of the trust and will be issued
under the trust agreement. The [ ] certificates are not being offered hereby.
The Owner Trustee
[ ]., is the owner trustee under the trust agreement. Its principal
offices are located at [ ].
The Trust Estate
The property of the trust - the trust estate - will include:
o the seller's right, title and interest in, to and under
o the Eligible Receivables existing in the dealer accounts included in the
pool of accounts on [ ], which is the date [ ] days before the trust will
initially issue the [ ] term notes
o the Eligible Receivables existing in any additional dealer accounts added
to the pool of accounts on the related cut-off date for additional
accounts
o the Eligible Receivables generated under each of the foregoing dealer
accounts from time to time thereafter so long as the dealer account is
included in the pool of accounts
o principal and interest collections on all the Eligible Receivables
o the related collateral security for the Eligible Receivables
o the seller's rights and remedies under the pooling and servicing
agreement associated with the receivables transferred to the trust;
o the rights of the trust in relation to basis swaps with respect to all
securities issued by the trust;
o the reserve funds, owned by the seller and pledged to the indenture
trustee, including the Reserve Fund and the Cash Accumulation Reserve Fund;
o the rights of the trust in relation to following accounts, including the
amounts held therein for the benefit of the [ ] term notes:
o the Collection Account, including the Cash Collateral Amount
o the Cash Accumulation Account
o the distribution accounts for the term notes and certificates
o any other account hereafter established for the benefit of all holders of
securities or for the benefit of a specific series
o the rights of the trust in relation to any other Specified Support
Arrangement, or any other assets transferred to the trust after the initial
closing date; and
o the rights of the trust in relation to each swap and account established on
or after the date the trust initially issues securities, or the initial
closing date for the benefit of any other series or class of securities or
for the benefit of all other series and classes of securities.
Reinvestment of Trust Principal Collections
Typically, the trust will use all Trust Principal Collections to
purchase new receivables, make payments that are due in respect of a series of
term notes or pay down the balance on any revolving notes. However, during some
periods, including a Payment Period or Cash Accumulation Period for the [ ] term
notes, the trust will accumulate the portion of Trust Principal Collections and
other available amounts which are allocated to notes which have accumulation
provisions. Generally, the trust will invest the accumulated amounts in Eligible
Investments to provide for repayment of principal on those notes with the
accumulation provisions, including the [ ] term notes, at the Targeted Final
Payment Dates for such notes. For a description of the application of principal
collections by the trust in each of these periods, see "Transfer and Servicing
Agreements--Application of Principal Collections to the [ ] Term Notes" in this
prospectus supplement. THE SERVICER
[To be inserted]
THE ORIGINATOR
[To be inserted]
THE PORTFOLIO
General
As of [ ], there were approximately [ ] dealers with active credit
lines in [ ]'s portfolio. The total portfolio, which includes both owned
receivables and serviced receivables, consisted of receivables with an aggregate
principal balance of approximately $[ ]. [ ] is the primary source of floor plan
financing for [ ]-franchised dealers in the United States. In the first quarter
of [ ], [ ] provided financing for approximately [ ]% of new factory sales to [
] dealers in the United States.
As of [ ], receivables with respect to new vehicles represented
approximately [ ]% of the aggregate principal amount of all receivables in the
Portfolio. Receivables with respect to Used Vehicles represented approximately [
]% of the aggregate principal amount of all receivables in the Portfolio. Other
receivables, including receivables for heavy-duty trucks, off-highway vehicles
and marine units represented approximately [...]% of the aggregate principal
amount of all receivables in the portfolio. As of [ ], approximately [...]% by
value of the used vehicles in [ ]'s portfolio represented vehicles bought at
closed auctions held by [ ] or others. As of [ ], the average Account in [ ]'s
portfolio provided for credit lines for new vehicles and used vehicles of
approximately [ ] units and [ ] units, respectively, and the average principal
balance of receivables thereunder was approximately $[ ] million and $[ ]
million, respectively.
For the [ ] months ended [ ], the weighted average spread over the
Prime Rate charged to dealers in [ ]'s portfolio was approximately [ ]%. Some
dealers elect not to participate in the net billing program and therefore
continue to be offered rebates under incentive programs. For the [ ] months
ended [ ], the average annual rate of dealer credits on [ ]'s portfolio ranged
between [ ] and [ ] basis points. The amount of any credit is applied to a
participating dealer's interest charges on floor plan and other loans, if any.
We cannot assure you that the spread over the prime rate in the future will be
similar to historical experience.
As of [ ], the aggregate principal amount financed with respect to
dealers assigned to "no credit" status was approximately $[ ] million or [ ]% of
the aggregate principal amount financed in the portfolio.
Loss Experience
The following table sets forth [ ]'s average principal balance of
receivables and loss experience for [ ]'s portfolio as a whole in each of the
periods shown. [ ]'s portfolio includes fleet accounts and other accounts that
are not Eligible Accounts as well as dealer accounts that meet the eligibility
criteria for inclusion in the trust but were not selected. Thus, the dealer
accounts related to the trust represent only a portion of [ ]'s entire portfolio
and, accordingly, actual loss experience with respect to those dealer accounts
may be different than that of [ ]'s portfolio as a whole. There can be no
assurance that the loss experience for receivables in the future will be similar
to the historical experience set forth below. The following historical
experience reflects financial assistance and incentives provided, from time to
time, by [ ] and [ ] to [ ]-franchised dealers, including those described in the
prospectus. If [ ] or [ ] reduced or was unable or elected not to provide
assistance or incentives, the loss experience of [ ]'s portfolio, including the
dealer accounts, might be adversely affected.
Loss Experience for the Portfolio
THREE MONTHS
ENDED MARCH 31, [ ] YEAR ENDED DECEMBER 31
[ ] [ ] [ ] [ ] [ ]
(DOLLARS IN MILLIONS)
Average Principal Receivables $ [ ] $ [ ] $ [ ] $[ ] $[ ]
Balance......................
Net Losses (Recoveries)...... $ [ ]) $ [ ] $ [ ] $[ ] $[ ]
Net Losses (Recoveries) as a %
of Liquidations.............. [ ]% [ ]% [ ]% [ ]% [ ]%
Net Losses (Recoveries) as a %
of Average Principal Receivables
Balance...................... [ ]% [ ]% [ ]% [ ]% [ ]%
In the above table, average receivables balance is the average of the
month-end principal balances of receivables, plus accrued interest, for each of
the months during that period. Net losses in any period are gross losses less
recoveries for that period. Recoveries include recoveries from collateral
security in addition to vehicles, and liquidations include all principal
reductions. The ratio of net losses (recoveries) to average principal balance
for the three-month period has been annualized.
Aging Experience
The following table provides the age distribution of the receivables
for all dealers in [ ]'s portfolio as a percentage of total principal balances
of receivables outstanding at the date indicated. The aging is based on the
receivable's interest commencement date. In addition, if a vehicle or the
related receivable is reclassified for any reason, the interest commencement
date will generally be the date of the reclassification. An example of a reason
for reclassification is a dealer's decision to designate a new vehicle for use
as a demonstration unit. The actual age distribution with respect to the
receivables related to any trust may be different because those receivables will
arise in dealer accounts representing only a portion of [ ]'s entire portfolio.
There can be no assurance that the aging experience for receivables in the
future will be similar to the historical experience set forth below.
Age Distribution for the Portfolio
Three Months
Ended March 31, Year Ended December 31
[ ] [ ] [ ] [ ] [ ]
--- --- --- --- ---
1-120.................... [ ]% [ ]% [ ]% [ ]% [ ]%
121-180.................. [ ]% [ ]% [ ]% [ ]% [ ]%
181-270.................. [ ]% [ ]% [ ]% [ ]% [ ]%
Over 270................. [ ]% [ ]% [ ]% [ ]% [ ]%
Monthly Payment Rates
The following table sets forth the highest and lowest monthly payment
rates for [ ]'s portfolio during any month in the periods shown and the average
of the monthly payment rates for all months during the periods shown. he payment
rates used below were calculated as set forth in the following equation:
(PRINCIPAL COLLECTIONS DURING THE PERIOD)
-----------------------------------------
Payment Rate % = (ending principal balance of receivables for that period)
There can be no assurance that the rate of principal collections for
the dealer accounts in the pool of accounts in the future will be similar to the
historical experience set forth below. The actual monthly payment rates with
respect to those dealer accounts may be different because, among other reasons,
those dealer accounts will represent only a portion of [ ]'s entire portfolio.
Monthly Payment Rates for the Portfolio
Three Months
Ended March 31, Year Ended December 31
[ ] [ ] [ ] [ ] [ ]
--- --- --- --- ---
Highest Month...................... [ ]% [ ]% [ ]% [ ]% [ ]%
Lowest Month....................... [ ] [ ] [ ] [ ] [ ]
Average for the Months in the period [ ] [ ] [ ] [ ] [ ]
THE POOL OF ACCOUNTS
As of the close of business on [ ], there were [ ] dealer accounts in
the pool of accounts. As of [ ], the average principal balance of receivables in
those Accounts was approximately $[ ] million (approximately [ ]% of which were
Eligible Receivables) and the weighted average spread over the Prime Rate
charged to dealers was approximately [...]% for the month of [ ]. This spread
over the Prime Rate does not include rebates earned by dealers under [ ]
incentive programs that entitle them to a credit based on interest charges.
These credits do not affect the spread over the Prime Rate earned by the trust.
As of [ ], the aggregate principal balance of receivables under those Accounts
was $[ ] and, of that amount, $[ ] would qualify as Eligible Receivables, except
for the limit imposed by the Maximum Pool Balance. In addition to the criteria
specified in the definition of "Eligible Accounts" in the "Glossary of Terms" in
the prospectus, a dealer account will not be an Eligible Account if (1) during
the preceding twelve months, [ ] has charged off, without recovering, any amount
in excess of $25,000 or (2) the obligor on such dealer account has materially
breached its obligation to pay for a receivable upon sale of the related
vehicle.
Geographic Distribution
The following table provides, as of [ ], the geographic distribution
of the dealer accounts in the pool of accounts based on the dealer addresses. As
of the [ ], no other state accounted for more than [ ]% of the principal amount
of receivables outstanding in the dealer accounts.
Geographic Distribution of Pool Accounts Related to the Trust
Percentage of Number of Percentage of Total
Receivables Total Receivables Dealer Number of Dealer
State Outstanding Outstanding Outstanding Outstanding
(thousands of dollars)
[ ]....... $[ ] [ ]% [ ] [ ]%
[ ]....... [ ] [ ] [ ] [ ]
[ ]....... [ ] [ ] [ ] [ ]
[ ]....... [ ] [ ] [ ] [ ]
[ ]....... [ ] [ ] [ ] [ ]
[ ]....... [ ] [ ] [ ] [ ]
THE DEALER FLOORPLAN FINANCING BUSINESS
[To be inserted]
THE [ ] TERM NOTES
General
The [ ] term notes will be issued pursuant to the terms of an
indenture to be dated as of the initial closing date between the trust and the
indenture trustee. As amended and supplemented from time to time, this is known
as the indenture, a form of which has been filed as an exhibit to the
registration statement of which this prospectus supplement forms a part. The
trust may issue additional series of term notes and revolving notes under the
indenture after the initial closing date. A copy of the indenture will be filed
with the SEC following the issuance of the [ ] term notes. The following summary
describes some of the terms of the [ ] term notes and the indenture. The summary
does not purport to be complete and is qualified in its entirety by reference to
all of the provisions of the [ ] term notes, the indenture and the prospectus.
Where particular provisions or terms used in the indenture are referred to, the
actual provisions are incorporated by reference as part of the summary. [ ],
a [ ] banking corporation, will be the indenture trustee.
All distributions will be made on each Note Payment Date to the
holders of the [ ] term notes of record as of the day preceding that Note
Payment Date. If definitive term notes are issued, distributions will be made to
the holders of the [ ] term notes as of the last day of the preceding month. All
payments will be made by wire transfer while the [ ] term notes are in global
form and will be made in accordance with the procedures of DTC, Euroclear and
Clearstream, Luxembourg. If definitive [ ] term notes are issued, such payments
thereon will be made by check and will be mailed to the address on the register
kept by the indenture trustee unless a holder gives wire transfer instructions
before the relevant record date. Final payment of any definitive [ ] term note
will only be made against presentation and surrender of the definitive [ ] term
note at the place or places specified in the notice of final payment to the
holder thereof.
Payments of Interest
Interest on the outstanding principal balance of the [ ] term notes
will accrue from the initial closing date until the [ ] term notes are paid in
full at a rate equal to USD [Three-Month LIBOR] plus [ ]% per annum, except as
described below. Interest will be payable on the [ ]th day of each [], [ ], [ ]
and [ ], or if such day is not a business day, then on the next business day. We
refer to each quarterly date on which interest is paid as a Quarterly
Distribution Date. The initial Quarterly Distribution Date is [ ].
There are two circumstances under which interest payments will be made
monthly rather than quarterly. First, if a Rapid Amortization Period is in
effect for the [ ] term notes, then from the first Monthly Distribution Date
following the end of the calendar month in which the Rapid Amortization Event
occurs until the date on which they are paid in full, the [ ] term notes will
bear interest at a rate equal to USD [One-Month LIBOR] plus [.....]% per annum.
Second, if the full amount of principal on [ ] term notes is not paid on or
before the [ ] Term Note Targeted Final Payment Date, then from the [ ] term
note Targeted Final Payment Date until the Monthly Distribution Date on which
the [ ] term notes are paid in full, the [ ] term notes will also bear interest
at a rate equal to USD [One-Month LIBOR] plus [ ]% per annum. In either case,
interest will be payable on each Monthly Distribution Date following the date on
which the interest rate has changed. We refer to times when monthly payments are
made as Monthly Payment Periods.
We use the term Note Payment Date to mean each Quarterly Distribution
Date or Monthly Distribution Date, as applicable, on which interest is payable
as described above or principal is payable as described below.
Interest will accrue from and including the initial closing date, or
from and including the most recent Note Payment Date on which interest has been
paid to but excluding the current Note Payment Date. Interest on the [ ] term
notes will be calculated on the basis of a year of 360 days and the actual
number of days occurring in the period for which interest is payable. Each Note
Payment Date will be a Payment Date as defined in the prospectus. Interest
accrued as of any Note Payment Date, but not paid on that Note Payment Date,
will be due on the next Note Payment Date.
Payments of interest on the [ ] term notes will have equal priority
with interest payments on other series of term notes and any series of revolving
notes, and will be senior to distributions of interest on the [ ] certificates
and any additional classes of certificates. Interest Collections will be applied
to make interest payments on the [ ] term notes as described under "The Transfer
and Servicing Agreements--Application of Interest Collections" in this
prospectus supplement.
Payments of Principal
We expect that the trust will pay the entire principal balance of the
[ ] term notes on the [ ] Term Note Targeted Final Payment Date, which is the
Note Payment Date in [ ]. However, the trust could make principal payments
sooner than the [ ] Term Note Targeted Final Payment Date if a Rapid
Amortization Event occurs. On each Monthly Distribution Date after the
commencement of a Rapid Amortization Period, the trust will apply the portion of
Available Trust Principal allocated to the [ ] term notes and any funds held in
the Cash Accumulation Account and Note Distribution Subaccount to repay
principal on the [ ] term notes.
It is also possible that the trust will not repay the entire principal
balance of the [ ] term notes on or before the [ ] Term Note Targeted Final
Payment Date. Starting on the [ ] Determination Date, the servicer will
calculate the Required Payment Period Length to determine the date on which the
trust will begin to accumulate principal collections for the purpose of repaying
principal on the [ ] term notes on the [ ] Term Note Targeted Final Payment
Date. If insufficient funds are accumulated during this period, then the payment
of principal on the [ ] Term Note Targeted Final Payment Date will be
insufficient to repay all of the [ ] term note principal balance.
All unpaid principal on the [ ] term notes will be due on the Stated
Final Payment Date for the [ ] term notes, which is the Distribution Date in [
]. Failure to pay any securities in full on their Stated Final Payment Date will
result in an event of default in the case of a note and an Early Amortization
Event for the trust.
If the Servicer exercises its optional right to repurchase receivables
as described in "The Transfer and Servicing Agreements--Optional Purchase by the
Servicer," then the proceeds of the repurchase will be treated as Trust
Principal Collections and Trust Interest Collections.
Priority Among Term Notes
Payments of principal on the [ ] term notes will have at least equal
priority with payments of principal on other series of term notes that may be
issued from time to time by the trust. Some series of term notes may have a
Payment Period prior to the commencement of the Wind Down Period and may have a
Payment Period prior to or together with the Payment Period for the [ ] term
notes.
Delivery of Notes
The [ ] term notes will be issued on or about the initial closing date
in book entry form through the facilities of DTC, Clearstream, Luxembourg and
Euroclear against payment in immediately available funds.
THE REVOLVING NOTES
No revolving notes will be issued on the initial closing date.
However, the trust expects to issue revolving notes under the indenture after
the initial closing date. The following summary describes some of the terms that
will apply to any revolving notes that are so issued. The summary does not
purport to be complete and is qualified in its entirety by reference to all of
the provisions of the revolving notes, the indenture and the prospectus. Where
particular provisions or terms used in the indenture are referred to, the actual
provisions, including definitions of terms, are incorporated by reference as
part of the summary. References in this document to the revolving notes include
all extensions and renewals thereof.
Payments of Interest
The trust will pay interest on each series of revolving notes at a
floating rate, which we refer to herein as the Revolver Interest Rate for that
series. This floating rate is likely to be based on USD [One-Month LIBOR] or USD
[Three-Month LIBOR] plus a spread, although it is possible that another index
will be used. Interest on each series will likely be paid on monthly or
quarterly Distribution Dates, commencing with the first applicable Distribution
Date after the issuance of the revolving notes. On each applicable Distribution
Date, interest will be calculated based on the average daily Net Revolver
Balance during the related Collection Period. Interest on any series of
revolving notes accrued as of any applicable Distribution Date but not paid on
that Distribution Date will be due on the next applicable Distribution Date.
Payments of interest on the revolving notes will have equal priority
to payments of interest on the term notes, including the [ ] term notes, and
will be senior in right of payment to distributions of interest on the
certificates.
Payments of Principal and Additional Borrowings
The trust may borrow funds under the revolving notes during the
Revolving Period up to the trust's specified Maximum Revolver Balance. The
holder of the revolving notes is under no obligation, however, to make advances
thereunder to the trust. The Specified Maximum Revolver Balance for the trust
will initially be $[ ] and may increase or decrease from time to time after the
initial closing date as described in the prospectus under "The Transfer and
Servicing Agreements--Additional Issuances; Changes in Specified Maximum
Revolver Balance." The trust must stay within the Specified Maximum Revolver
Balance. In connection with the issuance of any series, the revolving notes
outstanding on that date may be paid in full. The trust will not borrow
additional funds under the revolving notes during the Wind Down Period or any
Early Amortization Period but may borrow funds during the Payment Period for the
[ ] term notes.
The trust may pay principal on the revolving notes on a daily basis
during the Revolving Period, so long as it complies with the limitations
described herein during the Payment Period for the [ ] term notes and any other
applicable limitations during the Payment Period for any additional series of
term notes. During the Payment Period for the [ ] term notes, except for any
series of revolving notes then in a Payment Period, payments of principal on the
revolving notes may be made only after the [ ] term notes' Fully Funded Date.
During the Revolving Period, payments of principal on the revolving
notes will be required to the extent set forth in the terms of the revolving
notes. Each revolving note may be extended or renewed, and its Revolving Note
Targeted Final Payment Date adjusted accordingly, at any time prior to the last
day of the applicable month preceding the applicable Revolving Note Targeted
Final Payment Date by written notice from the affected holder thereof to the
indenture trustee and the seller setting forth the new Revolving Note Targeted
Final Payment Date; provided, that the Targeted Final Payment Date for any
revolving note may not occur during the Payment Period for any series of term
notes, or within two months thereafter, unless the holder of such revolving note
establishes its Revolving Note Targeted Final Payment Date by notice to the
servicer delivered prior to the initial determination of the payment period
length for that series of term notes. The new Revolving Note Targeted Final
Payment Date must be a Payment Date on or prior to the then applicable Revolving
Note Stated Final Payment Date. Principal on the revolving note will be due, to
the extent of funds available for that purpose, in such amounts and at such
times as are specified for each such revolving note.
During the Wind Down Period or an Early Amortization Period for the
trust, Available Trust Principal for any Collection Period and the related
Distribution Date will be allocated to each series of revolving notes in
accordance with their respective Principal Allocation Percentages up to their
respective outstanding principal balances, and will be paid on the Distribution
Date related to that Collection Period. An Early Amortization Period for the
trust and a Cash Accumulation Period for the [ ] term notes will commence if,
among other things, any revolving note is not paid in full on its Stated Final
Payment Date.
THE [ ] CERTIFICATES
General
On the initial closing date, the trust will issue the [ ] certificates
in a principal amount equal to approximately $[ ]. Initially, the seller
will retain [ ]% of the [ ] certificates. It is expected that the seller will
privately place the remaining [ ] certificates on the initial closing date.
The trust will issue the [ ] certificates under the trust agreement, a
form of which the seller has filed as an exhibit to the registration statement
of which this prospectus supplement forms a part. The following summary
describes some of the terms of the [ ] certificates and the trust agreement. The
summary does not purport to be complete and is qualified in its entirety by
reference to all of the provisions of the [ ] certificates, the trust agreement
and the prospectus. Where particular provisions or terms used in the [ ]
certificates and the trust agreement are referred to, the actual provisions,
including definitions of terms, are incorporated by reference as part of the
summary.
Interest
The [ ] certificates will bear interest on the outstanding certificate
balance (without reduction for unreimbursed Trust Charge-Offs), payable on each
Quarterly Distribution Date commencing on [ ], at a rate equal to USD
[Three-Month LIBOR] plus [ ]% per annum. If the [ ] certificates are not paid in
full on their Targeted Final Distribution Date or if the Fully Funded Date
occurs for all outstanding series of notes under any circumstance other than the
payments and set-asides that will occur during the Payment Period for the [ ]
term notes, then interest will be payable on each Monthly Distribution Date
thereafter at a rate equal to USD [One-Month LIBOR] plus [ ]% per annum. We
refer to each of the days on which interest is payable on the [ ] certificates
as a Certificate Payment Date. Interest on the [ ] certificates accrued as of
any Certificate Payment Date but not distributed on a Certificate Payment Date
will be due on the next Certificate Payment Date.
Payments of interest on the notes will be senior to distributions of
interest on the [ ] certificates.
Certificate Balance
The certificate balance as of any Monthly Distribution Date or a
related Certificate Payment Date with respect to the [ ] certificates is (a) $[
], plus (b) the principal amount of [ ] certificates issued after the initial
closing date, minus (c) all distributions in respect of the certificate balance
of the [ ] certificates actually made on or prior to that date, minus (d)
unreimbursed Trust Charge-Offs on that Monthly Distribution Date (determined
after giving effect to the application of Available Trust Interest and other
amounts available to reimburse Trust Charge- Offs on that date as described
below) allocated to the [ ] certificates, up to the certificate balance of the [
] certificates on that Monthly Distribution Date calculated without regard to
this clause (d). With respect to any other class of certificates, certificate
balance means the amount set forth in the terms of that class of certificates.
Any unreimbursed Trust Charge-Offs applied to reduce the certificate balance
will be applied against each class of certificates on that Certificate Payment
Date, pro rata on the basis of the certificate balance of the certificates of
that class outstanding on the preceding Certificate Payment Date, without
reduction for any unreimbursed Trust Charge-Offs.
We expect that the trust will pay the entire certificate balance of
the [ ] certificates on the Quarterly Distribution Date in [ ], which is the
Targeted Final Distribution Date for the [ ] certificates. The trust will seek
to set aside funds for this purpose during the Payment Period for the [ ] term
notes. Following the respective Fully Funded Dates for the [ ] term notes and
each other series of outstanding notes, all Available Trust Principal, up to an
amount equal to the outstanding certificate balance of the [ ] certificates,
will be set aside by the trust in a certificate distribution account for payment
to the [ ] certificates on the Targeted Final Distribution Date for the [ ]
certificates.
Distributions will be made with respect to the certificate balance on
the [ ] certificates after the trust has paid each series of term notes and
revolving notes in full or, with respect to each series of term notes for which
principal is being accumulated or otherwise provided, after the Fully Funded
Date has occurred. If all notes have been paid or provided for by their
respective Targeted Final Payment Dates, then distributions with respect to the
certificate balance of the [ ] certificates will commence on the Targeted Final
Payment Date for the [ ] certificates, to the extent of funds available for such
purpose.
The Stated Final Payment Date for the [ ] certificates will be on the
Certificate Payment Date in [ ]. If the [ ] certificates have not been paid in
full on or prior to that date, an Early Amortization Period for the trust will
commence.
Additional Issuances
From time to time after the initial closing date, so long as it
satisfies specified conditions, the trust may issue additional certificates. See
"The Transfer and Servicing Agreements--Additional Issuances; Changes in
Specified Maximum Revolver Balance" in the prospectus. The Certificate Rate for
additional classes of certificates issued after the initial closing date may be
different than the Certificate Rate for the [ ] certificates.
THE SELLER AND SERVICER
[TO BE INSERTED]
THE TRANSFER AND SERVICING AGREEMENTS
The parties will enter into the Transfer and Servicing Agreements as
of the initial closing date. The following summary describes the material terms
of the Transfer and Servicing Agreements. The seller has filed forms of the
Transfer and Servicing Agreements as exhibits to the registration statement of
which this prospectus supplement is a part. The Transfer and Servicing
Agreements will be filed with the SEC following the initial closing date. The
summary does not purport to be complete and is qualified in its entirety by
reference to all of the provisions of the Transfer and Servicing Agreements and
the prospectus. Where particular provisions or terms used in the Transfer and
Servicing Agreements are referred to, the actual provisions, including
definitions of terms, are incorporated by reference as part of the summary.
Application of Interest Collections
For each Collection Period, the trust will apply funds to pay interest
and other amounts on the related Monthly Distribution Date in the order and in
the priority of clauses (1), (2) and (3) below:
Clause (1) For each Collection Period, the trust will apply Trust
Interest Collections together with the other amounts comprising Available Trust
Interest for the related Monthly Distribution Date in the following order of
priority:
(a) an amount equal to the Monthly Servicing Fee for
that Monthly Distribution Date will be paid to the servicer;
and
(b) an amount equal to the Trust Interest Allocation
for each series of notes will be made available to that
series and applied in clause (2) below.
Clause (2) On each Monthly Distribution Date, the trust will apply the
amounts from clause (1)(b), together with the funds specified below, to each
series of notes as follows:
(a) for the [ ] term notes:
(i) the trust will make the following funds available:
(A) the [ ] term notes' Trust Interest Allocation;
(B) the net amount, if any, received by the trust
under the [ ] term notes basis swap;
(C) all net investment earnings on funds deposited
in the Note Distribution Subaccount for the [ ] term
notes;
(D) all Cash Accumulation Account Earnings; and
(E) if the [ ] term notes are then in a Cash
Accumulation Period and if the amounts specified in
the foregoing subclauses (A) through (D) are less
than the [ ] Term Notes Monthly Carrying Costs for
that Monthly Distribution Date, then the lowest of
(x) such shortfall,
(y) the Cash Accumulation Reserve Fund
Release Amount and
(z) the amount of funds on deposit in the
Cash Accumulation Reserve Fund will be made
available.
The amounts made available pursuant to the
foregoing clauses (2)(a)(i)(A) through (E) will be
the [ ] Term Notes Monthly Available Amount.
(ii) Next, the trust will aggregate and apply the [ ]
Term Notes Monthly Available Amount on the Monthly
Distribution Date as follows:
(A) first, the lesser of
(x) the [ ] Term Notes Monthly Available
Amount and
(y) the net payment, if any, due
from the trust under the [ ] term notes basis
swap will be paid in accordance with the
terms of the [ ] term notes basis swap; and
(B) second, the lesser of
(x) the [ ] Term Notes Monthly Available
Amount remaining after the application in subclause
(A) and
(y) an amount equal to the [ ] Term
Notes Monthly Interest Payable Amount for the
related Monthly Distribution Date will be
transferred to the Note Distribution Account
for payment of interest on the [ ] term
notes on the related Note Payment Date.
The amounts required to be paid pursuant to
the foregoing clauses (2)(a)(ii)(A)(y) and (B)(y) are the
[ ] Term Notes Monthly Carrying Costs. Any shortfall
of the [ ] Term Notes Monthly Available Amount
below the [ ] Term Notes Monthly Carrying Costs
will be treated as a Series Shortfall for the [ ] term notes.
Any excess of the [ ] Term Notes Monthly Available Amount
over the [ ] Term Notes Monthly Carrying Costs will be
treated as Remaining Interest Amounts.
(b) for each revolving note:
(i) on each Monthly Distribution Date, the trust will make
the following funds available:
(A) that revolving note's Trust Interest
Allocation; and
(B) the net amount, if any, received by the trust
under the basis swap with respect to that revolving note.
The amounts made available pursuant to the foregoing
clauses (2)(b)(i)(A) and (B) will be the Revolving Note Monthly
Available Amount for that revolving note.
(ii) Next, the trust will aggregate and apply the
Revolving Note Monthly Available Amount for that revolving note as
follows:
(A) first, the lesser of (x) the Revolving
Note Monthly Available Amount for that revolving note
and (y) the net payment, if any, due from the trust
under the revolving note basis swap with respect to
that revolving note will be paid in accordance with
the terms of the revolving note basis swap with
respect to that revolving note; and
(B) second, the lesser of (x) the Revolving
Note Monthly Available Amount remaining after the
application in subclause (A) and (y) an amount not to
exceed that revolving note's Noteholders' Interest
for the related Monthly Distribution Date will be
transferred to the Note Distribution Account for
payment of interest on that revolving note.
The amounts required to be paid pursuant to the
foregoing clauses (2)(b)(ii)(A)(y) and (B)(y) are the
Revolving Note Monthly Carrying Costs for that revolving note.
Any shortfall of the Revolving Note Monthly Available Amount
below the Revolving Note Monthly Carrying Costs will be
treated as a Series Shortfall for that revolving note. Any
excess of the Revolving Note Monthly Available Amount over the
Revolving Note Monthly Carrying Costs will be treated as
Remaining Interest Amounts.
(c) for each other series of term notes, in accordance with the
terms of each series, the trust will apply (x) the Trust Interest
Allocation for that series, (y) any amounts received from or owing
under Specified Support Arrangements in accordance with the terms of
the series of notes and (z) net investment earnings, if any, on funds
deposited in that series' Note Distribution Subaccount to pay the
monthly carrying costs for the series of term notes, which will
include the Noteholders' Interest for such series. Shortfalls in these
applications will be treated as a Series Shortfall for each series and
excess amounts will be treated as Remaining Interest Amounts.
Clause (3) On each Monthly Distribution Date, the trust will aggregate
the Remaining Interest Amounts from all series of notes and apply these funds in
the following order of priority:
(a) with respect to any series of notes which has a Series
Shortfall, pro rata on the basis of the respective Series Shortfalls,
an amount equal to the Series Shortfall for that series of notes for
that Monthly Distribution Date, will be transferred to the Note
Distribution Account in respect of that series or other applicable
account for the payment of amounts owing under the basis swap or in
respect of interest on those notes or payments on an interest rate
swap for any other series of notes;
(b) an amount equal to the net payment, if any, due from the
trust under the [ ] certificates basis swap and under any basis swap
with respect to any other class of certificates will be paid in
accordance with each basis swap;
(c) an amount equal to the Aggregate Certificateholders' Interest
for that Monthly Distribution Date will be transferred to the
Certificate Distribution Account;
(d) an amount equal to any servicer advances not previously
reimbursed will be paid to the Servicer, except as otherwise provided
in the Transfer and Servicing Agreements;
(e) an amount equal to any Reserve Fund Deposit Amount for that
Monthly Distribution Date will be deposited into the Reserve Fund;
(f) pro rata among the following amounts specified in (A) and (B)
for that Monthly Distribution Date, (A) an amount equal to the Cash
Accumulation Reserve Fund Deposit Amount will be deposited into the
Cash Accumulation Reserve Fund and (B) an amount equal to any deposit
required under the terms of any other Specified Support Arrangements
will be deposited into the account designated by the terms of the
Specified Support Arrangement;
(g) an amount equal to any Trust Defaulted Amount will be treated
as Additional Trust Principal on that Monthly Distribution Date; and
(h) an amount equal to the aggregate amount of unreimbursed Trust
Charge-Offs will be treated as Additional Trust Principal on that
Monthly Distribution Date.
If Monthly Available Amounts are not sufficient to make all payments
required by clauses (1), (2) and (3), then the funds described below will be
applied in the following order:
first, if any amounts specified in clauses (3)(a), (b), (c) and
(d) above remain unpaid, then a Deficiency Amount will exist, and the
servicer will be obligated to make a servicer advance of this amount
to the trust, but only to the extent that the Servicer, in its sole
discretion, expects to recover the advance from Remaining Interest
Amounts applied as described above on subsequent Distribution Dates
and from releases from the Cash Accumulation Reserve Fund as provided
in "--Cash Accumulation Reserve Fund" in this prospectus supplement,
and the servicer advances will be applied to reduce the Deficiency
Amount in the order set forth in clauses (2) and (3); and
second, if any Monthly Carrying Costs or any amounts specified in
clauses (3)(a), (b), (c), (d), (g) and (h) remain unpaid after the
application described in the preceding clause first, then an
Unsatisfied Deficiency Amount will exist, and funds on deposit in the
Reserve Fund will be applied to reduce the unsatisfied deficiency
amount in the order set forth in clauses (2) and (3), except that no
application of amounts from the Reserve Fund will be made for the
priorities in clauses (3)(e) or (f).
Remaining Interest Amounts for a Monthly Distribution Date not applied
as described above will generally be allocated and paid to the seller as
compensation for making the initial deposit and any additional deposits into the
Reserve Fund and the Cash Accumulation Reserve Fund.
To the extent that the full amount of the Trust Defaulted Amount has
not been treated as Additional Trust Principal pursuant to clause (3)(g) above,
the amount of the deficiency will be added to unreimbursed Trust Charge-Offs.
APPLICATION OF PRINCIPAL COLLECTIONS BY THE TRUST
There are three mutually exclusive time periods with respect to the
trust. These time periods are the Revolving Period, the Wind Down Period and the
Early Amortization Period. The way in which each of these trust level time
periods is relevant to and impacts each series or class of securities depends in
part upon the specific terms of that series or class. In addition, each series
or class of securities may have, by their terms, additional time periods
specific to that series or class which occur within or across the time periods
applicable to the trust as a whole. See "Application of Principal Collections to
the [ ] Term Notes" below for a description of the time periods which
specifically apply to the [ ] term notes.
Revolving Period
During the Revolving Period, the trust may, on a daily basis, use
Trust Principal Collections:
o to make payments of principal on the revolving notes;
o to purchase additional Eligible Receivables from the seller;
o to the extent required to maintain the Daily Trust Balance equal
the Daily Trust Invested Amount, to add to the Cash Collateral;
and
o to make principal payments or to set aside principal for later
payment on any series of term notes which then requires Available
Trust Principal to be retained or set aside. No distributions of
the certificate balance will be made during the Revolving Period.
During the Revolving Period, the trust may also use the Cash
Collateral Amount for the purposes described in the first, second and fourth
points above.
During the Revolving Period, the trust may issue from time to time, so
long as it satisfies the conditions described in the prospectus under "The
Transfer and Servicing Agreements--Additional Issuances; Changes in Specified
Maximum Revolver Balance," revolving notes, additional series of term notes and
additional classes of certificates.
The Revolving Period will terminate on the Scheduled Revolving Period
Termination Date. The Scheduled Revolving Period Termination Date will initially
be [ ], and it will automatically be extended to the last day of each succeeding
month unless the seller, prior to the then Scheduled Revolving Period
Termination Date, makes a non-extension election, causing the extension not to
occur. Unless a non-extension election is made as described below, each
extension will become effective as of the Business Day prior to the then
Scheduled Revolving Period Termination Date. The seller cannot extend the
Scheduled Revolving Period Termination Date beyond [ ], which is the Final
Revolving Period Termination Date.
In addition to a non-extension election, the seller may, at any time
prior to the then Scheduled Revolving Period Termination Date, affirmatively
cause an affirmative extension of the Scheduled Revolving Period Termination
Date to the last day of any specified month (but not beyond the Final Revolving
Period Termination Date), subject thereafter to further automatic extensions,
non- extension elections and affirmative extensions. Any non-extension election
or affirmative extension will be made by providing written notice of the
extension to the Servicer, the owner trustee (who will be obligated to provide
notice to the certificateholders), the indenture trustee (who will be obligated
to provide notice to the noteholders) and the rating agencies. Assuming no Early
Amortization Event has occurred, the Revolving Period will terminate and the
Wind Down Period will commence on the day immediately following a non-extension
election.
If the seller makes a non-extension election, as a result of which the
Revolving Period terminates and the Wind Down Period commences prior to the
Final Revolving Period Termination Date, the seller may elect to recommence the
Revolving Period on any date prior to the date that is the earlier of (1) the
one year anniversary of the termination of the Revolving Period and (2) the
Final Revolving Period Termination Date, so long as no Early Amortization Event
has occurred and is continuing. If an Early Amortization Event described in
subparagraphs (6), (8) or (10) under "The Transfer and Servicing
Agreements--Early Amortization Events" in the prospectus has occurred the seller
may nonetheless elect to so recommence the Revolving Period if the conditions
specified under "--Wind Down Period and Early Amortization
Period--Recommencement of Revolving Period" in this prospectus supplement are
satisfied.
Wind Down Period and Early Amortization Period
The Revolving Period will be followed by either the Wind Down Period
or an Early Amortization Period. These periods commence as follows:
o The Wind Down Period for the trust will begin on the day
following the Scheduled Revolving Period Termination Date and
will continue until the earlier of (a) the commencement of an
Early Amortization Period, (b) the date on which all outstanding
securities are paid in full and (c) under the limited
circumstances described above under "The Transfer and Servicing
Agreements--Application of Principal Collections by the
Trust--Revolving Period," the recommencement of the Revolving
Period.
o The Early Amortization Period will commence upon the occurrence
of an Early Amortization Event, whether it occurs during the
Revolving Period or the Wind Down Period. The Early Amortization
Events are set out in the prospectus under "The Transfer and
Servicing Agreements--Early Amortization Events" and below under
"--Early Amortization Events."
During the Wind Down Period and during any Early Amortization Period,
the trust will no longer reinvest Trust Principal Collections in new
receivables, nor will it make additional borrowings under any revolving notes or
issue any additional securities. Instead, on each Monthly Distribution Date,
Trust Principal Collections during the related Collection Period, together with
other amounts comprising Available Trust Principal, will be treated as follows:
first, the amounts will be allocated to each series of notes in
accordance with the series' Principal Allocation Percentage, and the
Available Trust Principal will be paid or set aside until the Fully
Funded Date for that series, and
second, following the Fully Funded Date for all series of notes,
any remaining Available Trust Principal will be available for the
payment of the outstanding certificate balance on the certificates or
for any other applications permitted by holders of certificates.
Principal payments will be made on the term notes of each series,
including the [ ] term notes and any revolving notes as described in "The [ ]
Term Notes--Payment of Principal" and "The Revolving Notes--Payments of
Principal and Additional Borrowings" above. For additional information on the
application of Available Trust Principal in respect of the [ ] term notes, see
"The Transfer and Servicing Agreements--Application of Principal Collections to
the [ ] Term Notes--Cash Accumulation Period" and "--Rapid Amortization Period"
below.
Early Amortization Events. In addition to the Early Amortization
Events set forth in the prospectus, an Early Amortization Event will occur if
any of the basis swaps terminate, except if the termination is for the limited
reasons set forth in "Basis Swaps" below.
The trigger amount for the Reserve Fund, which is a component of the
Early Amortization Event described in sub-paragraph (9) under "The Transfer and
Servicing Agreements--Early Amortization Events" in the prospectus, will equal
$[ ].
Recommencement of Revolving Period. In limited circumstances the
seller may elect to terminate an Early Amortization Period and recommence the
Revolving Period and any Payment Period prior to the Final Revolving Period
Termination Date. If an Early Amortization Event described in sub-paragraphs
(6), (8) or (10) under "The Transfer and Servicing Agreements--Early
Amortization Events" in the prospectus each of which is a Cash Accumulation
Event for the [ ] term notes - has occurred, the seller may elect to end the
Cash Accumulation Period and Early Amortization Period and recommence the
Revolving Period within the one-year anniversary of the commencement of the
Early Amortization Period and the Cash Accumulation Period if:
o none of those Early Amortization Events has existed for three
consecutive months;
o the Final Revolving Period Termination Date has not occurred;
o the long-term debt obligations of [ ] are rated at least "Baa3"
by Moody's;
o the Reserve Fund Funding Condition is satisfied; and
o after giving effect to any securities issued and any changes in
the trust's specified Maximum Revolver Balance on the date of the
recommencement, the quotient of (A) the outstanding certificate
balance of all the outstanding [ ] certificates over (B) the
Maximum Pool Balance equals or exceeds the specified certificate
percentage, which is [ ]%.
The Reserve Fund Funding Condition will be satisfied on the date of
recommencement of the Revolving Period only if:
o the amount on deposit in the Reserve Fund equals or exceeds the
Fund Required Amount as of the date of recommencement;
o the amount on deposit in the Cash Accumulation Reserve Fund for
series of notes equals or exceeds the related Cash Reserve Fund
Required Amount as of the date of recommencement.
Upon any recommencement, funds in the Cash Accumulation Account may be
used to purchase additional receivables, so long as the Daily Trust Balance is
equal to the Daily Trust Invested Amount.
APPLICATION OF PRINCIPAL COLLECTIONS TO THE [ ] TERM NOTES
Overview
There are three basic and mutually exclusive time periods with respect
to the [ ] term notes which determine how Trust Principal Collections and
principal payments on the [ ] term notes are handled by the trust. These periods
are the Payment Period, the Cash Accumulation Period and the Rapid Amortization
Period. The Payment Period will begin one to four months prior to the Targeted
Final Payment Date on the [ ] term notes. The Cash Accumulation Period will
begin upon the occurrence of a Cash Accumulation Event. The Rapid Amortization
Period will begin upon the occurrence of a Rapid Amortization Event.
The time periods with respect to the [ ] term notes co-exist with the
trust time periods described above in "--Application of Principal Collections by
the Trust." If an Early Amortization Period occurs for the trust, then it will
give rise to either a Cash Accumulation Period or Rapid Amortization Period for
the [ ] term notes. If the Wind Down Period commences for the trust prior to the
Payment Period for the [ ] term notes, a Cash Accumulation Period for the [ ]
term notes will commence. If the trust remains in its Revolving Period, then the
[ ] term notes will not have any separate time period until the commencement of
their Payment Period. However, if a Rapid Amortization Event which is not an
Early Amortization Event occurs, the [ ] term notes will be in a Rapid
Amortization Period at the same time that the trust is in the Revolving Period.
During the Payment Period and the Cash Accumulation Period, principal
collections on the receivables allocated to the [ ] term notes are set aside in
accounts to repay principal on the [ ] term notes on the Targeted Final Payment
Date. In contrast, during a Rapid Amortization Period, the trust will pay out
principal collections allocated to the [ ] term notes on each Monthly
Distribution Date occurring after the start of the Rapid Amortization Period
instead of retaining these collections for distribution on the Targeted Final
Payment Date.
Payment Period
A Payment Period for a series of notes occurs during the Revolving
Period for the trust. If so specified with respect to a series of notes,
Available Trust Principal will be used or set aside during the Payment Period
for the purpose of repaying the outstanding principal balance of those notes. If
the series of notes is subject to a currency swap, interest rate swap or another
type of swap or derivative instrument in respect of principal, then principal
will be set aside for the purpose of making payments under the swap or
instrument. Each series of notes which is in a Payment Period will be allocated
Available Trust Principal equal to its Principal Allocation Percentage thereof.
If Trust Principal Collections will not be set aside during the Payment Period
to repay the outstanding principal balance, then alternate sources of repayment
will be specified. Available Trust Principal which is not applied for this
purpose or set aside for repayment of the Certificate Balance will be used for
the other purposes specified above under "--Application of Principal Collections
By the Trust--Revolving Period". Upon the commencement of a Payment Period for a
series of term notes, the servicer will establish a Note Distribution
Subaccount. Any Investment Proceeds or earnings in respect of funds in the Note
Distribution Subaccount, will be applied as provided in the clause (2) under
"--Application of Interest Collections" above.
The Payment Period for the [ ] term notes will commence no earlier
than [ ]and no later than [ ]. On the Determination Date in [ ] and on each
Determination Date thereafter before the commencement of the Payment Period, the
Servicer will determine the appropriate date by calculating the Required Payment
Period Length, which is an estimation of the number of Collection Periods needed
to set aside funds for the repayment of the [ ] term notes and the [ ]
certificates on the [ ] Term Note Targeted Final Payment Date, which is also the
Targeted Final Distribution Date for the [ ] certificates. The Payment Period
will commence with the first day of the Collection Period which follows the
first Determination Date on which the Required Payment Period Length is equal to
or greater than the number of full Collection Periods remaining between that
Determination Date and the [ ] Term Note Targeted Final Payment Date.
On each day during the [ ] term notes' Payment Period, the [ ] term
notes will be allocated their Principal Allocation Percentage of Available Trust
Principal. These amounts will be deposited in the Note Distribution Subaccount
for the [ ] term notes until the Fully Funded Date for the [ ] term notes has
occurred and will be invested in Eligible Investments. The trust will use
amounts in the [ ] term notes' Note Distribution Subaccount, other than
Investment Proceeds thereon, only to make principal payments on the [ ] term
notes. During a Payment Period for the [ ] term notes, unless the revolving
notes are then in a Payment Period, the trust will not repay principal under the
revolving notes until the Fully Funded Date has occurred for the series of Notes
in that Payment Period, but the trust may purchase additional receivables by
borrowing under the revolving notes. On the Targeted Final Payment Date for the
[ ] term notes, the trust will pay the outstanding principal balance of the [ ]
term notes, or any lesser amount that has been set aside for that purpose, and,
to the extent not paid in full on the Targeted Final Payment Date, on each
Monthly Distribution Date thereafter until so paid in full.
The terms of any series of term notes issued after the initial closing
date with a Payment Period occurring, in whole or in part, during the Payment
Period for the [ ] term notes may provide for the Required Payment on those term
notes to be payable during the Payment Period for the [ ] term notes or after
the Fully Funded Date for the [ ] term notes.
As described under "The Transfer and Servicing
Agreements--Collections" in the prospectus, in some circumstances the Servicer
is permitted to make deposits of Principal Collections and Interest Collections
into the Collection Account on each Monthly Distribution Date rather than on a
daily basis. However, during a Payment Period, Cash Accumulation Period or Rapid
Amortization Period for the [ ] term notes, the Servicer will be required to
deposit Collections into the Collection Account on a daily basis until the Fully
Funded Date has occurred with respect to the [ ] term notes and the [ ]
certificates have been fully provided for.
Cash Accumulation Period
On each day during a Cash Accumulation Period for the [ ] term notes,
the [ ] term notes will be allocated their Principal Allocation Percentage of
Available Trust Principal and that amount will be deposited in the Cash
Accumulation Account for the [ ] term notes until the amount on deposit therein
equals the outstanding principal balance of the [ ] term notes. The trust will
use amounts in the Cash Accumulation Account only to make principal payments on
the [ ] term notes or as described under "--Application of Principal Collections
by the Trust - Wind Down Period and Early Amortization Period - Recommencement
of the Revolving Period" in this prospectus supplement. During a Cash
Accumulation Period, the trust will not borrow additional funds under the
revolving notes, nor will the trust purchase additional receivables. On the
Targeted Final Payment Date for the [ ] term notes, the trust will pay the
outstanding principal balance of the [ ] term notes, or any lesser amount as has
been set aside for this purpose, and, to the extent not paid in full on the
Targeted Final Payment Date, on each Monthly Distribution Date thereafter until
so paid in full.
If the [ ] term notes, any other series of term notes, or any
revolving notes are not paid in full on or prior to the applicable Stated Final
Payment Date, an Early Amortization Period for the trust will commence. This
event will constitute a Cash Accumulation Period for the [ ] term notes. If the
Targeted Final Payment Date for the [ ] term notes has previously occurred, the
effect of this Early Amortization Event - or any other Early Amortization Event
which occurs after the [ ] Term Note Targeted Final Payment Date and which
causes a Cash Accumulation Period to occur for the [ ] term notes - will be that
the trust will continue to pay allocable funds to the [ ] term notes on each
subsequent Monthly Distribution Date.
Rapid Amortization Period
On each day during a Rapid Amortization Period for the [ ] term notes,
the [ ] term notes will be allocated their Principal Allocation Percentage of
Available Trust Principal and that amount will be deposited in the Note
Distribution Account for the [ ] term notes. All amounts so allocated during a
Rapid Amortization Period will be paid to the holders of the [ ] term notes on
the related Monthly Distribution Date. In addition, on the first Monthly
Distribution Date during the Rapid Amortization Period, any amounts in respect
of principal held in the Cash Accumulation Account or the Note Distribution
Account for the [ ] term notes will be paid to the holders of the [ ] term
notes.
Reserve Fund
The Reserve Fund will be an Eligible Deposit Account established and
maintained in the name of the indenture trustee for the benefit of the holders
of notes, the holders of Certificates, and, as applicable, a swap counterparty.
On the initial closing date, the Reserve Fund will be funded with the Reserve
Fund Initial Deposit from the seller in an amount equal to $[ ]. The Reserve
Fund is of the type contemplated by the prospectus. See "The Transfer and
Servicing Agreements--Liquidity and Credit Support--Reserve Fund" in the
prospectus.
Additional amounts may be deposited in the Reserve Fund, and the
formula for the Reserve Fund Required Amount adjusted, in connection with the
issuance of additional series of term notes or changes in the trust's Specified
Maximum Revolver Balance. In addition, the seller, in its sole discretion, may
at any time make additional deposits into the Reserve Fund as described in the
prospectus under "The Transfer and Servicing Agreements-- Liquidity and Credit
Support--Reserve Fund." The seller is not obligated to make any additional
deposits into the Reserve Fund, and we cannot assure you that any additional
deposits will be made.
If the amount in the Reserve Fund is less than the Reserve Fund
Required Amount for any Monthly Distribution Date, the amount of the deficiency,
to the extent funds are available as described above under "--Application of
Interest Collections," will be deposited into the Reserve Fund.
Amounts on deposit in the Reserve Fund will be available to cover the
Unsatisfied Deficiency Amount on each Monthly Distribution Date as described
above under "--Application of Interest Collections." Amounts on deposit in the
Reserve Fund will be included in Available Trust Principal and applied to make
the final principal payments on the notes and the final distributions with
respect to Certificate Balance on the certificates during the Wind Down Period
and any Early Amortization Period if and to the extent that the application of
the amount on deposit in the Reserve Fund as Available Trust Principal will
reduce the outstanding principal balance on all notes and the outstanding
Certificate Balance with respect to all certificates to zero. This application
will occur after giving effect to all other required applications of the Reserve
Fund on that Monthly Distribution Date and all other amounts to be applied as
Available Trust Principal on that Monthly Distribution Date and after giving
effect to the payment and distribution of all amounts otherwise on deposit, or
to be deposited, in the Distribution Accounts on that Monthly Distribution Date.
If the amount in the Reserve Fund is more than the Reserve Fund
Required Amount for any Monthly Distribution Date, the amount of the excess,
unless otherwise agreed by the seller, will be paid to the seller as
compensation for making the Reserve Fund Initial Deposit and other deposits, if
any, into the Reserve Fund. On the Trust Termination Date, any funds remaining
on deposit in the Reserve Fund will be distributed to the seller.
Any investment earnings, net of losses and investment expenses, with
respect to the Reserve Fund for a Collection Period will be Investment Proceeds
and will be included in Available Trust Interest.
Cash Accumulation Reserve Fund
The Cash Accumulation Reserve Fund will be fully funded in the amount
of $[ ] on the initial closing date. The [ ] term notes will not have any rights
to amounts on deposit in the cash accumulation reserve fund or interest income
thereon, except as described in this prospectus supplement.
The seller, in its sole discretion, may at any time make additional
deposits into the Cash Accumulation Reserve Fund. The seller is not obligated to
make any additional deposits into the Cash Accumulation Reserve Fund and there
can be no assurance that any additional deposits will be made.
If the amount in the cash accumulation reserve fund on any Monthly
Distribution Date is less than the Cash Accumulation Reserve Fund Required
Amount for that Monthly Distribution Date, the amount of the deficiency, to the
extent available as described above under "--Application of Interest
Collections," will be deposited into the Cash Accumulation Reserve Fund.
On each Monthly Distribution Date, if the funds in the Cash
Accumulation Reserve Fund after giving effect to all other distributions or
allocations on that Monthly Distribution Date exceed the Cash Accumulation
Reserve Fund Required Amount, that excess will be distributed first to reimburse
servicer advances and second to the seller. The Cash Accumulation Reserve Fund
Required Amount will decline on each Monthly Distribution Date as the [ ] term
notes approach their Targeted Final Payment Date. On repayment of the entire
outstanding principal balance of the [ ] term notes, any funds remaining on
deposit in the Cash Accumulation Reserve Fund will be paid to the seller.
Basis Swaps
On the initial closing date, the trust will enter into a basis swap
with [ ], as the basis swap counterparty, with respect to each of the following:
o the [ ] term notes, and we refer to this basis swap as the [ ]
term notes basis swap
o the [ ] certificates, and we refer to this basis swap as the [ ]
certificate basis swap
Each basis swap is intended to allow the trust to receive interest at
a rate determined by reference to the index upon which the rate of interest for
the applicable series of notes or certificates or amounts payable under any
related Specified Support Arrangement is based. In each case, the trust will pay
an interest rate determined by reference to the prime rate, on the one hand, and
the trust will receive a rate of interest determined by reference to USD
[Three-Month LIBOR], as described herein.
As set forth in the table below, for each basis swap, on each Monthly
Distribution Date, the basis swap counterparty will be obligated to pay to the
trust an amount equal to interest accrued during the related Collection Period
preceding that Monthly Distribution Date, on the applicable Notional Amount
shown in the following table, at a rate equal to USD [Three-Month LIBOR], with
respect to that Monthly Distribution Date, plus a specified percentage for each
day during the related Collection Period divided by 360. In exchange, on each
Monthly Distribution Date, the trust will be obligated to pay to the basis swap
counterparty an amount equal to interest accrued during the related Collection
Period, on either the daily [ ] Term Notional Amount or the [ ] Certificate
Notional Amount at a per annum rate equal to the prime rate for each day during
that Collection Period divided by 360.
AMOUNT DUE FROM AMOUNT DUE
BASIS SWAP NOTIONAL AMOUNT SWAP COUNTERPARTY FROM THE TRUST
---------- --------------- ----------------- --------------
[ ] Term Notes [ ] Term Notional USD [Three-Month [Prime Rate LIBOR] +
basis swap Amount] [ ]%
[ ] Certificate [ ] Term Notional USD [Three-Month [Prime Rate LIBOR] +
basis swap Amount] [ ]%
Under the basis swaps, on each Monthly Distribution Date the amount
the trust is obligated to pay will be netted against the amount the basis swap
counterparty is obligated to pay so that only the net amount will be due from
the trust or the basis swap counterparty, as the case may be. This amount will
be payable out of Available Trust Interest as described above in clauses (2) and
(3) of "--Application of Interest Collections" or will be included in Available
Trust Interest.
Each basis swap will terminate if, among other things, either party
defaults in the payment of any amount due thereunder and if the basis swap
counterparty becomes insolvent. The termination of any basis swap upon these
events will be an Early Amortization Event for the trust and either a Cash
Accumulation Event or, in the case of an insolvency event, a Rapid Amortization
Event, for the [ ] term notes. The termination of a basis swap will not result
in any make-whole amount being payable by either party.
In some limited situations, the trust may, without causing an Early
Amortization Event, terminate, amend or modify the terms of any basis swap or
enter into other Specified Support Arrangements without the consent of holders
of the outstanding notes or certificates. These limited situations include:
(1) in connection with the issuance of additional term
notes, revolving notes or certificates;
(2) a change in the trust's specified Maximum Revolver
Balance or the specified Maximum Revolver Balance for any
series of revolving notes; or
(3) the payment in full of any series of term notes.
The trust must satisfy the conditions set forth in the trust sale and
servicing agreement for the issuance or change, including, in the case of any
issuance or increase in the trust's specified Maximum Revolver Balance,
confirmation from each rating agency that the issuance or increase will not
result in a reduction or withdrawal of the rating of any outstanding securities.
See "The Transfer and Servicing Agreements--Additional Issuances; Changes in
Specified Maximum Revolver Balance" in the prospectus.
OTHER LIQUIDITY AND CREDIT SUPPORT
Distributions on the certificates will be subordinated to payments on
the notes to the extent described herein. The trust property will include the
basis swaps, and the funds on deposit in the Reserve Fund and the Cash
Accumulation Reserve Fund. The servicer may also make Servicer Liquidity
Advances with respect to additional series of term notes issued hereafter if the
terms of the additional term notes so provide. The servicer will also make
servicer advances as described above. The Servicer will not make Servicer
Liquidity Advances for the [ ] term notes. Other credit, liquidity and other
enhancement arrangements may be established in connection with the issuance of
additional securities or increases in the trust's specified Maximum Revolver
Balance. There can be no assurance that any of these arrangements will be for
the benefit of the holders of the [ ] term notes.
DEFAULTS AND CHARGE-OFFS
For any Monthly Distribution Date, Available Trust Interest will be
available to cover the Trust Defaulted Amount as described in clause (3) under
"Application of Interest Collections" above. To the extent that, for any Monthly
Distribution Date, the allocated Available Trust Interest does not cover the
full amount of the Trust Defaulted Amount through treatment of that Available
Trust Interest as Additional Trust Principal, that deficiency will constitute an
unreimbursed Trust Charge- Off. Unreimbursed Trust Charge-Offs will be covered
on any subsequent Distribution Date out of Available Trust Interest and, to the
extent available therefor, withdrawals from the Reserve Fund. For any date,
unreimbursed Trust Charge-Offs will, unless reduced as described below, equal
the aggregate Trust Charge-Offs for all prior Monthly Distribution Dates unless
and to the extent the Trust Charge-Offs have been so covered.
The Daily Trust Invested Amount is reduced by the amount of
unreimbursed Trust Charge-Offs and will therefore be reinstated to the extent
any Trust Charge-Offs are reimbursed. Unreimbursed Trust Charge-Offs will be
applied first to reduce the outstanding Certificate Balance of the certificates
and then to reduce the outstanding principal balance of the notes. Interest
payments on securities will be reduced to the extent unreimbursed Trust
Charge-Offs are applied against these securities as of any Monthly Distribution
Date.
If unreimbursed Trust Charge-Offs exceed the certificate balance on
the Stated Final Payment Date for a series of notes, then the trust will not owe
to the holders of the [ ] term notes the portion of the excess that is allocable
to the [ ] term notes, and the amount of unreimbursed Trust Charge-Offs will be
permanently reduced by that allocation. Unreimbursed Trust Charge-Offs in excess
of the Certificate Balance will be applied to the notes on the basis of the
Trust Interest Allocation Percentage of the notes then outstanding. For purposes
of this application, the certificate balance and Trust Interest Allocation will
be calculated without reduction for Trust Charge-Offs.
OPTIONAL PURCHASE BY THE SERVICER
Notwithstanding anything in the prospectus to the contrary, at any
time from and after the time that:
o the Daily Trust Balance is equal to or less than 10% of the
highest sum, at any time since the initial closing date, of the
Daily Trust Balance plus the Cash Collateral Amount plus amounts
on deposit in the Cash Accumulation Account and the Note
Distribution Account; and
o either no term notes are outstanding or the Wind Down Period is
in effect,
the servicer may, at its option, purchase from the trust, as of the last day of
any Collection Period, all remaining receivables and other assets then held by
the trust, at a price equal to the aggregate Administrative Purchase Payments
for those receivables plus the appraised value of the other assets which price
will not be less than the outstanding principal balance and unpaid interest on
all notes. That amount will be treated as Trust Principal Collections received
during that Collection Period to the extent of the principal portion of the
aggregate Administrative Purchase Payments so paid, with the remainder being
Trust Interest Collections.
ERISA CONSIDERATIONS
Although there is little guidance on the subject, the seller believes
that, at the time of their issuance, the [ ] term notes would be treated as
indebtedness without substantial equity features for purposes of the Plan Assets
Regulation. The debt treatment of the [ ] term notes could change, subsequent to
their issuance, if the trust incurred losses. However, without regard to whether
[ ] term notes are treated as an equity interest for those purposes, the
acquisition or holding of [ ] term notes by or on behalf of a benefit plan could
be considered to give rise to a prohibited transaction if the seller, the trust
or any of their respective affiliates is or becomes a party in interest or a
disqualified person with respect to a benefit plan. Some of the exemptions from
the prohibited transaction rules could be applicable to the purchase and holding
of [ ] term notes by a benefit plan depending on the type and circumstances of
the plan fiduciary making the decision to acquire the [ ] term notes. Included
among these exemptions are: Prohibited Transaction Class Exemption 96-23,
regarding transactions affected by in-house asset managers; PTCE 95-60,
regarding investments by insurance company general accounts; PTCE 90-1,
regarding investments by insurance company pooled separate accounts; PTCE 91-38
regarding investments by bank collective investment funds; and PTCE 84-14,
regarding transactions effected by "qualified professional asset managers." For
additional information regarding treatment of the [ ] term notes under ERISA,
see "ERISA Considerations" in the prospectus.
FEDERAL INCOME TAX CONSEQUENCES
In the opinion of Stroock & Stroock & Lavan LLP, special tax counsel to
the seller, for U.S. federal income tax purposes, the [ ] term notes will
constitute indebtedness and the trust will not be treated as an association, or
publicly traded partnership, taxable as a corporation. Each term noteholder, by
the acceptance of a [ ] term note, will agree to treat the [ ] term notes as
indebtedness for federal, state and local income and franchise tax purposes.
Further, the trust will agree, and each holder of a [ ] certificate will agree
by their acceptance of such certificates, to treat the trust as a partnership
for federal, state and local income and franchise tax purposes if there is more
than one owner of [ ] certificates, and, if there is only one owner of [ ]
certificates, to treat that sole owner of the certificates as the owner of the
assets of the trust and to treat the trust as a disregarded entity.
[The trust does not anticipate treating the [ ] term notes as being
issued with original issue discount.] All prospective purchasers of [ ] term
notes or [ ] certificates should see "Material Federal Income Tax Consequences"
in the accompanying prospectus for additional information regarding the
application of federal income tax laws, and should also see "State and Local Tax
Considerations" in the accompanying prospectus.
UNDERWRITING
Based on the terms and conditions set forth in the underwriting
agreement, the seller has agreed to sell to each of the underwriters named
below, and each of the underwriters has severally agreed to purchase from the
seller, the principal amount of [ ] term notes set forth opposite its name
below:
Aggregate Principal Amount to be Purchased
UNDERWRITER [ ] TERM NOTES
Deutsche Bank Securities Inc............... $[ ]
Total................................. $[ ]
=
The seller has been advised by the underwriters that the several
underwriters propose initially to offer the [ ] term notes to the public at the
prices set forth on the cover page hereof, and to dealers at these prices less a
selling concession not in excess of the percentage set forth below for the [ ]
term notes. The Underwriters may allow, and the dealers may re-allow to other
dealers, a subsequent concession not in excess of the percentage set forth below
for the [ ] term notes. After the initial public offering, the public offering
price and these concessions may be changed.
SELLING
CONCESSION RE-ALLOWANCE
[ ] term notes [ ]% [ ]%
The underwriters may engage in over-allotment transactions,
stabilizing transactions, syndicate covering transactions and penalty bids with
respect to the [ ] term notes in accordance with Regulation M under the
Securities Exchange Act of 1934. Over-allotment transactions involve syndicate
sales in excess of the offering size, which creates a syndicate short position.
Stabilizing transactions permit bids to purchase the [ ] term notes so long as
the stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of the [ ] term notes in the open market after
the distribution has been completed in order to cover syndicate short positions.
Penalty bids permit the underwriters to reclaim a selling concession from a
syndicate member when the [ ] term notes originally sold by that syndicate
member are purchased in a syndicate covering transaction. These over-allotment
transactions, stabilizing transactions, syndicate covering transactions and
penalty bids may cause the prices of the [ ] term notes to be higher than they
would otherwise be in the absence of those transactions. Neither the seller nor
any of the underwriters represent that the underwriters will engage in these
transactions or that these transactions, if commenced, will not be discontinued
without notice at any time.
We will receive proceeds of approximately $[ ] from the sale of the
[ ] term notes, representing [ ]% of the principal amount of the [ ] term
notes, after paying the underwriting discount of $[ ], representing [.]% of the
principal amount of the [ ] term notes. Additional offering expenses are
estimated to be $[ ].
LEGAL OPINIONS
In addition to the legal opinions described in the prospectus, some of
the legal matters relating to the [ ] term notes will be passed upon for the
underwriters by Stroock & Stroock & Lavan LLP. [ ] has from time to time
represented, and is currently representing, [ ] and a number of its affiliates.
GLOSSARY OF PRINCIPAL TERMS
The following are given the meanings shown below to help describe the
payments and cash flows on the notes and the certificates.
[ ] Term Note Interest Rate means, for any Note Payment Date, (a) if
such Note Payment Date is a Quarterly Distribution Date, an interest rate equal
to USD [Three-Month LIBOR] plus [ ]% per annum, and (b) if such Note Payment
Date is a Monthly Distribution Date because a Rapid Amortization Event has
occurred or because the entire principal balance of the [ ] term notes was not
paid on or before the Targeted Final Payment Date, an interest rate equal to USD
[One- Month LIBOR] plus [ ]% per annum.
[ ] Term Notes Monthly Available Amount has the meaning set forth on
page S-[ ].
[ ] Term Notes Monthly Carrying Costs has the meaning set forth on page
S-[].
[ ] Term Notes Monthly Interest Payable Amount means, for any Monthly
Distribution Date, the sum of:
(a) the product of
(1) the outstanding principal balance of the [ ] Term Notes on
the last day of the related Collection Period (or, in the case of the
initial Monthly Distribution Date, the outstanding principal balance on
the initial closing date),
(2) the [ ] Term Note Interest Rate for the related Note
Payment Date, and
(3) a fraction, the numerator of which is the number of days
elapsed from and including the prior Monthly Distribution Date (or, in
the case of the initial Monthly Distribution Date, from and including
the initial closing date) to but excluding such Monthly Distribution
Date and the denominator of which is 360, and
(b) the excess of the [ ] Term Notes Monthly Interest Payable Amount
for the prior Monthly Distribution Date over the amount of funds that were
deposited in the [ ] Note Distribution Account on the preceding Monthly
Distribution Date.
[ ] Term Note Targeted Final Payment Date has the meaning set forth on
page S-[ ].
[ ] Term Notional Amount for any day during a Collection Period equals
the Unaccumulated Principal Balance of the [ ] term notes as of that day,
including after giving effect to unreimbursed Trust Charge-Offs as of the close
of business on the Monthly Distribution Date during that Collection Period.
Additional Trust Principal means, for any Monthly Distribution Date,
the amount, if any, of Available Trust Interest and funds in the Reserve Fund
applied to cover the Trust Defaulted Amount or to cover unreimbursed Trust
Charge-Offs on that Monthly Distribution Date.
Aggregate Certificateholders' Interest means, for any Monthly
Distribution Date, an amount equal to the sum of (a) the Certificateholders'
Interest for all classes of certificates for that Distribution Date and (b) the
Certificateholders' Interest Carryover Shortfall for the preceding Monthly
Distribution Date.
Aggregate Revolver Interest means, for any Monthly Distribution Date,
the sum of (a) the Revolver Interest for all series of revolving notes for that
Monthly Distribution Date and (b) the Revolver Interest Carryover Shortfall for
the preceding Monthly Distribution Date.
Available Trust Interest means, for any Distribution Date, the sum of
(1) Trust Interest Collections;
(2) Shared Investment Proceeds;
(3) the net amounts, if any, paid to the trust under the
[ ] certificates basis swap; and
(4) the portion of the purchase price to be included in
Available Trust Interest if the Servicer exercises its option to
purchase the assets of the trust as described below under "Optional
Purchase by the Servicer."
Available Trust Principal means
(a) for any day during a Collection Period, Trust Principal
Collections for that day minus any amounts paid on that day to the
Servicer as reimbursement for outstanding Servicer Liquidity Advances
and
(b) on the Monthly Distribution Date related to that
Collection Period, the sum of
(1) Additional Trust Principal, if any, for that Monthly
Distribution Date,
(2) the Cash Collateral Amount on that Monthly
Distribution Date and
(3) if that Monthly Distribution Date is related to
the Wind Down Period or an Early Amortization Period for the
trust or to the Payment Period for the [ ] term notes, and if
the amount on deposit in the Reserve Fund on that Distribution
Date exceeds zero, the Supplemental Principal Allocation for
that current Monthly Distribution Date.
Business Day means any day other than a Saturday, Sunday or any other
day on which banks in New York, New York or Detroit, Michigan may, or are
required to, be closed.
Cash Accumulation Account means an Eligible Deposit Account
established and maintained by the Servicer with the indenture trustee, in the
name of the indenture trustee, on behalf of the holders of the [ ] term notes.
Funds in the Cash Accumulation Account will be invested in Eligible Investments.
The Cash Accumulation Account will constitute a Designated Account, but the Cash
Accumulation Account Earnings will not constitute Shared Investment Proceeds for
purposes of the definition of Available Trust Interest.
Cash Accumulation Account Earnings will be maintained in the Cash
Accumulation Account. Cash Accumulation Account Earnings for a Monthly
Distribution Date means investment earnings during the related Collection Period
on funds deposited in the Cash Accumulation Account, net of losses and
investment expenses with respect to these funds.
Cash Accumulation Event means, for the [ ] term notes, each of the
Early Amortization Events, except for Early Amortization Events which are also
Rapid Amortization Events, and the commencement of a Wind Down Period for the
trust.
Cash Accumulation Reserve Fund means an Eligible Deposit Account
established and maintained by the trust in the name of the indenture trustee for
the benefit of the holders of the [ ] term notes. The Cash Accumulation Reserve
Fund is available for the payment of interest on the [ ] term notes to the
extent described under "The Transfer and Servicing Agreements--Application of
Interest Collections" in this prospectus supplement.
Cash Accumulation Reserve Fund Deposit Amount means, for any Monthly
Distribution Date, the excess, if any, of the Cash Accumulation Reserve Fund
Required Amount over the amount on deposit in the Cash Accumulation Reserve
Fund.
Cash Accumulation Period means, for the [ ] term notes, a period
beginning on the occurrence of a Cash Accumulation Event and ending on the
earliest of:
(1) the date on which the [ ] term notes are paid in full,
(2) the occurrence of a Rapid Amortization Event for the
[ ] term notes,
(3) the Trust Termination Date and
(4) under the limited circumstances described above under
"--Application of Principal Collections by the Trust--Revolving
Period," the recommencement of the Revolving Period for the trust.
Cash Accumulation Reserve Fund Release Amount for a Monthly
Distribution Date can never be less than zero and is always equal to zero except
during a Cash Accumulation Period or a Rapid Amortization Period when it is
calculated as follows:
Cash Accumulation Reserve ( (CAB) x ([ ] Term Note Interest Rate) x (Actual
Days) - (Interest Earned)
- -------------------------------------------------------------------------------
Fund Release Amount = 360
where:
CAB is the sum of (a) the daily average balance in the Cash
Accumulation Account and (b) the daily average balance in the Note
Distribution Subaccount in respect of the [ ] term notes prior to any
deposits or withdrawals in respect of principal into those accounts on
that Monthly Distribution Date; provided that earnings on those
accounts during the related Collection Period will be excluded from
those balances.
Actual Days is the actual numbers of days elapsed from and including
the prior Monthly Distribution Date to but excluding that Monthly
Distribution Date.
Interest Earned is the sum of the Cash Accumulation Account Earnings
and the Note Distribution Subaccount Earnings during the related
Collection Period.
Cash Accumulation Reserve Fund Required Amount means, with respect to
any Determination Date, the sum of (1) the present value, discounted at [ ]% per
annum, of the Monthly Mismatch Amounts for each Monthly Distribution Date
following the Monthly Distribution Date for which the calculation is being made
to the Monthly Distribution Date preceding the [ ] Targeted Final Payment Date
for the [ ] term notes and (2) $[ ].
Class A Certificate Notional Amount for any day during a Collection
Period equals the outstanding Certificate Balance of the [ ] certificates as of
the last day of that Collection Period, including after giving effect to
unreimbursed Trust Charge-Offs as of the close of business on the Monthly
Distribution Date during that Collection Period.
Certificate Payment Date shall have the meaning set forth on page
S-[ ].
Certificate Rate means for the [ ] certificates issued on the initial
closing date a rate equal to, with respect to any Certificate Payment Date, the
product of (1) a fraction, the numerator of which is the number of days elapsed
from and including the prior Certificate Payment Date (or, in the case of the
first Certificate Payment Date, from and including the initial closing date) to
but excluding that Certificate Payment Date and the denominator of which is 360
and (2) USD [Three- Month LIBOR] plus [ ]% or, if the [ ] certificates have not
been paid in full on their Targeted Final Payment Date or the Fully Funded Date
occurs for all outstanding series of notes, then USD [One-Month LIBOR] plus
[ ]%.
Certificateholders' Interest means, for any Monthly Distribution Date,
for any class of certificates, the product of (a) the Certificate Balance
(without reduction for unreimbursed Trust Charge-Offs) for that class on the
prior Monthly Distribution Date (or, in the case of the first Monthly
Distribution Date following the issuance of that class of certificates, on the
related closing date) plus the initial Certificate Balance (without reduction
for unreimbursed Trust Charge-Offs) of any certificates of that class issued
since that prior Monthly Distribution Date and (b) the Certificate Rate for that
class for that Monthly Distribution Date.
Certificateholders' Interest Carryover Shortfall means, for any
Monthly Distribution Date, the excess of (a) the Aggregate Certificateholders'
Interest for that Monthly Distribution Date over (b) the amount that was
actually deposited in the Certificate Distribution Account on that Monthly
Distribution Date in respect of Aggregate Certificateholders' Interest.
Deficiency Amount has the meaning specified on page S-[ ].
Determination Date means the [ ] day of each calendar month, or if the
[ ] day is not a Business Day, the next succeeding Business Day.
Eligible Investments means book-entry securities, negotiable
instruments or securities represented by instruments in bearer or registered
form which, at the time made, evidence:
(a) direct obligations of and which are fully guaranteed as to
timely payment by, the United States of America;
(b) demand deposits, time deposits or certificates of deposit of
any depository institution or trust company incorporated under the
laws of the United States of America or any state thereof, or any U.S.
branch of a foreign bank; the depository institution or trust company
shall be supervised and examined by federal or state banking or
depository institution authorities; provided, however, that at any
time of the investment or contractual commitment to invest therein,
the commercial paper or other short-term unsecured debt obligations,
other than those obligations the rating of which is based on the
credit of a person or entity other than that depository institution or
trust company, thereof shall have a credit rating from each of the
rating agencies then rating the obligations in the highest investment
category granted thereby;
(c) commercial paper having, at the time of the investment or
contractual commitment to invest therein, a rating from each of the
rating agencies then rating that commercial paper in the highest
investment category granted thereby;
(d) investments in money market or common trust funds having a
rating from each of the rating agencies then rating those funds in the
highest investment category granted thereby for money market funds,
including funds for which the indenture trustee or the owner trustee
or any of their respective affiliates is an investment manager or
advisor, so long as those fund shall have that rating, provided,
however, that no funds in the Cash Accumulation Account or the Note
Distribution Subaccount for the [ ] term notes shall be invested in
Eligible Investments described in this clause (d);
(e) bankers' acceptances issued by any depository institution or
trust company referred to in clause (b) above;
(f) repurchase obligations with respect to any security that is a
direct obligation of, or fully guaranteed by, the United States of
America or any agency or instrumentality thereof the obligations of
which are backed by the full faith and credit of the United States of
America, in either case entered into with a person or entity with the
required deposit rating or otherwise approved by the rating agencies;
and
(g) any other investment permitted by each of the rating
agencies, in each case, other than as permitted by the rating
agencies, maturing not later than the Business Day immediately
preceding the next Monthly Distribution Date.
As used in this definition, a rating is in the "highest investment
category" without regard to relative gradations within that category so that,
for example, commercial paper with a rating of either A-1 or A-1+ is considered
to be in the "highest investment category."
Final Revolving Period Termination Date has the meaning set forth on
page S-[ ].
Fully Funded Date means, with respect to a series of notes, the day on
which:
(a) for the [ ] term notes,
(1) the sum of the amounts on deposit in the Cash
Accumulation Account plus the amount on deposit in the Note
Distribution Subaccount for the [ ] term notes for the
payment of principal equals the outstanding principal balance of
the [ ] term notes or
(2) the [ ] term notes have been paid in full;
(b) for each other outstanding series of term notes,
(1) the outstanding principal balance of that series has
been reduced to zero,
(2) an amount equal to the principal balance has been set
aside in a segregated account for the benefit of the notes or
(3) some other arrangement with respect to the repayment
of principal of the Notes has been made which is satisfactory to
the rating agencies; or
(c) for the revolving notes, the principal balance has been
reduced to zero and the Specified Maximum Revolver Balance has been
reduced to zero.
LIBOR Business Day means any day other than a Saturday, Sunday or any
other day on which banks in London are required or authorized to be closed.
Monthly Available Amount means, for any Monthly Distribution Date, the
aggregate of the [ ] term notes Monthly Available Amount, any revolving note
monthly available amount and the comparable monthly available amounts for each
other series of term notes and revolving notes, if any.
Monthly Carrying Costs means, for any Monthly Distribution Date, the
aggregate of the [ ] term notes Monthly Carrying Costs, any Revolving Note
Monthly Carrying Costs and the comparable monthly carrying costs for each other
series of term notes and revolving notes, if any.
Monthly Distribution Date means the [ ]th day of each month, or if
such day is not a business day, then the next succeeding day which is a business
day, commencing [ ]. Each Monthly Distribution Date is a "Distribution Date" as
defined in the prospectus.
The Monthly Mismatch Amount for a Monthly Distribution Date is
calculated as follows:
Monthly Mismatch Amount = (Term Note Balance) x (Mismatch Rate)
- -------------------------------------------------------------------------------
12
where:
Term Note Balance is the outstanding principal balance on the [ ] term
notes on the Monthly Distribution Date on which the Cash Accumulation
Reserve Fund Required Amount is being calculated after distribution of
principal on that Monthly Distribution Date, and
Mismatch Rate is [ ]%.
Monthly Payment Period has the meaning set forth on page S-[ ].
Note Distribution Subaccount means an account in which the Servicer
will maintain all the funds deposited in the Note Distribution Account in
respect of principal for the series of term notes beginning its Payment Period.
This account may only be kept on the trust's books.
Note Payment Date has the meaning set forth on page S-[ ].
Noteholders' Interest means, for any Monthly Distribution Date,
(a) with respect to any series of term notes other than the
[ ] term notes, the amount required to be paid as, or set aside for
payment of, interest on that series of term notes on the Monthly
Distribution Date under its terms, including any interest payable as a
result of shortfalls from prior Monthly Distribution Dates, and
(b) with respect to any series of revolving notes, the sum of
(1) the Revolver Interest and
(2) the Revolver Interest Carryover Shortfall, in
each case, for that series of revolving notes for that
Distribution Period.
One Month Reference Bank Rate means, for a Monthly Distribution Date,
a rate determined on the basis of the rates at which deposits in U.S. dollars
are offered by the reference banks (which will be four major banks that are
engaged in transactions in the London interbank market, selected by the
indenture trustee after consultation with the seller) as of 11:00 a.m., London
time, on the day that is two LIBOR Business Days prior to the immediately
preceding Monthly Distribution Date to prime banks in the London interbank
market for a period of one month commencing on such preceding Monthly
Distribution Date in amounts approximately equal to the principal balance of the
[ ] term notes then outstanding. The indenture trustee will request the
principal London office of each of the reference banks to provide a quotation of
its rate. If at least two such quotations are provided, the rate will be the
arithmetic mean of the quotations, rounded upwards to the nearest one-sixteenth
of one percent. If on any such date fewer than two quotations are provided as
requested, the rate will be the arithmetic mean, rounded upwards to the nearest
one- sixteenth of one percent, of the rates quoted by one or more major banks in
New York, selected by the indenture trustee after consultation with the seller,
as of 11:00 a..m., New York time, on such date to leading European banks for
U.S. dollar deposits for a period of one month commencing on such applicable
date in amounts approximately equal to the then outstanding principal balance of
the [ ] term notes. If no such quotation can be obtained, the rate will be USD
One-Month LIBOR for the prior Monthly Distribution Date.
Principal Allocation Percentage for a referent series of notes, which
requires Available Trust Principal to be retained or set aside during any period
to fund principal payments with respect to the referent series on any date, is
calculated as follows:
(1) if that date does not relate to a Wind Down Period or
an Early Amortization Period for the trust:
(Aggregate Principal Balance of Referent Series)
- -------------------------------------------------------------------------------
Principal Allocation
Percentage= for a Referent
Series (Sum of Aggregate Principal Balance for all
Referent Series)
where:
Aggregate Principal Balance of Referent Series is
(A) with respect to any referent series of term notes, the
aggregate initial principal balance with respect to that referent
series or
(B) with respect to any referent series of revolving notes,
the outstanding principal balance of that referent series as of the
close of business on the day preceding the first day of the Payment
Period with respect to that series.
Sum of Aggregate Principal Balance for all Referent Series is the sum
of the Aggregate Principal Balance of Referent Series for each series
of notes which is on that date a referent series.
(2) if that date relates to a Wind Down Period or an Early
Amortization Period for the trust:
(Aggregate Principal Balance of Referent Series)
Principal Allocation
Percentage= for a Referent
Series (Sum of Aggregate Principal Balance for each
Series of Notes)
where:
Aggregate Principal Balance of Referent Series is the aggregate
outstanding principal balance of the referent series then outstanding
on the last day of the Revolving Period
Sum of Aggregate Principal Balance for each Series of Notes is the sum
of the Aggregate Principal Balance of Referent Series for all series
then outstanding on the last day of the Revolving Period, except for
any series the principal balance of which has been fully paid or
provided for, calculated for this purpose as though each outstanding
series is a Referent Series on that date.
Quarterly Distribution Date means with respect to the [ ] term notes
and the [ ] certificates, the [ ]th day of each [.], [ ], [ ] and [ ], or if
such day is not a Business Day, the next succeeding Business Day, beginning on
[ ].
A Rapid Amortization Event for the [ ] term notes will be:
(1) specified insolvency events relating to [ ], the
Servicer, [ ], or the seller,
(2) either the trust or the seller becomes required to register
as an "investment company" within the meaning of the Investment Company
Act of 1940 and
(3) on any Monthly Distribution Date, the balance in the Cash
Accumulation Reserve Fund would be less than $[ ] after giving effect
to all withdrawals and additions on that Monthly Distribution Date.
Items (2) and (3) above are not Early Amortization Events for the trust.
Rapid Amortization Period for the [ ] term notes means a period
commencing upon the occurrence of a Rapid Amortization Event and ending on the
earliest of (a) the date on which the [ ] term notes are paid in full and (b)
the Trust Termination Date.
Remaining Interest Amounts means, with respect to a series of notes,
each of the amounts designated as Remaining Interest Amounts under clause (2) of
"The Transfer and Servicing Agreements - Application of Interest Collections".
Required Payment means, for any series of term notes other than the [
] term notes, the amount of principal, if any, required by the terms of the term
notes to be due and payable, or to be set aside in anticipation of a future
payment of principal, on any specified date or dates. The term Required Payment
is not used herein to describe amounts owing or required to be set aside for the
[ ] term notes.
The Required Payment Period Length, as of a Determination Date, is
calculated as follows, with figures rounded up to the nearest whole integer:
Required Payment (Outstanding Note Principal Balance) + (Certificate Balance)
- --------------------------------------------------------------------------------
Period Length = (Recent Minimum Daily Trust Balance) x (Minimum Monthly Payment
Rate)
where:
Outstanding Note Principal Balance is the outstanding principal balance
of all [ ] term notes and all other notes with scheduled Payment
Periods during the Payment Period for the [ ] term notes;
Recent Minimum Daily Trust Balance is the minimum expected Daily Trust
Balance during the period between that Determination Date and February
28, 2005 as determined by the Servicer;
and Minimum Monthly Payment Rate is the minimum Monthly Payment Rate
during the twelve Collection Periods preceding that Determination Date.
Reserve Fund Deposit Amount means, for any Monthly Distribution Date,
the excess, if any, of the Reserve Fund Required Amount over the amount on
deposit in the Reserve Fund after taking into account any withdrawals from the
Reserve Fund on that Monthly Distribution Date.
Reserve Fund Funding Condition has the meaning set forth on page
S-[ ].
Reserve Fund Required Amount means,
(a) for any Monthly Distribution Date during the Revolving Period
or Wind Down Period, [ ]% of the Maximum Pool Balance as of that
Monthly Distribution Date, or if, as of that Monthly Distribution
Date, the long-term debt obligations of [ ] are rated less than "BBB-"
by Standard & Poor's Ratings Services, then [ ]%.
(b) for any Monthly Distribution Date during any Early
Amortization Period occurring prior to the Fully Funded Date for all
series of notes, [ ]% of the Maximum Pool Balance as of the last day
of the Revolving Period, or if, as of the last day of the Revolving
Period the long-term debt obligations of [ ] are rated less than
"BBB--" by Standard & Poor's Ratings Services, then [ ]%; and
(c) for any Monthly Distribution Date falling on or after the
Fully Funded Date for all series of notes, zero.
Revolver Interest means, for any Monthly Distribution Date, for any
series of revolving notes, the product of (a) the average daily Series Net
Revolver Balance for the series of revolving notes during the related Collection
Period and (b) the Revolver Interest Rate for the series of revolving notes for
the Monthly Distribution Date.
Revolver Interest Carryover Shortfall means, for any Monthly
Distribution Date, the excess of (a) the Aggregate Revolver Interest for the
Monthly Distribution Date over (b) the amount that was actually deposited in the
Revolver Distribution Account on the Monthly Distribution Date in respect of
Aggregate Revolver Interest.
Revolver Interest Rate for any revolving note to be issued has the
meaning set forth on page S-[ ].
Revolving Note Monthly Available Amount has the meaning set forth on
page S-[ ].
Revolving Note Monthly Carrying Costs has the meaning set forth on
page S-[ ].
Scheduled Revolving Period Termination Date has the meaning set forth
on page S-[ ].
Series Net Revolver Balance means, with respect to any series of
revolving notes, for any date, the aggregate outstanding principal balance under
the series of revolving notes minus any amounts on deposit in the Revolver
Distribution Account on that date for the payment of principal on that series of
revolving notes.
Series Shortfall means, for a series of notes, each of the amounts
designated as a Series Shortfall in clause (2) under "The Transfer and Servicing
Agreements -- Application of Interest Collections."
Servicer Liquidity Advance means, for any series of term notes the
terms of which provide for a Servicer Liquidity Advance, an advance by the
Servicer to the trust made to the extent a required principal payment for any
series of Notes for any Monthly Distribution Date cannot otherwise be made,
after giving effect to all issuances of securities and additional borrowings
under the revolving notes on that Monthly Distribution Date, as they are
available. However, the Servicer can only make Servicer Liquidity Advances to
the extent that the Servicer, in its sole discretion, expects to recover those
advances from subsequent trust Principal Collections. Servicer Liquidity
Advances with respect to a series of term notes will be reimbursed (a) if
Available Trust Principal is being set aside for that series of term notes, out
of that series' share of Available Trust Principal and (b) if Available Trust
Principal is not being set aside for term notes, out of a portion of Trust
Principal Collections not to exceed a fraction, the numerator of which is the
outstanding principal balance of that series of term notes and the denominator
of which is the outstanding balance of all series of notes as of that date. The
terms of the [ ] term notes do not provide for the Servicer to make Servicer
Liquidity Advances.
Shared Investment Proceeds means all Investment Proceeds other than
(A) Cash Accumulation Account Earnings, (B) Note Distribution Subaccount
earnings for the [ ] term notes, (C) Investment Proceeds from the Cash
Accumulation Reserve Fund and (D) Investment Proceeds from any other account
established for other series of term notes in which funds are accumulated to pay
principal on the notes at designated times.
Specified Maximum Revolver Balance has the meaning set forth on page
S-__.
Specified Support Arrangement means any letter of credit, security
bond, cash collateral account, spread account, guaranteed rate agreement,
maturity or liquidity facility, tax protection agreement, interest rate swap
agreement, interest rate cap agreement, other derivative product or other
arrangement to provide liquidity or credit support for the benefit of holders of
one or more series or classes of securities, other than the Reserve Fund,
whether or not that arrangement is an asset of the trust and is so designated.
As of the initial closing date, the Specified Support Arrangements will consist
of the basis swaps and the Cash Accumulation Reserve Fund. Specified Support
Arrangements for the benefit of any series or classes of securities, including
those established in connection with the issuance of any securities after the
initial closing date, may not inure to the benefit of other securities,
including the [ ] term notes, issued by the trust.
Supplemental Principal Allocation means, for any Monthly Distribution
Date related to the Wind Down Period or an Early Amortization Period for the
trust or related to the Payment Period for the [ ] term notes, an amount not
less than zero and equal to the lesser of:
(a) the excess, if any, of
(1) the product of
(A) the percentage equivalent of a fraction
which will never exceed 100%, the numerator of which
is the Daily Trust Balance and the denominator of
which is the principal balance of all receivables,
including receivables owned by [ ], in the dealer
accounts included in the pool of accounts, in each
case, as of the termination of the Ordinary Revolving
Period, and
(B) the aggregate amount of Principal
Collections on all receivables, including receivables
held by [ ], in the dealer accounts in the pool of
accounts for each day during the related Collection
Period over
(2) the aggregate amount of Trust Principal
Collections for each day during the related Collection Period
provided that no amount will be included pursuant to clause
(1)(B) or (2) for any day in that Collection Period that
occurred during the Ordinary Revolving Period and
(b) an amount equal to
(1) the Daily Trust Balance as of the termination of the
Ordinary Revolving Period plus
(2) the Cash Collateral Amount on the last day of the
Ordinary Revolving Period minus
(3) the Available Trust Principal for each Monthly
Distribution Date from and after the final Monthly
Distribution Date for the Revolving Period through but
excluding that current Monthly Distribution Date minus
(4) the amount added to unreimbursed Trust
Charge-Offs on each Monthly Distribution Date from and after
the final Monthly Distribution Date for the Revolving Period
through and including that current Monthly Distribution Date
minus
(5) Available Trust Principal for that current Monthly
Distribution Date, assuming the Supplemental Principal Allocation
for that Monthly Distribution Date was zero.
For purposes of this definition, Ordinary Revolving Period means the
period ending on the business day preceding the commencement of the Wind Down
Period or the Early Amortization Period for the trust or the Payment Period for
the [ ] term notes.
Targeted Final Distribution Date for the [ ] certificates has the
meaning specified on page S-[ ].
Three Month Reference Bank Rate means, for a Quarterly Distribution
Date, a rate determined on the basis of the rates at which deposits in U.S.
dollars are offered by the reference banks (which will be four major banks that
are engaged in transactions in the London interbank market, selected by the
indenture trustee after consultation with the seller) as of 11:00 a.m., London
time, on the day that is two LIBOR Business Days prior to the immediately
preceding Quarterly Distribution Date to prime banks in the London interbank
market for a period of three months commencing on such preceding Quarterly
Distribution Date in amounts approximately equal to the principal balance of the
[ ] term notes then outstanding. The indenture trustee will request the
principal London office of each of the reference banks to provide a quotation of
its rate. If at least two such quotations are provided, the rate will be the
arithmetic mean of the quotations, rounded upwards to the nearest one-sixteenth
of one percent. If on any such date fewer than two quotations are provided as
requested, the rate will be the arithmetic mean, rounded upwards to the nearest
one- sixteenth of one percent, of the rates quoted by one or more major banks in
New York, selected by the indenture trustee after consultation with the seller,
as of 11:00 a..m., New York time, on such date to leading European banks for
U.S. dollar deposits for a period of three months commencing on such applicable
date in amounts approximately equal to the then outstanding principal balance of
the [ ] term notes. If no such quotation can be obtained, the rate will be USD
[Three-Month LIBOR] for the prior Quarterly Distribution Date.
Trust Interest Allocation means, for any series of notes, for any
Monthly Distribution Date, an amount equal to the product of (1) Available Trust
Interest less the amounts paid to the Servicer under clause 1(a) under the "The
Transfer and Servicing Agreements -- Application of Interest Collections" and
(2) the Trust Interest Allocation Percentage for that series.
Trust Interest Allocation Percentage means, for any series of notes,
for any Monthly Distribution Date, a fraction calculated as set forth in the
following equation:
Trust Interest = (UPB OF NOTE SERIES)
--------------------------------------------------
Allocation Percentage (UPB of all Term Notes) + (UPB of all Revolving Notes)
where:
UPB of Note Series is
(1) for a series of term notes, the Unaccumulated Principal
Balance for that series of term notes and
(2) for a series of revolving notes, the daily average
outstanding principal balance for that series of revolving notes during
the related Collection Period;
UPB of all Term Notes is the Unaccumulated Principal Balances of all
series of term notes then outstanding; and
UPB of all Revolving Notes is the daily average of the outstanding
principal balance of all revolving notes during the related Collection
Period.
Trust Interest Collections means, for any Monthly Distribution Date,
an amount equal to the sum of (1) the product of (a) the Trust Percentage and
(b) Interest Collections for the related Collection Period and (2) recoveries
during the related Collection Period on Eligible Receivables that have
previously become defaulted receivables. If, on any Monthly Distribution Date,
the Servicer does not make a servicer advance in the amount of the full
Deficiency Amount, Trust Interest Collections for the Monthly Distribution Date
will be adjusted to give effect to the actual percentage of Eligible Receivables
in those dealer accounts in the pool of accounts in which the full amount of
interest due for the related Collection Period was not collected. The adjustment
will not affect the amount of interest allocated to the trust with respect to
the other dealer accounts in the pool of accounts.
Trust Percentage means, for any Monthly Distribution Date, the
percentage equivalent of a fraction never to exceed 100%, the numerator of which
is the average Daily Trust Balance during the related Collection Period and the
denominator of which is the average daily aggregate principal balance of all
receivables, including receivables owned by [ ], in the dealer accounts included
in the pool of accounts during the related Collection Period.
Trust Principal Collections means, for any date, the sum of (a) the
amount of Principal Collections on receivables held by the trust and (b) the
principal portion of all Warranty Payments and Administrative Purchase Payments,
if any, on that date.
Unaccumulated Principal Balance means, with respect to any series of
term notes as of a Monthly Distribution Date,
(1) the daily average of the outstanding principal balance
of the term notes during the related Collection Period minus
(2) with respect to the [ ] term notes, the daily average
during the related Collection Period of the sum of
(a) the amount of funds on deposit in the Cash
Accumulation Account and
(b) the amount of funds on deposit in the Note
Distribution Account in respect of the outstanding principal
balance of the [ ] term notes or, with respect to other series
of term notes, the daily average of the amount of funds on
deposit in any account during the related Collection Period
for which funds are accumulated to pay principal on that
series as specified under the terms of that series of term
notes.
Unsatisfied Deficiency Amount has the meaning specified on page S-[ ].
USD One-Month LIBOR
(a) with respect to the [ ] term notes on each Monthly
Distribution Date, means the rate for deposits in U.S. Dollars for a
period of one month which appears on the Bridge Information Systems
Telerate Service Page 3750 as of 11:00 a.m., London time, on the day
that is two LIBOR Business Days prior to the Monthly Distribution Date
preceding that Monthly Distribution Date, or, for the initial Monthly
Distribution Date, two LIBOR Business Days prior to the initial closing
date. If the rate does not appear on that page or any other page that
may replace page 3750 on the Telerate service, or if the Telerate
service is no longer offered, then the indenture trustee will select
the appropriate rate from another service for displaying LIBOR or
comparable rates after consultation with the seller. If no other
service is available, then the rate will be the Three Month Reference
Bank Rate; and
(b) with respect to the [ ] certificates, has a correlative
meaning to the definition in clause (a), except that references therein
and in the definition of One- Month Reference Bank Rate to the [ ] term
notes should be read to mean the [ ] certificates.
USD Three-Month LIBOR
(a) with respect to the [ ] term notes on each Quarterly
Distribution Date, the rate for deposits in U.S. Dollars for a period
of three months which appears on the Bridge Information Systems
Telerate Service Page 3750 as of 11:00 a.m., London time, on the day
that is two LIBOR Business Days prior to the Quarterly Distribution
Date preceding that Quarterly Distribution Date, or, for the initial
Quarterly Distribution Date, two LIBOR Business Days prior to the
initial closing date. If the rate does not appear on that page or any
other page that may replace page 3750 on the Telerate service, or if
the Telerate service is no longer offered, then the indenture trustee
will select the appropriate rate from another service for displaying
LIBOR or comparable rates after consultation with the seller. If no
service is available, then the rate will be the Three Month Reference
Bank Rate; and
(b) with respect to the [ ] certificates, has a correlative
meaning to the definition in clause (a), except that references therein
and in the definition of Three-Month Reference Bank Rate to the [ ]
term notes should be read to mean the [ ] certificates.
The information in this prospectus supplement is not complete and may be
changed. We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This prospectus
supplement is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
SUBJECT TO COMPLETION , _______, ____
PROSPECTUS
DEALER FLOORPLAN RECEIVABLE
ASSET-BACKED NOTES
(ISSUABLE IN SERIES)
ACE SECURITIES CORP.
SELLER
---------------
SERVICER
EACH TRUST--
o will issue one or more series of term notes, which will be
described in a prospectus supplement;
o will own a revolving pool of wholesale automotive receivables
generated by a portfolio of floor plan financing agreements with
retail automotive dealers; and
o Will also issue one or more series of revolving notes and one or
more classes of certificates, but these revolving notes and
certificates will not be sold under this prospectus.
THE TERM NOTES--
o will represent indebtedness of the related trust;
o will be paid only from the assets of the trust and amounts on
deposit in the related reserve funds;
o will represent the right to payments in the amounts and at the
times described in the related prospectus supplement; and
o will benefit from one or more forms of credit enhancement.
YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE _ IN THIS
PROSPECTUS.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED
THESE TERM NOTES OR DETERMINED IF THIS PROSPECTUS IS ACCURATE OR COMPLETE.
MAKING ANY CONTRARY REPRESENTATION IS A CRIMINAL OFFENSE.
Important notice about information presented in this prospectus and
the accompanying prospectus supplement
We provide information to you about the term notes in two separate
documents:
(1) this prospectus, which provides general information and terms of
the term notes, some of which may not apply to a particular series of term
notes, including your series.
(2) the accompanying prospectus supplement, which will provide
information regarding the pool of receivables held by the trust and will specify
the terms of your series of term notes.
IF THE TERMS OF YOUR SERIES OF TERM NOTES VARY BETWEEN THIS PROSPECTUS AND THE
PROSPECTUS SUPPLEMENT, YOU SHOULD RELY ON THE INFORMATION IN THE PROSPECTUS
SUPPLEMENT.
You should rely only on the information provided in this prospectus and the
accompanying prospectus supplement, including the information incorporated by
reference. We have not authorized anyone to provide you with other or different
information. We are not offering the term notes in any state where the offer is
not permitted.
YOU CAN FIND DEFINITIONS OF THE CAPITALIZED TERMS USED IN THIS PROSPECTUS UNDER
THE CAPTION "GLOSSARY OF TERMS" WHICH APPEARS AT THE END OF THIS PROSPECTUS.
TABLE OF CONTENTS
Risk Factors.................................................3
The Originator and the Servicer..............................3
The Seller...................................................4
The Trusts...................................................7
Capitalization Of The Trust..................................8
The Owner Trustee............................................8
Use Of Proceeds..............................................8
The Dealer Floor Plan Financing Business.....................8
Creation Of Receivables......................................9
The Accounts.................................................13
Maturity And Principal Considerations........................14
The Term Notes...............................................14
The Revolving Notes..........................................25
The Certificates.............................................26
The Transfer And Servicing Agreements........................26
Sale And Assignment Of Receivables And Collateral Security...26
Principal Collections........................................32
Legal Aspects................................................44
Federal Income Tax Consequences..............................46
Tax Characterization And Treatment Of Term Notes.............47
Tax Characterization Of The Trust............................50
State, Local And Foreign Tax Consequences....................51
Erisa Considerations.........................................51
Plan Of Distribution.........................................51
Legal Opinions...............................................52
Glossary Of Terms............................................54
RISK FACTORS
You should consider the following risk factors in deciding whether to
purchase the securities.
SOME RECEIVABLES MAY BECOME
UNCOLLECTIBLE IF OTHER PARTIES
ESTABLISH LIENS ON RECEIVABLES
THAT ARE SUPERIOR TO THE TRUST'S,
WHICH COULD DELAY PAYMENT ON YOUR
TERM NOTES. The originator and the seller will
file financing statements with
respect to each pool of receivables
sold to each trust. These financing
statements perfect the security
interests that the seller and the
trust have in the pool of
receivables. However, the seller
expects that the originator, as
servicer, will serve as the
custodian of the receivables and
will not physically segregate or
mark the receivables from other
receivables to indicate that they
have been sold to the trust.
Instead the receivables will be
held as discussed in the section in
this prospectus titled "The
Transfer and Servicing
Agreements--Sale and Assignment of
Receivables and Collateral
Security."
It is possible that another party
could acquire an interest in the
receivables superior to the trust's
interest. This would happen if the
other party purchases or takes a
security interest in the
receivables:
o for value
o in the ordinary course of
business and
o without actual knowledge of
the seller's or the trust's
interest.
When a previously secured vehicle
is sold or leased, and the proceed
of that sale of lease include
chattel paper -- as with most
retail installment contracts --
then a party who buys that chattel
paper may have an interest in the
receivable that is senior to the
trust's interest. This may result
in delay or reduction of payments
on the term notes. This is
described further in the section of
this prospectus titled "Legal
Aspects--Transfer of Receivables."
SOME RECEIVABLES MAY BECOME
UNCOLLECTIBLE IF DEALERS MAKE SALES
OUT OF TRUST, WHICH COULD DELAY
PAYMENT ON YOUR TERM NOTES A dealer who purchases financed
vehicles gives the originator a
security interest in those
vehicles. When a financed vehicle
is sold or leased, originator's
security interest in the vehicle
will generally terminate. A sale
out of trust occurs when a dealer
sells or leases a vehicle but fails
to pay the originator the amount
owed on the receivable for that
vehicle. If this happens,
originator will no longer be able
to look to that vehicle as security
for the receivable. This may impair
originator's ability to collect the
receivable, in which case you might
experience reductions or delays in
payments on your term notes.
IF THE ORIGINATOR FILES FOR BANKRUPTCY
YOU COULD EXPERIENCE REDUCTIONS AND
DELAYS IN PAYMENTS ON YOUR TERM
NOTES. If the originator files for
bankruptcy under the federal
bankruptcy code or any state
insolvency laws, a court may:
o consolidate the assets and
liabilities of the originator
with those of the seller
o decide that the sale of the
receivables to the seller was
not a "true sale"
o disallow a transfer of
receivables prior to the
bankruptcy.
The result of this court ruling
could be that the receivables
become part of the originator's
bankruptcy estate. If that were to
happen, you might experience
reductions or delays in payments on
your term notes. In addition, tax
or other liens might have priority
over the trust's interest. For a
more detailed discussion of this
risk, see "Legal Aspects--Matters
Relating to Bankruptcy " in this
prospectus.
In addition, if the originator
files for bankruptcy under the
federal bankruptcy code or any
state insolvency laws, the
franchised dealers who are
obligated to make payments on the
receivables might respond by
delaying or withholding payments on
the receivables. They might do this
even though they have no legal or
contractual justification to stop
payments. The result might be that
you experience reductions or delays
in payments on your term notes.
THE TRUST IS DEPENDENT ON THE
ORIGINATOR TO GENERATE NEW
RECEIVABLES; WITHOUT NEW
RECEIVABLES, THE TRUST MAY BE
UNABLE TO MAKE PAYMENTS ON THE
TERM NOTES. The originator makes loans to
franchised dealers to finance their
wholesale automobile purchases, and
these loans generate receivables.
The originator typically has in the
past provided financial assistance
to dealers, including capital
contributions in the form of
minority equity investments. The
originator must be able to generate
new receivables in order to meet
the trust's obligations to pay
interest and principal on the
securities. The seller does not
guarantee that it will continue to
generate receivables at historical
rates, and the following events
could negatively impact the
originator's ability to generate
new receivables:
o A decline in the manufacture
and sale of automobiles and
light trucks due to an
economic downturn, a labor
disruption, competitive
pressure, or any other
factors
o A change in vehicle
distribution practices by
manufacturers whose vehicles
are financed by the originator
o A change in dealer inventory
management practices
o A change in the interest rates
charged by the originator to
dealers
o A change in the amounts of the
credit lines offered by the
originator to dealers
o A change in the terms offered
by the originator to dealers
o Defaults on dealers accounts
o Termination of dealer
franchises
o Dealers filing for bankruptcy
o A change in other financial
support offered by the
originator to dealers
o Seasonal fluctuations in the
sale and leasing of vehicles
If the originator generates new
receivables at a lower rate than it
has done in the past, you might
experience reductions or delays in
payments on your term notes. The
payment reductions or delays may
reflect the decrease in
receivables.
If an auto maker terminates a
dealer franchise, the manufacturer
is typically obligated to
repurchase most new vehicles from
that dealer. If the originator or
another creditor forecloses on a
dealer's property, the manufacturer
has the option, but not the
obligation, to repurchase the
dealer's new, current model,
undamaged vehicles at invoice
price. If the originator exercises
this option, then the proceeds of
the purchase will generally be
available to pay on the
receivables.
COLLECTIONS FROM DEALERS IS
GENERALLY THE TRUST'S
ONLY SOURCE OF FUNDS TO MAKE
PAYMENTS ON THE TERM NOTES The trust's ability to make
payments on the term notes
generally depends on collections.
The from dealers on the
receivables. The prospectus
supplement will describe past
patterns of dealer payments on
similar receivables. However, we do
not guarantee that dealers will pay
on the receivables at the same rate
they have in the past or in any
other pattern.
No one can be certain of when
dealers will sell and lease
vehicles. The timing of sales
depends on many economic and social
factors that are beyond the control
of the originator, the seller and
the trust. Sales incentive programs
and financing incentive programs of
vehicle manufacturers also affect
the sale and lease of vehicles.
If the dealers' ability to pay on
the receivables declines for
whatever reason, you might
experience reductions or delays in
payments on your term notes.
THE ORIGINATOR AND THE SELLER DO NOT
GUARANTEE PAYMENTS ON THE RECEIVABLES
OR THE TERM NOTES, BUT IN LIMITED
CIRCUMSTANCES THE ORIGINATOR MAY BE
REQUIRED TO REPURCHASE RECEIVABLES The originator, the seller and
their respective affiliates are
generally not obligated to make any
term note payments to you, and they
do not guarantee payments on the
receivables and warranties about
the characteristics of the
receivables, and the originator
will then assign those
representations warranties to the
trust. If the originator branches
the receivables, the trust may
require the originator to
repurchase the applicable
receivables from the trust.
If the originator fails to
repurchase those receivables, you
might experience reductions or
delays in payments on your term
notes.
THE TRUST HAS LIMITED ASSETS: THE
RECEIVABLES AND ANY FORMS OF CREDIT
ENHANCEMENT The only significant assets or
sources of funds any trust will
have will be its receivables, its
rights in any reserve fund, or
other rights or credit enhancements
that the related prospectus
supplement will specify. The term
notes will only represent interests
in the trust related to those term
notes. Neither the originator, the
seller, the trustee, any of their
affiliates nor any other person nor
entity will insure or guarantee the
term notes, except as described in
the related prospectus supplement.
You must rely primarily on payments
on the related receivables and on
the reserve fund as the repayment
sources of your term notes. In
addition, you may have to look to
the proceeds from the repossession
and sale of collateral which
secures defaulted receivables and
the proceeds from any recourse
against dealers under the financing
agreements. If these sources are
insufficient, you might experience
reductions or delays in payments on
your term notes. For further detail
please see the section in this
prospectus titled "The Transfer and
Servicing Agreements--Liquidity and
Credit Support" and Legal Aspects."
YOU MAY FIND A LIMITED MARKET FOR
ANY RESALE OF THE TERM NOTES The underwriters may assist you in
reselling the term notes, but they
are not required to do so. A
secondary market for any term notes
may not develop. If a secondary
market does develop, it might not
continue or it might not be
sufficiently liquid to allow you to
resell any of your term notes.
THE RATINGS ON THE TERM NOTES ARE NOT
RECOMMENDATIONS; THEY MAY CHANGE OR BE
WITHDRAWN The term notes for each trust will
be issued only if they receive the
required rating. A security rating
is not a recommendation to buy,
sell or hold the term notes. Rating
agencies may revise the ratings or
withdrawn them at any time. Ratings
on the term notes do not address
the timing of distributions on
principal on the term notes prior
to the date specified in the
prospectus supplement as the rated
final maturity date. A withdrawal
or lower of rating of the term
notes may impact the value of your
term notes and affect their
marketability.
THE ORIGINATOR AND THE SERVICER
Information with respect the originator and the servicer will be set
forth in the related prospectus supplement.
THE SELLER
ACE Securities Corp., the seller, is a special purpose corporation
incorporated in the State of Delaware on June 3, 1998. The principal executive
offices of the depositor are located at 6525 Morrison Boulevard, Suite 318,
Charlotte, North Carolina 28211. Its telephone number is (704) 365-0569. The
depositor does not have, nor is it expected in the future to have, any
significant assets.
The limited purposes of the seller are, in general, to acquire, own
and sell mortgage loans and financial assets; to issue, acquire, own, hold and
sell securities and notes secured by or representing ownership interests in
mortgage loans and other financial assets, collections on the mortgage loans and
related assets; and to engage in any acts that are incidental to, or necessary,
suitable or convenient to accomplish, these purposes.
All of the shares of capital stock of the depositor are held by
Altamont Holdings Corp., a Delaware corporation.
THE TRUSTS
ACE Securities Corp., a Delaware corporation will establish a trust or
master trust pursuant to a trust agreement or a master trust agreement. The
trustee of each trust will be a commercial bank, savings and loan association or
trust company identified as the trustee in the related prospectus supplement.
Each Trust will issue one or more series of asset backed notes or
asset backed certificates, that will include one or more classes of certificates
or one or more classes of notes. Any notes included in a series will be issued
pursuant to an indenture entered into between the related trust and an indenture
trustee. The indenture trustee will also be a commercial bank, savings and loan
association or trust company identified as the indenture trustee in the related
prospectus supplement.
In exchange for the securities to be issued by a trust on the initial
issuance date for those securities, the seller will establish each trust by
selling, transferring and assigning to each trust, without recourse, the
seller's right, title and interest in, to and under:
o the Eligible Receivables existing in each dealer account in the
related pool of accounts on the date on which the trust issues
its first series of term notes and the Eligible Receivables
generated in each dealer account in the pool of accounts from
time to time thereafter during the term of the trust,
o Collections on these receivables and
o the related Collateral Security.
The seller or originator will retain the Retained Property, and under
each trust sale and servicing agreement, the seller will also sell, transfer and
assign to the related trust the seller's rights and remedies under the related
pooling and servicing agreement associated with the related receivables. To the
extent specified in the related prospectus supplement states otherwise, each
trust's assets will also include one or more interest rate swaps and funds on
deposit in some of the bank accounts of the trust.
Each dealer account is an individual line of credit or related lines
of credit represented by a revolving dealer floor plan financing agreement
extended or maintained by the originator to a United States corporation or other
entity or person engaged generally in the business of purchasing vehicles from a
manufacturer or distributor thereof and holding the vehicles for sale or lease
in the ordinary course of business. The pool of accounts is comprised of all
dealer accounts identified on the Schedule of Accounts as amended and
supplemented from time to time pursuant to the related pooling and servicing
agreement and trust sale and servicing agreement.
Pursuant to each trust sale and servicing agreement, the seller or
originator will have the limited right from time to time to designate additional
dealer accounts to be included in the related pool of accounts and from time to
time to designate the dealer accounts to be removed from that pool of accounts.
Once a dealer account is so designated for removal, or if a dealer account
ceases to be an Eligible Account, the receivables originated thereafter in that
dealer account will not be transferred to the trust. See "The Transfer and
Servicing Agreements--Addition and Removal of Accounts " in this prospectus.
With respect to each trust and to the extent specified in the related
prospectus supplement, interest rate cap or swap agreements, cash collateral
accounts and other credit, liquidity and other enhancement arrangements may be
held by the owner trustee or the indenture trustee for the benefit of holders of
any securities. These items may be included as assets of a trust or may be held
outside of a trust. Arrangements for the benefit of holders of one series or
class of securities of a trust may not be available to the holders of other
series or classes of the same trust. The principal offices of each trust will be
specified in the related prospectus supplement.
CAPITALIZATION OF THE TRUST
Prior to each trust's initial issuance date, the trust will have no
assets or liabilities. No trust is expected to engage in any activities other
than
(1) acquiring, managing and holding
(a) the related receivables
(b) other assets contemplated in this document and in the
related prospectus supplement and
(c) the proceeds from the assets in paragraphs (a) and (b);
(2) issuing securities; and
(3) making payments and distributions on those securities and
related activities.
No trust is expected to have any source of capital other than its
assets and any related credit, liquidity or other enhancement arrangement.
With respect to each trust, on the related initial issuance date, the
trust is expected to issue one or more series of term notes, one or more series
of revolving notes and one or more classes of certificates, all as further
described herein and in the prospectus supplement related to any term notes
offered hereby. See "The Revolving Notes " and "The Certificates " in this
prospectus. From time to time thereafter, the trust may issue additional series
of notes and additional certificates. See "The Transfer and Servicing
Agreements--Additional Issuances, Changes in Maximum Revolver Balance " in this
prospectus. The related prospectus supplement will set forth the pro forma
capitalization of a trust at the time of the issuance of any term notes. The
certificates will represent the equity in each trust. The related prospectus
supplement will set forth the portion of the certificates issued on the related
initial issuance date. To the extent applicable, the related prospectus
supplement will also set forth the portion of the certificates issued since the
related initial issuance date. The seller or its affiliates may retain all or a
portion of the certificates by or they may be sold to third party investors that
are unaffiliated with the seller, the originator and the trust.
THE OWNER TRUSTEE
The related prospectus supplement will specify the owner trustee for
each trust. The owner trustee's liability in connection with the issuance and
sale of the securities is limited solely to the express obligations of that
owner trustee set forth in the related trust agreement. An owner trustee may
resign at any time, in which event the servicer will be obligated to appoint a
successor trustee. The administrator of a trust may also remove the owner
trustee if the owner trustee ceases to be eligible to continue as owner trustee
under the related trust Agreement or if the owner trustee becomes insolvent. In
these circumstances, the administrator will be obligated to appoint a successor
trustee. Any resignation or removal of an owner trustee and appointment of a
successor trustee will not become effective until acceptance of the appointment
by the successor trustee.
USE OF PROCEEDS
Unless the related prospectus supplement states otherwise, the net
proceeds to be received by the seller from the sale of the securities will be
applied to purchase receivables from the originator.
THE DEALER FLOORPLAN FINANCING BUSINESS
The dealer accounts are individual lines of credit represented by
revolving dealer floor plan financing agreements extended or maintained by the
originator to United States dealers and, to the extent specified in the related
prospectus supplement, foreign dealers. The lines of credit for all these
dealers constitute the U.S. portfolio. Dealers use funds loaned under these
arrangements, which are known generally as "wholesale" or "floor plan"
financing, primarily to finance new and used motor vehicles manufactured or
distributed by motor vehicle manufacturers and distributors pending sale or
lease to the ultimate customer. In general, each receivable generated in a
dealer account is secured by all vehicles owned by the related dealer and, in
some instances, by other collateral security owned by that dealer.
The related prospectus supplement will provide information with
respect to the accounts which will include, among other things:
(a) underwriting criteria;
(b) the loss and delinquency experience for the portfolio of
accounts;
(c) the composition of the portfolio by account balance; and
(d) the geographic distribution of accounts.
THE ACCOUNTS
The receivables of any trust are rights to receive payments on
advances made by the originator to the related dealers under the dealer accounts
included in the pool of accounts for that trust. The initial pool of accounts
related to any trust will be selected from all of the dealer accounts in the the
originator's portfolio that were Eligible Accounts as of the date on which the
trust issues its first series of term notes. Eligible Accounts do not include
fleet accounts. Only Eligible Receivables will be transferred to the related
trust. See "The Transfer and Servicing Agreements--Sale and Assignment of
Receivables and Collateral Security " in this prospectus. Information with
respect to the dealer accounts initially included in the pool of accounts for
any trust will be set forth in the related prospectus supplement.
For each trust, pursuant to the related trust sale and servicing
agreement, the seller will have the limited right to designate from time to time
additional dealer accounts to be included in the pool of accounts. The seller
will have the right to purchase from the originator the Eligible Receivables
then existing and thereafter arising in those dealer accounts and to sell and
assign those receivables to the trust. See "The Transfer and Servicing
Agreements Sale and Assignment of Receivables and Collateral Security " in this
prospectus. In order to be designated an additional dealer account, among other
things, each additional dealer account must be an Eligible Account. Under the
circumstances specified in the related trust sale and servicing agreement, the
seller has the right to remove dealer accounts from the pool of accounts. If a
dealer account is so designated for removal or ceases to be an Eligible Account,
the receivables originated thereafter in that dealer account will not be
transferred to the trust. See "The Transfer and Servicing Agreements--Addition
and Removal of Accounts " in this prospectus.
MATURITY AND PRINCIPAL CONSIDERATIONS
Full amortization of any term notes by the applicable Targeted Final
Payment Date, if any, and the applicable Stated Final Payment Date depends on,
among other things, payments by dealers on receivables, and may not occur if
these payments are insufficient. Because the receivables generally are not paid
prior to the ultimate sale or lease of the underlying vehicle, the timing of
these payments is uncertain. In addition, the originator will not be able to
cannot assure that it will generate additional receivables under the dealer
accounts, that additional dealer accounts will be available or added to any pool
of accounts or that any particular pattern of dealer payments will occur.
The amount of new receivables generated in any month and monthly
payment rates on the receivables may vary because of any of the following
factors:
o seasonal variations in vehicle sales and inventory levels
o retail incentive programs provided by vehicle manufacturers
o incentive programs provided by financing sources and various
other factors affecting vehicle sales generally
Some historical information concerning the monthly payment rates for
the receivables in the portfolio will be set forth in each prospectus
supplement. There can be no assurance that the rate of principal collections on
the receivables in any trust will be comparable to prior experience.
Full amortization of any term notes by the applicable Targeted Final
Payment Date, if any, and the applicable Stated Final Payment Date may also be
affected by payment requirements for, and allocations to, other series of term
notes and the related revolving notes and certificates.
THE TERM NOTES
General
With respect to each trust, one or more series of term notes will be
issued pursuant to the terms of an indenture, a form of which has been filed as
an exhibit to the registration statement of which this prospectus forms a part.
The following summary does not purport to be complete and is qualified in its
entirety by reference to all of the provisions of the term notes and the
indenture. Where particular provisions or terms used in the indenture are
referred to, the actual provisions, along with definitions of terms, are
incorporated by reference as part of this summary.
Unless the related prospectus supplement specifies that the term notes
will be issued in definitive form, each series of term notes will initially be
represented by one or more term notes, which will be registered in the name of
Cede & Co., as the nominee of DTC in the United States, or Clearstream,
Luxembourg or Euroclear in Europe, except as set forth below. Unless the related
prospectus supplement states otherwise, term notes will be available for
purchase in denominations of $1,000 and integral multiples thereof in book-entry
form only.
Unless and until definitive term notes are issued under the limited
circumstances described herein or in the related prospectus supplement, no term
noteholder will be entitled to receive a physical certificate representing a
term note. Unless otherwise indicated, all references herein to actions by Term
Noteholders refer to actions taken by DTC upon instructions from its
participating organizations, or DTC participants. All distributions, notices,
reports and statements to term noteholders will be sent to DTC or Cede & Co. As
the registered holder of the term notes, as the case may be, for distribution to
beneficial owners in accordance with DTC's procedures. See "Book-Entry
Registration" and "Definitive Term Notes" in this prospectus.
Principal and Interest on the Term Notes
The related prospectus supplement will describe the timing and
priority of payment, seniority, Interest Rate, Targeted Final Payment Date, if
any, Stated Final Payment Date, Payment Period, if any, and the amount of, or
method for, determining payments of principal and interest on a series of term
notes. The related prospectus supplement will describe whether interest payments
on term notes will be made monthly, quarterly, semi-annually or otherwise. With
respect to each trust, unless the related prospectus supplement states
differently and except for a series of term notes during its Payment Period, if
any, during the Revolving Period, no payments of principal will be made on the
term notes and no distributions of the certificate balance will be made with
respect to the certificates and no amounts will be set aside for that purpose.
During the Payment Period, if any, for a series of term notes, Principal
Collections and other amounts constituting Available Trust Principal, which may
include proceeds from the issuance of additional securities, will be allocated
to principal payments thereon and paid as set forth in the related prospectus
supplement. Any of these principal payments may be due in instalments, may be
limited by a Controlled Deposit Amount, or may be due in a lump sum payment.
During the Wind Down Period and any Early Amortization Period,
Principal Collections and other amounts constituting Available Trust Principal
will be allocated to principal payments on the notes and will be set aside for
that purpose as set forth in the related prospectus supplement. Unless the
related prospectus supplement states otherwise, during the Wind Down Period and
any Early Amortization Period, if and so long as there are any funds on deposit
in the related Reserve Fund, to the extent that it would result in more
principal collections being allocated to the trust than otherwise, Principal
Collections will be allocated to the trust pro rata, based on the aggregate
percentage of all the receivables in the dealer accounts that are Eligible
Receivables as of the commencement of the Wind Down Period or Early Amortization
Period. Alternatively, if an Early Amortization Period commences during the Wind
Down Period, as of the commencement of the Wind Down Period. During the Wind
Down Period, the amount so allocated may, to the extent provided in the related
prospectus supplement, be limited by any applicable Controlled Deposit Amounts.
If an Early Amortization Period commences during any Payment Period or the Wind
Down Period, amounts on deposit in the Note Distribution Account, the Revolver
Distribution Account and the Certificate Distribution Account, if any, will be
paid to holders of securities on the first Distribution Date for the Early
Amortization Period as described in the related prospectus supplement. If the
related prospectus supplement so provides, specified Early Amortization Events
may be designated as a Cash Accumulation Event, in which case a Cash
Accumulation Period will commence. During any Cash Accumulation Period,
allocated Principal Collections will be invested in a cash accumulation account
dedicated to the holders of the series of term notes described in the prospectus
supplement until the planned date or dates for repayment of that series of term
notes.
With respect to each trust, unless the related prospectus supplement
states otherwise, principal and interest payments on all series of term notes
will have the same priority of payment. Payments of principal and interest on a
series of term notes may be senior or equivalent to the priority of payments on
the related revolving notes, as described in the related prospectus supplement.
However, this would not be the case in circumstances related to the occurrence
of an Event of Default. To the extent specified in the related prospectus
supplement, payments of principal and interest on the notes will be senior in
priority of payment to the distributions to be made on the related certificates
outstanding from time to time. A series of term notes may be entitled to (1)
principal payments with disproportionate, contingent, nominal or no interest
payment, or (2) interest payments with disproportionate, contingent, nominal or
no principal payments (Strip Notes).
The Interest Rate for each series of term notes issued by a trust may
be
o fixed,
o variable,
o contingent,
o adjustable,
o for some series of Strip Notes, an interest rate of zero, or
o any combination of Interest Rate types.
Each series of term notes may also have a different Targeted Final
Payment Date, if any, and Stated Final Payment Date.
The related prospectus supplement will specify the Interest Rate for
each series of term notes, or the initial Interest Rate and the method for
determining subsequent changes in the Interest Rate. One or more series of term
notes of a trust may be redeemable under the circumstances and in the manner
specified in the related prospectus supplement. Unless the related prospectus
supplement states differently, payments of interest on the term notes will be
made prior to payments of principal thereon.
The Indenture
MODIFICATION OF INDENTURE WITHOUT NOTEHOLDER CONSENT. Each trust and
related indenture trustee, on the trust's behalf, may, without consent of the
related noteholders, enter into one or more supplemental indentures for any of
the following purposes:
(1) to correct or amplify the description of the collateral or add
additional collateral;
(2) to provide for the assumption of the notes and the indenture
obligations by a permitted successor to the trust;
(3) to add additional covenants for the benefit of the related
noteholders;
(4) to convey, transfer, assign, mortgage or pledge any property to
or with the indenture trustee;
(5) to cure any ambiguity or correct or supplement any provision in
the indenture or in any supplemental indenture which may be
inconsistent with any other provision of the indenture or of any
supplemental indenture;
(6) to provide for the acceptance of the appointment of a permitted
successor indenture trustee or to add to or change any of the
provisions of the indenture as shall be necessary and permitted
to facilitate the administration by more than one trustee;
(7) to modify, eliminate or add to the provisions of the indenture in
order to comply with the Trust Indenture Act;
(8) to increase the Specified Maximum Revolver Balance in accordance
with the conditions therefor in the related trust sale and
servicing agreement; and
(9) to add any provisions to, change in any manner, or eliminate any
of the provisions of, the indenture or modify in any manner the
rights of noteholders under the indenture; provided that any
action specified in this clause (9) does not adversely affect in
any material respect the interests of any related noteholder
unless noteholder consent is otherwise obtained as described
below.
MODIFICATION OF INDENTURE WITH NOTEHOLDER CONSENT. With respect to
each trust, with the consent of the holders of a majority in principal amount of
the outstanding notes affected thereby, the trust and the indenture trustee may
execute a supplemental indenture to add provisions to, change in any manner or
eliminate any provisions of, the related indenture, or modify in any manner the
rights of the related noteholders.
Without the consent of the holder of each outstanding related note
affected thereby, however, unless otherwise provided in the prospectus
supplement, no supplemental indenture will:
(1) change the due date of any installment of principal of or
interest on any note or reduce the principal amount thereof, the
applicable interest rate or the redemption price with respect
thereto or change any place of payment where or the coin or
currency in which any note or any interest thereon is payable or
modify any of the provisions of the indenture in a way that
affects the calculation of the amount of any payment of interest
or principal due on any note on any Payment Date;
(2) impair the right to institute suit for the enforcement of some of
the provisions of the indenture regarding payment;
(3) reduce the percentage of the aggregate principal amount of the
outstanding notes the consent of the holders of which is required
for the supplemental indenture or the consent of the holders of
which is required to waive compliance with provisions of the
indenture or of defaults thereunder and their consequences as
provided for in the indenture;
(4) modify or alter the provisions of the indenture regarding the
voting of notes held by the related trust, any other obligor on
the notes, the seller or an affiliate of any of them;
(5) reduce the percentage of the aggregate outstanding principal
amount of the 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 the sale would be insufficient to
pay the principal amount and accrued but unpaid interest on the
outstanding notes;
(6) decrease the percentage of the aggregate outstanding principal
amount of the 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
(7) permit the creation of any lien ranking prior to or on a parity
with the lien of the indenture with respect to any part of the
trust estate or, except as otherwise permitted or contemplated in
the indenture, terminate the lien of the indenture on any of the
collateral or deprive the holder of any note of the security
afforded by the lien of the indenture.
Events of Default, Rights Upon Event of Default. With respect to each
trust, unless the related prospectus supplement states differently, Events of
Default under the indenture will consist of:
(1) any failure to pay interest on the related notes as and when the
same becomes due and payable, which failure continues unremedied
for five days;
(2) any failure (a) to make any required payment of principal on the
related notes or (b) to observe or perform in any material
respect any other covenants or agreements in the indenture, which
failure in the case of a default under this clause (2)(b)
materially and adversely affects the rights of related
noteholders, and which failure in either case continues for 30
days after written notice is given of the failure (x) to the
trust, the seller, or the servicer, as applicable, by the
indenture trustee or (y) to the trust, the seller, the servicer,
as applicable, and the indenture trustee by the holders of not
less than 25% of the principal amount of the related notes;
(3) failure to pay the unpaid principal balance of any related series
of notes by the respective Stated Final Payment Date for any
series; and
(4) specified events of bankruptcy, insolvency or receivership with
respect to the trust.
However, the amount of principal required to be paid to term
noteholders under the related indenture will generally be limited to amounts
available to be deposited therefor in the Note Distribution Account. Therefore,
unless the related prospectus supplement states otherwise, the failure to pay
principal on a series of term notes will not result in the occurrence of an
Event of Default until the applicable Stated Final Payment Date.
If an Event of Default should occur and be continuing with respect to
the notes of any trust, the related indenture trustee or the holders of a
majority in principal amount of the notes then outstanding, voting together as a
single class, may declare the principal of the notes to be immediately due and
payable. That declaration will constitute an Early Amortization Event. Under
some circumstances, the holders of a majority in principal amount of the notes
then outstanding may rescind the declaration. If this happens, the Revolving
Period will recommence in some circumstances. See "The Transfer and Servicing
Agreements--Early Amortization Events " in this prospectus.
If the notes of any trust are declared due and payable following an
Event of Default with respect thereto, the related indenture trustee may
institute proceedings to:
(1) collect amounts due or foreclose on trust property,
(2) exercise remedies as a secured party,
(3) sell the related trust estate or
(4) elect to have the trust maintain possession of the trust estate
and continue to apply Collections as if there had been no
declaration of acceleration. The indenture trustee could make
this election even though the Early Amortization Period commenced
by the declaration will continue unless the declaration is
rescinded.
The indenture trustee, however, is prohibited from selling the receivables held
by the trust following an Event of Default, unless:
(1) the holders of all the outstanding notes of the trust consent to
the sale,
(2) the proceeds of the sale are sufficient to pay in full the
principal of and the accrued interest on the outstanding
securities at the date of the sale or
(3) in some cases, the indenture trustee determines that the trust
estate would not provide sufficient funds on an ongoing basis to
make all payments on the notes as payments would have become due
if the obligations had not been declared due and payable, and the
indenture trustee obtains the consent of the holders of a
majority of the aggregate outstanding principal amount of the
notes.
Unless the related prospectus supplement provides otherwise, following a
declaration that the notes of a trust are immediately due and payable,
(1) noteholders will be entitled to pro rata repayment of principal
on the basis of their respective unpaid principal balances, and
(2) repayment in full of the accrued interest on and unpaid principal
balances of the notes will be made prior to any further
distribution of interest on the certificates or in respect of the
certificate balance.
Although the indenture trustee must comply with its duties under the
related indenture, if an Event of Default occurs and is continuing with respect
to the notes of any trust, the indenture trustee will be under no obligation to
exercise any of the rights or powers under the indenture at the request or
direction of any of the holders of the notes, if the indenture trustee
reasonably believes it will not be adequately indemnified against the costs,
expenses and liabilities which might be incurred by it in complying with that
request. As set forth in the indenture, the holders of a majority in aggregate
principal amount of the outstanding notes of a trust, voting 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. The
holders of a majority in aggregate principal amount of the notes then
outstanding, voting together as a single class, may, in some cases, waive any
default with respect thereto, except a default in the payment of principal or
interest or a default in respect of a covenant or provision of the indenture
that cannot be modified without the waiver or consent of all of the holders of
the notes.
No holder of a note will have the right to institute any proceeding
with respect to the related indenture, unless:
(1) the holder previously has given to the indenture trustee written
notice of a continuing Event of Default,
(2) the holders of not less than 25% in aggregate principal amount of
the outstanding notes, voting together as a single class, have
made written request of the indenture trustee to institute the
proceeding in its own name as indenture trustee,
(3) the holder or holders have offered the indenture trustee
reasonable indemnity,
(4) the indenture trustee has for 60 days failed to institute the
proceeding and
(5) no direction inconsistent with the written request has been given
to the indenture trustee during the 60-day period by the holders
of a majority in aggregate principal amount of the outstanding
Notes.
If an Event of Default occurs and is continuing with respect to any trust and if
it is known to the indenture trustee, the indenture trustee will mail notice of
the Event of Default to each noteholder of the trust within 90 days after it
occurs. Except in the case of a failure to make any required payment of
principal or interest on any note, the indenture trustee may withhold the notice
beyond the 90 day period if and so long as it determines in good faith that
withholding the notice is in the interests of the noteholders.
In addition, the indenture trustee and each noteholder and note owner,
by accepting a note, or interest therein, will covenant that they will not, for
a period of one year and one day after the termination of the related trust
agreement, institute against the related trust or seller any bankruptcy,
reorganization or other proceeding under any federal or state bankruptcy or
similar law.
Neither the indenture trustee in its individual capacity nor the owner
trustee in its individual capacity, nor any holder of a certificate including,
without limitation, the seller, 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 related trust contained in the indenture.
COVENANTS. Each indenture typically will provide that the related
trust may not consolidate with or merge into any other entity, unless, among
other things
(1) the entity formed by or surviving the consolidation or merger is
organized under the laws of the United States, any state or the
District of Columbia,
(2) the entity expressly assumes the trust's obligation to make due
and punctual payments on the notes and the performance or
observance of every agreement and covenant of the trust under the
indenture,
(3) no Event of Default shall have occurred and be continuing
immediately after the merger or consolidation,
(4) the trust has been advised that the ratings of the related
securities would not be reduced or withdrawn by the rating
agencies as a result of the merger or consolidation and
(5) the trust has received an opinion of counsel to the effect that
the consolidation or merger would have no material adverse tax
consequences to the trust or to any related holder of securities.
Each trust will not, among other things, except as expressly permitted
by the Related Documents:
(1) sell, transfer, exchange or otherwise dispose of any of the
assets of the trust,
(2) other than amounts withheld under the Code or applicable state
law, claim any credit on or make any deduction from the principal
or interest payable in respect of the related notes or assert any
claim against any present or former holder of the notes because
of the payment of taxes levied or assessed upon the trust,
(3) dissolve or liquidate in whole or in part,
(4) permit the validity or effectiveness of the related indenture to
be impaired or permit any person to be released from any
covenants or obligations with respect to the related Notes under
the indenture except as may be expressly permitted thereby or
(5) 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 trust estate or any part
thereof, or any interest therein or the proceeds thereof.
Except as specified in the related prospectus supplement, no trust may
engage in any activity other than as described above under "The Trusts." No
trust will incur, assume or guarantee any indebtedness other than indebtedness
incurred pursuant to the related notes, the related indenture, or otherwise in
accordance with the related Transfer and Servicing Agreements.
ANNUAL COMPLIANCE STATEMENT. Each trust will be required to file
annually with the related indenture trustee a written statement as to the
fulfillment of its obligations under the indenture.
INDENTURE TRUSTEE'S ANNUAL REPORT. The indenture trustee will be
required to mail each year to all related Noteholders, to the extent required
under the Trust Indenture Act,
(1) a brief report relating to its eligibility and qualification to
continue as indenture trustee under the related indenture,
(2) any amounts advanced by it under the indenture,
(3) the amount, interest rate and maturity date of some types of
indebtedness owing by the trust to the indenture trustee in its
individual capacity,
(4) the property and funds physically held by the indenture trustee,
and
(5) 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 notes of any trust upon the delivery of all of
the notes to the related indenture trustee for cancellation or, with
limitations, upon deposit of funds sufficient for the payment in full of all of
the notes with the indenture trustee.
The Indenture Trustee
The indenture trustee for the notes of a trust will be specified in
the related prospectus supplement. The indenture trustee may give notice of its
intent to resign at any time, in which event the trust will be obligated to
appoint a successor trustee. The trust may also remove the indenture trustee if
the indenture trustee ceases to be eligible to continue in that capacity under
the indenture, becomes insolvent, or otherwise becomes incapable of acting. If
the indenture trustee is removed, the trust will be obligated to appoint a
successor trustee. The holders of a majority of the aggregate principal amount
of the outstanding notes will also be entitled to remove the indenture trustee
and appoint a successor. Any resignation or removal of the indenture trustee and
appointment of a successor trustee does not become effective until acceptance of
the appointment by the successor trustee.
Reports to Term Noteholders
With respect to each trust, on or prior to each Payment Date, the
servicer will prepare and provide to the indenture trustee a statement to be
delivered to the related term noteholders on the Payment Date. To the extent
applicable to each series each statement will include the following information
as to the term notes with respect to the Payment Date or the period since the
previous Payment Date, as applicable:
(1) the amount, if any, of the distribution allocable to principal on
each series of term notes;
(2) the amount, if any, of the distribution allocable to interest on
each series of term notes;
(3) the aggregate outstanding principal balance for each series of
term notes, after giving effect to all payments reported under
(1) above;
(4) the aggregate principal balance of the revolving notes and the
aggregate certificate balance;
(5) if applicable, the amount of outstanding servicer advances;
(6) the amount of the Monthly Servicing Fee paid to the servicer with
respect to the related Collection Period or Periods, as the case
may be;
(7) the interest rate applicable for the next Payment Date for any
series of term notes with variable or adjustable rates;
(8) the amount, if any, withdrawn from or credited to any Reserve
Fund;
(9) the accumulated interest shortfalls, if any, on each series or
class of securities and the change in that amounts from the
preceding Payment Date;
(10) the Trust Charge-Offs allocated to each series or class of
securities and the change in those amounts from the preceding
Payment Date; and
(11) the balance of the Reserve Fund, if any, on the relevant date,
after giving effect to changes therein on that date.
Each amount set forth pursuant to subclauses (1), (2) and (9) with
respect to term notes will be expressed as a dollar amount per $1,000 of the
initial principal balance of the term notes.
Within the prescribed period of time for tax reporting purposes after
the end of each calendar year during which any term notes are outstanding, the
indenture trustee will furnish or cause to be furnished to each person or entity
who at any time during the preceding calendar year was a holder of record of a
Term Note -- initially Cede, as the nominee of DTC -- and received any payment
thereon from the trust, a statement containing information for the purpose of
assisting that Noteholders in the preparation of their federal income tax
returns. As long as the holder of record of the term notes is Cede, as nominee
of DTC, beneficial owners of term notes will receive tax and other information
from DTC participants and indirect DTC participants rather than from the
indenture trustee. See "Federal Income Tax Consequences " in this prospectus.
Book-Entry Registration
The Depository Trust Company is a limited purpose trust company
organized under the laws of the State of New York, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the New York UCC
and a "clearing agency" registered pursuant to Section 17A of the Exchange Act.
DTC was created to hold securities for its participants and to facilitate the
clearance and settlement of securities transactions between DTC participants
through electronic book-entries, thereby eliminating the need for physical
movement of certificates. DTC participants include securities brokers and
dealers, banks, trust companies and clearing corporations. Indirect access to
the DTC system also is available to banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a DTC participant,
either directly or through indirect DTC participants.
Unless the prospectus supplement provides otherwise, owners of
beneficial interest in notes (note owners) that are not participants or indirect
participants but desire to purchase, sell or otherwise transfer ownership of, or
other interests in, term notes may do so only through DTC participants and
through indirect DTC participants. In addition, term note owners will receive
all distributions of principal and interest through DTC participants. Under a
book-entry format, term note owners may experience some delay in their receipt
of payments since payments will be forwarded by the indenture trustee to Cede,
as nominee for DTC. DTC will forward the payments to DTC participants, which
thereafter will forward them to indirect DTC participants or term note owners.
It is anticipated that the only term noteholder of record will be Cede, as
nominee of DTC. Term note owners will not be recognized by the indenture trustee
as term noteholders, as that term is used in the indenture, and term note owners
will be permitted to exercise the rights of term noteholders only indirectly
through DTC and its DTC participants.
Under the rules, regulations and procedures creating and affecting DTC
and its operations, DTC is required to make book-entry transfers of term notes
among DTC participants on whose behalf it acts with respect to the term notes
and to receive and transmit payments of principal of, and interest on, the term
notes. DTC participants and indirect DTC participants with which term note
owners have accounts with respect to the term notes similarly are required to
make book-entry transfers and receive and transmit the payments on behalf of
their respective term note owners. Accordingly, although term note owners will
not possess term notes, the DTC's rules provide a mechanism by which term note
owners will receive payments and will be able to transfer their interests in
term notes.
Because DTC can only act on behalf of DTC participants, who in turn
act on behalf of indirect DTC participants and banks, the ability of a holder to
pledge term notes to persons or entities that do not participate in the DTC
system, or to otherwise act with respect to the term notes, may be limited due
to the lack of a physical certificate for the term notes.
DTC has advised the seller that it will take any action permitted to
be taken by a term noteholder under the indenture or other Related Document only
at the direction of one or more DTC participants to whose accounts with DTC the
term notes are credited. DTC may take conflicting actions with respect to other
undivided interests to the extent that the actions are taken on behalf of DTC
participants whose holdings include the undivided interests.
In addition to holding term notes through DTC participants or Indirect
DTC participants in the United States as described above, holders of term notes
may hold their term notes through Clearstream, Luxembourg or Euroclear in Europe
if they are participants of those systems, or indirectly through organizations
which are participants in those systems.
Clearstream, Luxembourg and Euroclear will hold omnibus positions on
behalf of their participants through customers' securities accounts in
Clearstream, Luxembourg's and Euroclear's names on the books of their respective
depositories which in turn will hold those positions in customers' securities
accounts in the depositories' names on the books of DTC.
Transfers between Clearstream, Luxembourg participants, as defined
below, and Euroclear participants, as defined below, will occur in accordance
with their respective rules and operating procedures. Cross- market transfers
between persons holding directly or indirectly through DTC, on the one hand, and
directly or indirectly through Clearstream, Luxembourg participants or Euroclear
participants, on the other hand, will be effected in DTC in accordance with DTC
rules on behalf of the relevant European international clearing systems by its
depositary. Cross-market transactions will require delivery of instructions to
the relevant European international clearing system by the counterparty in the
clearing system in accordance with its rules and procedures and within its
established deadlines. These deadlines will be set in European time. The
relevant European international clearing system will, if the transaction meets
its settlement requirements, deliver instructions to its depositary to take
action to effect final settlement on its behalf by delivering or receiving
securities in DTC, and making or receiving payment in accordance with normal
procedures for same-day funds settlement applicable to DTC. Clearstream,
Luxembourg participants and Euroclear participants may not deliver instructions
directly to the depositories.
Because of time-zone differences, credits of securities received in
Clearstream, Luxembourg or Euroclear as a result of a transaction with a DTC
participant will be made during subsequent securities settlement processing and
dated the Business Day following the DTC settlement date. Any credits or any
transactions in securities settled during this processing will be reported to
the relevant Euroclear or Clearstream, Luxembourg participants on that Business
Day. Cash received in Clearstream, Luxembourg or Euroclear as a result of sales
of securities by or through a Clearstream, Luxembourg participant or a Euroclear
participant to a DTC participant will be received with value on the DTC
settlement date but will be available in the relevant Clearstream, Luxembourg or
Euroclear cash account only as of the Business Day following settlement in DTC.
For information with respect to tax documentation procedures, see "Federal
Income Tax Consequence--Tax Characterization and Treatment of Term Notes--Tax
Consequences to Foreign Noteholders " in this prospectus.
Clearstream Banking, societe anonyme, 67 Bd Grande-Duchesse Charlotte,
L-2967 Luxembourg ("Clearstream, Luxembourg"), was incorporated in 1970 as
"Cedel S.A.", a company with limited liability under Luxembourg law (a societe
anonyme). Cedel S.A. subsequently changed its name to Cedelbank. On January 10,
2000, Cedelbank's parent company, Cedel International, societe anonyme ("CI")
merged its clearing, settlement and custody business with that of Deutsche Borse
Clearing AG ("DBC"). The merger involved the transfer by CI of substantially all
of its assets and liabilities (including its shares in CB) to a new Luxembourg
company, New Cedel International, societe anonyme ("New CI"), which is 50% owned
by CI and 50% owned by DBC's parent company Deutsche Borse AG. The shareholders
of these two entities are banks, securities dealers and financial institutions.
Cedel International currently has 92 shareholders, including U.S. financial
institutions or their subsidiaries. No single entity may own more than 5 percent
of Cedel International's stock.
Further to the merger, the Board of Directors of New Cedel
International decided to rename the companies in the group in order to give them
a cohesive brand name. The new brand name that was chosen is "Clearstream". With
effect from January 14, 2000 New CI has been renamed "Clearstream International,
societe anonyme". On January 18, 2000, Cedelbank was renamed "Clearstream
Banking, societe anonyme", and Cedel Global Services was renamed "Clearstream
Services, societe anonyme".
On January 17, 2000 DBC was renamed "Clearstream Banking AG". This
means that there are now two entities in the corporate group headed by
Clearstream International which share the name "Clearstream Banking", the entity
previously named "Cedelbank" and the entity previously named "Deutsche Brse
Clearing AG".
Clearstream, Luxembourg holds securities for its customers
("Clearstream, Luxembourg Participants") and facilitates the clearance and
settlement of securities transactions between Clearstream, Luxembourg customers
through electronic book-entry changes in accounts of Clearstream, Luxembourg
customers, thereby eliminating the need for physical movement of certificates.
Transactions may be settled by Clearstream, Luxembourg in any of 36 currencies,
including United States Dollars. Clearstream, Luxembourg provides to its
customers, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Clearstream, Luxembourg also deals with domestic
securities markets in over 30 countries through established depository and
custodial relationships. Clearstream, Luxembourg is registered as a bank in
Luxembourg, and as such is subject to regulation by the Commission de
Surveillance du Secteur Financier, "CSSF", which supervises Luxembourg banks.
Clearstream, Luxembourg's customers are world-wide financial institutions
including underwriters, securities brokers and dealers, banks, trust companies
and clearing corporations. Clearstream, Luxembourg's U.S. customers are limited
to securities brokers and dealers, and banks. Currently, Clearstream, Luxembourg
has approximately 2,000 customers located in over 80 countries, including all
major European countries, Canada, and the United States. Indirect access to
Clearstream, Luxembourg is available to other institutions that clear through or
maintain a custodial relationship with an account holder of Clearstream,
Luxembourg. Clearstream, Luxembourg has established an electronic bridge with
Morgan Guaranty Trust Company of New York as the Operator of the Euroclear
System (MGT/EOC) in Brussels to facilitate settlement of trades between
Clearstream, Luxembourg and MGT/EOC.
Euroclear was created in 1968 to hold securities for Euroclear
participants and to clear and settle transactions between Euroclear participants
through simultaneous electronic book-entry delivery against payment. This
eliminated the need for physical movement of certificates and any risk from lack
of simultaneous transfers of securities and cash. Transactions may now be
settled in any of 34 currencies, including United States dollars. Euroclear
includes various other services, including securities lending and borrowing and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described above. Euroclear is
operated by the Brussels, Belgium office of Morgan Guaranty Trust Company of New
York under contract with Euro-clear Clearance Systems S.C., a Belgian
cooperative corporation. All operations are conducted by Morgan Guaranty, and
all Euroclear securities clearance accounts and Euroclear cash accounts are
accounts with Morgan Guaranty, not with Euro-clear Clearance Systems. Euro-clear
Clearance Systems establishes policy for Euroclear on behalf of Euroclear
participants. Euroclear participants include banks, central banks, securities
brokers and dealers and other professional financial intermediaries and may
include the Underwriters. Indirect access to Euroclear is also available to
other firms that clear through or maintain a custodial relationship with a
Euroclear participant, either directly or indirectly.
Morgan Guaranty Trust Company of New York is the Belgian branch of a
New York banking corporation which is a member bank of the Federal Reserve
System. It is regulated and examined by the Board of Governors of the Federal
Reserve System and the New York State Banking Department, as well as the Belgian
Banking Commission. Securities clearance accounts and cash accounts with Morgan
Guaranty are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and the applicable
Belgian law. These laws and procedures govern transfers of securities and cash
with 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. Morgan Guaranty acts under these laws
and procedures only on behalf of Euroclear participants, and has no record of or
relationship with persons holding through Euroclear participants.
Distributions with respect to term notes held through Clearstream,
Luxembourg or Euroclear will be credited to the cash accounts of Clearstream,
Luxembourg participants or Euroclear participants in accordance with the
relevant system's rules and procedures, to the extent received by its
depositary. The distributions must be reported accordance with relevant United
States tax laws and regulations. See "Federal Income Tax Consequences--Tax
Characterization and Treatment of Term Notes " in this prospectus. Clearstream,
Luxembourg or Morgan Guaranty, as the case may be, will take any other action
permitted to be taken by a term noteholder under the indenture or other Related
Document on behalf of a Clearstream, Luxembourg participant or Euroclear
participant only in accordance with its relevant rules and procedures and only
if its depositary is able to effect that action on its behalf through DTC.
Although DTC, Clearstream, Luxembourg and Euroclear have agreed to the
foregoing procedures in order to facilitate transfers of term notes among
participants of DTC, Clearstream, Luxembourg and Euroclear, they are under no
obligation to perform or continue to perform these procedures and these
procedures may be discontinued at any time.
Except as required by law, neither the administrator, the owner
trustee nor the indenture trustee will have any liability for any aspect of the
records relating to or payments made on account of beneficial ownership
interests of the notes or the certificates of any series held by Cede, as
nominee for DTC, by Clearstream, Luxembourg or by Euroclear in Europe, or for
maintaining, supervising or reviewing any records relating to any beneficial
ownership interests.
Definitive Term Notes
Unless the related prospectus supplement states otherwise, term notes
will be issued in fully registered, certificated form, or definitive term notes,
to term noteholders or their nominees, rather than to DTC or its nominee, only
if
(1) the administrator advises the indenture trustee in writing
that DTC is no longer willing or able to discharge properly
its responsibilities with respect to the term notes and the
trust is unable to locate a qualified successor,
(2) the administrator, at its option, elects to terminate the
book-entry system through DTC, or
(3) after the occurrence of an Event of Default or a Servicing
Default, note owners representing beneficial interests
aggregating at least a majority of the outstanding principal
amount of the related term notes advise the appropriate
trustee through DTC in writing that the continuation of a
book-entry system through DTC, or a successor thereto, is no
longer in the best interest of the note owners.
Upon the occurrence of any event described in the immediately
preceding paragraph, DTC will notify the note owners and the indenture trustee
of that occurrence and of the availability of definitive term notes. Upon
surrender by DTC of the definitive certificates representing the term notes and
receipt of instructions for re-registration, the indenture trustee will reissue
the related term notes as definitive term notes to holders thereof.
Payments of principal of, and interest on, the definitive term notes
will thereafter be made in accordance with the procedures set forth in the
indenture directly to holders of definitive term notes in whose names the
definitive term notes were registered at the close of business on the last day
of the preceding month. Those payments will be made by check mailed to the
address of the holder as it appears on the register maintained by the indenture
trustee. The final payment on any definitive term note, however, will be made
only upon presentation and surrender of the definitive term note at the office
or agency specified in the notice of final payment to the holders thereof.
Definitive term notes will be transferable and exchangeable at the offices of
the appropriate trustee or of a registrar named in a notice delivered to holders
of definitive term notes. No service charge will be imposed for any registration
of transfer or exchange, but the appropriate trustee may require payment of a
sum sufficient to cover any tax or other governmental charge imposed in
connection therewith.
THE REVOLVING NOTES
Each trust will issue one or more series of revolving notes on the
initial issuance date and may issue more series of revolving notes from time to
time thereafter. Each series of revolving notes may have a different Revolver
Interest Rate which may be fixed, variable, contingent, adjustable or any
combination of the foregoing, and a different Targeted Final Payment Date, if
any, and Stated Final Payment Date. With respect to each trust, the outstanding
principal balance of the revolving notes may fluctuate on a daily basis as
Principal Collections on the related receivables not needed for principal
payments or distributions on related term notes or certificates are, at the
discretion of the seller or as otherwise described herein:
(1) allocated to the seller in payment for receivables purchased by
the trust,
(2) allocated to the Revolver Distribution Account as a payment of
principal on the revolving notes, or
(3) retained as the Cash Collateral Amount.
With respect to each trust, the seller, at its option, may on any day
increase the outstanding principal balance of the revolving notes to fund
purchases of receivables, provided, however, that the Net Revolver Balance may
not at any time exceed the Maximum Revolver Balance. The Specified Maximum
Revolver Balance for a trust will be set forth in the related prospectus
supplement and may be increased or decreased from time to time if a number of
conditions are satisfied. See "The Transfer and Servicing Agreements--Additional
Issuances, Changes in Maximum Revolver Balance " in this prospectus.
Unless the related prospectus supplement provides otherwise, no
additional borrowings will be permitted under any revolving note during the Wind
Down Period or any Early Amortization Period for the related trust. Payments of
principal on revolving notes will be made in the amounts and priority, and at
the times, specified in the related prospectus supplement. One or more series of
revolving notes for any trust may have a Targeted Final Payment Date, if any,
and Stated Final Payment Date or otherwise require principal payments during the
related Revolving Period and may provide for extensions and renewals under some
circumstances. Each revolving note will initially be held by the originator or
the seller, and the revolving note or an interest therein may be sold by the
originator or the seller in a private placement to a third-party investor.
Thereafter, a revolving note or an interest therein may be transferred in whole
or in part if certain conditions are satisfied. Any additional borrowings under,
and principal payments on, the revolving notes will be allocated among all
outstanding revolving notes as determined by the seller in its sole discretion.
However, this allocation will depend on any agreements among the seller and any
holders of the revolving notes. The revolving notes are not being offered
pursuant to this prospectus or any related prospectus supplement.
THE CERTIFICATES
With respect to each trust, the certificates will be issued pursuant
to the terms of a trust agreement between the seller and the owner trustee and
will represent the ownership interest in the trust. Certificates will be issued
on the initial issuance date for a trust and may be issued from time to time
thereafter. The certificate rate for the certificates may be fixed, variable,
contingent, adjustable or any combination of the foregoing, and may vary by
class of certificate. The related prospectus supplement will set forth the
amount of, or method for determining, distributions of the certificate balance
and the timing of the distributions, including the Stated Final Payment Date.
Unless the related prospectus supplement provides differently, principal and
interest payments on the notes will be senior to distributions of the
certificate balance and interest on the related certificates. The certificates
are not being offered pursuant to this prospectus or any related prospectus
supplement.
THE TRANSFER AND SERVICING AGREEMENTS
Except as otherwise specified in the related prospectus supplement,
the following summary describes some of the material terms of:
(1) the pooling and servicing agreement pursuant to which the seller
will purchase Eligible Receivables from the originator, and the
servicer will agree to service all receivables in the related
dealer accounts,
(2) the trust sale and servicing agreement pursuant to which the
trust will acquire those receivables from the seller and agree to
the servicing of the receivables by the servicer,
(3) the trust agreement pursuant to which the trust will be created
and certificates will be issued and
(4) the administration agreement pursuant to which the originator, as
administrator, will undertake a number of administrative duties
with respect to the trust. Collectively, these agreements will be
referred to as the Transfer and Servicing Agreements.
Forms of the Transfer and Servicing Agreements have been filed as
exhibits to the Registration Statement of which this prospectus forms a part.
Upon request of a holder of securities described therein. The seller will
provide a copy of the Transfer and Servicing Agreements. This copy will not
include exhibits. This summary does not purport to be complete and is qualified
by reference to all of the provisions of the Transfer and Servicing Agreements.
Where particular provisions or terms used in the Transfer and Servicing
Agreements are referred to, the actual provisions are incorporated by reference
as part of this summary.
SALE AND ASSIGNMENT OF RECEIVABLES AND COLLATERAL SECURITY
The originator will sell and assign to the seller, without recourse,
o on the initial issuance date for a trust, its entire interest in
the Eligible Receivables under the dealer accounts included in
the related pool of accounts as of the Initial Cut-Off Date, and
o on each date on which receivables are originated in a dealer
account in the related pool of accounts, its entire interest in,
all Eligible Receivables created on that date in the dealer
accounts in the related pool of accounts. However, if the
originator becomes subject to a bankruptcy proceeding, the
originator will not assign receivables to the seller without
approval of the bankruptcy court.
In each case, the originator will sell and assign to the seller the
related Collateral Security and the proceeds of all of the foregoing, pursuant
to a pooling and servicing agreement between the originator and the seller.
For each trust, on its initial issuance date and on each Receivables
Purchase Date, the seller will transfer and assign to the applicable trust,
without recourse, the Eligible Receivables and the other assets purchased from
the originator on that date, pursuant to a trust sale and servicing agreement
among the seller, the servicer and the trust. The owner trustee, on behalf of
the trust, together with the indenture trustee with respect to the notes,
concurrently with the initial transfer and assignment to the trust, will execute
and deliver to the seller the related notes and the related certificates to be
issued on the initial issuance date. Unless the related prospectus supplement
provides otherwise, the seller will sell the securities and will apply the net
proceeds received from the sale of the securities to the purchase of the related
receivables from the originator.
In each pooling and servicing agreement, in connection with the sale
of the related receivables to the seller, the originator will agree to indicate
in its records that the Eligible Receivables and Collateral Security have been
sold to the seller, and that, upon the execution of a trust sale and servicing
agreement, the seller has sold and assigned that property to the trust. In
addition, the originator will agree to provide a complete list to the seller
showing for each dealer account to be included in the pool of accounts, as of
the Initial Cut-Off Date, its account number and the outstanding principal
balance of receivables that the originator represents are Eligible Receivables
under that dealer account. In the related trust sale and servicing agreement,
the trust will accept the designation of the originator as custodian to maintain
possession, as the trust's agent, of the documents relating to the receivables.
the originator will not deliver to the seller, the owner trustee or the
indenture trustee any records or agreements relating to the dealer accounts or
the receivables. The records and agreements relating to the dealer accounts and
receivables related to any trust will not be segregated from those relating to
other accounts and receivables of the originator or otherwise marked to reflect
the sale of the receivables therein to the seller or the subsequent sale to the
related trust. This helps to assure uniform quality in servicing both the
receivables related to any trust and the servicer's own portfolio of
receivables, as well as to facilitate servicing and save administrative costs.
However, with respect to each trust, the originator will file UCC financing
statements with respect to the sale, transfer and assignment of receivables to
the seller and the seller will file UCC financing statements with respect to the
sale, transfer and assignment of the receivables to the trust. In addition, each
trust will file UCC financing statements with respect to the security interest
in the trust's assets granted to the indenture trustee under the indenture to
secure the trust's obligations thereunder. See "Legal Aspects--Transfer of
Receivables " in this prospectus. The documents evidencing the receivables will
remain in the originator's possession and will not be stamped or otherwise
marked to reflect the sale and assignment of the interests in the receivables to
the seller or the trust. As a result of the originator's continued possession,
if a subsequent purchaser were able to take possession of the receivables
without knowledge of the assignment, and if the receivables are deemed "chattel
paper" under applicable law, the trust's interests in the receivables could be
defeated. See "Legal Aspects--Transfer of Receivables " in this prospectus.
With respect to each trust, pursuant to the trust sale and servicing
agreement, as described in "Addition and Removal of Accounts " below, the seller
has the limited right to designate from time to time additional dealer accounts
to be included in the related pool of accounts. In connection with any
designation of additional dealer accounts, the seller will purchase from the
originator the Eligible Receivables in the additional dealer accounts and the
originator will follow the procedures set forth in the preceding paragraph,
except that the list will show information for the additional dealer accounts as
of the cut-off date for additional dealer accounts. The servicer will notify the
seller of this cut-off date in writing.
Representations and Warranties
In each pooling and servicing agreement, the originator will represent
and warrant to the seller, among other things, that:
(1) as of the initial issuance date, or, in the case of an additional
dealer account, as of the related cut-off date for additional
dealer accounts, each dealer account or additional dealer account
included in the pool of accounts is an Eligible Account; and
(2) as of the initial issuance date, or, in the case of an additional
dealer account, as of the related cut-off date for additional
dealer accounts, and on each Receivables Purchase Date each
receivable conveyed to the seller on that date that is identified
as an Eligible Receivable is actually an Eligible Receivable.
In the case of an additional dealer account, the originator will make
the above representations and warranties as of the related cut-off date.
In the related trust sale and servicing agreement, the seller will
assign the representations and warranties of the originator with respect to the
dealer accounts and the receivables to the trust, and will represent and warrant
to the trust that the seller has taken no action which would cause the
representations and warranties of the originator to be false in any material
respect as of the initial issuance date, each cut-off date for additional dealer
accounts and each Receivables Purchase Date, as the case may be.
The seller and the servicer may discover that there has been a breach
of a representation or warranty of the seller or the originator that materially
and adversely affects the trust's interest in a deferred payment receivable.
This is a receivable for which payment has been deferred pursuant to DPP, an
installment sales program or a similar arrangement. Any receivable affected this
way is referred to as a "Warranty Receivable". Unless and to the extent the
breach is cured in all material respects, the originator or the seller will
repurchase a Warranty Receivable as follows:
(1) if the breach or deferral is a breach of a representation or
warranty of the originator, the seller and the servicer will use
reasonable efforts to enforce the obligation of the originator
under the pooling and servicing agreement to pay the related
Warranty Payment, as defined below, and repurchase the receivable
or
(2) if the breach or deferral is a breach of a representation or
warranty of the seller, the seller will repurchase the
receivable.
Without limiting the generality of the foregoing, a receivable held by
a trust will not be an Eligible Receivable, and thus will be repurchased if and
to the extent (1) the principal amount thereof is adjusted downward because of a
rebate, refund, credit adjustment or billing error to the related dealer, or (2)
the receivable was created in respect of a vehicle that was refused or returned
by a dealer.
The "Warranty Payment", which is the price for a repurchase of a
Warranty Receivable by the originator or the seller will be equal to the
principal amount of the receivable. In the case of a breach or deferral
affecting less than the entire principal amount of a receivable, the Warranty
Payment will be to the extent of the breach or deferral, plus all accrued and
unpaid interest thereon through the date of purchase. The principal portion of
the Warranty Payment will be treated as Trust Principal Collections and the
remainder will be included in Interest Collections. All Warranty Payments will
be deposited into the related Collection Account on the related Distribution
Date. The repurchase obligations of the seller and the originator constitute the
sole remedy available to the securityholders, the indenture trustee or the owner
trustee for any uncured breach or deferral.
In each pooling and servicing agreement, the originator will also make
representations and warranties to the seller to the effect that, among other
things, as of the closing date for the sale of any securities:
(1) the originator is duly incorporated and in good standing, it has
the authority to consummate the transactions contemplated by the
pooling and servicing agreement, and the related Transfer and
Servicing Agreements constitute legal, valid and binding
obligations of the originator; and
(2) the transfer of the receivables and the related Vehicle
Collateral Security, pursuant to the related pooling and
servicing agreement constitutes a valid sale, transfer and
assignment to the seller of all right, title and interest of the
originator therein, whether then existing or thereafter created,
and the proceeds thereof.
If the breach of any of the representations and warranties described
in this paragraph results in the obligation of the seller under the related
trust sale and servicing agreement to purchase the receivables and the related
Collateral Security as described below, the originator will be obligated to
repurchase the property for an amount equal to the Reassignment Amount. In other
circumstances in which the seller is obligated under a trust sale and servicing
agreement to purchase the property, the originator will not be obligated to
repurchase the property.
In each trust sale and servicing agreement, the seller will also make
representations and warranties to the related trust to the effect that, among
other things, as of the closing date for the sale of any securities:
(1) the seller is duly incorporated and in good standing, it has the
authority to consummate the transactions contemplated by the
trust sale and servicing agreement, and the trust sale and
servicing agreement constitutes a legal, valid and binding
agreement of the seller; and
(2) the transfer of the receivables pursuant to the trust sale and
servicing agreement constitutes a valid sale, transfer and
assignment to the trust of all right, title and the interest of
the seller in the receivables and the related Collateral
Security, whether then existing or thereafter created, and the
proceeds thereof.
With respect to each trust, if the breach of any of the
representations and warranties described in this paragraph has a material
adverse effect on the interests of the securityholders, then any of the
indenture trustee, the owner trustee or the holders of the outstanding
securities evidencing not less than a majority of the outstanding principal
amount of the notes and a majority of the Voting Interests of all outstanding
certificates, by written notice to the seller, may direct the seller to accept
the reassignment of all receivables and the related Collateral Security within
60 days of the notice, or within the longer period specified in the notice. The
seller will be obligated to accept the reassignment and pay the Reassignment
Amount on a Distribution Date occurring within the applicable period.
The reassignment will not be required to be made, however, if at or
prior to the end of the applicable period, the representations and warranties
are then true and correct in all material respects and any material adverse
effect caused by the breach has been cured. With respect to each trust, the
payment of the Reassignment Amount for all outstanding securities will be
considered as payment in full for all receivables and the related Collateral
Security. The obligation of the seller to pay the Reassignment Amount as
described above will constitute the sole remedy respecting a breach of the
representations and warranties available to the trust, the securityholders, the
owner trustee or indenture trustee. It is not expected that the seller will have
significant assets other than its rights under the pooling and servicing
agreement and the trust sale and servicing agreement with respect to each trust.
In each pooling and servicing agreement, the originator will covenant
that the originator will not sell, pledge, assign or transfer any interest in
any Eligible Receivables or the related Vehicle Collateral Security, unless
required to by agreements with other persons or entities. An exception to this
covenant will be made for the sale and conveyances under the pooling and
servicing agreement and the interests created under the trust sale and servicing
agreement, or as otherwise permitted by the pooling and servicing agreement.
Addition and Removal of Accounts
With respect to each trust, and taking into account the conditions
described below, under the pooling and servicing agreement, the originator may
offer to designate, and the seller may request the designation of, additional
dealer accounts to be included in the pool of accounts and, under the trust sale
and servicing agreement, the seller has the right to designate from time to time
additional dealer accounts to be included in the related pool of accounts.
Unless the related prospectus supplement provides otherwise, in order to add any
additional dealer account to the related pool of accounts, the following
conditions, among others, must be satisfied:
(1) each additional dealer account must be an Eligible Account;
(2) the seller must represent and warrant that the inclusion of the
additional dealer accounts in the related pool of accounts will
not, in the reasonable belief of the seller, cause an Early
Amortization Event to occur; and
(3) unless the related prospectus supplement provides otherwise, each
of the rating agencies rating the notes must have provided
written confirmation that the addition will not result in a
reduction or withdrawal of the rating of any outstanding related
securities.
On the date any additional dealer account is added to the pool of
accounts, all Eligible Receivables then in that dealer account will be sold by
the originator to the seller and will be transferred by the seller to the trust.
With respect to each trust, even though each additional dealer account
must be an eligible account, additional dealer accounts may not be of the same
credit quality as the initial dealer accounts because, among other things, those
dealer accounts may not have been part of the originator's U.S. portfolio on the
Initial Cut-Off Date. Additional dealer accounts may have been originated at a
different time using credit criteria different from those applied to the initial
dealer accounts.
With respect to each trust, upon the satisfaction of the conditions
specified in the trust sale and servicing agreement, the seller will have the
right to remove dealer accounts from the pool of accounts. To so remove dealer
accounts, after proper notice, the seller, or the servicer on its behalf must,
among other things:
(1) furnish to the owner trustee a list of the selected dealer
accounts to be so removed from the pool of accounts specifying
for each selected dealer account to be removed, its account
number and the aggregate balance of Eligible Receivables in that
dealer account;
(2) represent and warrant that the removal of the selected dealer
accounts will not, in the reasonable belief of the seller, result
in the occurrence of an Early Amortization Event; and
(3) represent and warrant that the seller and the servicer have not
received notice from any rating agency that the removal will
result in a reduction or withdrawal of the rating of any of the
outstanding related securities.
In addition, if a dealer account in the pool of accounts ceases to be
an eligible account, that dealer account will be deemed a selected account to be
removed on that date. In either case, receivables arising thereafter in the
selected account selected for removal will not be transferred to the trust.
Receivables in any dealer account transferred to the trust prior to that date
and Collections thereon will continue to be assets of the trust. Unless the
related prospectus supplement states otherwise, the servicer will allocate all
Principal Collections on receivables in a Selected Account to the oldest
receivables in that dealer account. A selected account will be deemed removed
from the pool of accounts on the date on which the balance of all receivables in
that dealer account held by the trust becomes zero.
Bank Accounts
With respect to each trust, the servicer will establish and maintain
several Distribution Accounts: the Collection Account, the Note Distribution
Account, the Revolver Distribution Account and the Certificate Distribution
Account. The prospectus supplement may specify also that the servicer will
establish and maintain a Swap Distribution Account.
For each trust, funds in the Collection Account, the Note Distribution
Account, the Revolver Distribution Account and the Reserve Fund, if any, and
other accounts identified as these accounts in the related prospectus supplement
- - collectively, the Designated Accounts - and the Certificate Distribution
Account will be invested as provided in the trust sale and servicing agreement
in eligible investments, which are specified categories of marketable
securities. Eligible investments will generally be limited to investments
acceptable to the rating agencies as being consistent with the rating of the
related securities.
Except as described below or in the related trust sale and servicing
agreement, eligible investments will be limited to obligations or securities
that mature on or before the next Distribution Date or, in the case of the Note
Distribution Account, the date of the next payment with respect to the term
notes. To the extent permitted by the rating agencies rating the notes, funds in
any Reserve Fund and other cash collateral accounts, if any, may be invested in
related term notes that will not mature prior to the date of the next payment or
distribution with respect to the term notes. Except as otherwise specified in
the related prospectus supplement, the term notes may only be sold prior to
their maturity at a price equal to or greater than the unpaid principal balance
thereof if, following the sale, the amount on deposit in any Reserve Fund would
be less than the related Reserve Fund Required Amount or other applicable
limits, if any. Thus, the amount of cash in any Reserve Fund at any time may be
less than the balance of the Reserve Fund.
If the amount required to be withdrawn from the Reserve Fund to cover
shortfalls in Collections on the receivables or other assets specified in the
related prospectus supplement exceeds the amount of cash in the Reserve Fund, a
temporary shortfall in the amounts available for distribution could result.
Except as otherwise specified in the related prospectus supplement, investment
earnings on funds deposited in the Designated Accounts and the Certificate
Distribution Account, net of losses and investment expenses, will be Investment
Proceeds and will be available for distribution as described in the related
prospectus supplement. References to amounts on deposit in any Designated
Account or the Certificate Distribution Account will not include the amount of
any Investment Proceeds.
The Designated Accounts and the Certificate Distribution Account will
be maintained as Eligible Deposit Accounts.
Any other accounts to be established with respect to a trust will be
described in the related prospectus supplement.
Collections
With respect to each trust, the servicer will deposit Principal
Collections and Interest Collections on the related receivables into the related
Collection Account on a daily basis. However, the servicer need not deposit
Principal Collections and Interest Collections into the Collection Account on a
daily basis but may use all of those Collections for its own benefit until the
Business Day immediately preceding the related Distribution Date if at any time
the following conditions are satisfied:
(1) the entity specified in the prospectus supplement is the
servicer,
(2) no Servicing Default has occurred and is continuing and
(3) the entity specified in the prospectus supplement either
(a) maintains a short-term debt rating of at least A-1 by
Standard & Poor's and P-1 by Moody's,
(b) arranges for and maintains a letter of credit or other form
of credit support or enhancement in respect of the
servicer's obligations to make deposits of Collections on
the related receivables in the Collection Account that is
acceptable in form and substance to each rating agency or
(c) otherwise obtains the written confirmation from each rating
agency that the failure by the entity specified in the
prospectus supplement to make daily deposits will not result
in a downgrade, suspension or withdrawal of \the rating of
any of the outstanding related securities that it is then
rating.
Notwithstanding the foregoing, the Cash Collateral Amount for the last day of
any Collection Period shall be deposited into the Collection Account (to the
extent not already on deposit therein) no later than the second Business Day of
the following Collection Period. The prospectus supplement may describe
additional circumstances under which daily deposits will be required.
On any date on which Collections are deposited in the Collection
Account for a trust, the servicer will distribute directly to the entity
specified in the prospectus supplement on account of the Retained Property an
amount equal to Principal Collections on the receivables included in the
Retained Property. Whether or not the servicer is then making daily deposits of
Collections, if, at any time, the amount on deposit in a Collection Account
exceeds the amount required to be so deposited, the servicer will be permitted
to withdraw from the Collection Account and pay to the seller or the entity
specified in the prospectus supplement, as applicable, the amount of the excess.
Application of Collections
Interest Collections. For each trust, except as set forth in the
related prospectus supplement, for each Collection Period, the trust will apply
o Trust Interest Collections,
o receipts under credit, liquidity and other enhancement
arrangements,
o servicer advances,
o Investment Proceeds and
o amounts in the Reserve Fund
and will use these amounts to
o make interest payments on the related securities,
o pay related Monthly Servicing Fees,
o make payments under credit, liquidity and other enhancement
arrangements,
o reimburse servicer advances and
o cover some of the losses on defaulted receivables.
The related prospectus supplement will further set forth these applications.
Unless the related prospectus supplement states otherwise, Interest Collections
in excess of trust Interest Collections will be paid to the entity specified in
the prospectus supplement on account of the Retained Property.
PRINCIPAL COLLECTIONS
Revolving Period. During the Revolving Period for a trust and so long
as no series of related term notes is in a Payment Period, unless the related
prospectus supplement states otherwise, no amount is required to be set aside to
make principal payments on the term notes and distributions of the certificate
balance on related certificates. Accordingly, all Trust Principal Collections
and Additional Trust Principal on any date during the Revolving Period, together
with the Cash Collateral Amount from the prior date, will be available for
reinvestment in additional receivables to be purchased from the seller, and will
be paid to the seller to the extent so reinvested, so long as the servicer is
able to recover advances of principal. This will be the case provided that these
amounts will be held as the Cash Collateral Amount to the extent necessary to
ensure that the Daily Trust Invested Amount for that date equals the Daily Trust
Balance for that date. That determination will be made after giving effect to
any payments of principal, including required principal payments, on, or
additional borrowings under, the revolving notes on that date and all
collections on, and reinvestments in, receivables and all issuances of
securities by the trust on that date. Unless the related prospectus supplement
states otherwise, Principal Collections in excess of Trust Principal Collections
will be paid to the entity specified in the prospectus supplement on account of
the Retained Property.
Payment Periods. The prospectus supplement for a series of term notes
will describe how, during the Payment Period for that series, Available Trust
Principal will be allocated to the series and be available to make principal
payments on the term notes. This allocation will be dependent on the servicer's
ability to recover any advances of principal it may make. Principal payments on
any series of term notes will be made in the amounts and at the times described
in the related prospectus supplement. Available Trust Principal not so allocated
to term notes will be applied as described above under "Revolving Period." The
Payment Period, if any, for a series of term notes will commence on the first to
occur of the related Scheduled Series Payment Period Commencement Date and a
Series Early Payment Event.
Early Amortization and Wind Down Periods. The prospectus supplement
for a series of term notes will also describe how, during an Early Amortization
Period or the Wind Down Period for any trust, the trust will retain Trust
Principal Collections and set them aside as required for the purpose of making
payments of principal on the related notes and distributions with respect to the
certificate balance on the related certificates. The trust will make this
retention, and not pay Trust Principal Collections to the seller, so long as the
servicer is able to recover advances of principal it may make. Unless the
related prospectus supplement states differently, during either of these
periods, no additional borrowings will be permitted under the related revolving
notes. For each Collection Period during an Early Amortization Period or the
Wind Down Period for a trust, Trust Principal Collections, together with other
amounts, if any, comprising Available Trust Principal, will be applied to make
the required deposits into the Note Distribution Account, the Revolver
Distribution Account and the Certificate Distribution Account. The relative
priorities of these deposits and the amounts required to be so deposited for any
Distribution Date will be set forth in the related prospectus supplement. Unless
the related prospectus supplement states otherwise, during the Wind Down Period
for a trust, the amount to be so applied to payments on securities will be
limited by the applicable Controlled Deposit Amount. During an Early
Amortization Period for a trust, that limit will not apply and, in general, all
Trust Principal Collections and other amounts constituting Available Trust
Principal will be available to make payments on the securities. Payments will be
made on securities during the Wind Down Period and any Early Amortization Period
to the extent, if any, described in the related prospectus supplement. Unless
the related prospectus supplement states differently, Principal Collections in
excess of Trust Principal Collections will be paid to the entity specified in
the prospectus supplement on account of the Retained Property.
Servicer Advances
The servicer will make a servicer advance to each trust to the extent
and for the purposes set forth in the related prospectus supplement. Unless the
prospectus supplement provides otherwise, the servicer will agree to make
advances to the extent that the servicer, in its sole discretion, expects to
recoup those advances from subsequent Collections and other amounts available
for that purpose as described in the related prospectus supplement.
Liquidity and Credit Support
The amounts and types of credit, liquidity and other enhancement
arrangements and the provider thereof, if applicable, with respect to each trust
will be set forth in the related prospectus supplement. If and to the extent
provided in the related prospectus supplement, those arrangements may be in the
form of reserve accounts, letters of credit, credit or liquidity facilities,
repurchase obligations, third party payments or other support, cash deposits or
other arrangements as may be described in the related prospectus supplement or
any combination of two or more of the foregoing. In addition, securities may
have the benefit of interest rate swaps, caps and floors and other derivative
products, all as further described in the related prospectus supplement. These
arrangements may be for the benefit of one or more series or classes of
securities or all securities issued by a trust as described in the related
prospectus supplement.
The presence of a Reserve Fund and other forms of liquidity and credit
support, if any, are intended to increase the likelihood that the
securityholders or certificateholders, who are to benefit from those
arrangements will receive the full amount of principal or the certificate
balance, as the case may be, plus interest due. These forms of liquidity and
credit support are also intended to decrease the likelihood that the
securityholders will experience losses. Unless the related prospectus supplement
provides otherwise, these arrangements will not provide protection against all
risks of loss and will not guarantee repayment of the entire principal balance
or the certificate balance, as the case may be, and interest thereon. If losses
occur which exceed the amount covered by applicable arrangements or which are
not so covered, securityholders will bear their allocable share of deficiencies
as described herein and in the related prospectus supplement. In addition, if an
arrangement is for the benefit of more than one series or class of securities
issued by a trust, securityholders of a series or class will be faced with the
risk that the arrangement will be exhausted by the claims of securityholders of
other series or classes.
RESERVE FUND. If so provided in the related prospectus supplement, for
each trust, there will be established and maintained in the name of the
indenture trustee for the benefit of the securityholders a Reserve Fund. The
Reserve Fund will be an Eligible Deposit Account and funds in any Reserve Fund
will be invested in eligible investments. Except as otherwise provided in the
related prospectus supplement, with respect to each trust, any investment
earnings, net of losses and investment expenses, with respect to the related
Reserve Fund will be Investment Proceeds and will be available for distribution
as described in the related prospectus supplement. Amounts on deposit in any
Reserve Fund ,other than Investment Proceeds, will be available to make payments
and distributions on related securities, to cover any related Trust Defaulted
Amounts and for other purposes to the extent described in the related prospectus
supplement. The Reserve Fund Initial Deposit, if any, made by the seller will be
specified in the related prospectus supplement.
After the initial issuance date for a trust, the seller may make
additional deposits into any related Reserve Fund in connection with the
issuance of additional securities or an increase in the Specified Maximum
Revolver Balance. In addition, during the term of any trust, the seller will
have the option to make an additional deposit into any related Reserve Fund in
an amount not in excess of 1% of the Maximum Pool Balance. Available Trust
Interest will also be available for deposit into any Reserve Fund to the extent
described in the related prospectus supplement. Unless the related prospectus
supplement states differently, with respect to each trust, amounts on deposit in
the Reserve Fund will be paid to the seller to the extent the amounts exceed the
Reserve Fund Required Amount set forth in the related prospectus supplement or
as otherwise agreed by the seller, and on the trust Termination Date any funds
remaining on deposit in the Reserve Fund will be distributed to the seller.
Following distribution to the seller of amounts from the Reserve Fund,
securityholders will not have any rights in, or claims to, those amounts.
Distributions
With respect to each trust, payments of principal and interest on the
related term notes and revolving notes and distributions with respect to the
certificate balance and interest on the related certificates will be made from
amounts deposited for that purpose into the Note Distribution Account, the
Revolver Distribution Account and the Certificate Distribution Account,
respectively, as described in the related prospectus supplement. The timing,
calculation, allocation, order, source, priorities and requirements for all
payments to each series of noteholders and all distributions to
certificateholders will be set forth in the related prospectus supplement.
Payments of principal on notes and distributions in respect of the certificate
balance will be subordinate to distributions in respect of interest, and
distributions in respect of the certificates will be subordinate to payments on
the notes, all as more fully described in the related prospectus supplement.
With respect to each trust, unless the related prospectus supplement
states differently, payments of principal and interest on all series of term
notes will have the same priority of payment. This would be other than in
circumstances related to the occurrence of an Event of Default, payments of
principal and interest on term notes may be senior or equivalent to payment on
the related revolving notes, as described in the related prospectus supplement.
Net Deposits and Payments
As an administrative convenience, the servicer will be permitted to
make the deposit of Interest Collections, Principal Collections, servicer
advances and other amounts, for any trust, including amounts relating to any
credit, liquidity or other enhancement arrangement, on any date net of
distributions or payments to be made to the servicer on behalf of the trust on
that date. The servicer, however, will account to the indenture trustee, the
owner trustee and the securityholders with respect to each trust as if all
deposits, distributions and transfers were made individually. In addition, in
connection with any trust, at any time that the servicer is not required to
remit Collections on a daily basis and payments or distributions on any
securities are not required to be made monthly, the servicer may retain amounts
allocable to the securities or the Distribution Accounts until the related
Payment Date or Distribution Date. Pending deposit into an account, the
Collections may be employed by the servicer at its own risk and for its own
benefit and will not be segregated from its own funds. In this situation, all
distributions, deposits or other remittances will be treated as having been
distributed, deposited or remitted on the applicable Distribution Date for
purposes of determining other amounts required to be distributed, deposited or
otherwise remitted on that Distribution Date and other Distribution Dates.
Defaults and Charge-Offs
With respect to each trust, the extent to which Trust Interest
Collections, funds in the related Reserve Fund and other amounts are available
to cover the Trust Defaulted Amount will be described in the related prospectus
supplement. Any Trust Defaulted Amount not so covered will constitute Trust
Charge-Offs. Trust Charge-Offs may be covered in subsequent periods, but only to
the extent described in the related prospectus supplement. Amounts not so
covered will reduce the principal amount of the notes or the certificate
balance, as the case may be, which will reduce the Daily Trust Invested Amount,
and will be allocated among the securities as set forth in the related
prospectus supplement.
Early Amortization Events
Unless the related prospectus supplement provides otherwise, an "Early
Amortization Event" with respect to any trust refers to any of the following
events:
(1) failure on the part of the seller, the originator or the servicer
to observe or perform in any material respect any of its
covenants or agreements set forth in the related pooling and
servicing agreement or the related trust sale and servicing
agreement, as applicable, which failure continues unremedied for
a period of 60 days after written notice; provided, however, that
no Early Amortization Event will be deemed to exist if the
receivables affected by that failure are repurchased by the
seller, the originator or the servicer, as applicable, in
accordance with the related Transfer and Servicing Agreements;
(2) any representation or warranty made by the originator in the
related pooling and servicing agreement or by the seller in the
related trust sale and servicing agreement or any information
contained on the Schedule of Accounts proves to have been
incorrect in any material respect when made and continues to be
incorrect in any material respect for a period of 60 days after
written notice and, as a result, the interests of the
Securityholders are materially and adversely affected; provided,
however, that no Early Amortization Event will be deemed to occur
if the receivables relating to the representation or warranty are
repurchased by the originator or the seller, as applicable, in
accordance with the related Transfer and Servicing Agreements;
(3) failure to pay or set aside for payment all amounts required to
be paid as principal on the Notes or distributed with respect to
the certificate balance on the applicable Stated Final Payment
Date;
(4) on any Distribution Date, the average of the Monthly Payment
Rates for the three preceding Collection Periods is less than
25%;
(5) the amount on deposit in the related Reserve Fund is less than
the Reserve Fund Required Amount on three consecutive
Distribution Dates;
(6) a notice setting forth one or more Events of Default under the
related indenture and declaring the unpaid principal amount of
the related notes immediately due and payable has been given
pursuant to the indenture; provided, however, that if no other
Early Amortization Event has occurred and is continuing and so
long as the Scheduled Revolving Period Termination Date has not
occurred, if the seller so elects, the Early Amortization Period
resulting from that occurrence will terminate and the Revolving
Period will recommence if a notice rescinding the declaration is
given pursuant to the indenture;
(7) the occurrence of specified events of bankruptcy, insolvency or
receivership relating to any of (a) any entity specified in the
related prospectus supplement, (b) the servicer, (c) the
originator, if it is not the servicer, or the (d) seller;
(8) on any Distribution Date, as of the last day of the related
Collection Period, the aggregate principal balance of receivables
owned by the trust which were advanced against used vehicles
exceeds 20% of the Daily Trust Balance, for purposes of this
clause (8), any entity specified in the related prospectus
supplement vehicles which are sold to daily rental car
operations, repurchased pursuant to related repurchase agreements
and subsequently sold at auction to a related-franchised dealer
will not be considered to be used vehicles;
(9) on any Distribution Date, the Reserve Fund Required Amount for
that Distribution Date exceeds the amount on deposit in the
related Reserve Fund by more than the Reserve Fund Trigger Amount
as specified in the related prospectus supplement;
(10) on any Distribution Date, the average Daily Trust Balance is less
than 75% (or such other percentage set forth in the related
prospectus supplement) of the sum of the average outstanding
principal balance of the related term notes and the average
certificate balance (in each case, the average being determined
over the six Collection Periods immediately preceding the
Distribution Date, or, if shorter, the period from the related
initial issuance date through and including the last day of the
immediately preceding Collection Period;
(11) on any Distribution Date, as of the last day of each of the two
immediately preceding Collection Periods, the aggregate principal
balance of all related Available Receivables is less than 70% of
the aggregate principal balance of all receivables in the dealer
accounts in the related pool of accounts; and
(12) any other Early Amortization Event set forth in the related
prospectus supplement.
Upon the occurrence of any event described above, except as described
above or in the related prospectus supplement, an Early Amortization Event with
respect to a trust will be deemed to have occurred without any notice or other
action on the part of any other party. The Early Amortization Period will
commence as of the day on which the Early Amortization Event is deemed to occur.
During an Early Amortization Period for a trust, Trust Principal Collections and
other amounts constituting Available Trust Principal will be allocated to
principal payments on the related Notes and distributions of the certificate
balance on the related certificates and will be paid as set forth in the related
prospectus supplement. No Controlled Deposit Amount will apply during that
period. If an Early Amortization Period commences during a Payment Period or the
Wind Down Period, amounts, if any, on deposit in the Distribution Accounts will
be paid to Securityholders on the first Distribution Date for the Early
Amortization Period as described in the related prospectus supplement. Except as
otherwise described in the related prospectus supplement, no additional
borrowings may be made on the revolving notes during an Early Amortization
Period for the related trust.
In some circumstances, so long as the related Scheduled Revolving
Period Termination Date has not occurred, the Revolving Period may recommence
following the occurrence of an Early Amortization Event as described in
subparagraph (6) above or in the related prospectus supplement.
In addition to the consequences of an Early Amortization Event
discussed above, if an insolvency event occurs with respect to the seller, the
receivables of the trust may be liquidated and the trust terminated as described
below in "Insolvency Events."
Additional Issuances; Changes In Specified Maximum Revolver Balance
After the initial issuance date for a trust, additional series of term
notes, additional series of revolving notes and additional classes of
certificates may be issued by the trust from time to time, whether or not
additional revolving notes are issued in connection therewith. The Specified
Maximum Revolver Balance may also be increased or decreased without the consent
of holders of the outstanding notes or certificates, in each case upon the
satisfaction of the conditions specified in the related trust sale and servicing
agreement. These include the conditions that
(1) the seller will have represented and warranted that the issuance,
increase or decrease will not, in the reasonable belief of the
seller, cause an Early Amortization Event to occur, and
(2) after giving effect to all issuances and all changes in the
Specified Maximum Revolver Balance, the outstanding certificate
balance of all then outstanding certificates, less amounts held
in the Certificate Distribution Account, as a percentage of the
Maximum Pool Balance equals or exceeds the trust's Specified
Certificate Percentage, in each case, as set forth in the related
prospectus supplement.
Any issuance or increase in the Specified Maximum Revolver Balance is
also dependent upon each rating agency providing written confirmation that the
issuance or increase will not result in a reduction or withdrawal of the rating
of any outstanding securities. There is no limit to the number of series of term
notes that may be issued under the related trust sale and servicing agreement or
the related indenture.
The seller may offer any securities under a Disclosure Document in
transactions either registered under the Act, or exempt from registration
thereunder, directly, through one or more underwriters or placement agents, in
fixed-price offerings or in negotiated transactions or otherwise. Any of these
securities may be issued in fully registered or book-entry form in minimum
denominations determined by the seller.
Servicing Compensation and Payment of Expenses
With respect to each trust, unless the related prospectus supplement
states differently, as compensation for its servicing activities with respect to
the related receivables, on each Distribution Date, the servicer will receive a
servicing fee, the Monthly Servicing Fee, for the preceding Collection Period
equal to one-twelfth of the Servicing Fee Rate multiplied by the average daily
balance of the Daily Trust Invested Amount for the Collection Period. The
Monthly Servicing Fee will be payable to the servicer solely to the extent
amounts are available for distribution therefor as described in the related
prospectus supplement.
With respect to any pool of accounts, the servicer will service the
receivables included in the Retained Property as well as the receivables sold to
the related trust. The Monthly Servicing Fee associated with each trust is
intended to compensate the servicer for performing the functions of a third
party servicer of wholesale receivables as an agent for their beneficial owner.
These duties include, without limitation,
o collecting and recording payments,
o communicating with dealers,
o investigating payment delinquencies,
o evaluating the increase of credit limits, and
o maintaining records with respect to the dealer accounts and
receivables arising thereunder. With respect to any pool of
accounts, the servicer will service the receivables included in
the Retained Property as well as the receivables sold to the
related trust.
The Monthly Servicing Fee will also compensate the servicer for
managerial and custodial services performed by the servicer on behalf of the
trust. These include:
o accounting for collections,
o furnishing monthly and annual statements to the owner trustee and
the indenture trustee with respect to payments and distributions,
o making servicer advances, if any,
o providing assistance in any inspections of the documents and
records relating to the dealer accounts and receivables by the
indenture trustee and the owner trustee pursuant to the related
trust sale and servicing agreement, and
o providing related data processing and reporting services for
securityholders and on behalf of the indenture trustee and owner
trustee.
The Monthly Servicing Fee will also serve to reimburse the servicer for
additional expenses the servicer incurs in connection with administering the
pool of accounts. These expenses include:
o taxes, other than the trust's or the securityholders' federal,
state and local income and franchise taxes, if any,
o the owner trustee's and the indenture trustee's fees,
o accounting fees,
o outside auditor fees,
o data processing costs and other costs.
Servicing Procedures
Pursuant to each pooling and servicing agreement and related trust sale
and servicing agreement, the servicer is responsible for servicing, collecting,
enforcing and administering the receivables under the related dealer accounts.
The servicer will conduct these activities in accordance with customary and
usual procedures for servicing its own portfolio of revolving dealer floor plan
lines of credit, except where the failure to so act would not have a material
adverse effect on the interests of the Securityholders.
Pursuant to each pooling and servicing agreement and the related trust
sale and servicing agreement, the servicer may only modify the contractual terms
of the dealer accounts included in the related pool of accounts in general if:
(1) in the servicer's reasonable belief, no Early Amortization Event
will occur as a result of the change,
(2) the change is made applicable to the comparable segment of any
similar portfolio of accounts serviced by the servicer and not
only to those dealer accounts and
(3) in the case of a reduction in the rate of finance charges on the
receivables transferred to the trust, the servicer does not
reasonably expect that the reduction will, after considering
amounts due and amounts payable under any related interest rate
swaps or caps or similar agreements and Shared Investment
Proceeds for the related period, reduce the Net Receivables Rate
below the sum of:
(a) the weighted average of the rates of interest payable to
related securityholders and
(b) the Monthly Servicing Fee for the related period.
The servicer is not, however, precluded from renegotiating the
contractual terms of agreements with dealers on a case-by-case basis in a manner
consistent with its servicing guidelines.
Servicer Covenants
In each pooling and servicing agreement, the servicer will agree that:
(1) it will maintain in effect all qualifications required in order
to service the dealer accounts included in the related pool of
accounts and related receivables and will comply in all material
respects with all requirements of law in connection with
servicing the dealer accounts and receivables, except where the
failure to maintain that qualifications to comply with those
requirements would not have a material adverse effect on the
related securityholders of any outstanding related series;
(2) it will not permit any rescission or cancellation of receivables
held by the trust except as ordered by a court of competent
jurisdiction or other government authority;
(3) it will do nothing to impair the rights of the related
securityholders in the receivables held by the trust and it will
not reschedule, revise or defer payments due on any receivable
held by the trust, except in a manner consistent with its
servicing guidelines or as otherwise contemplated by the related
trust sale and servicing agreement; and
(4) it will not permit any receivable held by the trust to become
subject to any right of set-off or any offsetting balance.
For each trust, pursuant to the related pooling and servicing
agreement and the related trust sale and servicing agreement, the seller or the
servicer may from time to time discover or receive written notice that some of
the covenants of the servicer set forth therein have not been complied with in
all material respects with respect to any related receivable transferred to the
trust or related dealer account, and the noncompliance has a material adverse
effect on the interests of related securityholders in or under the receivable or
dealer account. If this occurs, the servicer will purchase the receivable or all
receivables transferred to the trust under the dealer account -- each, an
administrative receivable -- as applicable. The purchase will be made no later
than two Business Days , or during any other period as may be agreed by the
applicable trustee, following the discovery by the servicer of the
noncompliance.
With respect to each administrative receivable the servicer will be
obligated to deposit into the related Collection Account on the date on which
the purchase is deemed to occur an amount, the Administrative Purchase Payment,
equal to the principal amount of the receivable PLUS accrued but unpaid interest
thereon through the date of the purchase. An Administrative Purchase Payment
will be included in (i) Additional Trust Principal, to the extent of the
principal amount of the related receivable, and (ii) Interest Collections, as to
the remainder of the amount. A purchase by the servicer constitutes the sole
remedy available to the securityholders, the seller, the owner trustee, the
indenture trustee or the trust, if the covenant or warranty of the servicer is
not satisfied.
Matters Regarding The Servicer
Each trust sale and servicing agreement will provide that the servicer
may not resign from its obligations and duties as servicer thereunder and under
the related pooling and servicing agreement, except upon determination that the
servicer's performance of those duties is no longer permissible under applicable
law. No resignation will become effective until the related indenture trustee or
a successor servicer has assumed servicer's servicing obligations and duties
under the related Transfer and Servicing Agreements.
Each trust 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 related trust, indenture trustee, owner
trustee or any related securityholders for taking any action or for refraining
from taking any action pursuant to the related Transfer and Servicing Agreements
or for errors in judgment; except that neither the servicer nor any of those
persons will be protected against any liability that would otherwise be imposed
by reason of wilful misfeasance, bad faith or negligence -- except errors in
judgment -- in the performance of duties thereunder or by reason of reckless
disregard of its obligations and duties thereunder. Each trust sale and
servicing agreement will further provide that the servicer and its directors,
officers, employees and agents will be reimbursed by the related owner trustee
for any contractual damages, liability or expense incurred by reason of the
trustee's wilful misfeasance, bad faith or negligence -- except errors in
judgment -- in the performance of the trustee's duties under the applicable
Transfer and Servicing Agreements or by reason of reckless disregard of its
obligations and duties thereunder.
In addition, each trust 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 related Transfer and Servicing Agreements and that, in its opinion, may
cause it to incur any expense or liability. The servicer may, however, undertake
any reasonable action that it may deem necessary or desirable in respect of the
related Transfer and Servicing Agreements and the rights and duties of the
parties thereto and the interests of the Securityholders thereunder. The legal
expenses and costs of that action and any liability resulting therefrom will be
expenses, costs and liabilities of the trust and the servicer will be entitled
to be reimbursed therefor out of the related Collection Account. Any
indemnification or reimbursement will reduce the amount otherwise available for
distribution to the Securityholders.
Under the circumstances specified in each trust sale and servicing
agreement, any entity which succeeds the servicer will be treated as the
successor of the servicer under the trust sale and servicing agreement and the
pooling and servicing agreement. This successor entity will assume the
obligations of the servicer under those agreements. A successor entity of the
servicer includes 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 the business of the
servicer or, with respect to its obligations as servicer, any entity 50% or more
of the voting stock or interest of which is owned, directly or indirectly, by
the indirect parent of the servicer and which is otherwise servicing wholesale
receivables.
So long as the initial servicer acts as servicer, the servicer may at
any time subcontract any duties as servicer under the trust sale and servicing
agreement or pooling and servicing agreement to any entity more than 50% of the
voting stock or interest of which is owned, directly or indirectly, by the
indirect parent of the servicer or to any entity that agrees to conduct the
duties in accordance with the servicer's servicing guidelines and the trust sale
and servicing agreement. The servicer may at any time perform specific duties as
servicer through subcontractors who are in the business of servicing receivables
similar to the receivables, provided that no delegation will relieve the
servicer of its responsibility with respect to those duties.
Servicing Default
Except as otherwise provided in the related prospectus supplement, a
servicing default under each trust sale and servicing agreement will consist of:
(1) the servicer fails at any time to make any required distribution,
payment, transfer or deposit or to direct the related indenture
trustee to make any required distribution, which failure
continues unremedied for five Business Days after written notice
from the indenture trustee or the owner trustee is received by
the servicer or after discovery of the failure by an officer of
the servicer;
(2) the servicer fails at any time to duly observe or perform in any
material respect any other covenant or agreement in the trust
sale and servicing agreement, the related pooling and servicing
agreement, the related indenture or the related trust agreement,
which failure materially and adversely affects the rights of the
securityholders and which continues unremedied for 90 days after
the giving of written notice of the failure to the servicer by
the indenture trustee or the owner trustee or to the servicer and
the indenture trustee and the owner trustee by holders of notes
or Voting Interests, as applicable, evidencing not less than 25%
in principal amount of the outstanding notes or Voting Interests
or after discovery of the failure by an officer of the servicer;
(3) any representation, warranty or certification made by the
servicer in the trust sale and servicing agreement or in any
certificate delivered pursuant thereto proves to have been
incorrect when made and the inaccuracy has a material adverse
effect on the rights of the related securityholders and the
effect continues unremedied for a period of 60 days after the
giving of written notice thereof to the servicer by the indenture
trustee or the owner trustee; or
(4) specified events of bankruptcy, insolvency or receivership
involving the servicer occur.
Notwithstanding the foregoing, there will be no servicing default where
a servicing default would otherwise exist under clause (1)above for a period of
ten Business Days or under clauses (2) or (3) for a period of 60 days if the
delay or failure giving rise to the servicing default was caused by an act of
God or other similar occurrence. Upon the occurrence of any of these events, the
servicer will not be relieved from using its best efforts to perform its
obligations in a timely manner in accordance with the terms of the pooling and
servicing agreement and the trust sale and servicing agreement and the servicer
will provide the indenture trustee, the owner trustee, the seller and the
securityholders with prompt notice of the failure or delay by it, together with
a description of its efforts to so perform its obligations.
Rights Upon Servicing Default
As long as a servicing default under a trust sale and servicing
agreement remains unremedied, the related indenture trustee or holders of
related Notes evidencing not less than a majority in principal amount of the
then outstanding notes may terminate all the rights and obligations of the
servicer under the trust sale and servicing agreement and the related pooling
and servicing agreement. If the notes have been paid in full and the related
indenture has been discharged with respect thereto, by the related owner trustee
or certificateholders whose certificates evidence not less than a majority of
the Voting Interests may terminate. Upon termination, the indenture trustee will
succeed to all the responsibilities, duties and liabilities of the servicer
under those agreements and will be entitled to similar compensation
arrangements.
If, however, a bankruptcy trustee or similar official has been
appointed for the servicer, and no Servicing Default other than the appointment
has occurred, the trustee or official may have the power to prevent the
indenture trustee or the Securityholders from effecting 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 $100,000,000 and who otherwise meets the
eligibility requirements set forth in the trust sale and servicing agreement.
The indenture trustee may make arrangements for compensation to be paid, which
in no event may be greater than the servicing compensation to the servicer under
the trust sale and servicing agreement.
Waiver of Past Defaults
With respect to each trust, the holders of notes evidencing at least a
majority in principal amount of the then-outstanding Notes, voting as a single
class, may, on behalf of all the securityholders, waive any default by the
servicer in the performance of its obligations under the pooling and servicing
agreement and the trust sale and servicing agreement and its consequences.
However, a servicing default in making any required distributions, payments,
transfers or deposits in accordance with the trust sale and servicing agreement
may not be waived. No waiver of past defaults will impair the rights of the
indenture trustee, the owner trustee, or the securityholders with respect to
subsequent defaults.
Statements to Trustees and Trust
Prior to each Payment Date and Distribution Date, with respect to each
trust, the servicer will provide to the indenture trustee and the owner trustee
as of the close of business on the last day of the preceding Collection Period a
statement setting forth substantially the same information as is required to be
provided in the periodic reports to be provided to securityholders on that date
under the transfer and servicing agreements.
Evidence as to Compliance
Each trust sale and servicing agreement will provide that a firm of
independent public accountants will furnish to the owner trustee and the
indenture trustee on or before the date specified in the related prospectus
supplement of each year, beginning no later than the date specified in the
related prospectus supplement which is at least twelve months after the trust's
initial issuance date, a statement as to compliance by the servicer during the
preceding twelve months ended the date specified in the related prospectus
supplement with some of the standards relating to the servicing of the
receivables, the servicer's accounting records and computer files with respect
thereto and a number of other matters. The first of these statements shall cover
the period from the Initial issuance date to the date specified in the related
prospectus supplement.
Each trust sale and servicing agreement will also provide for delivery
to the owner trustee and the indenture trustee, on or before the date specified
in the related prospectus supplement of each year, beginning no later than the
date specified in the related prospectus supplement which is at least twelve
months after the trust's initial issuance date, a certificate signed by an
officer of the servicer stating that the servicer has fulfilled its obligations
under the trust sale and servicing agreement throughout the preceding twelve
months ended the date specified in the related prospectus supplement, or in the
case of the first certificate, the period from the trust's initial issuance date
to the date specified in the related prospectus supplement of that year. If
there has been a default in the fulfillment of this obligation, the certificate
shall describe each default. The servicer has agreed to give the indenture
trustee and the owner trustee notice of Servicing Defaults under the related
trust sale and servicing agreement.
Copies of these statements and certificates may be obtained by
Securityholders by request in writing addressed to the applicable indenture
trustee or owner trustee.
Amendments
Each of the Transfer and Servicing Agreements may be amended by the
parties thereto without the consent of the related securityholders
(1) to cure any ambiguity,
(2) to correct or supplement any provision therein that may be
defective or inconsistent with any other provision therein,
(3) to add or supplement any credit, liquidity or other enhancement
arrangement for the benefit of any securityholders, provided that
if any addition affects any series or class of Securityholders
differently than any other series or class of Securityholders,
then the addition will not, as evidenced by an opinion of
counsel, adversely affect in any material respect the interests
of any series or class of securityholders,
(4) to add to the covenants, restrictions or obligations of the
seller, the servicer, the owner trustee or the indenture trustee
for the benefit of securityholders, or
(5) to add, change or eliminate any other provision of the agreements
in any manner that will not, as evidenced by an opinion of
counsel, adversely affect in any material respect the interests
of the securityholders.
Each agreement may also be amended by the parties thereto with the
consent of the holders of at least a majority in principal amount of then
outstanding notes and the holders of certificates evidencing at least a majority
of the Voting Interests for the purpose of adding any provisions to or changing
in any manner or eliminating any of the provisions of the agreements or of
modifying in any manner the rights of the securityholders, except that no
amendment may
(1) increase or reduce in any manner the amount of, or accelerate or
delay the timing of, distributions or payments that are required
to be made on any security without the consent of the holder
thereof,
(2) adversely affect the rating of any series by any rating agency
without the consent of two-thirds of the principal amount of the
outstanding notes or the Voting Interests of the outstanding
certificates, as appropriate, of that series or class, or
(3) reduce the aforesaid percentage required to consent to any
amendment without the consent of the aforesaid percentage of
securityholders.
Insolvency Events
If pursuant to federal law the originator becomes party to any
involuntary bankruptcy or similar proceeding -- other than as a claimant -- the
seller will suspend its purchase of receivables from the originator under each
pooling and servicing agreement. If the originator or the seller obtains an
order approving the continued sale of receivables to the seller on the same
terms as, or on terms that do not have a material adverse effect on
securityholders as compared to, the terms in effect prior to the commencement of
the proceeding, the originator may resume selling receivables to the seller.
Receivables will be considered transferred to the seller only to the extent the
purchase price therefor has been paid in cash on the same Business Day. If the
involuntary proceeding has not been dismissed within 60 days of its filing, the
seller may not thereafter purchase receivables from the originator under any
pooling and servicing agreement and thus, no additional receivables will be
transferred to any trust. See "Legal Aspects " in this prospectus.
Each trust agreement will provide that the owner trustee does not have
the power to commence a voluntary proceeding in bankruptcy relating to the
related trust without the unanimous prior approval of all related
certificateholders , including the seller, and the delivery to the owner trustee
by each certificateholder, including the seller, of a certificate certifying
that each certificateholder reasonably believes that the trust is insolvent.
In each trust sale and servicing agreement, the servicer and the
seller will covenant that they will not, for a period of one year and one day
after the final distribution with respect to the related notes and the related
certificates to the Note Distribution Account or the Certificate Distribution
Account, as applicable, institute against the related trust any bankruptcy,
reorganization or other proceeding under any federal or state bankruptcy or
similar law.
Seller Liability; Indemnification
Each trust sale and servicing agreement provides that the servicer
will indemnify the indenture trustee and the owner trustee from and against any
loss, liability, expense, damage or cost arising out of or incurred in
connection with the acceptance or performance of its duties pursuant to the
Transfer and Servicing Agreements, including any judgment, award, settlement,
reasonable attorneys' fees and other costs or expenses incurred in connection
with the defense of any actual or threatened action, proceeding or claim.
However, this indemnification will be limited by the proviso that neither the
indenture trustee nor owner trustee will be so indemnified if the acts or
omissions or alleged acts or omissions constitute willful misfeasance, bad faith
or negligence by the indenture trustee or the owner trustee, as applicable. In
addition, the servicer will indemnify the trust, the indenture trustee, the
owner trustee and the securityholders against losses arising out of the
negligence, willful misfeasance or bad faith of the servicer in the performance
of its duties under the Transfer and Servicing Agreements and the indenture or
by reason of its reckless disregard of its obligations and duties thereunder.
The servicer will also indemnify the parties against any taxes that may be
asserted against the parties with respect to the transactions contemplated in
the trust sale and servicing agreement, other than taxes with respect to the
sale of receivables or securities, the ownership of receivables or the receipt
of payments on securities or other compensation.
Termination
A trust will terminate on its Trust Termination Date. Upon termination
of a trust and payment, or deposit to the Distribution Accounts, of all amounts
to be paid to securityholders, the receivables and all other assets of the trust
will be conveyed and transferred to the seller. However, funds in the related
Distribution Accounts for the final distributions to the securityholders and
after distribution to the entity specified in the prospectus supplement from the
Collection Account of amounts on account of the Retained Property, if required,
will not be conveyed and transferred to the seller at that time.
Optional Purchase by the Servicer
During the Wind Down Period and as otherwise set forth in the related
prospectus supplement, the servicer or any successor servicer will be permitted,
at its option, to purchase from each trust all remaining receivables and other
assets to the extent provided in the related prospectus supplement.
Intercreditor Arrangements
The agreements governing the dealer accounts typically provide for a
security interest in favor of the originator in the vehicles related to
receivables thereunder. With respect to the receivables to be conveyed to the
trust, the originator will represent in the related pooling and servicing
agreement that the security interest in the related vehicles is a first priority
perfected security interest. The security interest in favor of the originator in
the vehicles related to each dealer account in the related pool of accounts will
be assigned by the originator to the seller pursuant to each pooling and
servicing agreement and assigned to the applicable trust by the seller pursuant
to the related trust sale and servicing agreement. In its other lending
activities, the originator may have made capital loans, real estate loans or
other loans to dealers that are also secured by a security interest in the
vehicles. In each pooling and servicing agreement, the originator will agree
that any security interests in the vehicles that it may have in respect of
advances or loans to dealers other than the related receivables shall be junior
and subordinate to the security interests therein granted in connection with the
related receivables and that it will not realize on any collateral in a manner
materially adverse to the seller or any trust and the securityholders until the
seller and the related trust have been paid in full in respect of their
interests in the receivables related to the vehicles.
In addition, in connection with any other loans or advances made by
the originator to a Dealer, the originator may also have a security interest in
property constituting Collateral Security other than vehicles. In those cases,
the originator, in its sole discretion, may realize on that other Collateral
Security for its own benefit in respect of those loans or advances before the
indenture trustee, on behalf of any trust, is permitted to realize upon that
other Collateral Security and the security interests of the indenture trustee
therein shall be junior and subordinate to the security interests of the
originator granted in connection with those other loans and advances. Because of
the subordinate position of any indenture trustee in respect of the other
Collateral Security, there is no assurance that any indenture trustee will
realize any proceeds in respect of any other Collateral Security.
Administration Agreement
The administrator specified in the prospectus supplement will enter
into an administration agreement with the related trust and the related
indenture trustee pursuant to which the administrator will agree, to the extent
provided in the administration agreement, to provide the notices and to perform
other administrative obligations required by the related indenture. With respect
to each trust, the related prospectus supplement states otherwise, as
compensation for the performance of its obligations under the administration
agreement and as reimbursement for its expenses related thereto, the
administrator will be entitled to a monthly administration fee in an amount that
will be specified in the prospectus supplement.
LEGAL ASPECTS
Transfer of Receivables
On the initial issuance date for any trust, on each date on which
dealer accounts are added to the pool of accounts and on each Receivables
Purchase Date, the originator will sell, transfer and assign to the seller and
the seller will sell, transfer and assign the Eligible Receivables in the dealer
accounts included in the related pool of accounts to the trust. In the related
pooling and servicing agreement, the originator will represent and warrant to
the seller that the sale, transfer and assignment of the receivables thereunder
constitutes a valid sale, transfer and assignment of all right, title and
interest of the originator in and to the receivables to the seller. In the
related trust sale and servicing agreement, the seller will represent and
warrant to the trust that the seller has taken no action to make the
representations and warranties false in any material respect and that the sale,
transfer and assignment of the receivables thereunder constitutes a valid sale,
transfer and assignment of all right, title and interest of the seller in and to
the receivables to the trust.
Each of the originator and the seller will also covenant that it will
not sell, pledge, assign, transfer or grant any lien on the receivable other
than to the seller or to the trust, as applicable, or as otherwise contemplated
by the related Transfer and Servicing Agreements. For a discussion of the rights
of each trust arising from these representations and warranties, see "The
Transfer and Servicing Agreements--Representations and Warranties" in this
prospectus. To secure its payment obligations under the notes, pursuant to the
indenture, the trust will grant a security interest in the receivables to the
indenture trustee.
The originator will represent in each pooling and servicing agreement
that the receivables to be conveyed to the trust are either "chattel paper,"
"accounts" or "general intangibles" for purposes of the UCC. If receivables are
deemed to be chattel paper or accounts and the transfer thereof by the
originator to the seller or by the seller to a trust is deemed either to be a
sale or to create a security interest, the UCC will apply and the transferee
must file an appropriate financing statement or statements in order to perfect
its interest therein. If receivables are deemed to be general intangibles and
the transfer thereof by the originator to the seller or by the seller to a trust
is deemed to create a security interest, the UCC will apply and the transferee
must file an appropriate financing statement or statements in order to perfect
its interest therein. If receivables are deemed to be general intangibles and
the transfer thereof is deemed to be a sale, state law other than the UCC may
determine the appropriate steps to perfect the sale. Financing statements
covering the receivables to be conveyed to the trust will be filed under the UCC
by both the seller and each related trust to perfect and/or protect their
respective interests in the receivables, to the extent the filings are required
to so perfect and/or protect those interests). Continuation statements will be
filed as required to continue the perfection of those interests. No filings will
be made under any state laws other than the UCC.
There are circumstances under the UCC and applicable federal law in
which some limited subsequent transferees of a receivable held by the trust
could have an interest in a receivable with priority over the trust's interest
in that receivable. A purchaser of chattel paper who gives new value and takes
possession of the instruments which evidence the chattel paper in the ordinary
course of the purchaser's business may, under some circumstances, have priority
over the interest of the trust in the chattel paper. If the transfer of
receivables to the seller or a trust were recharacterized as a pledge, a tax or
other lien on property of the originator or the seller may also have priority
over the interest of the trust in the receivable. Further, cash collections on
the receivables held by each trust may, to the extent described above, be
commingled with the funds of the servicer and amounts due to the entity
specified in the prospectus supplement as the holder of the Retained Property
held by each trust and, in the event of the bankruptcy of the originator, the
trust may not have a perfected interest in the collections.
The originator will represent and warrant in the pooling and servicing
agreement that each receivable at the time of the sale to the seller is secured
by a first priority perfected security interest in the related vehicles.
Generally, under applicable state laws, a security interest in an automobile or
light truck which secures wholesale financing obligations may be perfected by
the filing of UCC financing statements. the originator takes all actions it
deems necessary under applicable state laws to perfect the originator's security
interest in vehicles. However, at the time a vehicle is sold or leased, the
originator's security interest in the vehicle will generally terminate.
Therefore, if a dealer fails to remit to the servicer amounts owed with respect
to any vehicle that has been sold or leased, the related receivable will no
longer be secured by the vehicle, but will be secured by the proceeds of the
retail sale or lease and, to the extent applicable, other Collateral Security.
If the proceeds of the sale or lease include chattel paper -- as is the case
with most retail instalment contracts -- some limited subsequent transferees of
that chattel paper could have an interest therein with priority over the trust's
interest therein.
Matters Relating to Bankruptcy
The seller's by-laws include a provision that, under some
circumstances, requires the seller to designate at least one director who
qualifies under the by-laws as "independent directors." The seller's certificate
of incorporation provides that the seller will not file a voluntary petition for
relief under the Bankruptcy Code without the unanimous affirmative vote of its
directors. Pursuant to the Transfer and Servicing Agreements, the owner trustee,
the indenture trustee and all securityholders will covenant that they will not
institute against the seller any bankruptcy, reorganization or other proceedings
under any insolvency laws until one year and one day after all securities have
been paid in full. In addition, a number of other steps will be taken to avoid
the seller's becoming a debtor in a bankruptcy case. The seller will agree not
to file a voluntary petition for relief under the insolvency laws so long as it
is solvent and does not foresee becoming insolvent.
The transfers of receivables from the originator to the seller and
from the seller to the trust have been structured as, and will be treated by the
parties as, sales. In 1993, the U.S. Court of Appeals for the Tenth Circuit
found that accounts sold prior to a bankruptcy should be treated as property of
the bankruptcy estate. In the event that the originator or the seller were to
become a debtor in a bankruptcy case, a creditor or trustee in bankruptcy of the
debtor or the debtor itself may apply this analysis or otherwise take the
position that the transfer of the receivables from the debtor to the seller or a
trust, as the case may be, should be recharacterized as a pledge of the
receivables to secure a borrowing by the debtor. If this were to occur, delays
in receipt of Collections on the receivables to the related trust and payments
on the related securities could result or, should the court rule in favor of any
creditor, trustee in bankruptcy or debtor, reductions in the amount of the
payments could result.
In addition, in the event that the originator or the seller were to
become a debtor in a bankruptcy case and a creditor or trustee in bankruptcy of
the debtor or the debtor itself were to request a court to order that the
originator should be substantively consolidated with the seller, delays in
payments on the securities could result. Should the bankruptcy court rule in
favor of the creditor, trustee in bankruptcy or debtor, the amount of the
payments could be reduced.
If the originator or the seller were to become a debtor in a
bankruptcy case, an Early Amortization Event would occur. If this happened, all
Trust Principal Collections would be applied to principal payments on related
securities and receivables arising in the related dealer accounts thereafter
would no longer be sold to the seller and transferred to the related trust. The
occurrence of specified events of bankruptcy, insolvency or receivership with
respect to the servicer will also result in a servicing default. A trustee in
bankruptcy of the servicer, including the servicer as debtor in possession, may
have the power to prevent either the indenture trustee, the owner trustee or the
securityholders from appointing a successor servicer.
In addition, if any Transfer and Servicing Agreement is deemed an
executory contract under bankruptcy laws, a trustee in bankruptcy of any party
to those agreements, including the party as debtor in possession, may have the
power to assume (i.e., reaffirm) or reject the agreement. A party deciding
whether to assume or reject an agreement would be given a reasonable period of
time to make that decision, perhaps even until the time of confirmation of the
plan of reorganization, which could result in delays in payments or
distributions on the related securities.
Transfers made in some isolated transactions contemplated by the
Transfer and Servicing Agreements (including payments made by the originator or
the seller with respect to repurchases or reassignments of receivables and the
transfers in connection with the designation of additional dealer accounts) may
be recoverable by the originator or the seller, as debtor in possession, or by a
trustee in bankruptcy of the originator or the seller, as a preferential
transfer from the originator or the seller if the transfers are made within
specified periods prior to the filing of a bankruptcy case in respect of the
originator or the seller and other conditions are met.
In addition, application of federal bankruptcy and state debtor relief
laws to any dealer could affect the interests of the related trust and the
related indenture trustee in the receivables of the dealer if the enforcement of
those laws result in any receivables conveyed to the trust being written off as
uncollectible by the servicer. Whether or not any receivables are written off as
uncollectible, delays in payments due on the receivables could result.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the anticipated material
United States federal income tax consequences of the purchase, ownership and
disposition of the term notes. The summary does not purport to deal with federal
income tax consequences applicable to all categories of holders, some of which
may be subject to special rules. For example, it does not discuss the tax
treatment of beneficial owners of term notes ("Note Owners") that are insurance
companies, regulated investment companies or dealers in securities. Moreover,
there are no cases or Internal Revenue Service ("IRS") rulings on similar
transactions involving debt interests issued by a trust with terms similar to
those of the term notes. As a result, the IRS might disagree with all or part of
the discussion below. Prospective investors are urged to consult their own tax
advisors in determining the federal, state, local, foreign and any other tax
consequences to them of the purchase, ownership and disposition of the term
notes.
The following summary is based upon current provisions of the Internal
Revenue Code of 1986, as amended (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. Each owner trust will be
provided with an opinion of tax counsel specified in the related prospectus
supplement ("Federal Tax Counsel") regarding some related federal income tax
matters discussed below. An opinion of Federal 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. The opinion of Federal Tax Counsel specifically
addresses only those issues specifically identified below as being covered by
that opinion; however, the opinion also states that the additional discussion
set forth below accurately sets forth the advice of Federal Tax Counsel with
respect to material federal income tax issues. For purposes of the following
summary, references to the owner trust, the term notes, and related terms,
parties and documents shall be deemed to refer, unless otherwise specified in
this prospectus, to each owner trust and the term notes, and related terms,
parties and documents applicable to the owner trust.
TAX CHARACTERIZATION OF THE OWNER TRUSTS
Upon the issuance of term notes, Federal Tax Counsel will deliver its
opinion that the relevant owner trust will not be an association, or publicly
traded partnership, taxable as a corporation for federal income tax purposes.
The opinion of Federal Tax Counsel will be based on the assumption that the
terms of the related trust agreement and documents will be complied with, and on
counsel's conclusions that the nature of the income of the owner trust, or
restrictions, if any, on transfers of the equity interests in the owner trust,
will exempt the owner trust from the rule that some publicly traded partnerships
are taxable as corporations.
If a owner trust were taxable as a corporation for federal income tax
purposes, the owner trust would be subject to corporate income tax on its
taxable income. The owner trust's taxable income would include all of its income
with respect to the contracts and other assets held by the owner trust, which
might be reduced by its interest expense on the term notes. Any corporate income
tax could materially reduce cash available to make payments of principal and
interest on the term notes.
TAX CONSEQUENCES TO NOTE OWNERS
TREATMENT OF THE TERM NOTES AS INDEBTEDNESS
The owner trust will agree, and the Note Owners will agree by their
purchase of term notes, to treat the term notes as debt for federal tax
purposes. Federal Tax Counsel will, subject to exceptions which, if applicable,
will be specified in the related prospectus supplement, advise the owner trust
that each series of term notes, other than Strip Notes and any series which is
specifically identified as receiving different tax treatment in the applicable
prospectus supplement, will be classified as debt for federal income tax
purposes. If, contrary to the opinion of Federal Tax Counsel, the IRS
successfully asserted that one or more of the term notes did not represent debt
for federal income tax purposes, the term notes might be treated as equity
interests in the owner trust. If so treated, the owner trust might be treated as
a publicly traded partnership that would be taxable as a corporation unless it
met particular qualifying income tests, and the resulting taxable corporation
would not be able to reduce its taxable income by deductions for interest
expense on term notes recharacterized as equity. Treatment of the term notes as
equity interests in a partnership could have adverse tax consequences to some
holders, even if the owner trust were not treated as a publicly traded
partnership taxable as a corporation. For example, income allocable to foreign
holders might be subject to United States tax and United States tax return
filing and withholding requirements, income allocable to tax-exempt holders
might constitute "unrelated business taxable income" (if some, but not all, of
the term notes were recharacterized as equity in a partnership), individual
holders might be subject to limitations on their ability to deduct their share
of owner trust expenses, and income from the owner trust's assets would be
taxable to Note Owners without regard to whether cash distributions are made to
such Note Owners and without regard to the Note Owners' method of tax
accounting. The discussion below assumes that the term notes will be
characterized as debt for federal income tax purposes.
INTEREST INCOME ON THE TERM NOTES
GENERAL. Expect as discussed below, interest on a term note generally
is includable in a Note Owner's income as ordinary interest income when actually
or constructively received, if the Note Owner uses the cash method of accounting
for federal income tax purposes, or when accrued, if the Note Owner uses an
accrual method of accounting for federal income tax purposes.
ORIGINAL ISSUE DISCOUNT. Term Notes of certain series may be issued
with "original issue discount" within the meaning of Section 1273(a) of the
Code. Holders of term notes issued with original issue discount generally must
include original issue discount in gross income for federal income tax purposes
as it accrues, in advance of receipt of the cash attributable to such income,
under a method that takes account of the compounding of interest. The Code
requires that information with respect to the original issue discount accruing
on any term note be reported periodically to the IRS and to certain categories
of Note Owners.
Each owner trust will report original issue discount, if any, to the
Note Owners based on the Treasury regulations relating to original issue
discount (the "OID Regulations"). The OID Regulations concerning contingent
payment debt instruments do not apply to the prepayable debt instruments, such
as the term notes.
The OID Regulations provide that, in the case of debt instruments such
as the term notes, (i) the amount and rate of accrual of original issue discount
will be calculated based on a reasonable assumed prepayment rate (the
"Prepayment Assumption"), and (ii) adjustments will be made in the amount and
rate of accrual of such discount to reflect differences between the actual
prepayment rate and the Prepayment Assumption. The method for determining the
appropriate assumed prepayment rate will eventually be set forth in Treasury
regulations, but those regulations have not yet been issued. The applicable
legislative history indicates, however, that such regulations will provide that
the assumed prepayment rate for securities such as the term notes will be the
rate used in pricing the initial offering of those securities. If the term notes
of a series are issued with original issue discount, the Prospectus Supplement
for that series of term notes will specify the Prepayment Assumption. However,
no representation is made that the term notes of that series will, in fact,
prepay at a rate based on the Prepayment Assumption or at any other rate.
In general, a term note will be considered to be issued with original
issue discount if its stated redemption price at maturity exceeds its issue
price. Except as discussed below under "--Payment Lag Term Notes; Initial Period
Considerations," and "--Qualified Stated Interest," and in the case of certain
Variable Rate Term Notes (as defined below) and accrual term notes, the stated
redemption price at maturity of a term note is its principal amount. The issue
price of a note is the initial offering price to the public (excluding bond
houses and brokers) at which a substantial amount of the class of notes is sold.
Notwithstanding the general definition of original issue discount, such discount
will be considered to be zero for any note on which such discount is less than
0.25% of its stated redemption price at maturity multiplied by its weighted
average life. The weighted average life of a term note apparently is computed
for purposes of this DE MINIMIS rule as the sum, for all distributions included
in the stated redemption price at maturity of the term note, of the amounts
determined by multiplying (i) the number of complete years (rounding down for
partial years) from the applicable closing date to the date on which each such
distribution is expected to be made, determined under the Prepayment Assumption,
by (ii) a fraction, the numerator of which is the amount of such distribution
and the denominator of which is the term note's stated redemption price at
maturity. The OID Regulations provide that holders will include any DE MINIMIS
original issue discount ratably as payments of stated principal are made on the
term notes.
The Note Owner of a term note issued with original issue discount must
include in gross income the sum of the "daily portions" of such original issue
discount for each day during its taxable year on which it held such term note.
In the case of an original Note Owner, the daily portions of original issue
discount are determined first by calculating the portion of the original issue
discount that accrued during each period (an "accrual period") that begins on
the day following a payment date (or in the case of the first such period,
begins on the applicable closing date) and ends on the next succeeding payment
date. The original issue discount accruing during each accrual period is then
allocated ratably to each day during such period to determine the daily portion
of original issue discount for that day.
The portion of the original issue discount that accrues in any accrual
period will equal the excess, if any, of (i) the sum of (A) the present value,
as of the end of the accrual period, of all of the distributions to be made on
the term note, if any, in future periods and (B) the distributions made on the
term note during the accrual period that are included in such term note's stated
redemption price at maturity, over (ii) the adjusted issue price of such term
note at the beginning of the accrual period. The present value of the remaining
distributions referred to in the preceding sentence will be calculated (i)
assuming that the term notes will be prepaid in future periods at a rate
computed in accordance with the Prepayment Assumption and (ii) using a discount
rate equal to the original yield to maturity of the term notes. For these
purposes, the original yield to maturity of the term notes will be calculated
based on their issue price and assuming that the term notes will be prepaid in
accordance with the Prepayment Assumption. The adjusted issue price of a term
note at the beginning of any accrual period will equal the issue price of such
term note, increased by the portion of the original issue discount that has
accrued during prior accrual periods, and reduced by the amount of any
distributions made on such term note in prior accrual periods that were included
in such term note's stated redemption price at maturity.
The daily portions of original issue discount may increase or decrease
depending on the extent to which the actual rate of prepayments diverges from
the Prepayment Assumption. If original issue discount accruing during any
accrual period computed as described above is negative, a Note Owner may only be
entitled to offset such amount against positive original issue discount accruing
on such term note in future accrual periods. Such a Note Owner may be entitled
to deduct a loss to the extent that its remaining basis would exceed the maximum
amount of future payments to which such Note Owner is entitled. However,
Treasury regulations do not address this issue.
A subsequent Note Owner that purchases a term note issued with
original issue discount at a cost that is less than its remaining stated
redemption price at maturity will also generally be required to include in gross
income, for each day on which it holds such term note, the daily portions of
original issue discount with respect to the term note, calculated as described
above. However, if (i) the excess of the remaining stated redemption price at
maturity over such cost is less than (ii) the aggregate amount of such daily
portions for all days after the date of purchase until final retirement of such
term note, then such daily portions will be reduced proportionately in
determining the income of such Note Owner.
QUALIFIED STATED INTEREST. Interest payable on a term note which
qualifies as "qualified stated interest" for purposes of the OID Regulations
will not be includable in the stated redemption price at maturity of the term
note. Conversely, if the interest on a term note does not constitute "qualified
stated interest," such interest will be includable in the stated redemption
price at maturity of the term note and the term note, consequently, will have
original issue discount. Interest payments will not qualify as qualified stated
interest unless the interest payments are "unconditionally payable." The OID
Regulations state that interest is unconditionally payable if reasonable legal
remedies exist to compel timely payment, or the debt instrument otherwise
provides terms and conditions that make the likelihood of late payment (other
than a late payment that occurs within a reasonable grace period) or nonpayment
of interest a remote contingency, as defined in the OID Regulations. Any terms
or conditions that do not reflect arm's length dealing or that the Note Owner
does not intend to enforce are not considered.
PREMIUM. A purchaser of a term note that purchases such term note at a
cost greater than its remaining stated redemption price at maturity will be
considered to have purchased such term note at a premium, and may, under Section
171 of the Code, elect to amortize such premium under a constant yield method
over the life of the term note. The Prepayment Assumption is probably taken into
account in determining the life of the term note for this purpose. Except as
provided in regulations, amortizable premium will be treated as an offset to
interest income on the term note.
PAYMENT LAG TERM NOTES; INITIAL PERIOD CONSIDERATIONS. Certain term
notes may provide for distributions of interest based on a period that is the
same length as the interval between payment dates but ends prior to each payment
date. Any interest that accrues prior to the applicable closing date may be
treated under the OID Regulations either (i) as part of the issue price and the
stated redemption price at maturity of the term notes or (ii) as not included in
the issue price or the stated redemption price. The OID Regulations provide a
special application of the DE MINIMIS rule for debt instruments with long first
accrual periods where the interest payable for the first period is at a rate
which is effectively less than that which applies in all other periods. In such
cases, for the sole purpose of determining whether original issue discount is DE
MINIMIS, the OID Regulations provide that the stated redemption price is equal
to the instrument's issue price plus the greater of the amount of foregone
interest or the excess (if any) of the instrument's stated principal amount over
its issue price.
VARIABLE RATE TERM NOTES. Under the OID Regulations, term notes paying
interest at a variable rate (each, a "Variable Rate Term Note") are subject to
special rules. A Variable Rate Term Note will qualify as a "variable rate debt
instrument" if (i) its issue price does not exceed the total noncontingent
principal payments due under the Variable Rate Term Note by more than a
specified DE MINIMIS amount; (ii) it provides for stated interest, paid or
compounded at least annually, at a current value of (a) one or more qualified
floating rates, (b) a single fixed rate and one or more qualified floating
rates, (c) a single objective rate or (d) a single fixed rate and a single
objective rate that is a qualified inverse floating rate; and (iii) it does not
provide for any principal payments that are contingent, as defined in the OID
Regulations, except as provided in (i), above. Because the OID Regulations
relating to contingent payment debt instruments do not apply to prepayable debt
instruments, such as the term notes, principal payments on the term notes should
not be considered contingent for this purpose.
A "qualified floating rate" is any variable rate where variations in
the value of such rate can reasonably be expected to measure contemporaneous
variations in the cost of newly borrowed funds in the currency in which the
Variable Rate Term Note is denominated. A multiple of a qualified floating rate
will generally not itself constitute a qualified floating rate for purposes of
the OID Regulations. However, a variable rate equal to (i) the product of a
qualified floating rate and a fixed multiple that is greater than 0.65 but not
more than 1.35 or (ii) the product of a qualified floating rate and a fixed
multiple that is greater than 0.65 but not more than 1.35, increased or
decreased by a fixed rate will constitute a qualified floating rate for purposes
of the OID Regulations. In addition, under the OID Regulations, two or more
qualified floating rates that can reasonably be expected to have approximately
the same values throughout the term of the Variable Rate Term Note will be
treated as a single qualified floating rate (a "Presumed Single Qualified
Floating Rate"). Two or more qualified floating rates with values within 25
basis points of each other as determined on the Variable Rate Term Note's issue
date will be conclusively presumed to be a Presumed Single Qualified Floating
Rate. Notwithstanding the foregoing, a variable rate that would otherwise
constitute a qualified floating rate, but which is subject to one or more
restrictions such as a cap or floor, will not be a qualified floating rate for
purposes of the OID Regulations unless the restriction is fixed throughout the
term of the Variable Rate Term Note or the restriction is not reasonably
expected as of the issue date to significantly affect the yield of the Variable
Rate Term Note.
An "objective rate" is a rate that is not itself a qualified floating
rate but which is determined using a single fixed formula and which is based
upon objective financial or economic information. The OID Regulations also
provide that other variable rates may be treated as objective rates if so
designated by the IRS in the future. Despite the foregoing, a variable rate of
interest on a Variable Rate Term Note will not constitute an objective rate if
it is reasonably expected that the average value of such rate during the first
half of the Variable Rate Term Note's term will be either significantly less
than or significantly greater than the average value of the rate during the
final half of the Variable Rate Term Note's term. Further, an objective rate
does not include a rate that is based on information that is within the control
of the issuer (or a party related to the issuer) or that is unique to the
circumstances of the issuer (or a party related to the issuer). An objective
rate will qualify as a "qualified inverse floating rate" if such rate is equal
to a fixed rate minus a qualified floating rate and variations in the rate can
reasonably be expected to inversely reflect contemporaneous variations in the
qualified floating rate. The OID Regulations also provide that if a Variable
Rate Term Note provides for stated interest at a fixed rate for an initial
period of less than one year followed by a variable rate that is either a
qualified floating rate or an objective rate and if the variable rate on the
Variable Rate Term Note's issue date is intended to approximate the fixed rate,
then the fixed rate and the variable rate together will constitute either a
single qualified floating rate or objective rate, as the case may be (a
"Presumed Single Variable Rate"). If the value of the variable rate and the
initial fixed rate are within 25 basis points of each other as determined on the
Variable Rate Term Note's issue date, the variable rate will be conclusively
presumed to approximate the fixed rate.
For Variable Rate Term Notes that qualify as "variable rate debt
instruments" under the OID Regulations and provide for interest at either a
single qualified floating rate, a single objective rate, a Presumed Single
Qualified Floating Rate or a Presumed Single Variable Rate throughout the term
(a "Single Variable Rate Term Note"), original issue discount is computed as
described above in "--Interest Income on the Term Notes--Original Issue
Discount" based on the following: (i) stated interest on the Single Variable
Rate Term Note which is unconditionally payable in cash or property (other than
debt instruments of the issuer) at least annually will constitute qualified
stated interest; (ii) by assuming that the variable rate on the Single Variable
Rate Term Note is a fixed rate equal to: (a) in the case of a Single Variable
Rate Term Note with a qualified floating rate or a qualified inverse floating
rate, the value, as of the issue date, of the qualified floating rate or the
qualified inverse floating rate or (b) in the case of a Single Variable Rate
Term Note with an objective rate (other than a qualified inverse floating rate),
a fixed rate which reflects the reasonably expected yield for such Single
Variable Rate Term Note; and (iii) the qualified stated interest allocable to an
accrual period is increased (or decreased) if the interest actually paid during
an accrual period exceeds (or is less than) the interest assumed to be paid
under the assumed fixed rate described in (ii), above.
In general, any Variable Rate Term Note other than a Single Variable
Rate Term Note (a "Multiple Variable Rate Term Note") that qualifies as a
"variable rate debt instrument" will be converted into an "equivalent" fixed
rate debt instrument for purposes of determining the amount and accrual of
original issue discount and qualified stated interest on the Multiple Variable
Rate Term Note. The OID Regulations generally require that such a Multiple
Variable Rate Term Note be converted into an "equivalent" fixed rate debt
instrument by substituting any qualified floating rate or qualified inverse
floating rate provided for under the terms of the Multiple Variable Rate Term
Note with a fixed rate equal to the value of the qualified floating rate or
qualified inverse floating rate, as the case may be, as of the Multiple Variable
Rate Term Note's issue date. Any objective rate (other than a qualified inverse
floating rate) provided for under the terms of the Multiple Variable Rate Term
Note is converted into a fixed rate that reflects the yield that is reasonably
expected for the Multiple Variable Rate Term Note. (A Multiple Variable Rate
Term Note may not bear more than one objective rate.) In the case of a Multiple
Variable Rate Term Note that qualifies as a "variable rate debt instrument" and
provides for stated interest at a fixed rate in addition to either one or more
qualified floating rates or a qualified inverse floating rate, the fixed rate is
initially converted into a qualified floating rate (or a qualified inverse
floating rate, if the Multiple Variable Rate Term Note provides for a qualified
inverse floating rate). Under such circumstances, the qualified floating rate or
qualified inverse floating rate that replaces the fixed rate must be such that
the fair market value of the Multiple Variable Rate Term Note as of the Multiple
Variable Rate Term Note's issue date is approximately the same as the fair
market value of an otherwise identical debt instrument that provides for either
the qualified floating rate or qualified inverse floating rate rather than the
fixed rate. Subsequent to converting the fixed rate into either a qualified
floating rate or a qualified inverse floating rate, the Multiple Variable Rate
Term Note is then converted into an "equivalent" fixed rate debt instrument in
the manner described above.
Once the Multiple Variable Rate Term Note is converted into an
"equivalent" fixed rate debt instrument pursuant to the foregoing rules, the
amounts of original issue discount and qualified stated interest, if any, are
determined for the "equivalent" fixed rate debt instrument by applying the
original issue discount rules to the "equivalent" fixed rate debt instrument in
the manner described above in "--Interest Income on the Term Notes--Original
Issue Discount." A holder of the Multiple Variable Rate Term Note will account
for such original issue discount and qualified stated interest as if the holder
held the "equivalent" fixed rate debt instrument. In each accrual period,
appropriate adjustments will be made to the amount of qualified stated interest
or original issue discount assumed to have been accrued or paid with respect to
the "equivalent" fixed rate debt instrument in the event that such amounts
differ from the actual amount of interest accrued or paid on the Multiple
Variable Rate Term Note during the accrual period.
If a Variable Rate Term Note does not qualify as a "variable rate debt
instrument" under the OID Regulations, then the Variable Rate Term Note would be
treated as a contingent payment debt obligation. The manner in which a Variable
Rate Term Note would be taxed if such note were treated as a contingent payment
debt obligation is not governed by the OID Regulations relating to contingent
payment debt obligations which do not apply to prepayable debt instruments, such
as the term notes, and Treasury regulations do not otherwise address this point.
MARKET DISCOUNT. A Note Owner that acquires a term note at a market
discount (that is, a discount that exceeds any unaccrued original issue
discount) will recognize gain upon receipt of a principal distribution,
regardless of whether the distribution is scheduled or is a prepayment. In
particular, the Note Owner will be required to allocate that principal
distribution first to the portion of the market discount on such term note that
has accrued but has not previously been includable in income, and will recognize
ordinary income to that extent. In general terms, unless Treasury regulations
when issued provide otherwise, market discount on a term note may be treated, at
the election of the holder of the term note, as accruing either (i) under a
constant yield method, taking into account the Prepayment Assumption, or (ii) in
proportion to accruals of original issue discount (or, if there is no original
issue discount, in proportion to stated interest on the term note).
In addition, a Note Owner may be required to defer deductions for a
portion of the Note Owner's interest expense on any debt incurred or continued
to purchase or carry a term note purchased with market discount. The deferred
portion of any interest deduction would not exceed the portion of the market
discount on the term note that accrues during the taxable year in which such
interest would otherwise be deductible and, in general, would be deductible when
such market discount is included in income upon receipt of a principal
distribution on, or upon the sale of, the term note. The Code requires that
information necessary to compute accruals of market discount be reported
periodically to the IRS and to certain categories of Note Owners.
Notwithstanding the above rules, market discount on a term note will
be considered to be zero if such discount is less than 0.25% of the remaining
stated redemption price at maturity of such term note multiplied by its weighted
average remaining life. Weighted average remaining life presumably is calculated
in a manner similar to weighted average life (described above under "--Interest
Income on the Term Notes--Original Issue Discount"), taking into account
distributions (including prepayments) prior to the date of acquisition of such
term note by the subsequent purchaser. If market discount on a term note is
treated as zero under this rule, the actual amount of such discount must be
allocated to the remaining principal distributions on such term note in
proportion to the amounts of such principal distributions, and when each such
distribution is made, gain equal to the discount, if any, allocated to the
distribution will be recognized.
ELECTION TO TREAT ALL INTEREST UNDER THE CONSTANT YIELD RULES. The OID
Regulations provide that the holder of a debt instrument issued after April 4,
1994 may elect to include in gross income all interest that accrues on such debt
instrument using the constant yield method. For purposes of this election,
interest includes stated interest, original issue discount, and market discount,
as adjusted to account for any premium. Note Owners should consult their own tax
advisors regarding the availability or advisability of such an election.
SALES OF TERM NOTES
If a term note is sold, the seller will recognize gain or loss equal
to the difference between the amount realized on the sale and its adjusted basis
in the term note. A holder's adjusted basis in a term note generally equals the
cost of the term note to the holder, increased by income reported by the holder
with respect to the term note and reduced (but not below zero) by distributions
on the term note (other than qualified stated interest) received by the holder
and by amortized premium. While any such gain or loss generally will be capital
gain or loss provided the term note is held as a capital asset, gain recognized
on the sale of a term note by a seller who purchased the term note at a market
discount would be taxable as ordinary income in an amount not exceeding the
portion of such discount that accrued during the period the term note was held
by such seller, reduced by any market discount includable in income under the
rules described above under "--Interest Income on the Term Notes--Market
Discount." Further, the term notes will be "evidences of indebtedness" within
the meaning of Section 582(c)(1) of the Code, so that gain or loss recognized
from a sale of a term note by a bank or other financial institution to which
such section applies would be ordinary income or loss.
SHORT-TERM NOTES
In the case of a term note with a maturity of one year or less from
its issue date (a "Short-Term Note"), no interest is treated as qualified stated
interest, and therefore all interest is included in original issue discount.
Note Owners that report income for federal income tax purposes on an accrual
method and some other Note Owners, including banks and certain dealers in
securities, are required to include original issue discount in income on
Short-Term Notes on a straight-line basis, unless an election is made to accrue
the original issue discount according to a constant yield method based on daily
compounding.
Any other Note Owner of a Short-Term Note is not required to accrue
original issue discount for federal income tax purposes, unless it elects to do
so. In the case of a Note Owner that is not required, and does not elect, to
include original issue discount in income currently, any gain realized on the
sale, exchange or retirement of a Short-Term Note is ordinary income to the
extent of the original issue discount accrued on a straight-line basis, or, if
elected, according to a constant yield method based on daily compounding,
through the date of sale, exchange or retirement. In addition, Note Owners that
are not required, and do not elect, to include original issue discount in income
currently are required to defer deductions for any interest paid on indebtedness
incurred or continued to purchase or carry a Short-Term Note in an amount not
exceeding the deferred interest income with respect to the Short-Term Note,
which includes both the accrued original issue discount and accrued interest
that are payable but that have not been included in gross income, until the
deferred interest income is realized. A Note Owner may elect to apply the
foregoing rules, except for the rule characterizing gain on sale, exchange or
retirement as ordinary, with respect to "acquisition discount" rather than
original issue discount. Acquisition discount is the excess of the stated
redemption price at maturity of the Short-Term Note over the Note Owner's basis
in the Short-Term Note. This election applies to all obligations acquired by the
taxpayer on or after the first day of the first taxable year to which the
election applies, unless revoked with the consent of the IRS. A Note Owner's tax
basis in a Short-Term Note is increased by the amount included in the Note
Owner's income with respect to the Short-Term Note.
FOREIGN INVESTORS IN TERM NOTES
Except as discussed below, a Note Owner that is not a "United States
person" (as defined below) generally will not be subject to United States income
or withholding tax in respect of a distribution on a term note provided that (i)
the holder complies to the extent necessary with certain certification
requirements, which generally relate to the identity of the beneficial owner and
the status of the beneficial owner as a person that is not a United States
person (as defined below), (ii) the holder is not a "10-percent shareholder"
within the meaning of Section 871(h)(3)(B) of the Code, which could be
interpreted to include a person that directly or indirectly owns 10% or more of
the equity interests in the owner trust, (iii) the holder is not a "controlled
foreign corporation" (as defined in the Code) related to the owner trust or
related to a 10 percent holder of equity interests in the owner trust, and (iv)
the holder is not engaged in a United States trade or business, or otherwise
subject to federal income tax as a result of any direct or indirect connection
to the United States other than through its ownership of a term note. For these
purposes, the term "United States person" means (i) a citizen or resident of the
United States, (ii) a corporation or partnership (or other entity properly
treated as a corporation or partnership for federal income tax purposes) created
or organized in or under the laws of the United States or any political
subdivision thereof, (iii) an estate whose income is includable in gross income
for United States federal income taxation regardless of its source, and (iv) a
trust for which one or more United States fiduciaries have the authority to
control all substantial decisions and for which a court of the United States can
exercise primary supervision over the trust's administration. A "Foreign Person"
is any person that is not a United States person. Each Note Owner should consult
its tax advisors regarding the tax documentation and certifications that must be
provided to secure the exemption from United States withholding taxes.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a term note by a Foreign Person generally will be exempt
from United States federal income and withholding tax, provided that (i) such
gain is not effectively connected with the conduct of a trade or business in the
United States by the Foreign Person and (ii) in the case of an individual
Foreign Person, the Foreign Person is not present in the United States for 183
days or more in the taxable year.
If the interest, gain or income on a term note held by a Foreign
Person is effectively connected with the conduct of a trade or business in the
United States by the Foreign Person (although exempt from the withholding tax
previously discussed if the holder provides an appropriate statement
establishing that such income is so effectively connected), the holder generally
will be subject to United States federal income tax on the interest, gain or
income at regular federal income tax rates. In addition, if the Foreign Person
is a foreign corporation, it may be subject to a branch profits tax equal to 30%
of its "effectively connected earnings and profits," within the meaning of the
Code, for the taxable year, as adjusted for certain items, unless it qualifies
for a lower rate under an applicable tax treaty (as modified by the branch
profits tax rules).
BACKUP WITHHOLDING ON TERM NOTES
Distributions made on the term notes and proceeds from the sale of
term notes to or through certain brokers may be subject to a "backup"
withholding tax of 31 percent of "reportable payments" (including interest
accruals, original issue discount, and, under certain circumstances,
distributions in reduction of principal amount) if the holder of the term notes
fails to comply with certain identification procedures, unless the Note Owner is
an exempt recipient under applicable provisions of the Code and, if necessary,
demonstrates such status. Any amounts so withheld from distributions on the term
notes would be refunded by the IRS or allowable as a credit against the Note
Owner's federal income tax.
STATE AND LOCAL TAX CONSIDERATIONS
The discussion above does not address the tax consequences of
purchase, ownership or disposition of term notes under any state or local tax
laws. We recommend that investors consult their own tax advisors regarding state
and local tax consequences.
* * *
THE TAX DISCUSSIONS SET FORTH ABOVE ARE INCLUDED FOR GENERAL INFORMATION ONLY
AND MAY NOT BE APPLICABLE DEPENDING UPON A NOTE OWNER'S PARTICULAR TAX
SITUATION. PROSPECTIVE PURCHASERS OF TERM NOTES SHOULD CONSULT THEIR TAX
ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP
AND DISPOSITION OF TERM NOTES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL
AND FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL OR
OTHER TAX LAWS.
ERISA CONSIDERATIONS
Section 406 of ERISA and Section 4975 of the Code prohibit a pension,
profit-sharing or other employee benefit plan, as well as individual retirement
accounts and some types of Keogh Plans, each a Benefit Plan, from engaging in
some types of transactions with persons that are "parties in interest" under
ERISA or "disqualified persons" under the Code with respect to a Benefit 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 those persons. Some
transactions involving the trust might be deemed to constitute prohibited
transactions under ERISA and the Code with respect to a Benefit Plan that
purchased term notes if assets of the trust were deemed to be assets of the
Benefit Plan. Under a regulation issued by the United States Department of
Labor, the Plan Assets Regulation, the assets of the trust would be treated as
plan assets of a Benefit Plan for the purposes of ERISA and the Code only if the
Benefit Plan acquired an "equity interest" in the trust and none of the
exceptions contained in the Plan Assets Regulation was applicable. An equity
interest is defined under the Plan Assets Regulation as an interest other than
an instrument which is treated as indebtedness under applicable local law and
which has no substantial equity features. Unless the related prospectus
supplement states otherwise, although there is little guidance on the subject,
the seller believes the term notes of each trust would be treated as
indebtedness without substantial equity features for purposes of the Plan Assets
Regulation. Other exceptions, if any, from application of the Plan Assets
Regulation available with respect to any term notes will be discussed in the
related prospectus supplement.
However, without regard to whether term notes are treated as an equity
interest for those purposes, the acquisition or holding of term notes by or on
behalf of a Benefit Plan could be considered to give rise to a prohibited
transaction if the seller, the servicer, the related trust or any of their
respective affiliates is or becomes a party in interest or a disqualified person
with respect to a Benefit Plan. Some of the exemptions from the prohibited
transaction rules could be applicable to the purchase and holding of term notes
by a Benefit Plan depending on the type and circumstances of the plan fiduciary
making the decision to acquire the notes. Included among these exemptions are:
Prohibited Transaction Class Exemption, 90-1, regarding investments by insurance
company pooled separate accounts; PTCE 91-38, regarding investments by bank
collective investment funds; PTCE 84-14, regarding transactions effected by
qualified professional asset managers; PTCE 95-60, regarding transactions by
life insurance company general accounts; and PTCE 96-23, regarding transactions
affected by in-house asset managers.
Employee benefit plans that are governmental plans, as defined in
Section 3(32) of ERISA, and some church plans, as defined in Section 3(33) of
ERISA, are not governed by ERISA. A plan fiduciary considering the purchase of
term notes should consult its tax and/or legal advisors regarding whether the
assets of the related trust would be considered plan assets, the possibility of
exemptive relief from the prohibited transaction rules and other issues and
their potential consequences.
PLAN OF DISTRIBUTION
On the terms and conditions set forth in an underwriting agreement ,
with respect to each series of term notes offered thereby, the seller will agree
to sell to each of the underwriters named therein and in the related prospectus
supplement, and each of the underwriters will severally agree to purchase from
the seller, the principal amount of term notes set forth therein and in the
related prospectus supplement.
In each underwriting agreement, the underwriters will agree, based on
the terms and conditions set forth therein, to purchase all the term notes
described therein which are offered hereby and by the related prospectus
supplement if any of the term notes are purchased. In the event of a default by
any underwriter, each underwriting agreement will provide that, in some
circumstances, purchase commitments of the nondefaulting underwriters may be
increased or the underwriting agreement may be terminated.
Each prospectus supplement will either:
(1) set forth the price at which each series of term notes being
offered thereby will be offered to the public and any concessions
that may be offered to dealers participating in the offering of
the term notes or
(2) specify that the term notes are to be resold by the underwriters
in negotiated transactions at varying prices to be determined at
the time of the sale. After the initial public offering of any
term notes, the public offering price and the concessions may be
changed.
The extent, if any, to which the closing of the sale of any series of term notes
is conditioned upon the closing of any other series of securities will be set
forth in the related prospectus supplement. Each underwriting agreement will
provide that the seller will indemnify the underwriters against a number of
liabilities, including liabilities under the Securities Act.
The indenture trustee may, from time to time, invest the funds in the
Designated Accounts in eligible investments acquired from the underwriters. The
place and time of delivery for the term notes in respect of which this
prospectus is delivered will be set forth in the related prospectus supplement.
LEGAL OPINIONS
Some legal matters relating to the term notes will be passed upon for
each trust and the seller Stroock & Stroock & Lavan LLP, special counsel to each
trust and the seller. Federal income tax matters will be passed upon for each
trust and the seller by Stroock & Stroock & Lavan LLP.
WHERE YOU CAN FIND MORE INFORMATION
As required by the Securities Act, we filed a registration statement
relating to the securities with the SEC. This prospectus is part of the
registration statement, but the registration statement includes additional
information.
The servicer will file with the SEC all required annual, monthly and
special SEC reports and other information about the trust.
You may read and copy any reports, statements or other information we
file at the SEC's public reference room in Washington, D.C. You can request
copies of these documents, upon payment of a duplicating fee, by writing to the
SEC. Please call the SEC at (800) SEC-0330 for further information on the
operation of the public reference rooms. Our SEC filings are also available to
the public on the SEC Internet site (http://www.sec.gov).
INCORPORATION BY REFERENCE
The SEC allows us to "incorporate by reference" information we file
with it, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be part of this prospectus. Information that we file later with
the SEC will automatically update the information in this prospectus. In all
cases, you should rely on the later information over different information
included in this prospectus or the accompanying prospectus supplement. We
incorporate by reference any future SEC reports and materials filed by or on
behalf of the trust until we terminate our offering of the certificates.
As a recipient of this prospectus, you may request a copy of any
document we incorporate by reference, except exhibits to the documents, unless
the exhibits are specifically incorporated by reference, at no cost, by writing
us at: 6525 Morrison Boulevard, Suite 318, Charlotte, North Carolina 28211.
GLOSSARY OF TERMS
THIS GLOSSARY OF TERMS DOES NOT PURPORT TO BE COMPLETE AND IS AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO THE RELATED TRANSFER AND SERVICING AGREEMENTS,
FORMS OF WHICH ARE FILED AS AN EXHIBIT TO THE REGISTRATION STATEMENT OF WHICH
THIS PROSPECTUS IS A PART. SOME OF THE CAPITALIZED TERMS USED BUT NOT DEFINED IN
THE PROSPECTUS OR THIS GLOSSARY OF TERMS ARE DEFINED IN THE RELATED PROSPECTUS
SUPPLEMENT. REFERENCES TO THE SINGULAR INCLUDE REFERENCES TO THE PLURAL AND VICE
VERSA.
"Additional Trust Principal" means, for any date, the sum of amounts
applied to cover the Trust Defaulted Amount and other amounts, all as more fully
described in the related prospectus supplement.
"Administrative Purchase Payment " has the meaning set forth in "The
Transfer and Servicing Agreements--Servicer Covenants."
"Available Receivable" means, with respect to each trust, unless the
related prospectus supplement states otherwise, a receivable that is identified
by the originator as satisfying the criteria set forth in clauses (1) through
(16) of the definition of Eligible Receivable.
"Available Trust Interest" means, with respect to each trust, for any
Distribution Date, the sum of (1) Trust Interest Collections, (2) Shared
Investment Proceeds and (3) receipts under credit, liquidity and other
enhancement arrangements and other amounts available to make interest payments
on securities and pay other amounts, all as more fully described in the related
prospectus supplement.
"Available Trust Principal" means, with respect to each trust, for any
Distribution Date, the sum of (1) Trust Principal Collections for the related
Collection Period, (2) Additional Trust Principal and (3) receipts under credit,
liquidity and other enhancement arrangements and other amounts available to make
payments of principal on the notes and distributions with respect to the
certificate balance on the certificates, all as more fully described in the
related prospectus supplement.
"Bankruptcy Code" means Title 11 of the United States Code, as
amended.
"Benefit Plan" has the meaning set forth in "ERISA Considerations."
"Business Day" means, unless the related prospectus supplement states
differently, any day other than a Saturday, Sunday or any other day on which
banks in New York, New York may, or are required to, remain closed.
"Cash Accumulation Event" has the meaning set forth in "The Term
Notes--Principal and Interest on the Term Notes."
"Cash Accumulation Period" has the meaning set forth in "The Term
Notes--Principal and Interest on the Term Notes."
"Cash Collateral Amount" means, with respect to each trust as of any
date, the amount of cash that is required to be held on behalf of the trust in
order to ensure that the Daily Trust Balance at least equals the Daily Trust
Invested Amount as described under "The Transfer and
ServicingAgreements--Application of Collections--Principal Collections."
"Certificate Distribution Account" means, for each trust, on or more
accounts established by the servicer at and maintained with the related owner
trustee, in the name of the owner trustee on behalf of the related
certificateholders, in which amounts to be applied for distribution to the
certificateholders will be deposited and from which all distributions to the
certificateholders will be made.
"Code" means the Internal Revenue Code of 1986, as amended, and the
Treasury Regulations promulgated thereunder.
"Collateral Security" means, with respect to a dealer account included
in the pool of accounts and receivables arising in the dealer account, all
collateral security granted to secure the obligations of the related Dealer in
connection therewith and any proceeds therefrom, including all Vehicle
Collateral Security and, to the extent applicable, other motor vehicles, parts
inventory, equipment, fixtures, service accounts, realty and guarantees.
"Collection Account" means, with respect to each trust, one or more
bank accounts, established by the servicer at and maintained with the indenture
trustee, in the name of the indenture trustee, on behalf of the holders of the
related securities, into which the trust's share of all payments made on or with
respect to the receivables in the dealer accounts related to that trust will be
deposited.
"Collection Period," including "Related Collection Period," means,
with respect to any Distribution Date, the calendar month preceding the month in
which that Distribution Date occurs.
"Collections" means Interest Collections and Principal Collections.
"Controlled Deposit Amount" means, with respect to any trust or any
series or class of securities, on any date, the amount set forth or determined
as described in the related prospectus supplement, which amount limits the
amount of Principal Collections that may be applied to make principal payments
on the notes or distributions of the certificate balance or be set aside for
that purpose.
"Daily Portion" has the meaning set forth in "Federal Income Tax
Consequences--Tax Characterization and Treatment of Term Notes."
"Daily Trust Balance" means, with respect to each trust, for any date,
the aggregate principal balance of all receivables held by the trust on that
date.
"Daily Trust Invested Amount" means, with respect to each trust, for
any date during a Collection Period, an amount equal to, without duplication:
(1) the outstanding aggregate principal amount of the related term
notes on that date PLUS
(2) the outstanding certificate balance on that date PLUS
(3) the Net Revolver Balance for that date MINUS
(4) the Cash Collateral Amount for that date MINUS
(5) any amounts held on that date in a related Distribution Account,
Cash Accumulation Account or other account for payment of
principal on the notes or distribution of the certificate balance
on the certificates, MINUS,
(6) the amount of unreimbursed trust Charge-Offs as of that date.
"Dealer Overconcentration Receivables" means, for any date, with
respect to any dealer or group of affiliated dealers, the outstanding Available
receivables with respect to that dealer or group of affiliated dealers to the
extent, if any, of the excess of:
(1) the aggregate principal balance of all the Available Receivables
on that date over
(2) 1.0% (or a different percentage as may be set forth in the
related prospectus supplement) of the sum of (a) the Specified
Maximum Revolver Balance and (b) the aggregate principal balance
of all outstanding term notes as of that date or, if applicable,
as of the commencement of any then occurring Early Amortization
Period, Wind Down Period or Payment Period. If, on any date,
there exist Dealer Overconcentration Receivables with respect to
a dealer or group of affiliated dealers, those Receivables
constituting Dealer Overconcentration Receivables shall be
identified pursuant to the procedures set forth in the related
trust sale and servicing agreement.
Dealer Overconcentration Receivables are determined in accordance with
the servicer's standard procedures for identifying and tracking accounts of
affiliated dealers.
"Defaulted Receivables" means, with respect to each trust, for any
Distribution Date, all receivables held by the trust that were charged-off as
uncollectible during the related Collection Period, other than any receivables
that may be repurchased by the seller or the originator or purchased by the
servicer on that Distribution Date unless specified events of bankruptcy,
insolvency or receivership have occurred with respect to the seller, the
originator or the servicer, as the case may be, in which event Defaulted
Receivables will include the principal amount of the otherwise excluded
receivables.
"Designated Accounts" has the meaning set forth in "The Transfer and
Servicing Agreements--Bank Accounts."
"Disclosure Document" has the meaning set forth in "prospectus
Summary--The Term Notes."
"Distribution Accounts" means the Securities Distribution Accounts and
the Swap Distribution Account, collectively.
"Distribution Date" means, with respect to each trust, the fifteenth
day of each calendar month or, if that day is not a Business Day, the next
succeeding Business Day, beginning on the Initial Distribution Date specified
inthe related prospectus supplement.
"DPP" has the meaning set forth in "The Dealer Floor Plan Financing
Business--Dealer Payment Terms."
"Early Amortization Event" has the meaning set forth in "The Transfer
and Servicing Agreements Early Amortization Events."
"Early Amortization Period" means, with respect to any trust, the
period commencing on the day on which an Early Amortization Event with respect
to the trust is deemed to have occurred, and ending on the first to occur of:
(1) the payment in full of all outstanding securities issued by the
trust,
(2) the recommencement of the Revolving Period if and to the extent
described herein or in the related prospectus supplement; and
(3) the Trust Termination Date.
A Distribution Date is said to occur for an Early Amortization Period
if the last day of the related Collection Period occurred during an Early
Amortization Period.
"Eligible Account" means, with respect to any trust, a dealer account
which, as of the date of determination thereof:
(1) is in favor of an entity or person that is not faced with
voluntary or involuntary liquidation, that is not classified in
"programmed" or "no credit" status and in which the originator or
an affiliate of the originator does not have a more than 20%
equity interest;
(2) has been established by the originator or and affiliate of the
originator;
(3) is maintained and serviced by the originator or an affiliate of
the originator;
(4) is not a fleet account; and
(5) satisfies the other criteria, if any, set forth in the related
prospectus supplement.
"Eligible Deposit Account" means either
(1) a segregated account with an Eligible Institution, or
(2) 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.
This corporate trust department having corporate trust powers and
acting as trustee for funds deposited in that account, so long as
any of the securities of the depository institution has a credit
rating from each rating agency then rating the securities in one
of its generic rating categories which signifies investment
grade.
"Eligible Institution" means, with respect to a trust, either
(1) the corporate trust department of the related indenture trustee
or owner trustee, as applicable, or
(2) 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,
(a) which has either (i) a long-term unsecured debt rating
acceptable to the rating agencies rating the notes or (ii) a short-term
unsecured debt rating or certificate of deposit rating acceptable to the Rating
Agencies and (b) whose deposits are insured by the Federal Deposit Insurance
Corporation or any successor thereto.
"Eligible Receivable" means, with respect to any date, a receivable,
except as otherwise provided in the related prospectus supplement:
(1) which was originated by the originator in the ordinary course of
business or which was originated by the originator or an
affiliate of the originator in the ordinary course of business
and acquired by the originator or an affiliate of the originator;
(2) which arose under a dealer account that was an Eligible Account,
and not a Selected Account, at the time of the transfer of the
receivable from the originator or affiliate of the originator to
the seller;
(3) which is payable in United States dollars;
(4) to which the originator had good and marketable title immediately
prior to the transfer thereof by the originator to the seller and
which has been the subject of a valid transfer and assignment
from the originator to the seller of all of the originator's
right, title and interest therein and the related Vehicle
Collateral Security, including any proceeds thereof;
(5) which is advanced against a vehicle;
(6) which at the time of the transfer thereof by the originator to
the seller is secured by a first priority perfected security
interest in the vehicle related thereto;
(7) with respect to which all consents, licenses and approvals of any
governmental authority in connection with the transfer thereof to
the seller and to the trust have been obtained and are in full
force and effect;
(8) which was created in compliance in all material respects with all
requirements of law applicable thereto;
(9) as to which, at all times following the transfer of the
receivable to the trust, the trust has either a first priority
perfected security interest or good and marketable title thereto,
free and clear of all liens, other than liens permitted pursuant
to the related trust sale and servicing agreement;
(10) which has been the subject of a valid transfer and assignment
from the seller to the trust of all the seller's right, title and
interest therein and the related Vehicle Collateral Security,
including any proceeds thereof;
(11) which is the legal, valid, binding and assignable payment
obligation of the dealer relating thereto, enforceable against
the dealer in accordance with its terms, except where
enforceability may be limited by the insolvency laws;
(12) which, at the time of transfer thereof by the originator to the
seller, is not faced with any valid right of rescission, setoff
or any other defense, including defenses arising out of
violations of usury laws, of the related dealer;
(13) as to which, at the time of the transfer thereof to the trust,
the originator and the seller have satisfied in all material
respects all their respective obligations with respect to the
Receivable required to be satisfied at that time;
(14) as to which, at the time of the transfer thereof to the trust,
neither the originator nor the seller has taken or failed to take
any action that would impair the rights of the trust or the
securityholders therein;
(15) which constitutes "chattel paper," an "account" or a "general
intangible" as defined in Article 9 of the UCC;
(16) with respect to which the related dealer has not postponed
principal payment pursuant to DPP, any similar arrangement, or
any installment payment program;
(17) which does not constitute a Dealer Overconcentration Receivable;
and
(18) which does not constitute an Excess Available Receivable.
Notwithstanding the foregoing, any other Receivable identified by the originator
as an Eligible Receivable will also be deemed an Eligible Receivable unless and
until that receivable is thereafter determined not to satisfy the eligibility
criteria set forth above and is reassigned by the related trust to the
originator or the seller pursuant to the related Transfer and Servicing
Agreements.
"Event of Default" has the meaning set forth in "The Term Notes--The
Indenture-- Events of Default; Rights upon Events of Default."
"Excess Available Receivables" means, with respect to each trust, for
any date, Available Receivables to the extent, if any, of the excess of:
(1) the aggregate principal balance of Available Receivables less the
aggregate principal balance of Dealer Overconcentration
receivables over
(2) the Maximum Pool Balance.
If, on any date, there exist Excess Available receivables, those
receivables constituting Excess Available receivables shall be identified
pursuant to the related trust sale and servicing agreement.
"Foreign Person" means a any noteholder other than a U.S. person.
"Initial Cut-Off Date" means, with respect to each trust, the date so
specified in the prospectus supplement relating to the first series of term
notes issued by the trust.
"Insolvency Event" means, with respect to a specified entity:
(1) the entry of a decree or order by a court, agency or supervisory
authority having jurisdiction in the premises for the appointment
of a conservator, receiver, trustee or liquidator for the entity,
in any insolvency, readjustment of debt, marshaling of assets and
liabilities or similar proceedings, or for the winding-up or
liquidation of the entity's affairs, and the continuance of that
decree or order unstayed and in effect for a period of 90
consecutive days,
(2) the consent by the entity to the appointment of a conservator,
receiver or liquidator in any insolvency, bankruptcy,
readjustment of debt, marshaling of assets and liabilities or
similar proceedings of or relating to the entity or of or
relating to substantially all of the entity's property, or
(3) the entity shall admit in writing its inability to pay its debts
generally as they become due, file a petition to take advantage
of any applicable insolvency, bankruptcy or reorganization
statute, make an assignment for the benefit of its creditors or
voluntarily suspend payment of its obligations.
"Interest Collections" means, with respect to any trust, for any
Collection Period, collections received during the Collection Period on the
receivables existing under the dealer accounts in the related pool of accounts
that the servicer attributes to interest pursuant to its servicing guidelines,
including Administrative Purchase Payments and Warranty Payments in excess of
the principal portion thereof.
"Interest Rate" means for any Payment Date and for any series of term
notes, the rate or rates of interest on the series of term notes as specified in
the related prospectus supplement.
"Investment Proceeds" means, with respect to any trust, for any
Distribution Date, investment earnings on funds deposited in Designated Accounts
and the Certificate Distribution Account, net of losses and investment expenses,
during the related Collection Period.
"Marine Accounts" means credit lines or accounts pursuant to which
advances are made to finance new and used boats and related items.
"Maximum Pool Balance" means, with respect to each trust, the sum of
(1) the Maximum Revolver Balance,
(2) the aggregate outstanding principal balance of all term
notes after giving effect to any amounts on deposit in the
Note Distribution Account for payments of principal and
(3) the aggregate outstanding certificate balance of all
certificates after giving effect to any amounts on deposit
in the Certificate Distribution Account for distributions
with respect to the certificate balance.
"Maximum Revolver Balance" means, with respect to each trust, at any
time, the Specified Maximum Revolver Balance set forth in the related prospectus
supplement, as that amount may be increased or decreased from time to time in
accordance with the related trust sale and servicing agreement. However, if at
any time additional borrowings may not be made under the revolving notes,
including, if applicable, during the Wind Down Period or an Early Amortization
Period, Maximum Revolver Balance shall mean the Net Revolver Balance.
"Monthly Payment Rate" means, for any Collection Period, the percentage
obtained by dividing Principal Collections for the Collection Period by the
average daily aggregate principal balance of all receivables included in the
Accounts in the pool of accounts during that Collection Period.
"Monthly Servicing Fee" means, with respect to each trust, unless the
related prospectus supplement states differently, for any Distribution Date, the
product of (1) the average daily balance of Daily Trust Invested Amount for the
related Collection Period and (2) one-twelfth of the Servicing Fee Rate.
"Net Receivables Rate" means, with respect to each trust, unless the
related prospectus supplement states differently, with respect to any Collection
Period, a rate equal to the product of
(1) the quotient obtained by dividing (a) 360 by (b) the actual
number of days elapsed in that Collection Period and
(2) the percentage equivalent of a fraction, the numerator of
which is the amount of Trust Interest Collections for the immediately
preceding Collection Period, after subtracting therefrom the Trust
Defaulted Amount for the Distribution Date related to the immediately
preceding Collection Period, and the denominator of which is the
average Daily Trust Balance for the immediately preceding Collection
Period.
"Net Revolver Balance" means, with respect to each trust, for any
date, the aggregate outstanding principal balance under the revolving notes
minus any amounts on deposit in the related Revolver Distribution Account on the
date for the payment of principal.
"Note Distribution Account" means, with respect to each trust, one or
more accounts, established by the servicer at and maintained with the related
indenture trustee, in the name of the indenture trustee, on behalf of the
holders of the related term notes, in which amounts to be applied for payment to
the term noteholders will be deposited and from which all payments to the term
noteholders will be made.
"OID" means original issue discount, as discussed and described in
"Material Federal Income Tax Consequences--Tax Consequences to Note
Owners-Interest Income on the Term Notes -- Original Issue Discount."
"Payment Date" means, with respect to a series of notes, each date
specified for payment of interest or principal on the notes in the related
prospectus supplement. With respect to a series of notes providing for monthly
payment of interest or principal, Payment Date means a Distribution Date.
"Payment Period" means, with respect to a series of notes, the period,
if any, described in the related prospectus supplement during which any amounts
will be set aside and/or paid as principal on the notes prior to the Wind Down
Period or an Early Amortization Period.
"Principal Collections" means, with respect to any trust, for any date
or any period, collections received on that date or during that period, as
applicable, on the receivables existing under the dealer accounts in the related
pool of accounts that the servicer attributes to principal pursuant to its
servicing guidelines, including the principal portion of warranty payments and
Administrative Purchase Payments.
"PTP" means, under the Code and Treasury Department regulations,
publicly traded partnership.
"Reassignment Amount" means, for any Distribution Date, after giving
effect to any allocations, withdrawals and deposits otherwise to be made on that
Distribution Date, the sum of the Daily Trust Invested Amount, which, for that
purpose, will be calculated without reduction for the Cash Collateral Amount,
and accrued but unpaid interest on all outstanding securities to the extent not
previously distributed to securityholders.
"Receivables Purchase Date" means, with respect to each trust, unless
the related prospectus supplement states differently, each Business Day during
the related Revolving Period on which Eligible Receivables are created in any
dealer account then included in the related pool of accounts, except as
described under "The Transfer and Servicing Agreements--Insolvency Events."
"Registered Term Notes" means a term note issued by the trust in
registered form.
"Related Documents" means the indenture, the transfer and servicing
agreement, and other related documents for the trust.
"Reserve Fund" means, with respect to each Trust, an Eligible Deposit
Account maintained for the benefit of the Trust and the Securityholders as
described in "The Transfer and Servicing Agreements--Liquidity and Credit
Support.
"Reserve Fund Initial Deposit" means, with respect to each trust, the
amount, if any, specified in the related prospectus supplement.
"Reserve Fund Required Amount" means, with respect to each trust, the
amount, if any, specified in the related prospectus supplement.
"Retained Property" means (i) receivables in the dealer accounts
included in the related pool of accounts that the originator does not transfer
to the seller and collections thereon and (ii) any receivables and collections
thereon repurchased by the originator from the seller or the trust as described
herein.
"Revolver Distribution Account" means, with respect to each trust, one
or more accounts, established by the servicer at and maintained with the related
indenture trustee, in the name of the indenture trustee, on behalf of the
holders of the related revolving notes, in which amounts to be applied for
payment to the revolving noteholders will be deposited and from which all
payments to the revolving noteholders will be made.
"Revolver Interest Rate" means for any Distribution Date and for any
series of revolving notes, the rate or rates of interest on those revolving
notes.
"Revolving Period" means, with respect to each trust, the period
commencing on the date on which the trust issues its first series of term notes
and continuing until the earlier of (1) the commencement of an Early
Amortization Period and (2) the Scheduled Revolving Period Termination Date. The
Revolving Period for a trust may recommence in limited circumstances described
herein or in the related prospectus supplement.
"Schedule of Accounts" means the list of the dealer accounts included
in the pool of accounts, which may be amended and supplemented from time to
time.
"Scheduled Revolving Period Termination Date" means, with respect to
each trust, the date specified in the related prospectus supplement.
"Scheduled Series Payment Period Commencement Date" means, with
respect to any series of term notes with a Payment Period, the date so specified
in the related prospectus supplement.
"Securities Distribution Accounts " means the Note Distribution
Account, the Revolver Distribution Account, and the Certificate Distribution
Account, collectively.
"Selected Accounts" has the meaning set forth in the "The Transfer and
Servicing Agreements--Addition and Removal of Accounts."
"Series Early Payment Event" means with respect to any series of term
notes with a Payment Period, an event specified in the related prospectus
supplement as commencing the related Payment Period.
"Servicing Fee Rate" means, with respect to each trust, 1% unless any
related prospectus supplement states otherwise.
"Short-Term Note" has the meaning set forth in "Material Federal
Income Tax Consequences--Tax Consequences to Note Owners--Short-Term Notes."
"State Final Payment Date" means, with respect to any series of notes
or certificates, the date so set forth in the related prospectus supplement, on
which date the final payment on the notes or final distribution on the
certificates is due.
"Strip Notes" has the meaning set forth in "The Term Notes--Principal
and Interest on the Term Notes."
"Swap Distribution Account" means, f so specified in the prospectus
supplement, one or more established by the servicer at and maintained with the
indenture trustee, in the name of the indenture trustee on behalf of the
counterparty to an applicable currency swap, interest rate swap or other swap,
together with the holders of the term notes of the relevant series, in which
amounts to be applied for distribution to such counterparty will be deposited
and from which distributions to such counterparty will be made.
"Targeted Final Payment Date" means, with respect to any series of
notes, the date, if any, specified in the related prospectus supplement on which
all principal is scheduled to be paid as principal on that series of notes, to
the extent not previously paid.
"Transfer and Servicing Agreements" means, with respect to each trust,
the pooling and servicing agreement, the trust sale and servicing agreement, the
trust agreement and the administration agreement.
"Trust Charge-Offs" means, with respect to each trust, for any
Distribution Date, the amount of the trust Defaulted Amount for that
Distribution Date that is not covered through the application of Trust Interest
Collections and funds in the Reserve Fund or otherwise. As of any date,
unreimbursed trust Charge-Offs will equal the aggregate trust Charge-Offs for
all prior Distribution Dates unless and to the extent the trust Charge-Offs have
been covered or otherwise reduced as described in the related prospectus
supplement.
"Trust Defaulted Amount" means, with respect to each trust, for any
Distribution Date, an amount not less than zero equal to the principal amount of
all Defaulted receivables.
"Trust Interest Collections" means, with respect to each trust,
Interest Collections for the related Collection Period attributable to the
receivables held by the trust, as more fully described herein and in the related
prospectus supplement.
"Trust Principal Collections" means, with respect to each trust,
Principal Collections for the related Collection Period attributable to the
receivables held by the trust, as more fully described herein and in the related
prospectus supplement.
"Trust Termination Date" is the date each trust will terminate and
will be on the earlier to occur of
(1) the day following the Distribution Date on which all amounts
required to be paid to the related securityholders pursuant to the
related Transfer and Servicing Agreements have been paid or have been
deposited in the related Distribution Accounts, and the aggregate
outstanding balance of the revolving notes is zero, if the seller
elects to terminate the trust at that time, and
(3) the specified Trust Termination Date as set forth in the
related prospectus supplement.
"UCC" means the Uniform Commercial Code as in effect in Delaware,
Michigan or New York, and as may be amended from time to time.
"U.S Person" means (i) a citizen or resident of the United States,
(ii) a corporation or partnership created or organized in the United States or
under the laws of the United States or of any state, (iii) an estate the income
of which is subject to federal income taxation regardless of its source, or (iv)
a trust if a court within the United States is able to exercise primary
supervision over the administration of the trust and one or more United States
fiduciaries have the authority to control all substantial decisions of the
trust.
"Vehicle Collateral Security" means, with respect to an Account and
the receivables arising under that dealer account, the security interest in the
vehicles of the related dealer granted to secure the obligations of that dealer
in connection therewith and any proceeds therefrom.
"Voting Interests" means, as of any date, the aggregate outstanding
certificate balance of all certificates; provided, however, that if the
originator and its affiliates own less than 100% of the certificates, then
certificates owned by the originator, the trust or any affiliate of the
originator or the trust, other than the seller, shall be disregarded and deemed
not to be outstanding. However, in determining whether the owner trustee shall
be protected in relying upon any request, demand, authorization, direction,
notice, consent or waiver, only certificates that the owner trustee knows to be
so owned shall be so disregarded. Certificates so owned that have been pledged
in good faith may be regarded as outstanding if the pledgee establishes to the
satisfaction of the owner trustee the pledgor's right so to act with respect to
the certificates and that the pledgee is not the originator or the Trust or any
affiliate of the originator or the trust, other than the seller.
"Warranty Payment" has the meaning set forth in "The Transfer and
Servicing Agreements--Representations and Warranties."
"Warranty Receivable" has the meaning set forth in "The Transfer and
Servicing Agreements--Representations and Warranties."
"Wind Down Period" means, with respect to each trust, the period
commencing on the day immediately after the Scheduled Revolving Period
Termination Date and continuing until the earlier of (1) the commencement of an
Early Amortization Period and (2) the date on which all of the related
securities have been paid in full. The first Distribution Date for a Wind Down
Period will be the Distribution Date following the first Collection Period
included in the Wind Down Period.
SUBJECT TO COMPLETION, [ ]
PROSPECTUS SUPPLEMENT (to prospectus dated , [ ])
$[ ] (APPROXIMATE)
ACE SECURITIES CORP. DEALER FLOORPLAN MASTER LOAN TRUST [ ]-[ ]
Issuer
[FLOATING RATE][ %] DEALER FLOORPLAN ASSET BACKED CERTIFICATES,
SERIES [ ]-[ ], DUE , 20[ ].
ACE SECURITIES CORP.
SELLER
[ ]
SERVICER
-----------------------------------
CONSIDER CAREFULLY THE RISK
FACTORS BEGINNING ON PAGE S-[ ] OF
THIS PROSPECTUS SUPPLEMENT AND ON
PAGE [ ] OF THE PROSPECTUS.
For a list of capitalized
terms used in this prospectus
supplement and the prospectus, see
the index of defined terms
beginning on page S-[ ] of this
prospectus supplement and on page
[ ] of the prospectus.
The certificates will
represent interests in the trust
fund only and will not represent
interests in or obligations of any
other entity.
This prospectus supplement may
be used to offer and sell the
certificates only if accompanied
by the prospectus.
Principal amount.........................................$[ ]
Per annum interest rate.................................... [ ]%
[ ]
Expected principal payment date..........................[. ]
$[ ] [ ]%
Legal final..............................................$[ ] [ ]%
$[ ] [ ]%
Initial public offering price(1)...........................
Underwriting discount......................................
Proceeds to seller.........................................
The initial public offering price will also include
interest accrued on the Series [ ]-[ ]
certificates, if any, from [ ].
The seller must pay expenses estimated to be
$[ ].
The trust will pay interest on the Series [ ]-[ ]
on the [ ] day of each month. The first
distribution date will be [ ].
We will deliver the Series [ ]-[ ] certificates in
book-entry form only on or about [ ].
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR
DETERMINED THAT THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO WHICH IT RELATES
IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
UNDERWRITER:
DEUTSCHE BANC ALEX. BROWN
The date of this prospectus supplement is[ ].
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS:
We provide information to you about the certificates offered by this prospectus
supplement in two separate documents that progressively provide more detail: (1)
the accompanying prospectus, which provides general information, some of which
may not apply to your certificates, and (2) this prospectus supplement, which
describes the specific terms of your certificates.
IF INFORMATION VARIES BETWEEN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS, YOU SHOULD RELY ON THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT.
You should rely only on the information contained or incorporated by reference
in this prospectus supplement and the accompanying prospectus. We have not
authorized anyone to provide you with different information.
We are not offering the certificates in any state where the offer is not
permitted. We do not claim that the information in this prospectus supplement
and prospectus is accurate as of any date other than the dates stated on their
respective covers.
----------------------
Dealers will deliver a prospectus supplement and prospectus when acting as
underwriters of the certificates and with respect to their unsold allotments or
subscriptions. In addition, all dealers selling the certificates will be
required to deliver a prospectus supplement and prospectus for ninety days
following the date of this prospectus supplement.
----------------------
We include cross-references in this prospectus supplement and the accompanying
prospectus to captions in these materials where you can find further related
discussions. The following table of contents and the table of contents included
in the accompanying prospectus provide the pages on which these captions are
located.
TABLE OF CONTENTS
SUMMARY OF TERMS.................................
RISK FACTORS.....................................
USE OF PROCEEDS..................................
THE DEALER FLOORPLAN FINANCING BUSINESS..........
THE ACCOUNTS.....................................
The Seller and the Servicer......................
[ ]'S PERFORMANCE HISTORY...................
MATURITY AND PRINCIPAL PAYMENT CONSIDERATIONS....
SERIES PROVISIONS................................
LEGAL MATTERS....................................
CERTIFICATE RATINGS..............................
GLOSSARY OF PRINCIPAL TERMS......................
ANNEX 1-OTHER SERIES OF INVESTOR CERTIFICATES....
SUMMARY OF TERMS
O THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROSPECTUS
SUPPLEMENT AND DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU NEED
TO CONSIDER IN MAKING YOUR INVESTMENT DECISION. TO UNDERSTAND ALL OF
THE TERMS OF THE OFFERING OF THE CERTIFICATES, IT IS NECESSARY THAT
YOU READ CAREFULLY THIS ENTIRE PROSPECTUS SUPPLEMENT AND ACCOMPANYING
PROSPECTUS.
O WHILE THIS SUMMARY CONTAINS AN OVERVIEW OF CERTAIN CALCULATIONS, CASH
FLOW PRIORITIES, AND OTHER INFORMATION TO AID YOUR UNDERSTANDING, YOU
SHOULD READ CAREFULLY THE FULL DESCRIPTION OF THESE CALCULATIONS, CASH
FLOW PRIORITIES AND OTHER INFORMATION IN THIS PROSPECTUS SUPPLEMENT
AND THE ACCOMPANYING PROSPECTUS BEFORE MAKING ANY INVESTMENT DECISION.
TITLE OF SECURITIES [Floating Rate] [ %] Dealer Floorplan Asset Backed
Certificates, Series [ ]-[ ] (the "Series [ ]-[ ] certificates").
ISSUER [ ] Dealer Floorplan Master Loan Trust (the "trust")
SELLER ACE Securities Corp.
SERVICER [ ].
TRUSTEE [ ].
INVESTED AMOUNT The total principal amount of the Series [ ]-[ ] certificates
invested in receivables on the date they are issued is expected to be $[ ]. This
invested amount is subject to decreases and increases as described in this
prospectus supplement under the caption "Series Provisions - Allocation
Percentages".
SERIES ISSUANCE DATE [ ].
SERIES CUT-OFF DATE [ ].
TERMS OF THE CERTIFICATES:
A. Interest Payment Dates Interest will be payable on the [ ] of each [month]
[quarter] [other], unless the [ ] is not a business day, in which case the
payment will be made on the following business day. The first payment will be on
[ ].
B. Per Annum Interest [Rate] [Rates] [ ]. [[ ]] [above] [below] [times[ ] or, if
lower, the assets receivables rate described in this prospectus supplement.]
[Interest will be calculated on the basis of the actual number of days in the
applicable interest period divided by 360.] [Interest will be calculated on the
basis of a 360-day year of twelve 30-day months.]
C. Interest Periods Each period from and including a distribution date to but
excluding the day prior to the following distribution date, except that the
first interest period will be [ ] days.]
D. Principal Payments We expect to pay the principal of the Series [ ]-[ ]
certificates in full on [ ].
However, under some circumstances we may pay principal earlier or later or in
reduced amounts. See "Maturity and Principal Payment Considerations" in this
prospectus supplement.
LEGAL FINAL We will be obligated to pay the outstanding principal amount of the
Series [ ]-[ ] certificates, to the extent not previously paid, by [ ].
REVOLVING PERIOD During the revolving period, we will not pay principal on the
Series [ ]-[ ] certificates or accumulate principal for that purpose. Instead,
we will use the Series [ ]-[ ] share of principal collections to make principal
distributions on other series and or pay them to the seller. The revolving
period will begin at the close of business on the Series Cut-Off Date and end
when the [accumulation period] [controlled amortization period] begins. The
revolving period will also end if an early amortization period that is not
terminated begins.
[ACCUMULATION PERIOD We will accumulate principal for the Series [ ]-[ ]
certificates during an accumulation period of between one and [ ] months long
unless an early amortization period that is not terminated begins before the
start of the accumulation period. The latest date on which the accumulation
period will commence is [ ]. During the accumulation period we will
accumulate the Series [ ]-[ ] share of principal collections for payment on [ ].
See "Series Provisions -- Principal" in this prospectus supplement.]
[CONTROLLED AMORTIZATION PERIOD The Series [ ]-[ ] certificates will have a
controlled amortization period of between one and [.] months long unless an
early termination period that is not terminated begins before the start of the
controlled amortization period. The latest date on which the controlled
amortization period will commence is [ ]. We expect to make payments of
principal on the Series [ ]-[ ] certificates on each distribution date during
that period. See "Series Provisions -- Principal" in this prospectus
supplement.].
[REINVESTMENT PERIOD] If a reinvestment event occurs, the Series [ ]-[ ]
certificates will have a reinvestment period. Under some circumstances, the
revolving period may recommence if the seller takes some actions. See "Series
Provisions -- Reinvestment Events".]
[EXCLUDED SERIES; PREFUNDED PERIOD We are issuing the Series [ ]-[ ]
certificates at a time when another series is amortizing or accumulating
principal or is about to do so. We refer to that other series as a paired series
in relation to Series [ ]-[ ]. Consequently, we will keep the Series [ ]-[ ]
initial invested amount in a prefunding account during its prefunded period. The
prefunded period will start on the Series [ ]-[ ] issuance date and will not go
beyond [ ]. As funds are deposited into an account for the paired series, we
will release an equal amount of funds from the prefunding account to the seller.
However, until the paired series is paid in full, we will not allocate any
collections on the receivables to Series [ ]-[ ]. In this context, we refer to
Series [ ]-[ ] as an excluded series. During the prefunded period, we will pay
interest on the Series [ ]-[ ] certificates out of net investment earnings from
funds in the prefunded account [and funds in a yield supplement account]. We
will not pay principal on the Series [ ]-[ ] certificates until the paired
series has been paid in full. The effect of this prefunding arrangement is that
we will apply the Series [ ]-[ ] invested amount to the purchase of its share of
receivables during the prefunded period to the extent the paired series
amortizes or accumulates. See "Series Provisions" in this prospectus
supplement.]
EARLY AMORTIZATION PERIOD If an early amortization event occurs and is not
cured, you will begin to receive payments of principal. We refer to this period
after the occurrence of an early amortization event as the early amortization
period. Early amortization events are events that might adversely affect the
trust's ability to make payments on the Series [ ]-[ ] certificates as
originally expected. See "Description of the Certificates -- Reinvestment Events
and Early Amortization Events" in the prospectus and "Series Provisions - Early
Amortization Events" in this prospectus supplement for a description of the
events that might cause an early amortization period to start and, in some
cases, terminate.
CREDIT ENHANCEMENT
A. Subordination of the
Seller's Interest The seller's interest in the trust will be subordinated to the
rights of the Series [ ]-[ ] certificateholders to the extent described in this
prospectus supplement. Collections on the receivables otherwise allocable to the
seller may be used to pay interest on the Series [ ]-[ ] certificates and other
amounts, but only to the extent of the available subordinated amount.
The "available subordinated amount" will initially be $[ ] but is subject to
reduction from time to time. See "Series Provisions -- Allocation of
Collections; Limited Subordination of Seller's Interest" in this prospectus
supplement for more information about the available subordinated amount.
B. [Reserve Fund On the Series [ ]-[ ] issuance date, the seller will deposit
$[ ] into the reserve fund for the Series [ ]-[ ] certificates. The reserve fund
required amount for any distribution date will equal [ ]% of the outstanding
principal balance of the Series [ ]-[ ] certificates for that distribution date,
after giving effect to any change in the outstanding principal balance on that
distribution date. Amounts on deposit in the reserve fund will be available to
pay monthly interest, the monthly servicing fee and investor default amounts
and, on the final payment date, carry-over amounts.]
[C. Other Enhancement] The trust will have the benefit of a [letter of credit]
[interest rate swap] [currency swap] [cash collateral account] [guaranty]
[surety bond] [insurance policy] [spread account] [other enhancement] [issued by
[ ]] for the benefit of the Series [ ]-[ ] certificateholders as described in
this prospectus supplement. [Describe subordination of another series, if
applicable.] See "Series Provisions -- Distributions from the Collection
Account; Reserve Fund; [Yield Supplement Account]; Other Enhancement" in this
prospectus supplement].
[YIELD SUPPLEMENT ACCOUNT On the Series [ ]-[ ] issuance date, the seller will
deposit $[ ] in the yield supplement account for the Series [ ]-[ ]
certificates. The yield supplement account required amount for any distribution
date will equal [ ]% of the outstanding principal balance of the Series [ ]-[ ]
certificates for that distribution date, after giving effect to any change in
the outstanding principal balance on that distribution date.
Amounts on deposit in the yield supplement account will be available to pay
carry-over amounts.]
EXCESS PRINCIPAL COLLECTIONS Principal collections allocable to other series, to
the extent not needed to make payments in respect of the other series, will be
applied to make principal payments in respect of the Series [ ]-[ ] certificates
and of other series of certificates entitled to principal payments.
[EXCESS SERVICING All interest collections otherwise allocable to any series
with respect to any distribution date, to the extent the collections are not
needed to make payments to or deposits for the benefit of certificateholders of
the series or to restore the credit enhancement for the series, will be applied
to cover shortfalls with respect to interest payments and other amounts due to
or for the benefit of the holders of the Series [ ]-[ ] certificates, the Series
[ ]-[ ] certificates, the Series [ ] certificates and each Series of
certificates issued after the Series [ ]-[ ] certificates that is designated by
the seller to share the collections.]
SERVICING FEE RATE [ ]% [per month] [per annum] [(on a [ ] day basis)], or less
if the servicer waives any portion of the monthly servicing fee on any date.
OPTIONAL REPURCHASE The Series [ ]-[ ] certificateholders' interest in the trust
is subject to optional repurchase by the servicer on any distribution date after
the invested amount for the Series [ ]-[ ] certificates is reduced to $[ ] or
less.
OTHER SERIES OF CERTIFICATES The trust has previously issued and may issue
additional series of certificates. A summary of series currently outstanding is
contained in "Annex I -- Other Series of Investor Certificates" at the end of
this prospectus supplement.
ERISA CONSIDERATIONS [It is expected that the Series [ ]-[ ] certificates will
be eligible for purchase by employee benefit plans. However, plans contemplating
the purchase of Series [ ]-[ ] certificates should consult their counsel before
making a purchase. See "ERISA Considerations" in the prospectus.] [Other.]
TAX STATUS Stroock & Stroock & Lavan LLP, federal tax counsel to the trust, is
of the opinion that at the time of initial issuance of the Series [ ]-[ ]
certificates for federal income tax purposes:
the Series [ ]-[ ] certificates will be characterized as debt and
the trust will not be characterized as an association, or a publicly traded
partnership, taxable as a corporation.
By your acceptance of a certificate, you will agree to treat your Series [ ]-[ ]
certificates as indebtedness for federal, state and local income and franchise
tax purposes and [ ] single business tax purposes. [The trust does not
anticipate treating the Series [ ]-[ ] certificate as being issued with original
issue discount.] See "Material Federal Income Tax Consequences" in the
accompanying prospectus for additional information concerning the application of
federal income tax laws.
CERTIFICATE RATINGS The trust will issue the Series [ ]-[ ] certificates only if
they are rated at the time of issuance in the highest long-term rating category
by at least one nationally recognized rating agency. The rating agencies and
their ratings only address the likelihood that you will ultimately receive all
of your required principal and interest distributions. The rating agencies and
their ratings do not address the likelihood that any carry-over interest amounts
will be paid, the likelihood you will receive interest or principal payments on
a scheduled date, or whether you will receive any principal on the Series [ ]-[
] certificates prior to or after the expected distribution date.
RISK FACTORS An investment in Series [ ]-[ ] certificates involves material
risks. See "Risk Factors" in this prospectus supplement or the prospectus.
CERTIFICATES NOT LISTED ON ANY EXCHANGE The Series [ ]-[ ] certificates will not
be listed on an exchange or quoted in an automated quotation system of a
registered securities association. See "Risk Factors--Your Ability to Resell
Certificates is Limited" in this prospectus supplement or the prospectus.
RISK FACTORS
THE FOLLOWING INFORMATION, WHICH YOU SHOULD CAREFULLY CONSIDER,
IDENTIFIES CERTAIN SIGNIFICANT SOURCES OF RISK ASSOCIATED WITH AN INVESTMENT IN
THE CERTIFICATES.
YOU MAY NOT RECEIVE YOUR PRINCIPAL The shorter the accumulation period
ON THE EXPECTED PAYMENT DATE the greater the chance that payment
BECAUSE OF THE PERFORMANCE in full of the Series [ ]-[ ]
OTHER SERIES: certificates by their OF expected
distribution date will depend on
principal collections from other
series.] A series from which
principal collections are expected
to be available to make payments on
the Series [ ]-[ ] certificates may
enter an early amortization period
[or reinvestment period] after [ ]
[the [ ] distribution date] [the
start of its accumulation period].
Principal collections from that
series will not be available to pay
principal of the Series [ ]-[ ]
certificates. As a result, you may
receive some of your principal
later than the Series [ ]-[ ]
expected distribution date.
[Payments of principal during the
controlled amortization period may
be less than the amount we expect
to pay.] [Also, you will not
receive any principal until the
invested amount of the paired
series has been paid in full.] On
written request, the seller will
give you disclosure documents
relating to the other outstanding
series. Those documents describe
the events which could result in
the start of an early amortization
period for those series.
IF AN EARLY AMORTIZATION EVENT If an early amortization event
OCCURS, YOU MAY RECEIVE YOUR occurs, you may receive your
PRINCIPAL SOONER OR LATER THAN YOU principal sooner or later than you
EXPECTED AND YOU MAY NOT RECEIVE expected and you may not receive
ALL OF YOUR PRINCIPAL: all of your principal. In
particular, a significant decline
in the amount of receivables
generated could cause an early
amortization of your certificates.
If the balance of the receivables
is not maintained at a specified
level, [ ] must designate
additional accounts, the
receivables of which will be sold
to the seller. The seller will be
required to transfer those
receivables to the trust. If
additional accounts are not
designated by [ ] when required, an
early amortization event will
occur. In some cases, however, the
resulting early amortization period
may end and you will stop receiving
principal payments.
If a bankruptcy event relating to [
], the seller or [ ] were to occur,
an early amortization event would
occur. In that case additional
receivables would not be
transferred to the trust and
principal payments on the Series [
]-[ ] certificates would commence.
See "The Dealer Floorplan Financing Business" in the prospectus and
"Maturity and Principal Payment Considerations" and "Series Provisions - Early
Amortization Events" in this prospectus supplement for more information about
the timing of payments on the Series [ ]-[ ] certificates.
You may receive interest at a lower rate than you expected. The
receivables bear interest at the prime rates of banks plus a margin, while the
certificate rate is based on [_____]. Several factors will have an effect on the
interest rates of the Series [ ]-[ ] certificates. Some of those factors are
described below.
YOU WILL RECEIVE THE LOWER OF [ ] The "assets receivables rate" is
AND THE ASSETS RECEIVABLES RATE: based on the interest rates on the
receivables and investment earnings
on amounts on deposit in trust bank
accounts. If (a) the certificate
rate based on [ ] exceeds
(b) the assets receivables rate,
the certificate rate will be the
assets receivables rate.
YOU WILL RECEIVE LESS INTEREST IF The certificate rate based on [ ]
THE TRUST IS NOT ABLE TO MAKE UP A may exceed the assets receivables
DEFICIENCY IN INTEREST PAYMENTS IF rate as a result of (i) [ ]
THE CERTIFICATE RATE IS HIGHER exceeding the interest rate on the
THAN THE ASSETS RECEIVABLES RATE: receivables and (ii) [ ] exceeding
the investment earnings on amounts,
if any, on trust accounts in which
principal collections are held. In
this regard, [ ] may reduce the
interest rates borne by the
receivables. Any deficiency in
interest payments resulting from
the assets receivables rate being
lower than the certificate rate
based on [ ] and interest on the
deficiency (a "Carry-over Amount")
will be paid with:
o any amounts in the yield
supplement account; any funds
remaining after all required
distributions and deposits for
the Series [ ]-[ ]
certificates have been made; and
o on the last distribution date
for Series [ ]-[ ], amounts in
the [reserve fund and] some of
the seller's collections.
We cannot assure you that those
amounts, if any, will be sufficient
to pay any of these unpaid interest
amounts. If any of these unpaid
interest amounts is outstanding for
[six] distribution dates in a row,
an [early amortization event]
[reinvestment event] will occur.]
CREDIT ENHANCEMENT IS LIMITED o As the Credit Enhancement Is
AND MAY BE REDUCED. Reduced, You Are More Likely to
Incur Losses and to Receive Your
Principal Earlier or Later Than
You Expected. Credit enhancement
of the Series [ ]-[ ]
certificates will be provided by
the subordination of the
seller's interest to the extent
of the available subordinated
amount as described in this
prospectus supplement [and by
amounts in the reserve fund].
[Describe other subordination of
the seller's interest, if
applicable.] [Describe any other
applicable credit enhancements.]
The amount of such credit
enhancement is limited and will
be reduced from time to time.
See "Series Provisions --
Allocation of Collections;
Limited Subordination of
Seller's Interest" for more
information about credit
enhancement for the Series [ ]-[
] certificates.
THE TRUST IS o The trust is completely
DEPENDENT ON [ ] AND [ ]. dependent upon [ ] for the
generation of new receivables.
The ability of [ ] to generate
receivables is in turn dependent
to a large extent on the sales
of automobiles and light duty
trucks manufactured or
distributed by [ ]. Several
factors will have an effect on
that dependence. If [ ] does not
generate sufficient receivables,
an early amortization event may
occur.
YOUR ABILITY TO RESELL o There may be no secondary market
CERTIFICATES IS LIMITED. for your certificates. The
underwriters may participate in
making a secondary market in the
certificates, but are under no
obligation to do so. We cannot
assure you that a secondary
market will develop. If a
secondary market does develop,
we cannot assure you that it
will continue or that you will
be able to resell your
certificates. Also, your
certificates will not be listed
on any securities exchange or
quoted in the automated
quotation system of any
registered securities
association. As a result, you
will not have the liquidity that
might be provided by that kind
of listing or quotation. You can
find a "Glossary of Principal
Terms for the Prospectus
Supplement" beginning on page
S-[ ] in this prospectus
supplement.
USE OF PROCEEDS
From the net proceeds of the Series [ ]-[ ] certificates, we will make
the deposits to the [Reserve Fund] [the Yield Supplement Account] [the Excess
Funding Account] described in this prospectus supplement, and we will pay the
remaining $[..] of the net proceeds to [ ]. [ ] will use the proceeds to
purchase receivables from [ ] or to repay amounts previously borrowed to
purchase receivables. [ ] will use the portion of the proceeds paid to it for
general corporate purposes.
THE DEALER FLOORPLAN FINANCING BUSINESS
The receivables sold to the trust were or will be selected from
extensions of credit and advances made by [ ] and [ ] to approximately [ ]
domestic motor vehicle dealers. [ ] financed [ ]% of the total number of all [
]-franchised dealers as of [ ]. [ ] has extended credit lines to [ ] [
]-franchised dealers that also operate non-[ ] franchises (representing
approximately [ ]% of the aggregate credit lines of dealers in the Wholesale
Portfolio as of [ ]) and [ ] non-[ ] dealers (representing approximately [ ]% of
those aggregate credit lines). As of [ ], the balance of principal receivables
in the Wholesale Portfolio was approximately $[ ] billion. [ ] currently
services the Wholesale Portfolio through its home office and through a network
of [ ] zone offices located throughout the United States. As of [..], the
average credit lines per dealer in the Wholesale Portfolio for new and used
vehicles (which includes Auction Vehicles) were $[ ] million and $[ ] million,
respectively, and the average balance of principal receivables per dealer was $[
] million. As of [ ], the aggregate total receivables balance as a percentage of
the aggregate total credit lines was approximately [ ]%.
The following table sets forth the percentages of dealer account
balances by year of credit line origination for the Wholesale Portfolio.
PORTFOLIO PERCENTAGES BY YEAR
OF CREDIT LINE ORIGINATION
AS OF [ ]
PRIOR TO
[ ] [ ] [ ] [ ] [ ] [ ] [ ] [ ]
As of [ ], the weighted average spread over the prime rate charged to
dealers in the Wholesale Portfolio was approximately [ ]%.
Used vehicles (which excludes Auction Vehicles) represented
approximately [ ]% of the aggregate principal amount of receivables in the
Wholesale Portfolio as of [ ]. As of [ ], used vehicles represented
approximately [ ]% of the aggregate principal amount of receivables in the trust
(including Excluded Receivables).
The following table provides the percentage of dealers in the
Wholesale Portfolio that were subject to finance hold as of the dates indicated.
Finance Hold Experience As of December 31,
FINANCE HOLD EXPERIENCE
AS OF [] AS OF DECEMBER 31,
[ ] [ ] [ ] [ ] [ ] [ ] [ ] [ ] [ ] [ ]
Percentage of
Dealers.. [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
The following table provides the number and percentage of dealers in
Dealer Trouble Status in the Wholesale Portfolio as of the dates indicated.
Dealer Trouble Experience
AS OF [] AS OF DECEMBER 31,
[ ] [ ] [ ] [ ] [ ] [ ] [ ] [ ] [ ] [ ]
Number of
Dealers [ ] [ ] [ ] [ ] [ ] [ ] [ ] [ ] [ ] [ ]
Percentage of
Dealers [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
THE ACCOUNTS
As of [ ], with respect to the Accounts in the trust: (a) there were
approximately [ ] Accounts and the principal receivables balance was
approximately $[ ] billion; (b) the average credit lines per dealer for new and
used vehicles (which include Auction Vehicles) were approximately $[ ]million
and $[ ] million, respectively, and the average balance of principal receivables
per dealer was approximately $[ ] million; and (c) the aggregate total
receivables balance as a percentage of the aggregate total credit line was
approximately [ ]%. Unless otherwise indicated, the statistics included in this
paragraph, in the table below with respect to the Accounts and the receivables
in the trust give effect to approximately $[ ] million of principal receivables
balances with respect to dealers (the "Excluded Receivables" and the "Excluded
Dealers", respectively), that are in voluntary or involuntary bankruptcy
proceedings or voluntary or involuntary liquidation or that, subject to
limitations, are being voluntarily removed by the seller from the trust. A
portion of those principal receivables was created after those dealers entered
into that status or were designated by the seller for removal from the trust
and, as a result, are owned by [ ]. Principal receivables balances created prior
to those dealers entering into that status or being designated for removal from
the trust are included in the principal receivables balance. See "Description of
the Certificates" in the prospectus for a description of the manner in which an
Account can be removed from the trust.
The following table sets forth the percentages of dealer account
balances by year of credit line origination for the accounts in the trust.
PORTFOLIO PERCENTAGES BY YEAR
OF CREDIT LINE ORIGINATION
AS OF [ ]
PRIOR TO
[ ] [ ] [ ] [ ] [ ] [ ] [ ] [ ]
[ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
As of [ ], the weighted average spread over the Prime Rate charged to
Dealers was approximately [ ]%.
[ ]'S PERFORMANCE HISTORY
LOSS EXPERIENCE
The following tables set forth the average principal receivables
balance and loss experience for each of the periods shown on the Wholesale
Portfolio. Because the Eligible Accounts will be only a portion of the entire
Wholesale Portfolio, actual loss experience with respect to the Eligible
Accounts may be different. We cannot assure you that the loss experience for the
receivables in the future will be similar to the historical experience set forth
below with respect to the Wholesale Portfolio. Also, the historical experience
set forth below reflects financial assistance provided by Deutsche Banc Alex.
Brown or [ ] to [ ]-franchised dealers as described under "The Dealer Floorplan
Financing Business -- Relationship with [ ]" in the prospectus. If [ ] is not
able to or elects not to provide that assistance, the loss experience in respect
of the Wholesale Portfolio may be adversely affected. See "Risk Factors" in the
prospectus and "Risk Factors -- The Trust is Dependent on [ ] and [ ]" in this
prospectus supplement.
LOSS EXPERIENCE FOR THE WHOLESALE PORTFOLIO
[ ] MONTHS ENDED YEAR ENDED DECEMBER 31
[ ] [ ] [ ] [ ] [ ] [ ] [ ] [ ] [ ]
Average
Principal
Receivables
Balance(1)....$ []% $[ ]% $[ ] $[ ]% $[ ]% $[ ]% $[ ] $[ ]% $[ ]%
Net
Losses/(Net
Recoveries)(2)$[ ]% $[ ]% $[ ] $[ ]% $[ ]% $ [ ]% $[ ]% $[ ]% $[ ]%
Net
Losses/(Net
Recoveries) as
a Percent of
Liquidations $[ ]% $[ ]% $[ ] $[ ]% $[ ]% $ [ ]% $[ ]% $[ ]% $[ ]%
Net
Losses/(Net
Recoveries) as
a Percent of
Average
Principal
Receivables
Balance(3) [ ]% [ ]% [ ] [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
[ ] MONTHS ENDED YEAR ENDED DECEMBER 31,
[ ] [ ] [ ] [ ] [ ] [ ] [ ] [ ] [ ]
Average
Principal
Receivables $[ ] $[ ] $[ ] $[ ] $[ ] $[ ] $[ ] $[ ] $[ ]
Balance(1)
Net Losses/(Net
Recoveries)(2)$[ ] $[ ] $[ ] $[ ] $[ ] $[ ] $[ ] $[ ] $[ ]
Net Losses/(Net
Recoveries) as a
Percent of
Liquidations [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
Net Losses/(Net
Recoveries) as a
Percent of
Average
Principal
Receivables
Balance(3) [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
YEAR ENDED DECEMBER 31,
[ ] [ ] [ ] [ ] [ ] [ ]
Average Principal
Receivables
Balance(1) $[ ] $[ ] $[ ] $[ ] $[ ] $[ ]
Net Losses/(Net
Recoveries)(2) $[ ] $[ ] $[ ] $[ ] $[ ] $[ ]
Net Losses/(Net
Recoveries) as a
Percent of
Liquidations [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
Net Losses/(Net
Recoveries) as a
Percent of Average
Principal
Receivables
Balance(3) [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
- ---------
(1) Average Principal Receivables Balance is the average of the month-end
principal balances for the [ ] months ending on the last day of the period,
except for the [ ] months ended [ ]and [ ], which are based on a [ ]-month
average.
(2) Net losses in any period are gross losses less recoveries for such
period.
(3) Percentages for the [ ] months ended [ ] and [ ] are expressed on an
annualized basis.
AGING EXPERIENCE
The following table provides the age distribution of vehicle inventory
for all dealers in the Wholesale Portfolio, as a percentage of total principal
outstanding at the date indicated. Because the Eligible Accounts will only be a
portion of the entire Wholesale Portfolio, actual age distribution with respect
to the Eligible Accounts may be different.
AGE DISTRIBUTION FOR THE WHOLESALE PORTFOLIO
AS OF [ ] AS OF DECEMBER 31,
DAYS [ ] [ ] [ ] [ ] [ ] [ ] [ ] [ ]
1-120........... [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
121-180......... [ ] [ ] [ ] [ ] [ ] [ ] [ ] [ ]
181-270......... [ ] [ ] [ ] [ ] [ ] [ ] [ ] [ ]
Over 270........ [ ] [ ] [ ] [ ] [ ] [ ] [ ] [ ]
GEOGRAPHIC DISTRIBUTION
The following table provides the geographic distribution of the vehicle
inventory for all dealers in the trust on the basis of receivables outstanding
and the number of dealers generating the portfolio. The percentages may not add
to 100.00% because of rounding.
GEOGRAPHIC DISTRIBUTION OF ACCOUNTS IN THE TRUST
AS OF [ ]
PERCENTAGE OF PERCENTAGE OF
RECEIVABLES RECEIVABLES TOTAL NUMBER OF NUMBER OF
OUTSTANDING(2) OUTSTANDING(2) DEALERS(3) DEALERS(3)
[Texas]......... $ % %
[California]....
[New York]......
[Florida].......
[Illinois]......
[New Jersey]....
[Michigan]......
[ ]........
Other(1)........
Total........... $ % %
- ----------------
(1) No other state includes more than 5% of the outstanding receivables.
(2) Includes Excluded Receivables.
(3) Includes Excluded Dealers.
MATURITY AND PRINCIPAL PAYMENT CONSIDERATIONS
You will begin receiving principal on your certificates if an Early
Amortization Period that is not terminated has commenced. Full amortization of
the Series [ ]-[ ] certificates by the [ ] distribution date (the "Series [ ]-[
] Expected Payment Date") depends on, among other things, repayment by dealers
of the receivables and may not occur if dealer payments are insufficient.
Because the receivables are paid upon retail sale of the underlying vehicle, the
timing of the payments is uncertain. Also, there is no assurance that [ ] will
generate additional receivables under the Accounts or that any particular
pattern of dealer payments will occur. [Also, the shorter the Accumulation
Period Length the greater the likelihood that payment of the Series [ ]-[ ]
certificates in full by the Series [ ]-[ ] Expected Payment Date will be
dependent on the reallocation of principal collections which are initially
allocated to other outstanding series.] If one or more other series from which
principal collections are expected to be available to be reallocated to the
payment of the Series [ ]-[ ] certificates enters into an early amortization
period [or reinvestment period] after [ ] [the [ ] distribution date] [the start
of the Accumulation Period], principal collections allocated to those series
will not be available to be reallocated to make payments of principal of the
Series [ ]-[ ] certificates and [you may receive your final payment of principal
later than the Series [ ]-[ ] Expected Payment Date] [the amount of principal
distributed on the Series [ ]-[ ] certificates on any distribution date during
the Controlled Amortization Period may be less than the Controlled Amortization
Amount.] [Also, you will not receive any payments of principal until the
invested amount of the Paired Series has been reduced to zero.]
Because an Early Amortization Event with respect to the Series [ ]-[ ]
certificates may occur and would initiate an Early Amortization Period, you may
receive the final distribution of principal on your Series [ ]-[ ] certificates
prior to the scheduled termination of the Revolving Period or prior to the
Series [ ]-[ ] Expected Payment Date. [Several of the events which constitute
Reinvestment Events with respect to the Series [ ]-[ ] certificates may
constitute early amortization events with respect to other Series. Should an
event of that type occur, holders of certificates of those other series would
receive monthly distribution of principal, which distributions would not be
limited to any controlled amortization amount. At the same time, Series [ ]-[ ]
Certificateholder Principal Collections would be retained in the Principal
Funding Account and would not be distributed to Series [ ]-[ ]
certificateholders until the Series [ ]-[ ] Expected Payment Date or, if
earlier, the first distribution date following the occurrence of an Early
Amortization Event.
The amount of new receivables generated in any month and monthly
payment rates on the receivables may vary because of seasonal variations in
vehicle sales and inventory levels, retail incentive programs provided by
vehicle manufacturers and various economic factors affecting vehicle sales
generally. The following table sets forth the highest and lowest monthly payment
rates for the Wholesale Portfolio during any month in the periods shown and the
average of the monthly payment rates for all months during the periods shown.
The monthly payment rate is the percentage equivalent of a fraction, the
numerator of which is the aggregate of all collections of principal during the
period and the denominator of which is the average aggregate principal balance
for the period. We cannot assure you that the rate of principal collections will
be similar to the historical experience set forth below. As the Eligible
Accounts will be only a portion of the entire Wholesale Portfolio, historical
monthly payment rates with respect to the Eligible Accounts may be different
than those shown below.
MONTHLY PAYMENT RATES FOR THE WHOLESALE PORTFOLIO
[ ] MONTHS
ENDED [ ] YEAR ENDED DECEMBER 31,
[ ] [ ] [ ] [ ] [ ] [ ] [ ] [ ] [ ] [ ] [ ]
Highest Month [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%[ ]% [ ]%
Lowest Month [ ] [ ] [ ] [ ] [ ] [ ] [ ] [ ] [ ] [ ] [ ]
Average of the
Months in the
Period [ ] [ ] [ ] [ ] [ ] [ ] [ ] [ ] [ ] [ ] [ ]
SERIES PROVISIONS
GENERAL
The trust will issue the Series [ ]-[ ] certificates under the Pooling
and Servicing Agreement and a Series Supplement relating to the Series [ ]-[ ]
certificates (the "Series Supplement"). Beneficial interests in Series [ ]-[ ]
certificates will be offered in minimum denominations of $1,000 and integral
multiples of that amount. The trustee will make available for inspection a copy
of the Pooling and Servicing Agreement, without exhibits or schedules, on
request. You should refer to the prospectus for additional information
concerning the Series [ ]-[ ] certificates and the Pooling and Servicing
Agreement.
In general terms, we allocate collections on the receivables first
among each series. We then allocate the series collections between the investors
in that series and the seller. We apply the investor's share of interest
collections to pay the investors' share of the servicing fee and interest on the
Series [ ]-[ ] certificates and to cover the investors' share of losses on the
principal receivables. If the investors' share of interest collections is not
sufficient to cover those amounts, we will use the seller's share of
collections, but only up to the available subordinated amount, to cover the
shortfall. When it is time to distribute principal to investors or accumulate
principal collections for that purpose, we will use the investors' share of
principal collections. Under some circumstances, we may use collections
allocated to another series, but which are not then needed by that series. For
the most part, the trustee applies the collections pursuant to directions from
the servicer.
The preceding paragraph is a very simplified description of the
primary allocation and use of collections on the receivables. The following
description contains a precise description of the calculations of allocations
and the manner, timing and priorities of the application of the collections.
Many of the calculations are complex and are described in the definition of the
terms used. The complex defined terms are needed in order to tell you the
precise amount that will be available to make a specified payment. The Glossary
of Principal Terms for the Prospectus Supplement at the end of this prospectus
supplement contains many of these definitions. However, for convenience we often
include the definition where its subject is being discussed.
INTEREST
Interest on the principal balance of the Series [ ]-[ ] certificates
will accrue at the Certificate Rate and will be payable to the Series [ ]-[ ]
certificateholders on each distribution date, commencing [ ]. Interest payable
on any distribution date will accrue from and including the preceding
distribution date to but excluding that distribution date, or, in the case of
the first distribution date, from and including the Series [ ]-[ ] Issuance Date
to but excluding the first distribution date. Each of those periods is an
"Interest Period." Interest will be calculated on a basis of [the actual number
of days in each Interest Period divided by [360] [other]] [a 360-day year of
twelve 30-day months]. Interest due for any distribution date but not paid on
that distribution date will be due on the next distribution date, together with
interest on the amount at the Certificate Rate [calculated on the basis of [ ]],
to the extent permitted by applicable law. We will make interest payments on the
Series [ ]-[ ] certificates generally out of Series [ ]-[ ] Certificateholder
Interest Collections, [any withdrawals from the Reserve Fund, [Excess Interest
Collections, if any, allocated to Series [ ]-[ ] , ] and Investment Proceeds
and, under some circumstances, Available Seller's Collections to the extent of
the Available Subordinated Amount [and any withdrawals from the Yield Supplement
Account] [describe other sources.]
The Certificate Rate for each Interest Period will be determined on
the [LIBOR Determination Date ] [Adjustment Date] preceding that Interest
Period. The "Certificate Rate" will be [ %] [equal to [the lesser of (a)] the
index] [LIBOR] [plus] [minimum] [times] [ ]% [and (b) [except with respect to
[the Prefunded Period [other]] the [Assets Receivables Rate for the related
distribution date].
"Monthly Interest" for any distribution date means the amount of
interest accrued in respect of the Series [ ]-[ ] certificates in the Interest
Period for that distribution date.
["LIBOR" with respect to any Interest Period will be established by
the Calculation Agent and will equal the offered rate for United States dollar
deposits for one month that appears on Telerate Page 3750 as of 11:00 A.M.,
London time, on the second LIBOR Business Day prior to that Interest Period (a
"LIBOR Determination Date"). "Telerate Page 3750" means the display page so
designated on the Dow Jones Telerate Service, or any other page as may replace
that page on that service, or any other service as may be nominated as the
information vendor, for the purpose of displaying London interbank offered rates
of major banks). If that rate appears on Telerate Page 3750, LIBOR will be that
rate. "LIBOR Business Day" as used in this prospectus supplement means a day
that is both a Business Day and a day on which banking institutions in the City
of London, England are not required or authorized by law to be closed. If on any
LIBOR Determination Date the offered rate does not appear on Telerate Page 3750,
the Calculation Agent will request each of the reference banks, which shall be
major banks that are engaged in transactions in the London interbank market
selected by the Calculation Agent, to provide the Calculation Agent with its
offered quotation for United States dollar deposits for one month to prime banks
in the London interbank market as of 11:00 A.M., London time, on that date. If
at least two reference banks provide the Calculation Agent with the offered
quotations, LIBOR on that date will be the arithmetic mean, rounded upwards, if
necessary, to the nearest 1/100,000 of 1% (.0000001), with five one-millionths
of a percentage point rounded upward, of all the quotations. If on that date
fewer than two of the reference banks provide the Calculation Agent with the
offered quotations, LIBOR on that date will be the arithmetic mean, rounded
upwards, if necessary, to the nearest 1/100,000 of 1% (.0000001), with five
one-millionths of a percentage point rounded upward, of the offered per annum
rates that one or more leading banks in The City of New York selected by the
Calculation Agent are quoting as of 11:00 A.M., New York City time, on that date
to leading European banks for United States dollar deposits for one month. If,
however, those banks are not quoting as described above, LIBOR for that date
will be LIBOR applicable to the Interest Period immediately preceding that
Interest Period. The "Calculation Agent" will be the trustee.
[Describe Index and define Adjustment Date.]
[If the Certificate Rate for a distribution date [other than a
distribution date [with respect to the Prefunded Period] [other]] calculated on
the basis of [the Index] [LIBOR] as described above is greater than the Assets
Receivable Rate, then the Certificate Rate for that distribution date will be
the Assets Receivables Rate.]
The "Assets Receivables Rate" for any Interest Period shall equal the
product of (a) the quotient obtained by dividing (i) 360 by (ii) the actual
number of days elapsed in that period and (b) a percentage, expressed as a
fraction,(i) the numerator of which is the sum of (A) Certificateholder Interest
Collections for the Collection Period immediately preceding the last day of that
period, which for this purpose only is based on interest amounts billed to the
dealers which are due during that Collection Period, less the Monthly Servicing
Fee with respect to that immediately preceding Collection Period, (B) the
Investment Proceeds to be applied on the distribution date related to that
period and (ii) the denominator of which is the sum of (A) the product of (I)
the Floating Allocation Percentage, (II) the Series Allocation Percentage and
(III) the average Pool Balance, after giving effect to any charge-offs, for that
immediately preceding Collection Period, (B) the principal balance on deposit in
the Excess Funding Account on the first day of that period, after giving effect
to all deposits to and withdrawals therefrom on that first day, and (C) the
principal balance on deposit in the Principal Funding Account on the first day
of that period, after giving effect to all deposits to and withdrawals therefrom
on that first day, [other].
If the Certificate Rate for any distribution date is based on the
Assets Receivables Rate, the Series [ ]-[ ] will be entitled to receive the
Carry-over Amount to the extent of available funds. The "Carry-over Amount" for
a distribution date will be the sum of (a) the excess of the amount of interest
on the Series [ ]-[ ] certificates that would have accrued in respect of the
related Interest Period had interest been calculated based on [LIBOR][the
Index], over (b) the amount of interest on the Series [ ]-[ ] certificates
actually accrued in respect of that Interest Period based on the Assets
Receivables Rate plus (c) the unpaid portion of any excess from prior
distribution dates, and interest accrued on that amount calculated on the basis
of [LIBOR][the Index].
A Carry-over Amount will only be payable from amounts on deposit in
the Yield Supplement Account and, if those amounts are depleted, to the extent
funds are allocated and available for that purpose after making all required
distributions and deposits with respect to the Series [ ]-[ ] certificates,
including payments with respect to principal [(including payments to the Excess
Funding Account)], Monthly Interest, the Monthly Servicing Fee[, the Reserve
Fund Deposit Amount] and the Investor Default Amount as described below under
"Distributions from the Collection Account; [Reserve Fund;] Yield Supplement
Account [Other Enhancement]". Also, any Carry-over Amount outstanding on the
final distribution date, after making the distributions described in the
preceding sentence, will be paid on the final distribution date from (i) amounts
on deposit in the Reserve Fund that would otherwise be payable to the seller,
and (ii) Available Seller's Collections on deposit in the Collection Account
that would otherwise be payable to the seller, as described under "Distributions
from the Collection Account; [Reserve Fund]; Yield Supplement Account][Other
Enhancement]". The rating of the Series [ ]-[ ] certificates does not address
the likelihood of payment of any Carry-over Amount.]
PRINCIPAL
We will not make principal payments to the Series [ ]-[ ]
certificateholders until the Series [ ]-[ ] [Expected Payment Date] [Principal
Commencement Date] or, upon the commencement of an Early Amortization Period
that is not terminated as described in this prospectus supplement, until the
first Special Payment Date. [However, even if an Early Amortization Event
occurs, we will not make principal payments will be made to the Series [ ]-[ ]
certificateholders during the Prefunded Period.] On each distribution date with
respect to the Revolving Period, collections of principal receivables allocable
to the interest of the Series [ ]-[ ] certificateholders in the Trust Assets
(the "Series [ ]-[ ] Certificateholders' Interest") that are not required to be
deposited to the Excess Funding Account, subject to limitations, will either be
(a) allocated to one or more series which are in amortization, early
amortization or accumulation periods to cover principal payments due to the
certificateholders of any of those series or which provides for excess funding
accounts or similar arrangements or (b) if no series is then amortizing or
accumulating principal or otherwise does not provide for excess funding accounts
or similar arrangements, paid to the seller to maintain the Series [ ]-[ ]
Certificateholders' Interest or held as Unallocated Principal Collections. See
"Allocation Percentages -- Principal Collections for all Series" and
"Distributions from the Collection Account[; Reserve Fund][; Yield Supplement
Account][; Other Enhancement] -- Principal Collections".
The "Revolving Period" will be the period beginning at the close of
business on the Series Cut-Off Date and terminating on the earlier of (a) the
close of business on the day immediately preceding the Accumulation Period
Commencement Date and (b) the close of business on the day an Early Amortization
Period commences. The Revolving Period, however, may recommence upon the
termination of an Early Amortization Period. See "Early Amortization Events".
During the Revolving Period, we will not use the Series [ ]-[ ]
certificateholders' share of principal collection to make principal payments on
the Series [ ]-[ ] certificates. Instead, we will use them to make principal
distributions on other series or we will pay them to the seller.
Unless an Early Amortization Period [or Reinvestment Period] that is
not terminated as described in this prospectus supplement shall have commenced,
the Series [ ]-[ ] certificates will have an Accumulation Period of one, two,
three, four or five month(s) long as described in the following paragraph.
On the [ ] distribution date and each subsequent distribution date
after that date that occurs prior to the Accumulation Period Commencement Date,
the servicer shall calculate the Accumulation Period Length. The "Accumulation
Period Length" will be calculated on each of those dates as the lesser of (i)
the number of full Collection Periods between that distribution date and the
Series [ ]-[ ] Expected Payment Date and (ii) the product, rounded upwards to
the nearest integer not greater than five, of (a) one divided by the lowest
Monthly Payment Rate on the receivables during the last [ ] months and (b) a
fraction, the numerator of which is the sum of (i) the Invested Amount as of
that distribution date, after giving effect to all changes in the Invested
Amount on that date, and (ii) the invested amounts of all other series
[,excluding some series,] currently in their amortization or accumulation
periods or expected to be in their amortization or accumulation periods by the
Series [ ]-[ ] Expected Payment Date and (iii) the denominator of which is the
sum of the Invested Amount and the invested amounts as of that distribution
date, after giving effect to all changes in those amounts on that date, of all
other outstanding series [,excluding some series,] which are expected to be
outstanding on the Series [ ]-[ ] Expected Payment Date.
The "Accumulation Period Commencement Date" will be determined as
follows:
THE ACCUMULATION PERIOD
COMMENCEMENT DATE WILL BE THE
IF THE ACCUMULATION PERIOD FIRST DAY IN THE FOLLOWING
LENGTH IS COLLECTION PERIOD:
Five Collection Periods [ ] Collection Period
Four Collection Periods [ ] Collection Period
Three Collection Periods [ ] Collection Period
Two Collection Periods [ ] Collection Period
One Collection Period [ ] Collection Period
However, if at any time after the [ ] distribution date, any other outstanding
series [,excluding some series,] shall have entered into an early amortization
period, the Accumulation Period Commencement Date shall be the earlier of (i)
the date that that outstanding series shall have entered into its early
amortization period and (ii) the Accumulation Period Commencement Date as
previously determined. See "Annex I-- Other Series of Investor Certificates"
The effect of the calculation of the Accumulation Period Length will
allow us to reduce the length of the Accumulation Period based on the invested
amounts of other series which are scheduled to be in their revolving periods
during the Accumulation Period and on increases in the principal payment rate.
Unless and until an Early Amortization Period [or Reinvestment Period]
that is not terminated as described in this prospectus supplement shall have
occurred and until the outstanding principal balance of the Series [ ]-[ ]
certificates is paid in full, on each distribution date with respect to the
[Accumulation Period][Controlled Amortization Period], collections of principal
receivables allocable to the Series [ ]-[ ] Certificateholders' Interest plus
other amounts comprising Monthly Principal will no longer be paid for the
benefit of another series or to the seller. Instead, those collections up to the
[Controlled Deposit Amount][Controlled Distribution Amount] for each of those
distribution dates will be [deposited in the Principal Funding
Account][distributed to the Series [ ]-[ ] certificateholders]. [We will use the
funds deposited in the Principal Funding Account and any amounts in the Excess
Funding Account to pay the outstanding principal balance of the Series [ ]-[ ]
certificates on the Series [ ]-[ ] Expected Payment Date. If on that date the
total amount in the Principal Funding Account and the Excess Funding Account is
less than the outstanding principal balance of the Series [ ]-[ ] certificates,
the Early Amortization Period will commence. On each subsequent distribution
date the Series [ ]-[ ] certificateholders will receive distributions of Monthly
Principal and Monthly Interest until the outstanding principal balance of the
Series [ ]-[ ] certificates has been paid in full or the Termination Date has
occurred. Even if the total amount in the Principal Funding Account Balance and
the Excess Funding Account on the Series [ ]-[ ] Expected Payment Date is
insufficient to pay the outstanding principal balance of the Series [ ]-[ ]
certificates in full, we will distribute that amount to the Series [ ]-[ ]
certificateholders at that time.] [However, we will not make any payments of
principal on the Series [ ]-[ ] certificates during the Prefunded Period.]
EXCESS FUNDING ACCOUNT
Unless and until an Early Amortization Event [or Reinvestment Event]
shall have occurred, we will keep the Excess Funded Amount in the Excess Funding
Account established with the trustee. The Excess Funded Amount will initially
equal the excess, if any, of the initial principal balance of the Series [ ]-[ ]
certificates, over the Initial Invested Amount. The trustee will invest funds on
deposit in the Excess Funding Account at the direction of the servicer in
Eligible Investments. Those investments must mature on or prior to the next
distribution date.
We will pay funds on deposit in the Excess Funding Account to the
seller or allocate them to one or more series which are in amortization, early
amortization or accumulation periods, but only to the extent of any increases in
the Invested Amount as a result of the addition of receivables to the trust, a
reduction in the Seller's Interest, or a reduction in the invested amount of any
other series. We will deposit additional amounts in the Excess Funding Account
on a distribution date to the extent that (i) the sum of (a) the Series [ ]-[ ]
Certificateholders' Interest in Principal Receivables, determined for this
purpose by reducing the interest by the amount, if any, by which the Required
Participation Amount exceeds the Pool Balance due to an increase in the
Subordination Factor, and (b) the amount on deposit in the Excess Funding
Account prior to the deposit on that distribution date is less than (ii) the
outstanding principal balance of the Series [ ]-[ ] certificates, but only to
the extent that funds are available as described in this prospectus supplement.
If other series provide for excess funding accounts or other arrangements
similar to the Excess Funding Account involving fluctuating levels of investment
in the receivables, the allocation of additional receivables to increase the
Invested Amount will be based on the proportion that the amount on deposit in
the Excess Funding Account bears to the amounts on deposit in the excess funding
accounts of all series providing for excess funding accounts or similar
arrangements or to amounts otherwise similarly available. The deposit of amounts
in the Excess Funding Account will be based on the proportion that the Adjusted
Invested Amount bears to the adjusted invested amounts of all series providing
for excess funding accounts or similar arrangements.
On each distribution date, we will apply all investment income
received on amounts in the Excess Funding Account during the related Collection
Period as described in this prospectus supplement.
On the [ ] distribution date we will transfer any funds on deposit in
the Excess Funding Account to the Principal Funding Account. No funds will be
deposited in the Excess Funding Account during any Early Amortization Period.
Also, we will not deposit any amounts into the Excess Funding Account with
respect to any Collection Period following the [ ] Collection Period.]
ALLOCATION PERCENTAGES
ALLOCATION BETWEEN THE SERIES [ ]-[ ] CERTIFICATEHOLDERS AND THE
SELLER. We will allocate funds to the Series [ ]-[ ] certificateholders on the
basis of various percentages. Which percentage we use depends on whether the
collections being allocated are interest collections, principal collections or
other amounts and whether or not the collections are received in the Revolving
Period.
The servicer will allocate amounts initially allocated to Series [ ]-[
] as described under "Description of the Certificates - Allocation Percentage"
in the prospectus between the Series [ ]-[ ] Certificateholders' Interest and
the Seller's Interest for each Collection Period as follows:
(i) Series Allocable Interest Collections and the Series
Allocable Defaulted Amount will be allocated to Series [ ]-[ ]
certificateholders based on the Floating Allocation Percentage[. During any
Early Amortization Period, however, Series Allocable Interest Collections will
be allocated to the Series [ ]-[ ] certificateholders based on the Principal
Allocation Percentage];
(ii) during any period that is not the Accumulation Period or an
Early Amortization Period (a "Nonprincipal Period"), Series Allocable Principal
Collections will be allocated to Series [ ]-[ ] certificateholders based on the
Floating Allocation Percentage;
(iii) during the [Accumulation Period][Controlled Amortization
Period] and any Early Amortization Period [or Reinvestment Period], Series
Allocable Principal Collections will be allocated to Series [ ]-[ ]
certificateholders based on the [Principal Allocation Percentage][other]; and
(iv) Series Allocable Miscellaneous Payments will at all times be
allocated to Series [ ]-[ ] certificateholders.
We will allocate to the seller all amounts that are not allocated to
the Series [ ]-[ ] certificateholders as described above.
The "Floating Allocation Percentage" effects, in general, a pro rata
allocation based on the Invested Amount, The "Floating Allocation Percentage"
for any Collection Period will be [the percentage equivalent, which shall never
exceed 100%, of a fraction, the numerator of which is the Invested Amount as of
the last day of the immediately preceding Collection Period and the denominator
of which is the product of (x) the Pool Balance as of that last day and (y) the
Series Allocation Percentage for the Collection Period in respect of which the
Floating Allocation Percentage is being calculated. With respect to the first
Collection Period, however, the Floating Allocation Percentage shall mean the
percentage equivalent of a fraction, the numerator of which is the Initial
Invested Amount as of the Series Issuance Date and the denominator of which is
the Series Allocation Percentage of the Pool Balance as of the Series Cut-Off
Date][other].
The "Principal Allocation Percentage" is, in general, based on the
Invested Amount at the end of the Revolving Period. Consequently, even though we
are distributing or accumulating principal collections for Series [ ]-[ ]
certificateholders, the numerator used for the calculation will not decline. The
"Principal Allocation Percentage" for any Collection Period will be [the
percentage equivalent, which shall never exceed 100%, of a fraction, the
numerator of which is the Invested Amount as of the last day of the Revolving
Period, if that last day has occurred or, if that last day has not occurred, as
of the last day of the immediately preceding Collection Period and the
denominator of which is the product of (x) the Pool Balance as of that last day
and (y) the Series Allocation Percentage for the Collection Period in respect of
which the Principal Allocation Percentage is being calculated][other].
The "Invested Amount" represents the amount of outstanding principal
receivables allocable to the Series [ ]-[ ] certificateholders. The Invested
Amount may increase or decrease depending on principal collection deposited into
or released from the Excess Funding Account, principal distributed to or
accumulated for Series [ ]-[ ] certificateholders and losses on the receivables
and the reimbursement of those losses. The "Invested Amount" for any date will
be [an amount equal to the Initial Invested Amount (x) minus the amount, without
duplication, of principal payments, except for principal payments made from the
Excess Funding Account, made to Series [ ]-[ ] certificateholders or deposited
to the Principal Funding Account in respect of the Series [ ]-[ ] certificates
prior to that date since the Series Issuance Date (y) minus the excess, if any,
of (i) the aggregate amount of Investor Charge-Offs for all distribution dates
preceding that date, over (ii) the aggregate amount of any reimbursements of
Investor Charge-Offs for all distribution dates preceding that date][other].
The "Initial Invested Amount" means [[the portion of the initial
principal amount of the Series [ ]-[ ] certificates which is invested in
principal receivables on the Series Issuance Date, which is expected to equal $[
], based on information as of the Series Cut-off Date,] during the Prefunded
Period, zero and after that time [ ]], (x) plus the amount of any withdrawals
from the Excess Funding Account in connection with the purchase of an additional
interest in principal receivables since the Series Issuance Date, (y) minus the
amount of any additions to the Excess Funding Account in connection with a
reduction in the principal receivables in the trust or an increase in the
Subordination Factor since the Series Issuance Date.
The Floating Allocation Percentage and the Principal Allocation
Percentage will be adjusted for any Collection Period in which Additional
Accounts are designated to reflect the additional receivables added to the
trust.
PRINCIPAL COLLECTIONS FOR ALL SERIES
We will allocate principal collections allocated to the Series [ ]-[ ]
Certificateholders' Interest for any Collection Period first [to make required
deposits to the Excess Funding Account during the Revolving Period], [to make
required payments of principal [to the Principal Funding Account during the
[Accumulation Period] [or Reinvestment Period] and] to the Series [ ]-[ ]
certificateholders during [the Controlled Amortization Period and] any Early
Amortization Period] [describe other applications, if applicable]. See
"Distributions from the Collection Account; [Reserve Fund;] Yield Supplement
Account; Other Enhancement -- Principal Collections". The servicer will
determine the amount of Available Series [ ]-[ ] Certificateholder Principal
Collections for any Collection Period remaining after required payments, if any,
and the amount of any similar excess for any other series ("Excess Principal
Collections"). The servicer will allocate Excess Principal Collections to cover
any principal distributions to certificateholders for any series entitled to
them which are either scheduled or permitted and which have not been covered out
of principal collections and other amounts allocated to those series ("Principal
Shortfalls"). See "Maturity and Principal Payment Considerations". We will
generally not use Excess Principal Collections to cover investor charge-offs for
any series. If Principal Shortfalls exceed Excess Principal Collections for any
Collection Period, we will allocate Excess Principal Collections [pro rata among
the applicable series based on the relative amounts of Principal Shortfalls]
[describe other method of applying, if applicable].
ALLOCATION OF COLLECTIONS; LIMITED SUBORDINATION OF SELLER'S INTEREST
On any date on which collections are deposited in the Collection
Account, the servicer will distribute directly to the seller an amount equal to
(a) the Excess Seller's Percentage for the related Collection Period of Series
Allocable Interest Collections for that date and (b) the Excess Seller's
Percentage for the related Collection Period of Series Allocable Principal
Collections for that date. However, the servicer will make this distribution
only if the Seller's Participation Amount, determined after giving effect to any
Principal Receivables transferred to the trust on that date, exceeds the Trust
Available Subordinated Amount for the immediately preceding Determination Date,
after giving effect to the allocations, distributions, withdrawals and deposits
to be made on the distribution date immediately following that Determination
Date.
The "Excess Seller's Percentage" is an allocation percentage that
reflects the seller's share of cancellations that will not be available as part
of the Available Seller's Collections to cover losses and shortfalls allocable
to the Series [ ]-[ ] certificates.
Also, during any Nonprincipal Period, subject to limitations, the
servicer will distribute directly to the seller on each date of deposit an
amount equal to the Available Seller's Principal Collections for that date.
However, the servicer will make this distribution only if the Seller's
Participation Amount, determined after giving effect to any principal
receivables transferred to the trust on that date, exceeds the Trust Available
Subordinated Amount for the immediately preceding Determination Date, after
giving effect to the allocations, distributions, withdrawals and deposits to be
made on the distribution date immediately following that Determination Date.
[describe exceptions, if any]
The "Available Seller's Principal Collections" is the seller's share
of principal collections that are part of the Available Seller's Collections,
which are generally available to cover losses and shortfalls allocable to the
Series [ ]-[ ] certificates. The Available Seller's Interest Collections is also
part of the Available Seller's Collections. The allocation percentage used to
determine each of these amounts is the percentage equal to the Seller's
Percentage minus the Excess Seller's Percentage. The Seller's Percentage is the
allocation percentage used to determine the seller's entire share of
collections. It will vary depending on whether interest collections, principal
collections or defaulted receivables are being allocated and whether the
allocation occurs during the Revolving Period. The "Seller's Percentage" means
100% minus
the Floating Allocation Percentage, when used with respect to interest
collections [, except during any Early Amortization Period], Defaulted
Receivables and principal collections during any Nonprincipal Period, and
the [Principal Allocation Percentage][other], when used with respect
to [interest collections during any Early Amortization Period and] principal
collections during the [Accumulation Period] [Controlled Amortization Period]
and any Early Amortization Period [or Reinvestment Period].
The "Seller's Participation Amount" for any date means an amount equal
to the Pool Balance on that date minus the aggregate invested amounts for all
outstanding series on that date.
DEFICIENCY AMOUNT
[On each Determination Date [with respect to a distribution date that
occurs on or prior to the Fully Reinvested Date [or any distribution date after
that date during the Revolving Period, if the Revolving Period has
recommenced]], the servicer will determine any shortfall in amounts payable to
or for the account of the Series [ ]-[ ] certificateholders and losses on the
receivables that are allocable to the Series [ ]-[ ] certificates. This
shortfall and loss amount is the "Deficiency Amount". It is calculated as the
amount, if any, by which (a) the sum of (i) Monthly Interest for the following
distribution date, (ii) Monthly Interest accrued but not paid with respect to
prior distribution dates, and interest on that Monthly Interest, (iii) the
Monthly Servicing Fee for that distribution date, (iv) the Investor Default
Amount for that distribution date, (v) the amount of any Adjustment Payment
allocated to the Series [ ]-[ ] certificates for that distribution date that has
not been deposited in the Collection Account as required under the Pooling and
Servicing Agreement and (vi) if that distribution date is the final distribution
date, any Carry-over Amount on that distribution date that will not be satisfied
on that date by the application of amounts on deposit in the Yield Supplement
Account as described under "Distributions from the Collection Account; Reserve
Fund; Yield Supplement Account; Other Enhancement -- Yield Supplement Account",
exceeds (b) the sum of (i) Certificateholder Interest Collections and Investment
Proceeds for that distribution date, (ii) [Excess Interest collections allocated
to Series [ ]-[ ] with respect to that distribution date] [and (iii) the amount
of funds in the Reserve Fund on that Determination Date available to fund any
portion of the Deficiency Amount as described under "Distributions from the
Collection Account; Reserve Fund[; Yield Supplement Account] -- Interest
Collections"]. The lesser of the Deficiency Amount and the Available
Subordinated Amount is the "Draw Amount".(1) [Include other sources of funds and
applications of the Draw Amount, as appropriate.]1 We will use Available
Seller's Collections, up to the Draw Amount, to cover the shortfalls and losses
represented by the Deficiency Amount.
AVAILABLE SUBORDINATED AMOUNT
The amount of seller's collections available to cover any Deficiency
Amount is limited to Available Seller's Collections, which is in turn determined
by the Available Subordinated Amount. Under certain circumstances, the seller
may, but is not obligated to, increase the Available Subordinated Amount by the
Incremental Subordinated Amount. The formulas for determining these amounts are
set forth below.
The "Available Subordinated Amount" for a Determination Date is equal
to (a) the lesser of (i) the Available Subordinated Amount for the preceding
Determination Date, minus, with limitations, the Draw Amount for that preceding
Determination Date, [minus funds from the Reserve Fund applied to cover any
portion of the Investor Default Amount,] plus the excess, if any, of the
Required Subordinated Amount for that Determination Date over the Required
Subordinated Amount for the immediately preceding Determination Date due to an
increase in the Subordination Factor, plus the amount of Excess Servicing
available to be paid to the seller as described under "Distributions from the
Collection Account[; Reserve Fund;] [Yield Supplement Account][; Other
Enhancement]-- Excess Servicing", and (ii) the product of the fractional
equivalent of the Subordinated Percentage and the Invested Amount, minus (b) in
the case of clause (i)(a), the Incremental Subordinated Amount for that
preceding Determination Date, plus (c) the Incremental Subordinated Amount for
the current Determination Date, plus (iii) the Subordinated Percentage of funds
to be withdrawn from the Excess Funding Account on the succeeding distribution
date and paid to the seller or allocated to one or more series.] (1) Modify, as
appropriate, if interest collections, Investment Proceeds and Available Sellers'
Collections from one series will be available to cover interest or other
shortfalls for a related series.
However, from and after the commencement of the [Accumulation
Period][Controlled Amortization Period] until the [Series [ ]-[ ]] certificates
are paid in full and from and after the commencement of any Early Amortization
Period that is not terminated as described in this prospectus supplement until
the payment in full of the [Series [ ]-[ ]] certificates, we will calculate the
Available Subordinated Amount on the basis of the Invested Amount as of the
close of business on the day preceding the [Accumulation Period] [Controlled
Amortization Period] or Early Amortization Period, as applicable. [Also, from
and after the commencement of any Reinvestment Period that is not terminated
until the earliest of (a) the commencement of any Early Amortization Period that
is not terminated as described in this prospectus supplement, (b) the payment in
full of the [Series [ ]-[ ]] certificates and (c) the Fully Reinvested Date, we
will calculate the Available Subordinated Amount on the basis of the Invested
Amount as of the close of business on the day preceding that Reinvestment Period
[less [describe permitted reductions]. The Available Subordinated Amount for the
first Determination Date is equal to the Required Subordinated Amount.
The "Required Subordinated Amount" is, as of any date of
determination, [the sum of] (a) the product of the initial Subordinated
Percentage[, as adjusted from time to time as described in this prospectus
supplement other than as a result of an increase in the Subordinated Percentage
at the option of the seller,] and the Invested Amount [and the Incremental
Subordinated Amount.]
Assuming that the Initial Invested Amount of the [Series [ ]-[ ]]
certificates is equal to the initial principal amount of the [Series [ ]-[ ]]
certificates, the Required Subordinated Amount would initially be $[ ].
The "Incremental Subordinated Amount" on any Determination Date will
equal the result obtained by multiplying (i) a fraction, the numerator of which
is the sum of the Invested Amount on the last day of the immediately preceding
Collection Period and the Available Subordinated Amount for that Determination
Date, calculated without adding the Incremental Subordinated Amount for that
Determination Date as described in the third clause in the definition of
"Available Subordinated Amount" above, and the denominator of which is the Pool
Balance on that last day by (ii) the excess, if any, of (a) the sum of the
Overconcentration Amount, the Installment Balance Amount and the aggregate
amount of Ineligible Receivables on that Determination Date over (b) the
aggregate amount of Ineligible Receivables, receivables in Accounts containing
Dealer Overconcentrations and receivables in Installment Balances, in each case
that became Defaulted Receivables during the preceding Collection Period and are
not subject to reassignment from the trust, unless insolvency events relating to
the seller or [ ] have occurred, as further described in the Pooling and
Servicing Agreement.
The "Subordinated Percentage" will initially equal the percentage
equivalent of a fraction, the numerator of which is the Subordination Factor and
the denominator of which will be the excess of 100% over the Subordination
Factor. The "Subordination Factor" will [initially] be [ ]% [, but will be
subject to increase to [ ]% in the event that the rating of [ ]'s long-term
unsecured debt is lowered below BBB- by Standard & Poor's or withdrawn by
Standard & Poor's, unless the seller receives written confirmation from Standard
& Poor's that the failure to so increase the Subordination Factor would not
result in Standard & Poor's lowering or withdrawing its rating of the [Series [
]-[ ]] certificates. The seller may, in its sole discretion, at any time
increase the Available Subordinated Amount for so long as the cumulative amount
of the increases does not exceed the lesser of (i) $ [ ] or (ii) [ ]% of the
Invested Amount. The seller is not under any obligation to increase the
Available Subordinated Amount at any time, except as described in this
prospectus supplement. If [the sum of] the Available Subordinated Amount [and
the Incremental Subordinated Amount] were reduced to less than the Required
Subordinated Amount [and the Incremental Subordinated Amount], a [Reinvestment
Event] [Early Amortization Event] would occur. The seller could elect to
increase the Available Subordinated Amount at the time the [Reinvestment Event]
[Early Amortization Event] would otherwise occur, thus preventing or delaying
the occurrence of the [Reinvestment Event] [Early Amortization Event] [Describe
partial Reinvestment Periods resulting from a failure to meet the test described
above, if applicable.].
[Negative Carry Subordinated Amount. We will set aside funds to
mitigate the decrease in interest collections that arises when principal
collections are deposited in an account and invested in Eligible Investments
rather than reinvested in receivables. In the event of the occurrence of [a
Reinvestment Event,] [an Early Amortization Event] [or the commencement of the
Accumulation Period] [or the commencement of the Controlled Amortization
Period], Interest Collections and Principal Collections otherwise distributed to
the seller in respect of the Excess Seller's Percentage will be deposited to the
Reserve Fund [and other] until the aggregate amount of the deposits made for
that purpose is $[ ]. We will not replenish any of those funds that are
deposited for that purpose and are later withdrawn from the Reserve Fund.
[Describe other subordination of the Seller's Interest, if
applicable.]
DISTRIBUTIONS FROM THE COLLECTION ACCOUNT[; RESERVE FUND] [; YIELD
SUPPLEMENT ACCOUNT][; OTHER ENHANCEMENT]
INTEREST COLLECTIONS. On each distribution date [with respect to a
Collection Period that ends prior to the Fully Invested Date [and each
Collection Period after the Fully Invested Date during the Revolving Period]],
the trustee will apply Series [ ]-[ ] Certificateholder Interest Collections and
Investment Proceeds, if any, [Excess Interest Collections allocated to Series [
]-[ ] [other amounts] in respect of the related Collection Period to make the
following distributions in the following priority:
(i) [first, the trustee will [deposit into the Interest Funding
Account] [distribute to the Series [ ]-[ ] certificateholders] an amount equal
to Monthly Interest for that distribution date, plus the amount of any Monthly
Interest previously due but not [deposited to the Interest Funding Account or]
distributed on a prior distribution date, plus, but only to the extent permitted
under applicable law, interest at the Certificate Rate on Monthly Interest
previously due but not [deposited or] distributed;
(ii) [second, [describe application, if any, to cover interest or
other shortfalls with respect to related series;]
(iii) third, the trustee will distribute to the servicer an
amount equal to the Monthly Servicing Fee for that distribution date, unless
that amount has been netted against deposits to the Collection Account as
described in the prospectus under "Description of the Certificates -- Allocation
of Collections; Deposits in Collection Account" or waived by the servicer;
(iv) [fourth, the trustee will deposit into the Reserve Fund an
amount equal to the Reserve Fund Deposit Amount, if any, for that distribution
date shall be deposited in the Reserve Fund;]
(v) fifth, an amount equal to the Investor Default Amount, if
any, for that distribution date shall be treated as a portion of Available
Series [ ]-[ ] Certificateholder Principal Collections for that distribution
date;
(vi) [sixth, the trustee will distribute to the Series [ ]-[ ]
certificateholders an amount equal to any outstanding Carry-over Amount, after
giving effect to any withdrawals from the Yield Supplement Account;]
(vii) [seventh, the trustee will deposit into the Yield
Supplement Account an amount equal to the Yield Supplement Account Deposit
Amount, if any, for that distribution date;]
(viii) [eighth, describe other applications, if any]; and
(ix) ninth, the balance shall constitute Excess Servicing].
[Describe application of Interest Collections, Investment Proceeds and
other amounts allocated to related series to cover distributions under the first
clause above, if applicable.]
[If, during the Prefunded Period, the Investment Proceeds [describe
other funds] are not sufficient to make the entire distributions required by the
first clause above, the trustee shall withdraw funds from the Yield Supplement
Account and apply the funds to complete the distributions under that clause.]
[If [Series [ ]-[ ]] Certificateholder Interest Collections and
Investment Proceeds [Excess Interest Collections allocated to Series [ ]-[ ]
[describe other funds] are not sufficient to make the entire distributions
required by the first, second, third and fifth clauses above and, in the case of
the final payment date only, the sixth clause above, the trustee [after applying
amounts on deposit in the Yield Supplement Account and [describe other funds]]
shall withdraw funds from the Reserve Fund and apply those funds to complete the
distributions under those clauses. In the case of the sixth clause above, the
withdrawal will be limited to amounts that would otherwise be distributable to
the seller. During any Early Amortization Period [or Reinvestment Period],
however, the trustee will not apply funds in the Reserve Fund to make
distributions required by the fifth clause above to the extent that, after
giving effect to the application, the amount on deposit in the Reserve Fund
would be less than $[ ].]
If there is a Draw Amount for the distribution date and the
distribution date is not the final payment date, the trustee shall apply the
amount of Available Seller's Collections for the related Collection Period on
deposit in the Collection Account on that distribution date, but only up to the
Draw Amount, to make the distributions required by the first, second, third and
fifth clauses above [that have not been made through the application of funds
from the Reserve Fund [or the Yield Supplement Account] [or describe other
funds] as described in the preceding paragraph.] If there is a Draw Amount for
that distribution date and that distribution date is the final distribution
date, the trustee shall apply the amount of Available Seller's Collections for
the related Collection Period on deposit in the Collection Account on that
distribution date, but only up to the Draw Amount, to make the distributions
required by the first, second, third, fifth and sixth clauses above that have
not been made through the application of funds from the Reserve Fund [or the
Yield Supplement Account] [or described other funds] as described in the
preceding paragraph.] Additionally, the trustee will apply Available Seller's
Collections to any unpaid Adjustment Payments. The Available Subordinated Amount
will be reduced by the amount of Available Seller's Collections so applied. If
the Draw Amount exceeds the Available Seller's Collections, the Available
Subordinated Amount will be reduced by the amount of the excess, but not by more
than the sum of the Investor Default Amount and the portion of Adjustment
Payments not paid by the seller, in order to maintain the Invested Amount, but
not by more than the Investor Default Amount for the distribution date.
"[Series [ ]-[ ]] Certificateholder Interest Collections" for any
distribution date will be the portion of Series Allocable Interest Collections
for the related Collection Period allocated to the [Series [ ]-[ ]]
Certificateholders' Interest as described under "Allocation Percentages --
Allocation Between the [Series [ ]-[ ]] Certificateholders and the Seller".
"Investment Proceeds" for any distribution date will be an amount
equal to the sum of investment earnings for the preceding Collection Period
from:
(a) [funds held in the Reserve Fund;]
(b) [the Series Allocation Percentage of funds held in the
Collection Account;]
(c) [funds held in the Excess Funding Account;]
(d) [funds held in the Yield Supplement Account;]
(e) [funds held in the Principal Funding Account;]
(f) [funds held in the Prefunding Account;]
(g) [funds held in the Interest Funding Account;]
(h) [funds held in [other accounts].]
[INVESTMENT PROCEEDS. On each distribution date with respect to a
Collection Period that ends after the Fully Reinvested Date [other than any of
those Collection Periods during the Revolving Period], the trustee will apply
Investment Proceeds [Excess Interest Collections allocated to Series [ ]-[ ] ]
[describe other funds], in respect of the related Collection Period to make the
following distributions in the following priority:
(a) first, an amount equal to Monthly Interest for that
distribution date, plus, the amount of any Monthly Interest previously due but
not [deposited in the Interest Funding Account or] distributed on a prior
distribution date, plus, but only to the extent permitted under applicable law,
interest at the Certificate Rate plus [ ]% on Monthly Interest previously due
but not [deposited or] distributed, shall be [deposited to the Interest Funding
Account] [distributed to Series [ ]-[ ] certificateholders;
(b) [second, describe other applications, including, if
applicable, to cover interest or other shortfalls with respect to related
series; and]
(c) third, the balance shall be distributed to the seller.]
[Describe application of Interest Collections, Investment Proceeds and
other amounts allocated to related Series to cover distributions under the first
clause above, if applicable.]
[If, on any distribution date, Investment Proceeds [Excess Interest
Collections allocated to Series [ ]-[ ] ] [describe other funds] are not
sufficient to make the entire distribution required in clause first above [after
applying [describe other funds]], the trustee shall withdraw funds from the
Reserve Fund and apply those funds to complete the distribution under that
clause.]
[RESERVE FUND. The "Reserve Fund" will be an Eligible Deposit Account
established and maintained in the name of the trustee for the benefit of the
[Series [ ]-[ ]] certificateholders. On the Series Issuance Date, the seller
will deposit $[ ] ([ ]% of the principal balance of the Series [ ]-[ ]
certificates) into the Reserve Fund. We will deposit certain collections into
the Reserve Fund in an effort to keep the Reserve Fund Required Amount in the
Reserve Fund. The "Reserve Fund Required Amount" for any distribution date will
equal [ ]% of the outstanding principal balance of the [Series [ ]-[ ]]
certificates for that distribution date, after giving effect to any change in
that balance on that distribution date. [Describe any increases in the Reserve
Fund Required Amount.] Funds in the Reserve Fund will be invested in Eligible
Investments that will mature on or prior to the next distribution date. On each
Determination Date, the servicer will apply any investment earnings (net of
losses and investment expenses) with respect to the Reserve Fund as set forth
under "Distributions from the Collection Account; Reserve Fund[; Yield
Supplement Account] [Other Enhancement]". After the earlier of the payment in
full of the outstanding principal balance of the [Series [ ]-[ ]] certificates
and the Termination Date, any funds remaining on deposit in the Reserve Fund
will be paid to the seller. [Describe other applications, if any.]
If, after giving effect to the allocations, distributions and deposits
in the Reserve Fund described above under "Interest Collections", the amount in
the Reserve Fund is less than the Reserve Fund Required Amount for the next
distribution date, the trustee shall deposit any remaining Available Seller's
Collections for the related Collection Period into the Reserve Fund until the
amount in the Reserve Fund is equal to that Reserve Fund Required Amount.
If, for any distribution date with respect to an Early Amortization
Period [or Reinvestment Period], after giving effect to the allocations,
distributions and deposits described in the preceding paragraph, the amount in
the Reserve Fund is less than the Excess Reserve Fund Required Amount for that
distribution date, the trustee shall deposit the remaining Available Seller's
Collections for the related Collection Period into the Reserve Fund until the
amount in the Reserve Fund is equal to that Excess Reserve Fund Required Amount.
[YIELD SUPPLEMENT ACCOUNT. The "Yield Supplement Account" will be an
Eligible Deposit Account established and maintained in the name of the trustee
for the benefit of the Series [ ]-[ ] certificateholders. On the Series Issuance
Date, the seller will deposit $[ ] ([ ]% of the principal balance of the Series
[ ]-[ ] certificates) into the Yield Supplement Account. We will apply funds in
the Yield Supplement Account toward the payment of the shortfalls interest
distributions to Series [ ]-[ ] certificateholders] described in the following
paragraph. After the Series Issuance Date, we will fund the Yield Supplement
Account as described under "Interest Collections" above.
[On any distribution date with respect to the Prefunded Period on
which Investment Proceeds [describe other funds] are insufficient to make the
entire distributions required by the first clause] under "Interest Collections"
above, the trustee will apply the amount on deposit in the Yield Supplement
Account on that distribution date toward payment of that insufficiency.] [On any
distribution date on which there is a Carry-over Amount, the trustee will apply
the amount on deposit in the Yield Supplement Account on that distribution date
toward payment of that Carry-over Amount to satisfy that Carry-over Amount.]
[Describe other applications, e.g., to pay Monthly Interest [other than during a
Prefunded Period].] Funds in the Yield Supplement Account will be invested [in
Eligible Investments that mature on or prior to the next distribution date] [at
the direction of the servicer in any investments consisting of financial assets
that by their terms convert to cash within a finite period of time]. On each
Determination Date, the servicer will apply any investment earnings, net of
losses and investment expenses, with respect to the Yield Supplement Account as
set forth under "Distributions from the Collection Account; [Reserve Fund;]
Yield Supplement Account; Other Enhancement". After the earlier of the payment
in full of the outstanding principal balance of the Series [ ]-[ ] certificates
and the Termination Date, any funds remaining on deposit in the Yield Supplement
Account will be paid to the seller. [Describe other applications.]]
EXCESS SERVICING. On each distribution date [with respect to a
Collection Period that ends prior to the Fully Reinvested Date [or any
Collection Period that ends after the Fully Reinvested Date during the Revolving
Period]], the servicer will allocate Excess Servicing with respect to the
Collection Period immediately preceding that distribution date, in the following
priority:
(a) [FIRST, we will allocate an amount equal to the aggregate
amount of Investor Charge-Offs which have not been previously reimbursed, after
giving effect to the allocation on that distribution date of Series Allocable
Miscellaneous Payments with respect to that distribution date, in the same
manner as we allocate Available [Series [ ]-[ ]] Certificateholder Principal
Collections for that distribution date;
(B) SECOND, the trustee will pay to the servicer an amount equal
to the aggregate outstanding amounts of the Monthly Servicing Fee which have
been previously waived as described under "Description of the certificates --
Servicing Compensation and Payment of Expenses" in the prospectus;
(c) [THIRD, describe other applications; and]
(D) FOURTH, the balance, if any, shall increase the Available
Subordinated Amount as described in the definition of "Available Subordinated
Amount" and be distributed to the seller.]
PRINCIPAL COLLECTIONS
On each distribution date [with respect to a Collection Period that
ends prior to the Fully Reinvested Date [or any Collection Period that ends
after the Reinvested Date during the Revolving Period]], the servicer will
allocate Available [Series [ ]-[ ]] Certificateholder Principal Collections as
follows:
(a) for each distribution date with respect to any Nonprincipal
Period, the servicer will allocate all Available Series [ ]-[ ]
Certificateholder Principal Collections FIRST, to make a deposit to the Excess
Funding Account if the sum of (i) the [Series [ ]-[ ]] Certificateholders'
Interest in Principal Receivables, determined for this purpose by reducing that
interest by the amount, if any, by which the Required Participation Amount
exceeds the Pool Balance due to an increase in the Subordination Factor, and
(ii) the amount on deposit in the Excess Funding Account prior to the allocation
on that distribution date is less than the outstanding principal balance of the
[Series [ ]-[ ]] certificates and SECOND to Excess Principal Collections as
described under "Allocation Percentages-- Principal Collections for all Series";
and
(b) for each distribution date with respect to the [Accumulation
Period][Controlled Amortization Period], all Available [Series [ ]-[ ]]
Certificateholder Principal Collections the servicer will allocate:
(i) first, an amount equal to Monthly Principal for that
distribution date will be deposited to the Principal Funding
Account; and
(ii) second, the balance, if any, will be allocated to
Excess Principal Collections; and
(c) for each distribution date with respect to any Early
Amortization Period, the trustee will distribute an amount equal to the Monthly
Principal to the [Series [ ]-[ ]] certificateholders.
[If the Invested Amount is greater than zero on the Termination Date,
any funds remaining in the Reserve Fund, after the application of funds in the
Reserve Fund as described above under "Interest Collections", will be treated as
a portion of Available [Series [ ]-[ ]] Certificateholder Principal Collections
for the distribution date occurring on the Termination Date.]
"Monthly Principal" is the amount of principal that we will distribute
to or accumulate for the Series [ ]-[ ] certificateholders. The "Monthly
Principal" with respect to any distribution date relating to the [Accumulation
Period][Controlled Amortization Period] or any Early Amortization Period [or
Reinvestment Period] will equal Available [Series [ ]-[ ]] Certificateholder
Principal Collections for that distribution date. For each distribution date,
however, [with respect to the Controlled Amortization Period, Monthly Principal
will not exceed the Controlled Deposit Amount]. Also, Monthly Principal will not
exceed the Invested Amount.
During the "Controlled Accumulation Period", we intend to accumulate
each month a fixed amount equal to the Controlled Accumulation Amount, which is
equal to the Invested Amount as of the [ ] distribution date, after giving
effect to any changes in the Invested Account on that date, divided by the
Accumulation Period Length. Because there may be funds in the Excess Funding
Account and the amount of principal collection may fluctuate, we intend to
accumulate the Controlled Deposit Amount in each distribution date in the
Controlled Accumulation Period.
The "Controlled Deposit Amount" for a distribution date will be the
excess, if any, of (a) the sum of (i) the product of the Controlled Accumulation
Amount and the number of distribution dates from and including the first
distribution date with respect to the Accumulation Period through and including
that distribution date, but not in excess of the Accumulation Period Length, and
(ii) the amount on deposit in the Excess Funding Account as of the [ ]
distribution date, after giving effect to any withdrawals from or deposits to
that account on that date, other than the transfer to the Principal Funding
Account of amounts on deposit in the Excess Funding Account on that date)), over
(b) the sum of amounts on deposit in the [Excess Funding Account and] the
Principal Funding Account, in each case before giving effect to any withdrawals
from or deposits to those accounts on that distribution date.]
REQUIRED PARTICIPATION PERCENTAGE
As described under "Description of the Certificates" in the
prospectus, the seller will be required to add the receivables of Additional
Accounts if the Pool Balance at the end of a Collection Period is less than the
Required Participation Amount for the following distribution date. The
calculation of the Required Participation Amount is a function of the Required
Participation Percentage. The "Required Participation Percentage" for [Series [
]-[ ]] is [ ]%. However, if the aggregate amount of principal receivables due
from any dealer or group of affiliated dealers at the close of business on the
last day of any Collection Period with respect to which that determination is
being made is greater than [ ]% of the Pool Balance on that last day, the
Required Participation Percentage, as of that last day and with respect to that
Collection Period and the immediately following Collection Period only, will be
[ ]%. Furthermore, the seller may, upon ten days' prior notice to the trustee,
the Rating Agencies and any Enhancement provider, reduce the Required
Participation Percentage to not less than 100%, so long as the Rating Agencies
shall not have notified the seller or the servicer that any reduction will
result in a reduction or withdrawal of the rating of the [Series [ ]-[ ]]
certificates or any other outstanding series or class of certificates.
[PRINCIPAL FUNDING ACCOUNT
The servicer will establish and maintain in the name of the trustee an
Eligible Deposit Account for the benefit of the Series [ ]-[ ]
certificateholders (the "Principal Funding Account"). On each distribution date
with respect to the [Accumulation Period] [or any Reinvestment Period], we will
deposit Monthly Principal in the Principal Funding Account as provided above
under "Principal Collections". If an Early Amortization Period [that is not
terminated as described in this prospectus supplement] commences during the
[Accumulation Period] [or any Reinvestment Period], we will distribute the
Principal Funding Account Balance shall be paid to the Series [ ]-[ ]
certificateholders on the first distribution date after the Collection Period in
which the Early Amortization Period begins.
The trustee will invest all amounts on deposit in the Principal
Funding Account on any distribution date, after giving effect to distributions
to be made on that distribution date (the "Principal Funding Account Balance"),
from the date of their deposit to on or prior to the Series [ ]-[ ] Expected
Payment Date at the direction of the servicer in Eligible Investments that will
mature on or prior to the following distribution date. The servicer may select
an appropriate agent as representative of the servicer for the purpose of
designating those investments. On each distribution date, the trustee will apply
the interest and other investment income on the Principal Funding Account
Balance as provided above under "Distributions from the Collection Account[;
Reserve Fund][; Yield Supplement Account]; Other Enhancement]".]
[PREFUNDING ACCOUNT
The servicer will establish and maintain in the name of the trustee,
on behalf of the trust, an Eligible Deposit Account for the benefit of the
Series [ ]-[ ] certificateholders (the "Prefunding Account"). On the Series
Issuance Date the seller will deposit an amount equal to the initial principal
amount of the Series [ ]-[ ] certificates in the Prefunding Account. As funds
are accumulated in the Principal Funding Account for the Paired Series or
distributed to holders of certificates of those series, the trustee will
distribute an equal amount of funds on deposit in the Prefunding Account to the
seller.
The trustee will invest all amounts on deposit in the Prefunding
Account on any distribution date, after giving effect to distributions to be
made on that distribution date (the "Prefunding Account Balance"), from the date
of their deposit at the direction of the servicer in Eligible Investments that
will mature on or prior to the following distribution date. The servicer may
select an appropriate agent as representative of the servicer for the purpose of
designating those investments. On each distribution date, the trustee will apply
the interest and other investment income on the Prefunding Account Balance as
provided above under "Distributions from the Collection Account[; Reserve
Fund][; Yield Supplement Account][; Other Enhancement]".]
[Describe other Series [ ]-[ ] accounts, if applicable.]
[OTHER ENHANCEMENT]
[Describe any other Enhancement]
DISTRIBUTIONS
The trust will make payments to Series [ ]-[ ] certificateholders from
the Collection Account, [the Reserve Fund,] [the Principal Funding Account,]
[the Interest Funding Account,] [the Yield Supplement Account,] [other] and [the
Excess Funding Account].
(a) The trustee will apply funds on deposit in the
Collection Account, [the Reserve Fund,] [the Interest Funding Account,] [the
Yield Supplement Account,] [other] to make the following distributions at the
following times:
(i) on each [distribution date] [interest payment date or
Special Payment Date] all amounts on deposit in the
Collection Account, [the Reserve Fund,] [the Interest
Funding Account,] [the Yield Supplement Account] [other] as
are payable to the Series [ ]-[ ] certificateholders with
respect to accrued interest will be distributed to the
Series [ ]-[ ] certificateholders.
(b) The trustee will apply the funds on deposit in the
[Collection Account,] [the Principal Funding Account,] [other] and [the Excess
Funding Account], to make, without duplication, the following distributions at
the following times:
(i) [on each distribution date during the Controlled
Amortization Period the trustee will distribute to the
Series [ ]-[ ] certificateholders all amounts on deposit in
the Collection Account [and the Excess Funding Account]
[other] as are payable to the Series [ ]-[ ]
certificateholders with respect to principal; and]
(c) [on the Series [ ]-[ ] Expected Payment Date, the trustee
will distribute to the Series [ ]-[ ] certificateholders the Principal Funding
Account Balance, [the amount on deposit in the Excess Funding Account] [and all
amounts on deposit in the Collection Account [other] as are payable to Series [
]-[ ] certificateholders with respect to principal up to a maximum amount on
that date equal to the excess of the outstanding principal amount of the Series
[ ]-[ ] certificates over unreimbursed Investor Charge-Offs, each on that date].
(d) [on each Special Payment Date, the Principal Funding Account
Balance, the trustee will distribute to the Series [ ]-[ ] certificateholders
[the amount on deposit in the Excess Funding Account] [and all amounts on
deposit in the Collection Account][other] as are payable to Series [ ]-[ ]
certificateholders with respect to principal up to a maximum amount on that date
equal to the excess of the outstanding principal amount of the Series [ ]-[ ]
certificates over unreimbursed Investor Charge-Offs, each on that date.]
(e) On each distribution date on which there is an unpaid
Carry-over Amount, the trustee will distribute to the Series [ ]-[ ]
certificateholders that Carry-over Amount to the extent funds are available
therefor first from amounts on deposit in the Yield Supplement Account and
second to the extent funds are available for that purpose after making all
required distributions and deposits with respect to the Series [ ]-[ ]
certificates as provided above under "Distributions from the Collection Account
[; Reserve Fund;] [Yield Supplement Account][; Other Enhancement] -- Interest
Collections".];
(f) [If, on the finals distribution date, there is any Carry-over
Amount, after giving effect to any distributions on that date under the first
through third clauses above, the trustee shall distribute to the Series [.]
certificateholders (i) amounts on deposit in the Reserve Fund, to the extent
those amounts would otherwise be distributed to the seller, and (ii) Available
Seller's Collections on deposit in the Collection Account, to the extent those
amounts would otherwise be distributed to the seller, which are available to
satisfy the Carry-over Amount on the final distribution date, as described above
under "Distributions from the Collection Account; [Reserve Fund][; Yield
Supplement Account][; Other Enhancement] -- Interest Collections".
We will make the distributions to the Series [ ]-[ ]
certificateholders of record at the close of business on the day immediately
preceding the related distribution date (each of those days a "Record Date"),
except that the final distribution with respect to any Series [ ]-[ ]
Certificate will be made only upon surrender of that Series [[ ]-[ ]]
Certificate.
OPTIONAL REPURCHASE
The Series [ ]-[ ] Certificateholders' Interest will be subject to
optional repurchase by the servicer on any distribution date after the Invested
Amount becomes less than or equal to $[ ], which is [ ]% of the initial
outstanding principal amount of the Series [ ]-[ ] certificates. [Series [ ]-[ ]
certificates will also be subject to repurchase at the option of the seller or
the Series [ ]-[ ] certificateholders at any time on or after the [ ]
distribution date.] The purchase price will equal the sum of (i) the Invested
Amount of the Series [ ]-[ ] certificates on the Determination Date preceding
the distribution date on which the purchase is scheduled to be made, (ii)
accrued and unpaid interest on the Series [ ]-[ ] certificates at the
Certificate Rate, together with interest on overdue interest, [and (iii) any
outstanding Carry-Over Amount with respect to the Series [ ]-[ ] certificates.]
INVESTOR CHARGE-OFFS
Investor Default Amounts are losses incurred in the receivables during
a Collection Period that are allocable to the Series [ ]-[ ] certificateholders.
We intend to cover Investor Default Amounts as described under "Interest
Collections" under "Distribution's from the Collection Account [; Reserve Fund]
[; Yield Supplement Account] [; Other Enhancement]". If we are unable to do so,
Investor Charge-offs may occur.
If the Available Subordinated Amount is reduced to zero and on any
distribution date the Deficiency Amount is greater than zero, the outstanding
principal balance of the Series [ ]-[ ] certificates will be reduced by the
Deficiency Amount, but not by more than the Investor Default Amount for that
distribution date. Such reduction is an "Investor Charge-Off". Any reduction in
the outstanding principal balance of the Series [ ]-[ ] certificates will have
the effect of slowing or reducing the return of principal to the holders of
Series [ ]-[ ] certificates. If the outstanding principal balance of the Series
[ ]-[ ] certificates has been reduced by any Investor Charge-Offs, it will be
increased on any distribution date, but not by an amount in excess of the
aggregate unreimbursed Investor Charge-Offs, by the sum of (a) Series Allocable
Miscellaneous Payments for that distribution date and (b) the amount of Excess
Servicing allocated and available for that purpose as described above.
[REINVESTMENT EVENTS
We describe what happens upon the occurrence of a Reinvestment Event
under "Description of the Certificates--Reinvestment Events and Early
Amortization Events" in the prospectus.
The Reinvestment Events with respect to the Series [ ]-[ ]
certificates are the following:
[1 failure on the part of [ ], the servicer or [ ], as
applicable,
o to make any payment or deposit required by the Pooling
and Servicing Agreement or the Receivables Purchase
Agreement, including but not limited to any Transfer
Deposit Amount or Adjustment Payment, on or before the
date occurring two business days after the date that
payment or deposit is required to be made;
o to deliver a Distribution Date Statement on the date
required under the Pooling and Servicing Agreement, or
within the applicable grace period which will not
exceed five business days;
o to comply with its covenant not to create any lien on a
Receivable; or
o to observe or perform in any material respect any other
covenants or agreements set forth in the Pooling and
Servicing Agreement or the Receivables Purchase
Agreement, which failure continues unremedied for a
period of 45 days after written notice of that failure;
2. any representation or warranty made by the RPA seller in the
Receivables Purchase Agreement or by [ ] in the Pooling and Servicing Agreement
or any information required to be given by [ ] to the trustee to identify the
Accounts proves to have been incorrect in any material respect when made and
continues to be incorrect in any material respect for a period of 60 days after
written notice and as a result the interests of the certificateholders are
materially and adversely affected. A Reinvestment Event, however, shall not be
deemed to occur if [ ] has repurchased the related receivables or all of the
receivables, if applicable, during that period in accordance with the provisions
of the Pooling and Servicing Agreement;
3. the occurrence of events of bankruptcy, insolvency or
receivership relating to any of [ ] or [ ];
4. a failure by [ ] to convey receivables in Additional Accounts
to the trust within five business days after the day on which it is required to
convey the receivables under the Pooling and Servicing Agreement;
5. on any Determination Date, the Available Subordinated Amount
for the next distribution date will be reduced to an amount less than the
Required Subordinated Amount on that Determination Date after giving effect to
the distributions to be made on the next distribution date;
6. any Service Default with respect to the Series [ ]-[ ]
certificates occurs;
7. on any Determination Date, as of the last day of the preceding
Collection Period, the aggregate amount of Principal Receivables relating to
Used Vehicles exceeds [ ]% of the Pool Balance on that last day;
8. on any Determination Date, the average of the Monthly Payment
Rates for the two preceding Collection Periods, is less than [ ]%;
9. the delivery by the seller to the trustee, of a notice stating
that the seller will no longer continue to sell receivables to the trust
commencing on [ ] or any yearly anniversary of that date; provided, however,
that the seller shall have delivered to the trustee an opinion of counsel to the
effect that, following the discontinuation of sales of receivables, the trust
shall not become an investment company within the meaning of the Investment
Company Act of 1940, as amended;
10. on any Determination Date, the quotient expressed as a
percentage and obtained by dividing (i) the sum of (a) the amount on deposit in
the Yield Supplement Account on the next distribution date, after giving effect
to the distribution to be made on that distribution date, and (b) the amount on
deposit in the Yield Supplement Account on the immediately preceding
distribution date, after giving effect to the distributions made on that
distribution date, by (ii) the sum of (a) the outstanding principal balance of
the Series [ ]-[ ] certificates on the next distribution date, after giving
effect to all distributions and payments to be made on that distribution date,
and (b) the outstanding principal balance of the Series [ ]-[ ] certificates on
the immediately preceding distribution date, after giving effect to all
distributions and payments made on that distribution date, is less than [ ]%;
11. interest at the Certificate Rate is not paid on the Series [
]-[ ] Certificate on any interest payment date;
12. any Carry-over Amount is outstanding on six consecutive
distribution dates; and
13. [other].(2)
[In the case of any event described in the clause [1, 2 or 6] above, a
Reinvestment Event with respect to Series [ ]-[ ] will be deemed to have
occurred only if, after the applicable grace period described in those clauses,
if any, either the trustee or Series [ ]-[ ] certificateholders holding Series [
]-[ ] certificates evidencing more than 50% of the aggregate unpaid principal
amount of the Series [ ]-[ ] certificates by written notice to the seller and
the servicer, and the trustee, if given by certificateholders, declare that a
Reinvestment Event has occurred as of the date of that notice. In the case of
any event described in clause [3, 4, 5, 7, 8, 9, 10, 11, 12 or 13] above, a
Reinvestment Event with respect to Series [ ]-[ ] will be deemed to have
occurred without any notice or other action on the part of the trustee or the
Series [ ]-[ ] certificateholders immediately upon the occurrence of that
event.]
[Under limited circumstances, a Reinvestment Period which commences
prior to the scheduled end of the Revolving Period may terminate and the
Revolving Period recommence. If a Reinvestment Period results from the failure
by [ ] to convey receivables in Additional Accounts to the trust, as described
in clause 4 above, during the Revolving Period and no other Reinvestment Period
or Early Amortization Period [that has not been terminated as described in this
prospectus supplement] has commenced, the Reinvestment Period resulting from
that failure will terminate and the Revolving Period will recommence. However,
it will not recommence if the scheduled termination date of the Revolving Period
has occurred, as of the end of the first Collection Period during which the
seller would no longer be required to convey receivables to the trust. The
seller may no longer be required to convey receivables as described above as a
result of a reduction in the Invested Amount occurring due to principal payments
made in respect of the Series [ ]-[ ] certificates and the certificates of other
outstanding series during the Reinvestment Period or as a result of the
subsequent addition of receivables to the trust. However, if any Reinvestment
Event occurs, the Revolving Period will recommence following the receipt of
.........
(2) Delete or modify, as appropriate.
o written confirmation by each Rating Agency, other than Moody's,
that its rating of the Series [ ]-[ ] certificates will not be
withdrawn or lowered as a result of that recommencement and
o the consent of Series [ ]-[ ] certificateholders holding Series [
]-[ ] certificates evidencing more than 50% of the aggregate
unpaid principal amount of the Series [ ]-[ ] certificates to
that recommencement, provided that no other Reinvestment Period
or Early Amortization Period [that has not been terminated as
described in this prospectus supplement] has commenced and the
scheduled termination of the Revolving Period has not occurred.]
[Describe other cures of Reinvestment Events and partial Reinvestment
Periods, if applicable.]
EARLY AMORTIZATION EVENTS
[The Early Amortization Events with respect to the Series [ ]-[ ]
certificates will include each of the events so defined in the prospectus, plus
the following:
1. failure on the part of [ ], the servicer or [ ], as
applicable, (a) to make any payment or deposit required by the Pooling and
Servicing Agreement or the Receivables Purchase Agreement, including but not
limited to any Transfer Deposit Amount or Adjustment Payment, on or before the
date occurring two business days after the date that payment or deposit is
required to be made; or (b) to deliver a Distribution Date Statement on the date
required under the Pooling and Servicing Agreement, or within the applicable
grace period which will not exceed five business days; or (c) to comply with its
covenant not to create any lien on a Receivable; or (d) to observe or perform in
any material respect any other covenants or agreements set forth in the Pooling
and Servicing Agreement or the Receivables Purchase Agreement, which failure
continues unremedied for a period of 45 days after written notice of that
failure;
2. any representation or warranty made by the RPA seller in the
Receivables Purchase Agreement or by [ ] in the Pooling and Servicing Agreement
or any information required to be given by [ ] to the trustee to identify the
Accounts proves to have been incorrect in any material respect when made and
continues to be incorrect in any material respect for a period of 60 days after
written notice and as a result the interests of the certificateholders are
materially and adversely affected. An Early Amortization Event, however, shall
not be deemed to occur if [ ] has repurchased the related receivables or all of
the receivables, if applicable, during that period in accordance with the
provisions of the Pooling and Servicing Agreement;
3. the occurrence of events of bankruptcy, insolvency or
receivership relating to [ ] or [ ];
4. a failure by [ ] to convey receivables in Additional Accounts
to the trust within five business days after the day on which it is required to
convey those receivables under the Pooling and Servicing Agreement;
5. on any Determination Date, the Available Subordinated Amount
for the next distribution date will be reduced to an amount less than the
Required Subordinated Amount on that Determination Date after giving effect to
the distributions to be made on the next distribution date;
6. any Service Default with respect to the Series [ ]-[ ]
certificates occurs;
7. on any Determination Date, as of the last day of the preceding
Collection Period, the aggregate amount of Principal Receivables relating to
Used Vehicles exceeds [ ]% of the Pool Balance on that last day;
8. on any Determination Date, the average of the Monthly Payment
Rates for the three preceding Collection Periods, is less than [ ]%;
9. any Carry-over Amount is outstanding on six consecutive
distribution dates; and
10. the outstanding principal amount of the Series [ ]-[ ]
certificates is not repaid by the Series [ ]-[ ] Expected Payment Date; and
11. [Other].(3)
[In the case of any event described in clauses [1, 2 or 6] above, an
Early Amortization Event with respect to Series [ ]-[ ] will be deemed to have
occurred only if, after the applicable grace period described in those clauses,
if any, either the trustee or Series [ ]-[ ] certificateholders holding Series [
]-[ ] certificates evidencing more than 50% of the aggregate unpaid principal
amount of the Series [ ]-[ ] certificates by written notice to the seller and
the servicer, and the trustee, if given by certificateholders, declare that an
Early Amortization Event has occurred as of the date of that notice. In the case
of any Early Amortization Event described in the prospectus or any event
described in [3, 4, 5, 7, 8, 9, 10 or 11] above, an Early Amortization Event
with respect to Series [ ]-[ ] will be deemed to have occurred without any
notice or other action on the part of the trustee or the Series [ ]-[ ]
certificateholders immediately upon the occurrence of that event.]
- ----------
(3) Delete or modify, as appropriate.
[Under limited circumstances, an Early Amortization Period which
commences prior to the scheduled end of the Revolving Period may terminate and
the Revolving Period recommence. If an Early Amortization Period results from
the failure by [ ] to convey receivables in Additional Accounts to the trust, as
described in clause 4 above, during the Revolving Period and no [Reinvestment
Event or] Early Amortization Event [that has not been cured or waived as
described in this prospectus supplement] has occurred, the Early Amortization
Period resulting from that failure will terminate and the Revolving Period will
recommence. However, it will not recommence if the scheduled termination date of
the Revolving Period has occurred, as of the endof the first Collection Period
during which the seller would no longer be required to convey receivables to the
trust. The seller may no longer be required to convey receivables as described
above as a result of a reduction in the Invested Amount occurring due to
principal payments made in respect of the Series [ ]-[ ] certificates and the
certificates of other outstanding series during the Early Amortization Period or
as a result of the subsequent addition of receivables to the trust. However, if
any Early Amortization Event, other than an Early Amortization Event described
in the third clause above or in the prospectus, occurs, the Revolving Period
will recommence following receipt of (a) written confirmation by each Rating
Agency, other than Moody's, that its rating of the Series [ ]-[ ] certificates
will not be withdrawn or lowered as a result of the recommencement and (b) the
consent of Series [ ]-[ ] certificateholders holding Series [ ]-[ ] certificates
evidencing more than 50% of the aggregate unpaid principal amount of the Series
[ ]-[ ] certificates to the recommencement, provided that no other [Reinvestment
Event or] Early Amortization Event] [that has not been cured or waived as
described in this prospectus supplement] has occurred and the scheduled
termination of the Revolving Period has not occurred.]
TERMINATION
The last payment of principal and interest on the Series [ ]-[ ]
certificates will be due and payable no later than the [ ] distribution date
(the "Termination Date"). In the event that the Invested Amount is greater than
zero on the Termination Date, after giving effect to deposits and distributions
otherwise to be made on the Termination Date, the trustee will sell or cause to
be sold an interest in the receivables, as specified in the Pooling and
Servicing Agreement, in an amount equal to the sum of (a) 110% of the Invested
Amount on the Termination Date, after giving effect to the deposits and
distributions, and (b) the Available Subordinated Amount on the preceding
Determination Date, after giving effect to the allocations, distributions,
withdrawals and deposits to be made on the distribution date following that
Determination Date.
In no event, however, shall the amount exceed the product of the
Series Allocation Percentage, for the Collection Period in which the Termination
Date occurs, of receivables on the Termination Date. The trustee will distribute
the net proceeds of the sale and any collections on the receivables will be paid
to Series [ ]-[ ] certificateholders on the Termination Date to the extent
necessary to pay the remaining amounts due to the Series [ ]-[ ]
certificateholders.
REPORTS
On each distribution date, including each distribution date that
corresponds to the Series [ ]-[ ] Expected Payment Date or any Special Payment
Date, commencing with the initial distribution date, the trustee will forward to
each Series [ ]-[ ] certificateholder of record a statement (the "Distribution
Date Statement") prepared by the servicer setting forth the following
information. In the case of the third, fourth and fifth clauses below, the
information will be presented on the basis of an original principal amount of
$1,000 per Series [ ]-[ ] certificate if the [Accumulation Period] [Controlled
Amortization Period] or an Early Amortization Period][or Reinvestment Period]
has commenced). The information includes: (a) the aggregate amount of
collections, the aggregate amount of Interest Collections and the aggregate
amount of Principal Collections processed during the immediately preceding
Collection Period; (b) the Series Allocation Percentage, the Floating Allocation
Percentage, the Principal Allocation Percentage and the Series [ ]-[ ]
Certificate Principal Percentage for that Collection Period; (c) the total
amount, if any, distributed on the Series [ ]-[ ] certificates; (d) the amount
of the distribution allocable to principal on the Series [ ]-[ ] certificates;
(e) the amount of the distribution allocable to interest on the Series [ ]-[ ]
certificates; (f) the Investor Default Amount for that distribution date; (g)
the Draw Amount, if any, for that Collection Period; (h) the amount of the
Investor Charge-Offs and the amounts of reimbursements of the Investor
Charge-Offs for that Collection Period; (i) the amount of the Monthly Servicing
Fee for that Collection Period; (j) the [Controlled Distribution
Amount][Controlled Deposit Amount] for the following distribution date; (k) the
Invested Amount[, the Excess Funded Amount] and the outstanding principal
balance of the Series [ ]-[ ] certificates for that distribution date, after
giving effect to all distributions which will occur on that distribution date;
(l) the "pool factor" for the Series [ ]-[ ] certificates as of the
Determination Date with respect to that distribution date, consisting of an
eleven-digit decimal expressing the Invested Amount as of that Determination
Date, determined after taking into account any reduction in that Invested Amount
which will occur on that distribution date, as a proportion of the Initial
Invested Amount; (m) the Available Subordinated Amount for that Determination
Date; (n) [the Reserve Fund balance for that date]; (o) [the Principal Funding
Account Balance,] [the Interest Funding Account Balance,] [the Prefunding
Account Balance] and [the Yield Supplement Account balance] with respect to that
date; (p) [during any Reinvestment Period, information with respect to the
Eligible Investments in the accounts for the Series [ ]-[ ] certificates;] and
(q) [other].
[However, after the Fully Reinvested Date, [unless the Revolving
Period has recommenced,] that statement will not include the information in
clauses [ above].]
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement (the "Underwriting Agreement"), the seller has agreed to sell to the
underwriters named below (the "underwriters"), and each of the underwriters has
severally agreed to purchase from the seller, the principal amount of the Series
[ ]-[ ] certificates set forth opposite its name:
SERIES [ ]-[
UNDERWRITERS ] CERTIFICATES
[ ]................................ $[ ]
[ ]................................ $[ ]
Total.................................. $[ ]
[Distribution of the Series [ ]-[ ] certificates will be made from
time to time in negotiated transactions or otherwise at varying prices to be
determined at the time of sale. Proceeds to the seller will be [ ]% of the
aggregate principal amount of the Series [ ]-[ ] certificates plus accrued
interest from [ ], before deducting expenses estimated to be $[ ]. In connection
with the purchase and sale of the Series [ ]-[ ] certificates, the underwriters
may be deemed to have received compensation from the seller in the form of
underwriting discounts.
[In the ordinary course of their businesses, the underwriters and
their respective affiliates have engaged and may engage in investment banking
transactions with the seller and its affiliates.]
The underwriters intend to make a secondary market in the Series [ ]-[
] certificates, but have no obligation to do so. We cannot assure you that a
secondary market for the Series [ ]-[ ] certificates will develop or, if it does
develop, that it will continue or that it will provide holders of the Series [
]-[ ] certificates with a sufficient level of liquidity of, or trading markets
for, the Series [ ]-[ ] certificates.
ERISA CONSIDERATIONS
Employee benefit plans and other retirement arrangements (including
individual retirement accounts) which are subject to Title I of the Employee
Retirement Income Security Act of 1974, as amended, or Section 4975 of the Code
may not purchase the Series [ ] - [ ] certificates.
LEGAL MATTERS
Certain legal matters relating to the Series [ ]-[ ] certificates will
be passed upon for [ ] by Stroock & Stroock & Lavan LLP, New York, New York, and
for the underwriters by Stroock & Stroock & Lavan LLP. Federal income tax and
ERISA matters will be passed upon for [ ] and the trust by Stroock & Stroock &
Lavan LLP. In addition to representing the underwriters, Stroock & Stroock &
Lavan LLP from time to time represents Deutsche Banc Securities Inc. and its
affiliates on other matters. See "Legal Matters" in the prospectus.
CERTIFICATE RATINGS
The trust will issue the Series [ ]-[ ] certificates only if they are
rated at the time of issuance in the highest long-term rating category by at
least one nationally recognized rating agency.
The rating agencies and their ratings only address the likelihood that
you will ultimately receive all of your required principal and interest
distributions. The rating agencies and their ratings do not address the
likelihood that any carry-over interest amounts will be paid, the likelihood you
will receive interest or principal payments on a scheduled date, or whether you
will receive any principal on the Series [ ]-[ ] certificates prior to or after
the expected distribution date.
The ratings assigned to the Series [ ]-[ ] certificates should be
evaluated independently form similar ratings on other types of securities. A
rating is not a recommendation to buy, sell or hold securities and may be
subject to revision or withdrawal at any time by the rating agencies.
GLOSSARY OF PRINCIPAL TERMS
"Accumulation Period Commencement Date" means the date on which the
Accumulation Period will begin, which is determined as follows:
THE ACCUMULATION PERIOD
COMMENCEMENT DATE
IF THE ACCUMULATION WILL BE THE FIRST DAY IN THE FOLLOWING
PERIOD LENGTH IS COLLECTION PERIOD:
Five Collection Periods [ ] Collection Period
Four Collection Periods [ ] Collection Period
Three Collection Periods [ ] Collection Period
Two Collection Periods [ ] Collection Period
One Collection Period [ ] Collection Period
However, if at any time after the [ ] payment date, any other
outstanding series [(excluding certain series)] shall have entered into an early
amortization period, the Accumulation Period Commencement Date shall be the
earlier of (i) the date that that outstanding series shall have entered into its
early amortization period and (r) the Accumulation Period Commencement Date as
previously determined.
"Accumulation Period Length" means the length of the Accumulation
Period, which will be lesser of (i) the number of full Collection Periods
between such payment date and the Series [ ]-[ ] Expected Payment Date and (ii)
the product, rounded upwards to the nearest integer not greater than five, of
(a)one divided by the lowest Monthly Payment Rate on the receivables during the
last [ ] months and (b) fraction, (x) the numerator of which is the sum of (1)
the Invested Amount as of that distribution date, after giving effect to all
changes in the Invested Amount on that date, and (2) the invested amounts of all
other series [,excluding some series,] currently in their amortization or
accumulation periods or expected to be in their amortization or accumulation
periods by the Series [ ]-[ ] Expected Payment Date and (y) the denominator of
which is the sum of the Invested Amount and the invested amounts as of that
distribution date, after giving effect to all changes in those amounts on that
date, of all other outstanding series [,excluding some series,] which are
expected to be outstanding on the Series [ ]-[ ] Expected Payment Date.
"Assets Receivables Rate" means the product of (a) the quotient
obtained by dividing (i) 360 by the actual number of days elapsed in that period
and (ii) a percentage, expressed as a fraction, (b) the numerator of which is
the sum of (x) Certificateholder Interest Collections for the Collection Period
immediately preceding the last day of that period, which for this purpose only
is based on interest amounts billed to the dealers which are due during that
Collection Period, less the Monthly Servicing Fee with respect to that
immediately preceding Collection Period, (y) the Investment Proceeds to be
applied on the distribution date related to that period and (z) Excess Interest
Collections allocated to Series [ _-_] with respect to that period] and (c) the
denominator of which is the sum of (x) the product of (1) the Floating
Allocation Percentage, (2) the Series Allocation Percentage and (3) the average
Pool Balance, after giving effect to any charge-offs, for that immediately
preceding Collection Period, (y) the principal balance on deposit in the Excess
Funding Account on the first day of that period, after giving effect to all
deposits to and withdrawals therefrom on that first day, and (z) the principal
balance on deposit in the Principal Funding Account on the first day of that
period, after giving effect to all deposits to and withdrawals therefrom on that
first day, [other].
"Available Seller's Collections" means, for any date, the sum of (i)
the Available Seller's Interest Collections for that date and (ii) the Available
Seller's Principal Collections for that date.
The "Available Seller's Collections", however, will be zero for any
Collection Period with respect to which the Available Subordinated Amount is
zero on the Determination Date immediately following the end of that Collection
Period.
"Available Seller's Interest Collections" means, for any date, an
amount equal to the result obtained by multiplying (i) the excess of (a) the
Seller's Percentage for the related Collection Period over (b) the Excess
Seller's Percentage for that Collection Period by (ii) Series Allocable Interest
Collections for that date.
"Available Seller's Principal Collections" means, for any date, an
amount equal to the product of (i) the excess of (a) the Seller's Percentage for
the related Collection Period over (b) the Excess Seller's Percentage for that
Collection Period and (ii) Series Allocable Principal Collections for that date.
"Available Series [ ]-[ ] Certificateholder Principal Collections"
means, for any distribution date, the sum of (i) the product of (a) the Floating
Allocation Percentage, with respect to any Nonprincipal Period, or the Principal
Allocation Percentage, with respect to the [Accumulation Period][Controlled
Amortization Amount] or any Early Amortization Period [or Reinvestment Period],
for the related Collection Period and (b) Series Allocable Principal Collections
deposited in the Collection Account for the related Collection Period, (ii) the
amount, if any, of Interest Collections, Investment Proceeds, [funds in the
Reserve Fund,] Available Seller's Collections and Excess Servicing allocated to
cover the Investor Default Amount or reimburse Investor Charge-Offs, (iii)
Series Allocable Miscellaneous Payments on deposit in the Collection Account for
that distribution date and (iv) Excess Principal Collections, if any, from other
series allocated to Series [ ]-[ ] .
"Available Subordinated Amount" means, for a Determination Date, an
amount equal to (i) the lesser of (a) the Available Subordinated Amount for the
preceding Determination Date, minus, with limitations, the Draw Amount for that
preceding Determination Date, [minus funds from the Reserve Fund applied to
cover any portion of the Investor Default Amount,] plus the excess, if any, of
the Required Subordinated Amount for that Determination Date over the Required
Subordinated Amount for the immediately preceding Determination Date due to an
increase in the Subordination Factor, plus the amount of Excess Servicing
available to be paid to the seller as described under "Distributions from the
Collection Account[; Reserve Fund;] [Yield Supplement Account][; Other
Enhancement]-- Excess Servicing", and (b) the product of the fractional
equivalent of the Subordinated Percentage and the Invested Amount, [minus (ii)
in the case of the first subclause to the first clause above the Incremental
Subordinated Amount for that preceding Determination Date,] [plus (iii) the
Incremental Subordinated Amount for the current Determination Date,] [plus (iv)
the Subordinated Percentage of funds to be withdrawn from the Excess Funding
Account on the succeeding distribution date and paid to the seller or allocated
to one or more series.]
"Calculation Agent" means the trustee.
"Certificate Rate" means [ %] [an amount equal to [the lesser of (a)]
the index] [LIBOR] [plus] [minimum] [times] [ ]% [and (b) [except with respect
to [the Prefunded Period [other]] the [Assets Receivables Rate for the related
distribution date]
"Carry-over Amount" means (i) the excess of (a) the amount of interest
on the Series [ ]-[ ] certificates that would have accrued in respect of the
related Interest Period had interest been calculated based on [LIBOR][the
Index], over (b) the amount of interest on the Series [ ]-[ ] certificates
actually accrued in respect of that Interest Period based on the Assets
Receivables Rate plus (ii) the unpaid portion of any excess from prior
distribution dates, and interest accrued on that amount calculated on the basis
of [LIBOR][the Index].
"Controlled Accumulation Amount" means an amount equal to the Invested
Amount as of the [ ] distribution date (after giving effect to any changes in
the Invested Amount on that date) divided by the [Accumulation Period Length].]
"Controlled Deposit Amount" means, for a distribution date, the
excess, if any, of (i) [the sum of (a) the product of the Controlled
Accumulation Amount and the number of distribution dates from and including the
first distribution date with respect to the Accumulation Period through and
including that distribution date, but not in excess of the Accumulation Period
Length, [and (b) the amount on deposit in the Excess Funding Account as of the [
] distribution date, after giving effect to any withdrawals from or deposits to
that account on that date, other than the transfer to the Principal Funding
Account of amounts on deposit in the Excess Funding Account on that date, ] over
(ii) the sum of amounts on deposit in the [Excess Funding Account and] the
Principal Funding Account, in each case before giving effect to any withdrawals
from or deposits to those accounts on that distribution date.]
"Deficiency Amount" means the amount, if any, by which (a) the sum of
(i) Monthly Interest for the following distribution date, (ii) Monthly Interest
accrued but not paid with respect to prior distribution dates, and interest on
that Monthly Interest, (iii) the Monthly Servicing Fee for that distribution
date,(iv) the Investor Default Amount for that distribution date, (v) the amount
of any Adjustment Payment allocated to the Series [ ]-[ ] certificates for that
distribution date that has not been deposited in the Collection Account as
required under the Pooling and Servicing Agreement and (vi) if that distribution
date is the final distribution date, any Carry-over Amount on that distribution
date that will not be satisfied on that date by the application of amounts on
deposit in the Yield Supplement Account as described under "Distributions from
the Collection Account; Reserve Fund; Yield Supplement Account; Other
Enhancement -- Yield Supplement Account", exceeds (b) the sum of (i)
Certificateholder Interest Collections and Investment Proceeds for that
distribution date, (ii) Excess Interest collections allocated to Series [ ]-[ ]
with respect to that distribution date] [and (iii) the amount of funds in the
Reserve Fund on that Determination Date available to fund any portion of the
Deficiency Amount as described under "Distributions from the Collection Account;
Reserve Fund[; Yield Supplement Account] - Interest Collections"].
"Distribution Date Statement" means a statement prepared by the
servicer setting forth the following information (which, in the case of the
third, fourth and fifth clauses below, will be stated on the basis of an
original principal amount of $1,000 per Series [ ]-[ ] certificate if the
[Accumulation Period] [Controlled Amortization Period] or an Early Amortization
Period][or Reinvestment Period] has commenced):
(a) the aggregate amount of collections, the aggregate amount of
Interest Collections and the aggregate amount of Principal
Collections processed during the immediately preceding
Collection Period;
(b) the Series Allocation Percentage, the Floating Allocation
Percentage, the Principal Allocation Percentage and the
Series [ ]-[ ] Certificate Principal Percentage for that
Collection Period;
(c) the total amount, if any, distributed on the Series [ ]-[ ]
certificates;
(d) the amount of the distribution allocable to principal on the
Series [ ]-[ ] certificates;
(e) the amount of the distribution allocable to interest on the
Series [ ]-[ ] certificates;
(f) the Investor Default Amount for that distribution date;
(g) the Draw Amount, if any, for that Collection Period;
(h) the amount of the Investor Charge-Offs and the amounts of
reimbursements of the Investor Charge-Offs for that
Collection Period;
(i) the amount of the Monthly Servicing Fee for that Collection
Period;
(j) the [Controlled Distribution Amount][Controlled Deposit
Amount] for the following distribution date;
(k) the Invested Amount[, the Excess Funded Amount] and the
outstanding principal balance of the Series [ ]-[ ]
certificates for that distribution date, after giving effect
to all distributions which will occur on that distribution
date;
(l) the "pool factor" for the Series [ ]-[ ] certificates as of
the Determination Date with respect to that distribution
date, consisting of an eleven-digit decimal expressing the
Invested Amount as of that Determination Date, determined
after taking into account any reduction in that Invested
Amount which will occur on that distribution date, as a
proportion of the Initial Invested Amount;
(m) the Available Subordinated Amount for that Determination
Date;
(n) [the Reserve Fund balance for that date];
(o) [the Principal Funding Account Balance,] [the Interest
Funding Account Balance,] [the Prefunding Account Balance]
and [the Yield Supplement Account balance] with respect to
that date;
(p) [during any Reinvestment Period, information with respect to
the Eligible Investments in the accounts for the Series [
]-[ ] certificates;] and
(q) [other].
[However, after the Fully Reinvested Date, [unless the Revolving
Period has recommenced,] that statement will not include the information in
clauses [ above].]
"Draw Amount" means the lesser of (i) the Deficiency Amount and (ii)
the Available Subordinated Amount.
"Excess Principal Collections" means the amount of Available
Certificateholder Principal Collections for any Collection Period remaining
after their application to required payments or deposits for Series [ ]-[ ] , if
any, and the amount of any similar excess for any other series.
"Excess Reserve Fund Required Amount" for any distribution date with
respect to an Early Amortization Period [or Reinvestment Period] means an amount
equal to the greater of (i) [ ]% of the initial principal balance of the [Series
[ ]-[ ]] certificates and (ii) the excess of (a) the sum of (x) the Available
Subordinated Amount on the preceding Determination Date, after giving effect to
the allocations, distributions, withdrawals and deposits to be made on that
distribution date, and (y) an amount equal to (1) the excess of the Required
Participation Percentage over 100% multiplied by (2) the outstanding principal
balance of the [Series [ ]-[ ]] certificates on that distribution date, after
giving effect to any changes in that balance on that distribution date, (b) over
the excess of (x) the Series Allocation Percentage of the Pool Balance on the
last day of the immediately preceding Collection Period over (y) the Invested
Amount on that distribution date, after giving effect to changes in that amount
on that distribution date; provided that the Excess Reserve Fund Required Amount
shall not exceed that Available Subordinated Amount. [Describe adjustments, if
applicable]
"Excess Seller's Percentage" means, for any Collection Period, a
percentage, which percentage shall never be less than 0% nor more than 100%,
equal to (i) 100% minus, when used with respect to interest collections [,
except during any Early Amortization Period,] and principal collections during
any Nonprincipal Period, the sum of (a) the Floating Allocation Percentage with
respect to that Collection Period and (b) the percentage equivalent of a
fraction, the numerator of which is the Available Subordinated Amount as of the
Determination Date occurring in that Collection Period, after giving effect to
the allocations, distributions, withdrawals and deposits to be made on the
distribution date immediately following that Determination Date, and the
denominator of which is the product of (x) the Pool Balance as of the last day
of that immediately preceding Collection Period and (y) the Series Allocation
Percentage for the Collection Period in respect of which the Excess Seller's
Percentage is being calculated or (ii) 100% minus, when used with respect to
[interest collections during any Early Amortization Period and] principal
collections during [the Accumulation Period] [Controlled Amortization Period]
and any Early Amortization Period [or Reinvestment Period], the sum of (a) the
[Principal Allocation Percentage] [other] with respect to that Collection Period
and (b) the percentage described in the clause (i)(b) above for that Collection
Period.
"Excluded Dealers" means the dealers that are in voluntary or
involuntary bankruptcy proceedings or voluntary or involuntary liquidation or
that, subject to limitations, are being voluntarily removed by the seller from
the trust.
"Excluded Receivables" means principal receivables with respect to
Excluded Dealers.
"Final Distribution Date" means the distribution date on which, after
giving effect to all payments to be made on that distribution date, the
outstanding principal balance of the [Series [ ]-[ ]] certificates will be paid
in full.
"Floating Allocation Percentage" means, for any Collection Period,
[the percentage equivalent, which shall never exceed 100%, of a fraction, the
numerator of which is the Invested Amount as of the last day of the immediately
preceding Collection Period and the denominator of which is the product of (a)
the Pool Balance as of that last day and (b) the Series Allocation Percentage
for the Collection Period in respect of which the Floating Allocation Percentage
is being calculated.
With respect to the first Collection Period, however, the Floating
Allocation Percentage shall mean the percentage equivalent of a fraction, the
numerator of which is the Initial Invested Amount as of the Series Issuance Date
and the denominator of which is the Series Allocation Percentage of the Pool
Balance as of the Series Cut-Off Date][other].
"Incremental Subordinated Amount" means on any Determination Date the
result obtained by multiplying (i) a fraction, the numerator of which is the sum
of the Invested Amount on the last day of the immediately preceding Collection
Period and the Available Subordinated Amount for such Determination Date,
calculated without adding the Incremental Subordinated Amount for such
Determination Date, and the denominator of which is the Pool Balance on such
last day by (ii) the excess, if any, of (a) the sum of the Overconcentration
Amount, the Installment Balance Amount and the aggregate amount of Ineligible
Receivables on such Determination Date over (b) the aggregate amount of
Ineligible Receivables, receivables in Accounts containing Dealer
Overconcentrations and receivables in Installment Balances, in each case that
became Defaulted Receivables during the preceding Collection Period and are not
subject to reassignment from the trust, unless certain insolvency events
relating to the seller or [ ] have occurred, as further described in the Pooling
and Servicing Agreement.
"Initial Invested Amount" means [[the portion of the initial principal
amount of the Series [ ]-[ ] certificates which is invested in principal
receivables on the Series Issuance Date, which is expected to equal $[ ], based
on information as of the Series Cut-off Date,] during the Prefunded Period, zero
and after that time [ ]], (i) plus the amount of any withdrawals from the Excess
Funding Account in connection with the purchase of an additional interest in
principal receivables since the Series Issuance Date, (ii) minus the amount of
any additions to the Excess Funding Account in connection with a reduction in
the principal receivables in the trust or an increase in the Subordination
Factor since the Series Issuance Date.
"Interest Period" means, with respect to any distribution date, the
period from and including the preceding distribution date to but excluding that
distribution date, or, in the case of the first distribution date, from and
including the Series [ ]-[ ] issuance date to but excluding the first
distribution date.
"Invested Amount" means for any date [an amount equal to the Initial
Invested Amount, (a) minus the amount, without duplication, of principal
payments, except for principal payments made from the Excess Funding Account,
made to Series [ ]-[ ] certificateholders or deposited to the Principal Funding
Account in respect of the Series [ ]-[ ] certificates prior to that date since
the Series Issuance Date (b) minus the excess, if any, of (i) the aggregate
amount of Investor Charge-Offs for all distribution dates preceding that date,
over (ii) the aggregate amount of any reimbursements of Investor Charge-Offs for
all distribution dates preceding that date][other].
"Investment Proceeds" means, for any distribution date, an amount
equal to the sum of investment earnings for the preceding Collection Period
from:
(a) funds held in the Reserve Fund;]
(b) the Series Allocation Percentage of funds held in the
Collection Account;]
(c) funds held in the Excess Funding Account;]
(d) funds held in the Yield Supplement Account;]
(e) funds held in the Principal Funding Account;]
(f) funds held in the Prefunding Account;]
(g) funds held in the Interest Funding Account;]
(h) funds held in [other accounts].]
"Investor Charge-Off" means a reduction in the outstanding principal
balance of the Series [ ]-[ ] certificates, calculated as described on pages S-[
].
"LIBOR" means, with respect to any Interest Period, the rate
established by the Calculation Agent, which will equal the offered rate for
United States dollar deposits for one month that appears on Telerate Page 3750
as of 11:00 A.M., London time, on the LIBOR Determination Date. However, if on
any LIBOR Determination Date the offered rate does not appear on Telerate Page
3750, the Calculation Agent will request each of the reference banks, which
shall be major banks that are engaged in transactions in the London interbank
market selected by the Calculation Agent, to provide the Calculation Agent with
its offered quotation for United States dollar deposits for one month to prime
banks in the London interbank market as of 11:00 A.M., London time, on that
date. If at least two reference banks provide the Calculation Agent with the
offered quotations, LIBOR on that date will be the arithmetic mean, rounded
upwards, if necessary, to the nearest 1/100,000 of 1% (.0000001), with five
one-millionths of a percentage point rounded upward, of all the quotations. If
on that date fewer than two of the reference banks provide the Calculation Agent
with the offered quotations, LIBOR on that date will be the arithmetic mean,
rounded upwards, if necessary, to the nearest 1/100,000 of 1% (.0000001), with
five one-millionths of a percentage point rounded upward, of the offered per
annum rates that one or more leading banks in The City of New York selected by
the Calculation Agent are quoting as of 11:00 A.M., New York City time, on that
date to leading European banks for United States dollar deposits for one month.
If, however, those banks are not quoting as described above, LIBOR for that date
will be LIBOR applicable to the Interest Period immediately preceding that
Interest Period.
"LIBOR Business Day" means a day that is both a Business Day and a day
on which banking institutions in the City of London, England are not required or
authorized by law to be closed.
"LIBOR Determination Date" means, with respect to any Interest Period,
the second LIBOR Business Day prior to that Interest Period.
"Monthly Interest" means, for any distribution date, the amount of
interest accrued in respect of the Series [ ]-[ ] certificates in the Interest
Period for that distribution date.
"Monthly Principal" means, with respect to any distribution date
relating to the [Accumulation Period][Controlled Amortization Period] or any
Early Amortization Period [or Reinvestment Period], the Available [Series [ ]-[
]] Certificateholder Principal Collections for that distribution date. For each
distribution date, however, [with respect to the Controlled Amortization Period,
Monthly Principal may not exceed the Controlled Deposit Amount]. Also, Monthly
Principal will not exceed the Invested Amount.
"Nonprincipal Period" means any period that is not the Accumulation
Period or an Early Amortization Period.
"Pool Factor" means, for a distribution date, an eleven-digit decimal
expressing the Invested Amount as of the Determination Date, determined after
taking into account any reduction in the Invested Amount which will occur on the
distribution date, as a proportion of the Initial Invested Amount.
"Prefunding Account" means an Eligible Deposit Account established and
maintained by the servicer in the name of the trustee, on behalf of the trust,
for the benefit of the [Series [ ]-[ ]] certificateholders into which the seller
will deposit the initial principal amount of the Series [ ]-[ ] certificates.
"Prefunding Account Balance" means all amounts on deposit in the
Prefunding Account on any distribution date, after giving effect to
distributions to be made on such distribution date.
"Principal Allocation Percentage" means, for any Collection Period,
[the percentage equivalent, which shall never exceed 100%, of a fraction, the
numerator of which is the Invested Amount as of the last day of the Revolving
Period, if that last day has occurred or, if that last day has not occurred, as
of the last day of the immediately preceding Collection Period and the
denominator of which is the product of (a) the Pool Balance as of that last day
and (b) the Series Allocation Percentage for the Collection Period in respect of
which the Principal Allocation Percentage is being calculated][other].
"Principal Funding Account" means an Eligible Deposit Account
established and maintained by the servicer in the name of the trustee, on behalf
of the trust, for the benefit of the Series [ ]-[ ] certificateholders and in
which principal is accumulated for payment to the Series [ ]-[ ]
certificateholders.
"Principal Funding Account Balance" means all amounts on deposit in
the Principal Funding Account on any distribution date, after giving effect to
distributions to be made on such distribution date.
"Principal Shortfalls" means any principal distributions to
certificateholders for any series entitled to those principal distributions
which are either scheduled or permitted and which have not been covered out of
principal collections and other amounts allocated to the series.
"Record Date" means, for any distribution date, the day immediately
preceding that date.
"Required Participation Percentage" means, for [Series [ ]-[ ]], [ ]%.
If, however, the aggregate amount of Principal Receivables due from any Dealer
or group of affiliated Dealers at the close of business on the last day of any
Collection Period with respect to which the determination is being made is
greater than [ ]% of the Pool Balance on that last day, the Required
Participation Percentage shall mean, as of that last day and with respect to
that Collection Period and the immediately following Collection Period only, [
]%. Furthermore, the seller may, upon ten days' prior notice to the trustee, the
Rating Agencies and any Enhancement provider, reduce the Required Participation
Percentage to not less than 100%, so long as the Rating Agencies shall not have
notified the seller or the servicer that any reduction will result in a
reduction or withdrawal of the rating of the [Series [ ]-[ ]] certificates or
any other outstanding series or class of certificates.
"Required Subordinated Amount" means, as of any date of determination,
[the sum of (i) the product of the initial Subordinated Percentage[, as adjusted
from time to time as described in this prospectus supplement other than as a
result of an increase in the Subordinated Percentage at the option of the
seller,] and the Invested Amount [and (ii) the Incremental Subordinated Amount.]
"Reserve Fund" means an Eligible Deposit Account established and
maintained in the name of the trustee for the benefit of the [Series [ ]-[ ]]
certificateholders to hold the Reserve Fund Required Amount.
"Reserve Fund Deposit Amount" means the amount, if any, by which the
Reserve Fund Required Amount exceeds the amount on deposit in the Reserve Fund.
"Reserve Fund Required Amount" means, for any distribution date, [ ]%
of the outstanding principal balance of the [Series [ ]-[ ]] certificates for
that distribution date, after giving effect to any change in that balance on
that distribution date. [Describe any increases in the Reserve Fund Required
Amount.]
"Revolving Period" means the period beginning at the close of business
on the Series Cut-Off Date and terminating on the earlier of (i) the close of
business on the day immediately preceding the day on which the Accumulation
Period commences and (ii) the close of business on the day an Early Amortization
Period commences.
The Revolving Period, however, may recommence upon the termination of
an Early Amortization Period.
"Seller's Participation Amount" means, for any date, an amount equal
to the Pool Balance on that date minus the aggregate invested amounts for all
outstanding series on that date.
"Seller's Percentage" means 100% minus (i) the Floating Allocation
Percentage, when used with respect to interest collections [, except during any
Early Amortization Period], Defaulted Receivables and principal collections
during any Nonprincipal Period, and (ii) the [Principal Allocation
Percentage][other], when used with respect to [interest collections during any
Early Amortization Period and] principal collections during the [Accumulation
Period] [Controlled Amortization Period] and any Early Amortization Period [or
Reinvestment Period].
"[Series [ ]-[ ]] Certificateholder Interest Collections" means, for
any distribution date, the portion of Series Allocable Interest Collections for
the related Collection Period allocated to the [Series [ ]-[ ]]
Certificateholders' Interest as described under "Series Provisions -- Allocation
Percentages -- Allocation Between the [Series [ ]-[ ]] Certificateholders and
the Seller" in this prospectus supplement.
"Series [ ]-[ ] Certificateholders' Interest" means the interest of
the Series [ ]-[ ] certificateholders in the Trust Assets.
"Series [ ]-[ ] certificates" means the [Floating Rate] [ %] Dealer
Floorplan Asset Backed Certificates, Series [ ]-[ ] .
"Series [ ]-[ ] Expected Payment Date" means the [ ] distribution
date.
"Series Supplement" means the series supplement to the Pooling and
Servicing Agreement relating to the Series [ ]-[ ] certificates.
"Subordinated Percentage" means, initially, the percentage equivalent
of a fraction, the numerator of which is the Subordination Factor and the
denominator of which will be the excess of 100% over the Subordination Factor.
"Subordination Factor" means, [initially] [ ]% [, but will be subject
to increase to [ ]% in the event that the rating of [ ]'s long-term unsecured
debt is lowered below BBB- by Standard & Poor's or withdrawn by Standard &
Poor's, unless the seller receives written confirmation from Standard & Poor's
that the failure to so increase the Subordination Factor would not result in
Standard & Poor's lowering or withdrawing its rating of the [Series [ ]-[ ]]
certificates.]
"Telerate Page 3750" means the display page so designated on the Dow
Jones Telerate Service, or any other page as may replace that page on that
service, or any other service as may be nominated as the information vendor, for
the purpose of displaying London interbank offered rates of major banks.
"Termination Date" means the [ ] distribution date, on which the last
payment of principal and interest on the Series [ ]-[ ] certificates will be due
and payable.
"Trust" means the [ ] Dealer Floorplan Master Loan Trust.
"Underwriters" means [ ] and [ ].
"Underwriting Agreement" means the Underwriting Agreement [between]
[among] [ ] dated as of [ ].
"Yield Supplement Account" means an Eligible Deposit Account
established and maintained in the name of the trustee for the benefit of the
Series [ ]-[ ] certificateholders to hold the Yield Supplement Required Amount.
"Yield Supplement Account Deposit Amount" means the amount, if any, by
which the Yield Supplement Account Required Amount exceeds the amount on deposit
in the Yield Supplement Account.
"Yield Supplement Account Required Amount" means for any distribution
date (a)that occurs during the Prefunded Period, [ ], (b) that occurs [after the
Prefunded Period and] prior to the Fully Reinvested Date [or any distribution
date after the Fully Reinvested Date during the Revolving Period]], [ ]% of the
outstanding principal balance of the Series [ ]-[ ] certificates for that
distribution date, after giving effect to any change in that balance on that
distribution date, [and (c) for any [other] distribution date that occurs on or
after the Fully Reinvested Date, zero].
[THIS PAGE INTENTIONALLY LEFT BLANK]
ANNEX I
OTHER SERIES OF INVESTOR CERTIFICATES
This Annex I sets forth the principal characteristics of (i) the
Floating Rate Dealer Floorplan Asset Backed Certificates, Series [ ], (ii) the
Floating Rate Dealer Floorplan Asset Backed Certificates, Series [ ], (iii) the
[.]% Dealer Floorplan Asset Backed Certificates, Series [ ], (iv) the Floating
Rate Dealer Floorplan Asset Backed Certificates, Series [ ], (v) the Fixed Rate
Dealer Floorplan Asset Backed Certificates, Series [ ], (vi) the Floating
Rate Dealer Floorplan Asset Backed Certificates, Series [ ], (vii) the Floating
Rate Dealer Floorplan Asset Backed Certificates, Series [ ], (viii) the [ ]%
Dealer Floorplan Asset Backed Certificates, Series [ ] and (ix) the Floating
Rate Dealer Floorplan Asset Backed Certificates, Series [ ] ("Series [ ]",
"Series [ ]", "Series [ ]", "Series [ ]", "Series [ ]", "Series [ ]",
"Series [ ]", "Series [ ]" and "Series [ ]", respectively). For more specific
information with respect to any Series, any prospective investor should contact
[ ] at [ ]. [ ] will provide, without charge, to any prospective purchaser, a
copy of the disclosure document with respect to that series.
1. SERIES [ ]
Initial Principal Amount............................. $[ ]
Scheduled Interest Payment Date...................... Monthly, on or about the [ ]th day of each month
Current Principal Amount............................. $[ ]
Required Participation Percentage.................... [ ]%
Initial Subordinated Amount.......................... Approximately [ ]% of the Invested Amount
Revolving Period [ ] to the earlier of the
commencement of an Accumulation Period or an Early
Amortization Period
Expected Payment Date................................ [ ] Distribution Date
Termination Date..................................... [ ] Distribution Date
2. SERIES [ ]
Initial Principal Amount............................. $[ ]
Scheduled Interest Payment Date...................... Monthly, on or about the [ ]th day of each month
Current Principal Amount............................. $[ ]
Required Participation Percentage.................... [ ]%
Initial Subordinated Amount.......................... Approximately [ ]% of the Invested
Revolving Period..................................... [ ] to the earlier of the commencement of an
Accumulation Period or an Early Amortization Period
Expected Payment Date................................ [ ] Distribution Date
Termination Date..................................... [ ] Distribution Date
3. SERIES [ ]
Initial Principal Amount............................. $[ ]
Scheduled Interest Payment Date...................... Monthly, on or about the [ ]th day of each month
Current Principal Amount............................. $[ ]
Required Participation Percentage.................... [ ]%
Initial Subordinated Amount.......................... Approximately [ ]% of the Invested Amount
Revolving Period [ ] to the earlier of the
commencement of an Accumulation Period, a Reinvestment
Period or an Early Amortization Period
Expected Payment Date................................ [ ] Distribution Date
Termination Date..................................... [ ] Distribution Date
4. SERIES [ ]
Initial Principal Amount
.....................................................Class A-1 Certificates $[ ]
.....................................................Class A-2 Certificates $[ ]
Scheduled Interest Payment Date...................... Monthly, on or about the [ ]th day of each month
Current Principal Amount
.....................................................Class A-1 Certificates $[ ]
.....................................................Class A-2 Certificates $[ ]
Required Participation Percentage.................... [ ]%
Initial Subordinated Amount.......................... Approximately [ ]% of the Invested Amount
Revolving Period
Class A-1 Certificates...................... [ ] to the earlier of the commencement of an
Accumulation Period or an Early Amortization Period
Class A-2 Certificates...................... [ ] to the earlier of the commencement of an
Accumulation Period or an Early Amortization Period
Expected Payment Date
Class A-1 Certificates...................... [ ] Distribution Date
Class A-2 Certificates...................... [ ] Distribution Date
Termination Date
Class A-1 Certificates...................... [ ] Distribution Date
Class A-2 Certificates...................... [ ] Distribution Date
5. SERIES [ ]
Initial Principal Amount
Class A-1 Certificates...................... $[ ]
Class A-2 Certificates...................... $[ ]
Scheduled Interest Payment Date...................... Monthly, on or about the [ ]th day of each month
Current Principal Amount
Class A-1 Certificates...................... $[ ]
Class A-2 Certificates...................... $[ ]
Required Participation Percentage.................... [ ]%
Initial Subordinated Amount.......................... Approximately [ ]% of the Invested Amount
Revolving Period
Class A-1 Certificates...................... [ ] to the earlier of the commencement of an
Accumulation Period or an Early Amortization Period
Class A-2 Certificates...................... [ ] to the earlier of the commencement of an
Accumulation Period or an Early Amortization Period
Expected Payment Date
Class A-1 Certificates...................... [ ] Distribution Date
Class A-2 Certificates...................... [ ] Distribution Date
Termination Date
Class A-1 Certificates...................... [ ] Distribution Date
Class A-2 Certificates...................... [ ] Distribution Date
6. SERIES [....................................]
Initial Principal Amount
Class A-1 Certificates...................... $[ ]
Class A-2 Certificates...................... $[ ]
Scheduled Interest Payment Date...................... Monthly, on or about the [ ]th day of each month
Current Principal Amount
Class A-1 Certificates...................... $[ ]
Class A-2 Certificates...................... $[ ]
Required Participation Percentage.................... [ ]%
Initial Subordinated Amount.......................... Approximately [ ]% of the Invested Amount
Revolving Period
Class A-1 Certificates...................... [ ] to the earlier of the commencement of an
Accumulation Period or an Early Amortization Period
Class A-2 Certificates...................... [ ] to the earlier of the commencement of an
Accumulation Period or an Early Amortization Period
Expected Payment Date
Class A-1 Certificates...................... [ ] Distribution Date
Class A-2 Certificates...................... [ ] Distribution Date
Termination Date
Class A-1 Certificates...................... [ ] Distribution Date
Class A-2 Certificates...................... [ ] Distribution Date
7. SERIES [ ]
Initial Principal Amount............................. $[ ]
Scheduled Interest Payment Date...................... Monthly, on or about the [ ]th day of each month
Current Principal Amount............................. $[ ]
Required Participation Percentage.................... [ ]%
Initial Subordinated Amount.......................... Approximately [ ]% of the Invested Amount
Revolving Period..................................... [ ] to the earlier of the commencement of an
Accumulation Period or an Early Amortization Period
Expected Payment Date................................ [ ]
Termination Date..................................... [ ]
8. SERIES [ ]
Initial Principal Amount............................. $[ ]
Scheduled Interest Payment Date...................... Monthly, on or about the [ ]th day of each month
Current Principal Amount............................. $[ ]
Required Participation Percentage.................... [ ]%
Initial Subordinated Amount.......................... Approximately [ ]% of the Invested Amount
Revolving Period..................................... [ ] to the earlier of the commencement of an
Accumulation Period or an Early Amortization Period
Expected Payment Date................................ [ ]
Termination Date..................................... [ ]
9. [ ]
Initial Principal Amount............................. $[ ]
Scheduled Interest Payment Date...................... Monthly, on or about the [ ]th day of each month
Current Principal Amount............................. $[ ]
Required Participation Percentage.................... [ ]%
Initial Subordinated Amount.......................... Approximately [ ]% of the Invested Amount
Revolving Period..................................... [ ] to earlier of the commencement of an Accumulation
Period or an Early Amortization Period
Expected Payment Date................................ [ ]
Termination Date..................................... [ ]
SUBJECT TO COMPLETION, [ ], 20[ ]
PROSPECTUS
DEALER FLOORPLAN FLOORPLAN MASTER LOAN TRUST
Issuer
ASSET BACKED CERTIFICATES
ACE SECURITIES CORP.
Seller
THE TRUST--
o may periodically issue asset backed certificates in one or more
series with one or more classes; and
o will own
-- receivables arising from a portfolio of automobile
dealer revolving floorplan financing agreements;
-- payments due on those receivables; and
-- other property described in this prospectus and in the
prospectus supplement.
THE CERTIFICATES--
o will represent interests in the trust;
o will be paid only from the assets of the trust;
o will represent the right to payments in the amounts and at the
times described in the prospectus supplement for those
certificates; and
o may benefit from one or more forms of credit enhancement.
BEFORE YOU DECIDE TO INVEST IN ANY OF THE CERTIFICATES, PLEASE READ THIS
PROSPECTUS AND THE RELATED PROSPECTUS SUPPLEMENT, ESPECIALLY THE RISK FACTORS
BEGINNING ON PAGE OF THE PROSPECTUS. The certificates will be interests in the
trust only and neither the certificates nor the assets of the trust will
represent interests in or obligations of ACE Securities Corp. or any of its
affiliates.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THE CERTIFICATES OR DETERMINED THAT THIS
PROSPECTUS OR ANY PROSPECTUS SUPPLEMENT IS ACCURATE OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this prospectus is [ ], 20[ ]
READING THIS PROSPECTUS AND THE
ACCOMPANYING PROSPECTUS SUPPLEMENT
We provide information on your certificates in two separate documents
that offer varying levels of detail:
o this prospectus provides general information, some of which may
not apply to a particular series of certificates, including your
certificates, and
o the accompanying prospectus supplement provides a summary of the
specific terms of your certificates.
If the terms of the certificates described in this prospectus vary
with the accompanying prospectus supplement, you should rely on the information
in the prospectus supplement.
We include cross-references to sections in these documents where you
can find further related discussions. Refer to the table of contents in the
front of each document to locate the referenced sections.
You should rely only on the information contained in this prospectus
and the accompanying prospectus supplement, including any information
incorporated by reference. We have not authorized anyone to provide you with
different information. The information in this prospectus or the accompanying
prospectus supplement is only accurate as of the dates on their respective
covers.
TABLE OF CONTENTS
Section Page
Risk Factors..................................................
ACE Securities Corp. and the Trust............................
Use of Proceeds...............................................
The Dealer Floorplan Financing Business.......................
The Accounts..................................................
The Seller....................................................
The Originator and the Servicer...............................
Description of the Certificates...............................
Description of the Receivables Purchase
Agreement..............................................
Legal Aspects of the Receivables..............................
Tax Matters...................................................
ERISA Considerations..........................................
Experts.......................................................
Plan of Distribution..........................................
Legal Matters.................................................
Glossary of Principal Terms for Prospectus....................
Global Clearance, Settlement and Tax..........................
Documentation Procedures
RISK FACTORS
IN THIS SECTION AND IN THE RELATED PROSPECTUS SUPPLEMENT UNDER THE
HEADING "RISK FACTORS," WE DISCUSS THE PRINCIPAL RISK FACTORS OF AN INVESTMENT
IN THE CERTIFICATES.
YOUR ABILITY TO RESELL CERTIFICATES There may be no secondary
IS LIMITED. market for your certificates.
Underwriters may participate in
making a secondary market in the
certificates, but are under no
obligation to do so. We cannot
assure you that a secondary market
will develop. If a secondary market
does develop, we cannot assure you
that it will continue or that you
will be able to resell your
certificates. Also, your
certificates will not be listed on
any securities exchange or quoted
in the automated quotation system
of any registered securities
association. As a result, you will
not have the liquidity that might
be provided by that kind of listing
or quotation.
VARIOUS LEGAL ASPECTS MAY CAUSE There are limited circumstances
DELAYS IN YOUR RECEIVING under the Uniform Commercial Code
PAYMENTS OR MAY RESULT IN REDUCED and applicable federal law in which
PAYMENTS OR LOSSES prior or subsequent transferees of
ON YOUR CERTIFICATES. receivables could have an interest
in the receivables with priority
over the trust's interest. See
"Legal Aspects of the Receivables
-- Transfer of Receivables".
THIS RISK FACTOR DISCUSSES VARIOUS The originator and the seller
WAYS IN WHICH A THIRD have and will treat the
PARTY MAY BECOME ENTITLED TO transactions described in this
RECEIVE COLLECTIONS ON THE prospectus as a sale of the
RECEIVABLES INSTEAD OF receivables to the seller and then
THE TRUST. IF THAT HAPPENS, YOU to the trust. However, the
WILL EXPERIENCE DELAYS IN originator and/or the seller may
DISTRIBUTIONS ON YOUR CERTIFICATES become a debtor in a bankruptcy
AND MAY EXPERIENCE REDUCTIONS IN case and a creditor or
DISTRIBUTIONS ON YOUR trustee-in-bankruptcy of the debtor
CERTIFICATES. ULTIMATELY, YOU MAY or the debtor itself may take the
INCUR A LOSS ON YOUR CERTIFICATES. position that the sale of
receivables to the seller or to the
trust should be recharacterized as
a pledge of the receivables to
secure a borrowing of the debtor.
In that case, the trust could
experience delays in payments of
collections of receivables to it
or, should the court rule in favor
of any trustee, debtor or creditor,
reductions in the amount of the
payments could result. Also, if the
transfer of receivables to the
seller is recharacterized as a
pledge, a tax or government lien on
the property of the originator
arising before any receivables come
into existence may have priority
over the seller's interest in the
receivables. See "Legal Aspects of
the Receivables - Matters Relating
to Bankruptcy".
At the time a vehicle is sold,
the originator's security interest
in the vehicle will terminate.
Therefore, if a dealer fails to
remit to the originator amounts
owed with respect to vehicles that
have been sold, the related
receivables will no longer be
secured by vehicles.
THE TIMING OF PAYMENTS ON THE Dealers pay receivables upon
RECEIVABLES WILL the retail sale of the underlying
DETERMINE WHETHER WE WILL vehicle. The timing of those sales
PAY PRINCIPAL ON THE is uncertain. Also, we cannot
CERTIFICATES WHEN INTENDED. assure you that there will be
additional receivables created
under the Accounts or that any
particular pattern of dealer
repayments will occur. The payment
of principal on the certificates
depends on dealer repayments. As a
result, you may not receive your
principal when you expected
because:
o the certificates of your
series or class may not
be fully amortized by its
expected payment date, if
any, or
o the payment of principal
to certificateholders or
the deposit of principal
in a principal funding
account during the
controlled amortization
period or accumulation
period, if any, with
respect to your series or
class of certificates may
not equal the controlled
amortization amount or
controlled deposit
amount, if any, with
respect to the series or
class.
SOCIAL, ECONOMIC AND OTHER FACTORS Payment of the receivables is
WILL AFFECT THE LEVEL OF THE COLLECTIONS largely dependent upon the retail
ON THE RECEIVABLES AND MAY AFFECT sale of the related vehicles. The
THE AMOUNT OF THE level of retail sales of cars and
DISTRIBUTIONS OF THE CERTIFICATES. light duty trucks may change as the
result of a variety of social and
economic factors. Economic factors
include
o interest rates,
o unemployment levels,
o the rate of inflation and
o consumer perception of
economic conditions
generally.
The use of incentive programs,
e.g., manufacturers' rebate
programs, may affect retail sales.
However, we cannot predict whether
or to what extent economic or
social factors will affect the
level of vehicle sales.
THE ABILITY OF THE TRUST TO The originator is not obligated
MAKE PAYMENTS ON YOUR CERTIFICATES to make any payments in respect of
DEPENDS IN PART ON THE ABILITY OF THE any certificates or the
ORIGINATOR TO GENERATE RECEIVABLES AND receivables. However, the trust
THE ABILITY OF THE ORIGINATOR TO depends completely upon the
PERFORM ITS OBLIGATIONS UNDER THE originator to generate new
POOLING AND SERVICING AGREEMENT. receivables. The ability of the
originator to generate receivables
depends in turn to a large extent
on the sales of automobiles and
light duty trucks. We cannot assure
you that the originator will
continue to generate receivables at
the same rate as receivables were
generated in prior years. Also, if
the initial servicer were to cease
acting as servicer, delays in
processing payments on the
receivables and information in
respect of the receivables could
occur and result in delays in
payments to you.
The originator makes
representations and warranties with
respect to the characteristics of
the receivables. In some cases, the
originator would be required to
purchase receivables with respect
to which the representations and
warranties have been breached. If
the originator fails to make a
required repurchase, the trust may
have less funds. In addition,
subject to limitations, the
originator has the ability to
change the terms of the Accounts,
including the rate and the credit
line, as well as change its
underwriting procedures. These
changes could reduce the amount of
collections received on the
receivables.
Under agreements between the
manufacturer and franchised
dealers, manufacturers are
committed to purchase unmiled
vehicles from the dealers upon
dealership termination. If the
relevant manufacturer is not able
to repurchase the new vehicles
under the repurchase provision of
new vehicles in the dealer
agreements, losses with respect to
the receivables may be adversely
affected. See "The Dealer Floorplan
Financing Business - Relationship
with Franchised Dealers".
CREDIT ENHANCEMENT IS LIMITED. We will provide credit
IF THE CREDIT ENHANCEMENT IS enhancement of each series of
EXHAUSTED, YOU MAY INCUR A certificates by subordinating the
LOSS. seller's interest to the extent of
the available subordinated amount
for the series as described in the
related prospectus supplement. The
amount of the credit enhancement is
limited and will be reduced from
time to time as described in the
related prospectus supplement. If
the credit enhancement is
exhausted, you are much more likely
to incur a loss. See "Limited
Subordination of Seller's Interest;
Enhancements".
OTHER CERTIFICATEHOLDERS MAY In some cases, the consent or
CONTROL THE ACTIONS OF THE TRUST. approval of the holders of a
THEIR ACTIONS MAY BE specified percentage of the
ADVERSE TO YOUR INTEREST. aggregate unpaid principal amount
of all outstanding certificates of
all outstanding series will be
required to direct some actions.
These actions include amending the
pooling and servicing agreement in
some cases and directing a
reassignment of the entire
portfolio of receivables. Also,
following the occurrence of an
insolvency event with respect to
the seller, the holders of
certificates evidencing more than
50% of the aggregate unpaid
principal amount of each series or
each class of each series, and any
holder of a supplemental
certificate, will be required to
direct the trustee not to sell or
otherwise liquidate the
receivables.
THE ISSUANCE OF The relevant trust, which may
ADDITIONAL SERIES OF be a master trust, may have
CERTIFICATES MAY ADVERSELY AFFECT previously issued series and may
YOUR INTEREST. issue additional series, which may
be represented by different classes
within a series. A series
supplement delivered under the
pooling and servicing agreement in
connection with the issuance of
other series will specify principal
terms applicable to the series. No
series supplement may change the
terms of the certificates of
another series or the terms of the
pooling and servicing agreement as
applied to the certificates of
another series. See "Description of
the Certificates -- New Issuances".
However, we cannot assure you that
the terms of any one series might
not have an impact on the timing or
amount of payments received by a
certificateholder of any other
series.
CREDIT RATINGS OF THE Unless we specify otherwise in
CERTIFICATES REFLECT THE RATING the related prospectus supplement,
AGENCY'S ASSESSMENT OF THE it will be a condition to the
LIKELIHOOD THAT YOU WILL issuance of the certificates of
RECEIVE YOUR each series offered by this
PAYMENTS OF INTEREST AND prospectus that they be rated one
PRINCIPAL. of the four highest long-term
rating category by at least one
nationally recognized rating
agency. Any rating assigned to the
certificates of a series or a class
by a rating agency
o will reflect the rating
agency's assessment of
the likelihood that
certificateholders of the
series or class will
receive the payments of
interest and principal
required to be made under
the pooling and servicing
agreement and
o will be based primarily
on the value of the
receivables in the trust,
the level of
subordination of the
seller's interest in the
trust and the
availability of any
enhancement with respect
to the series or class.
However, any rating will not,
unless we otherwise specify in the
related prospectus supplement,
address the likelihood that the
principal of, or interest on, any
certificates of the series or class
will be paid on a scheduled date.
The rating will not be a
recommendation to buy, hold or sell
certificates of the series or
class, and the rating will not
comment as to the market price or
suitability for a particular
investor. We cannot assure you that
a rating will remain for any given
period of time or that a rating
agency will not reduce or withdraw
a rating in the future if in its
judgment circumstances in the
future so warrant.
BOOK-ENTRY REGISTRATION MAY LIMIT Unless we otherwise specify in
YOUR ABILITY TO RESELL the prospectus supplement relating
OR PLEDGE YOUR CERTIFICATES. to a series of certificates, the
certificates of each series will
initially be book-entry
certificates and will not be
registered in your name or your
nominee's name. Accordingly, you
will not be recognized by the
trustee as the "certificateholder".
You will only be able to exercise
the rights of a certificateholder
indirectly through DTC and its
participating organizations, and,
if applicable, through Euroclear or
Clearstream Banking and their
respective participating
organizations. See "Description of
the Certificates -- General", " --
Book-Entry Registration" and " --
Definitive Certificates".
You can find a "Glossary of Principal Terms for the Prospectus"
beginning on page _____ in this prospectus.
ACE SECURITIES CORP. AND THE TRUST
ACE SECURITIES CORP.
Ace Securities Corp.'s executive offices are located at 6525 Morrison
Boulevard, Suite 318, Charlotte, North Carolina 28211, and its telephone number
is (704) 365-0569.
THE TRUST
ACE Securities Corp., will establish a trust or master trust pursuant
to a trust agreement or a master trust agreement. The trustee of each trust will
be a commercial bank, savings and loan association or trust company identified
as the trustee in the related prospectus supplement.
The trust was or will be formed in accordance with the laws of the
State of New York under the Pooling and Servicing Agreement. The property of the
trust consists of
o the receivables existing in the Accounts on the date specified in
the prospectus supplement (the "Initial Cut-Off Date").
o all receivables generated in the Accounts from time to time after
the Initial Cut-Off Date during the term of the trust as well as
receivables generated in any Accounts added to the trust from
time to time, but excluding receivables in any Accounts that are
removed from the trust from time to time after the Initial
Cut-Off Date,
o an assignment of all the seller's rights and remedies under the
Receivables Purchase Agreement,
o all funds collected or to be collected in respect of the
receivables,
o all funds on deposit in accounts of the trust,
o any Enhancement issued with respect to any particular series or
class of certificates and
o a security interest in the vehicles and any other collateral
security.
See "Description of the Certificates -- Addition of Accounts". See "Description
of the Receivables Purchase Agreement" for a summary of terms of the Receivables
Purchase Agreement.
The property of the Trust may also include Enhancements for the
benefit of certificateholders of a particular series or class. The
certificateholders of a particular series or class will not have any interest in
any Enhancements provided for the benefit of the certificateholders of another
series or class, unless we so provide in the related Series Supplement or Series
Supplements. Under the Pooling and Servicing Agreement, the seller will be
allowed, subject to limitations and conditions, and in some circumstances will
be obligated,
o to designate from time to time Additional Accounts to be included
as Accounts and to convey to the trust the receivables of the
Additional Accounts, and
o to designate from time to time Accounts to be removed and to
require the trustee to convey receivables in the Removed Accounts
to the seller.
The trust was formed for this and like transactions under the Pooling
and Servicing Agreement and prior to formation had no assets or obligations. The
trust will not engage in any business activity other than
o acquiring and holding the receivables and the other assets of the
trust and proceeds from the receivables and those assets,
o issuing the certificates and the seller's certificate, and any
Supplemental certificates, and making payments on those
certificates
o and related activities.
As a consequence, we do not expect the trust to have any need for, or source of,
capital resources other than the assets of the trust.
USE OF PROCEEDS
Unless we otherwise provide in the related prospectus supplement:
o from the net proceeds from the sale of the certificates of a
series offered by this prospectus we will make the deposit of the
Excess Funded Amount, if any, for the series, to the Excess
Funding Account for the series, and we will pay the remaining
portion of the net proceeds to the seller; and
o the seller will use the portion of the proceeds paid to it.
THE DEALER FLOORPLAN FINANCING BUSINESS
We will set forth in the prospectus supplement for each series
information with respect to the dealer floorplan financing business of the
originator.
The dealer accounts are individual lines of credit represented by
revolving dealer floor plan financing agreements extended or maintained by the
originator to United States dealers and, to the extent specified in the related
prospectus supplement, foreign dealers. The lines of credit for all these
dealers constitute the U.S. portfolio. Dealers use funds loaned under these
arrangements, which are known generally as "wholesale" or "floor plan"
financing, primarily to finance new and used motor vehicles manufactured or
distributed by motor vehicle manufacturers and distributors pending sale or
lease to the ultimate customer. In general, each receivable generated in a
dealer account is secured by all vehicles owned by the related dealer and, in
some instances, by other collateral security owned by that dealer.
The related prospectus supplement will provide information with
respect to the accounts which will include, among other things:
(a) underwriting criteria;
(b) the loss and delinquency experience for the portfoliio of
accounts;
(c) the composition of the portfolio by account balance; and
(d) the geographic distribution of accounts.
THE ACCOUNTS
GENERAL
The receivables arise in the revolving financing arrangements (the
"Accounts") with domestic automobile dealers ("dealers") franchised by
automobile manufacturers. The originator selected or will select the Accounts
from all the wholesale accounts in the Wholesale Portfolio that are Eligible
Accounts (the "Eligible Portfolio"). Each Account in the Eligible Portfolio must
be an account established by the originator, directly or as successor, in the
ordinary course of business and meet other criteria provided in the Pooling and
Servicing Agreement. See "Description of the Certificates -- Representations and
Warranties". The originator and the seller have represented or will represent
that each believes that the Accounts will be representative of the accounts in
the Eligible Portfolio and that the inclusion of the Accounts, as a whole, will
not represent an adverse selection from the Eligible Portfolio.
From time to time, dealers may deposit funds with the originator in
cash management accounts, limited in amount to the amount of the wholesale
accounts. The originator will apply funds deposited by a dealer in its cash
management account to reduce the dealer's outstanding Principal Receivables
balance. Under some circumstances, a dealer may reborrow the funds.
Under the Pooling and Servicing Agreement, the seller, and under the
Receivables Purchase Agreement, the originator has the right, subject to
limitations and conditions, and in some circumstances is obligated, to choose
from time to time additional qualifying wholesale accounts to be included as
Accounts and to convey to the trust some of the receivables of the Additional
Accounts, including receivables created after the conveyance. These accounts
must meet the eligibility criteria set forth above as of the date the accounts
are designated as Additional Accounts. The originator will convey the
receivables then existing, with exceptions, or later created under the
Additional Accounts to the seller. The seller will then convey them to the
trust. See "Description of the Certificates -- Addition of Accounts". In
addition, as of any Additional Cut-off Date in respect of Additional Accounts
and the date any new receivables are generated, the originator will represent
and warrant to the seller, and the seller will represent and warrant to the
trust, that the receivables meet the eligibility requirements set forth in the
Pooling and Servicing Agreement. See "Description of the Certificates --
Conveyance of Receivables". Under some circumstances specified in the Pooling
and Servicing Agreement, the seller has the right to remove Accounts, and the
receivables arising from the Accounts, from the trust. See "Description of the
Certificates -- Removal of Accounts". During the term of the trust, the Accounts
from which the receivables arise will be the same Accounts designated by the
seller on the Initial Cut-Off Date plus any Additional Accounts, minus any
Accounts removed from the trust.
We will provide information about the Accounts in each prospectus
supplement.
THE ORIGINATOR AND THE SERVICER
Information with respect the originator and the servicer will be set
forth in the related prospectus supplement.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The trust will issue the certificates of a series under a Pooling and
Servicing Agreement (as amended and supplemented from time to time, the "Pooling
and Servicing Agreement"), among Ace Securities Corp., as seller of the
receivables, the servicer of the receivables, and the trustee. The Pooling and
Servicing Agreement will be substantially in the form filed as an exhibit to the
Registration Statement of which this prospectus is a part. The trustee will make
available for inspection a copy of the Pooling and Servicing Agreement, without
exhibits or schedules, to certificateholders of a Series on written request. The
following summary describes terms that may be applicable to the certificates of
each series, is not complete and is qualified in its entirety by reference to
the Pooling and Servicing Agreement and the applicable Series Supplement.
The certificates of each series will evidence undivided beneficial
interests in assets of the trust allocated to the certificateholders of the
series (the "Certificateholders' Interest"). These interests will represent the
right to receive from the trust assets funds up to, but not in excess of, the
amounts required to make payments of interest on and principal of the
certificates of the series under the Pooling and Servicing Agreement as
described in the related prospectus supplement.
The certificates of each series will initially be represented by
certificates registered in the name of the nominee of DTC (together with any
successor depository selected by the seller, the "Depository"), except as set
forth below. Unless the related prospectus supplement states otherwise, the
certificates of each series will be available for purchase in minimum
denominations of $1,000 and integral multiples of $1,000 in book-entry form
only. DTC has informed the seller that DTC's nominee will be Cede. Accordingly,
Cede is expected to be the holder of record of the certificates. Unless and
until Definitive Certificates are issued, no certificateholder will be entitled
to receive a physical certificate representing a certificate. All references in
this prospectus to actions by certificateholders shall refer to actions taken by
DTC upon instructions from Participants. Also, all references in this prospectus
to distributions, notices, reports and statements to certificateholders shall
refer to distributions, notices, reports and statements to DTC or Cede, as the
registered holder of the certificates, as the case may be. See "Book-Entry
Registration" and "Definitive Certificates".
INTEREST
The certificates of a series or class will accrue interest on their
principal balance at the per annum rate set forth in or determined as described
in the prospectus supplement. Interest will be payable to the certificateholders
of a series or class on the interest payment dates specified in the prospectus
supplement. If the prospectus supplement for a series or class of certificates
so provides, the interest rate and the interest payment dates for each
certificate of that series or class may be adjusted from time to time, including
as a result of a decline in the interest rate of the receivables.
Except as otherwise stated in this prospectus or in the related
prospectus supplement, interest collections and other amounts allocable to the
Certificateholders' Interest of a Series will be used to make interest payments
to certificateholders of the Series on each interest payment date with respect
to those certificateholders. During any Early Amortization Period, however, with
respect to a series, we will distribute interest to the certificateholders
monthly on each Special Payment Date.
If the interest payment dates for a series or class occur less than
monthly, we will deposit the collections or other amounts, or the portion
allocable to the class, in one or more trust accounts (each an "Interest Funding
Account"). The trustee will apply the amounts in the Interest Funding Account to
make interest payments to certificateholders of the series or class on the
following interest payment date for that series. If a series has more than one
class of certificates, each class may have a separate Interest Funding Account.
PRINCIPAL
The certificates of each series and class will have a revolving period
(the "Revolving Period"). During the Revolving Period, principal collections and
other amounts otherwise allocable to the Certificateholders' Interest of the
series or class will not be paid to those certificateholders. Instead, they will
be
o paid to the entity specified in the related prospectus
supplement,
o deposited to the Excess Funding Account, if any, for the series
or
o distributed to, or for the benefit of, the certificateholders of
other classes or series.
A Revolving Period for a series will begin on the date stated in the related
prospectus supplement (the "Series Cut-off Date") and end on the earlier of:
o the day immediately before the Accumulation Period commencement
date or the Controlled Amortization Period commencement date for
the series and
o the day immediately before the day on which an Early Amortization
Event or a Reinvestment Event occurs with respect to the series.
If a series has more than one class of certificates, each class may have a
different Revolving Period.
The trust may use any of the following structures for paying principal
on a series or class of certificates. We will describe the actual structure for
a series or class in the related prospectus supplement.
A series may have an accumulation period (the "Accumulation Period").
The Accumulation Period will begin at the close of business on the date
specified in or determined in the manner specified in the prospectus supplement
and end on the earliest of:
o the beginning of a Reinvestment Period with respect to the
series,
o the beginning of an Early Amortization Period with respect to the
series and
o payment in full of the outstanding principal amount of the series
certificates.
During the Accumulation Period for a series, we will deposit principal
collections and other amounts allocable to the Certificateholders' Interest of
the series, which may include some Excess Principal Collections, on each
distribution date in a trust account established for the benefit of the
certificateholders of the series (a "Principal Funding Account"). The trustee
will apply the amounts in the Principal Funding Account, together with any
amounts in the Excess Funding Account allocable to the series, to make principal
distributions to the certificateholders of the series when due. The amount to be
deposited in a Principal Funding Account for any series on any distribution date
may, but will not necessarily, be limited to the Controlled Deposit Amount. The
"Controlled Deposit Amount" is an amount stated in the related prospectus
supplement plus, in the case of some distribution dates, any amounts in the
Excess Funding Account allocable to the series. If a series has more than one
class of certificates, each class may have a different Accumulation Period and a
separate Principal Funding Account and Controlled Deposit Amount. Also, there
may be priorities among the classes with respect to deposits of principal into
the Principal Funding Accounts.
A series may have a controlled amortization period (the "Controlled
Amortization Period"). The Controlled Amortization Period will begin at the
close of business on the date stated in or determined in the manner stated in
the related prospectus supplement and will end on the earliest of:
o the beginning of a Reinvestment Period with respect to the
series,
o the beginning of an Early Amortization Period with respect to the
series and
o payment in full of the outstanding principal amount of the
certificates of that series.
During the Controlled Amortization Period for a series, the trustee
will apply principal collections and other amounts allocable to the
Certificateholders' Interest of the series, which may include Excess Principal
Collections and amounts in the Excess Funding Account, on each distribution date
to make principal distributions to any class of certificateholders of the series
then scheduled to receive distributions. The amount to be distributed to those
certificateholders may be limited to the Controlled Amortization Amount for the
series. If a series has more than one class of certificates, each class may have
a different Controlled Amortization Period and a separate Controlled
Amortization Amount. In addition, the related prospectus supplement may describe
priorities among the classes with respect to the distributions.
A series may have a reinvestment period (the "Reinvestment Period").
The Reinvestment Period will begin on the day on which a Reinvestment Event has
occurred and end on the earliest of:
o the beginning of an Early Amortization Period with respect to the
series,
o the recommencement of the Revolving Period in accordance with the
related Series Supplement and
o payment in full of the outstanding principal amount of the
certificates of that series.
During the Reinvestment Period for a series, we will deposit principal
collections and other amounts allocable to the Certificateholders' Interest of
the series, which may include some Excess Principal Collections, on each
distribution date in a Principal Funding Account. The trustee will apply the
funds in the Principal Funding Account, together with any amounts in the Excess
Funding Account allocable to the series, to make principal distributions to the
certificateholders of the series when due. The amount to be deposited in a
Principal Funding Account for any series on any distribution date will not be
limited to any Controlled Deposit Amount or Controlled Amortization Amount. If a
series has more than one class of certificates, each class may have a separate
Principal Funding Account and there may be priorities among the classes with
respect to deposits of principal into the Principal Funding Accounts.
The "Early Amortization Period" for a series is the period beginning
on the day on which an Early Amortization Event has occurred with respect to the
series and ending on the earliest of:
o payment in full of the outstanding principal amount of the
certificates of that series,
o the recommencement of the Revolving Period in accordance with the
related Series Supplement and
o the Termination Date for the series.
The start of an Early Amortization Period for a series will terminate
its Revolving Period, Reinvestment Period, Controlled Amortization Period or
Accumulation Period, as applicable. Further, we will no longer pay principal
collections and some other amounts allocable to the Certificateholders' Interest
of that series to the seller or the holders of any other outstanding series or
deposited in a Principal Funding Account. Instead, the trustee will distribute
them as principal payments to the applicable certificateholders of that series
monthly on each distribution date beginning with the distribution date following
the Collection Period in which that Early Amortization Period begins (each of
those distribution dates, a "Special Payment Date"). During an Early
Amortization Period for a series, distributions of principal to
certificateholders of the series will not be limited to any Controlled Deposit
Amount or Controlled Amortization Amount. In addition, on the first Special
Payment Date for any series, to the extent stated in the related Series
Supplement, the trustee will distribute any funds on deposit in its Excess
Funding Account, if any, and any funds on deposit in its Principal Funding
Account with respect to that series to the certificateholders of the relevant
class or series up to the outstanding principal balance of their certificates.
See "Reinvestment Events and Early Amortization Events" for a discussion of the
events which might lead to the beginning of an Early Amortization Period with
respect to a Series.
The trust may use any combination of the above described structures for
a series or class and may use any other principal payment structure set forth in
a prospectus supplement.
We will invest funds on deposit in any Principal Funding Account in
Eligible Investments. The Eligible Investments in the related prospectus
supplement intended to assure a minimum rate of return on the investment of the
funds. To make it more likely that the principal amount of a series or class of
certificates will be paid in full at the end of its Accumulation Period, the
series or class may be subject to a maturity liquidity facility or other similar
mechanism stated in the relevant prospectus supplement. A maturity liquidity
facility is a financial contract that typically provides that enough principal
will be available to retire the certificates at a specified date.
Certificates of a series or class may also be purchased from time to
time, typically at their respective principal amounts, in connection with a
remarketing of the certificates if we so provide in the related prospectus
supplement. A purchase of certificates of a series or class may cause the
outstanding principal amount of series or class to decrease prior to the start
of any Controlled Amortization Period or Early Amortization Period. The
prospectus supplement for any series subject to purchase will describe the
conditions to and procedures for any purchase. The proceeds of any purchase
would be paid to the holders of the certificates so purchased.
BOOK-ENTRY REGISTRATION
Unless in the related prospectus supplement states otherwise,
certificateholders may hold certificates of a Series through DTC, in the United
States, or Clearstream Banking, societe anonyme ("Clearstream") or Euroclear, in
Europe, if they are participants of those systems, or indirectly through
organizations which are participants in those systems.
Cede, as nominee for DTC, will be the registered holder of the global
certificates. Except as described in this prospectus, no certificateholder will
be entitled to receive a certificate representing that person's interest in the
certificates. Unless and until Definitive Certificates are issued, all
references in this prospectus to actions by certificateholders shall refer to
actions taken by DTC upon instructions from its Participants. Also, all
references in this prospectus to distributions, notices, reports and statements
to certificateholders shall refer to distributions, notices, reports and
statements to Cede, as the registered holder of the certificates, for
distribution to the certificateholders in accordance with DTC procedures.
Clearstream and Euroclear will hold omnibus positions on behalf of
their participants through customers' securities accounts in Clearstream's and
Euroclear's names on the books of their respective depositaries. Those
depositaries will hold those positions in customers' securities accounts in the
depositaries' names on the books of DTC. Citibank, N.A. ("Citibank") will act as
depositary for Clearstream and Morgan Guaranty Trust Company of New York
("Morgan") will act as depositary for Euroclear (in those capacities, the
"Foreign Agency Depositaries").
Transfers between DTC participants will occur in the ordinary way in
accordance with DTC rules. Transfers between Clearstream Participants and
Euroclear Participants will occur in the ordinary way in accordance with their
applicable rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Clearstream or
Euroclear participants, on the other, will be effected in DTC in accordance with
DTC rules on behalf of the relevant European international clearing system by
its Foreign Agency Depositary. Those cross-market transactions, however, will
require the counterparty in the relevant European international clearing system
to deliver instructions to the system in accordance with its rules and
procedures and within its European time deadlines. The relevant European
international clearing system will, if the transaction meets its settlement
requirements, deliver instructions to its Foreign Agency Depositary to take
action to effect final settlement on its behalf. The Foreign Action Depositary
will then deliver or receive securities in DTC, and make or receive payment in
accordance with normal procedures for same-day funds settlement applicable to
DTC. Clearstream Participants and Euroclear Participants may not deliver
instructions directly to the Foreign Agency Depositaries.
Because of time-zone differences, credits of securities received in
Clearstream or Euroclear as a result of a transaction with a DTC participant
will be made during subsequent securities settlement processing and dated the
business day following the DTC settlement date. Those credits or any
transactions in the securities settled during the processing will be reported to
the relevant Euroclear or Clearstream participant on that business day. Cash
received in Clearstream or Euroclear as a result of sales of securities by or
through a Clearstream Participant or a Euroclear Participant to a DTC
participant will be received with value on the DTC settlement date but will be
available in the relevant Clearstream or Euroclear cash account only as of the
business day following settlement in DTC. For additional information regarding
clearance and settlement procedures for the certificates, see Annex I. Also, for
information with respect to tax documentation procedures relating to the
certificates, see Annex I and "Tax Matters --Federal Income Tax Consequences --
Foreign Investors".
DTC is
o a limited-purpose trust company organized under the laws of the
State of New York,
o a member of the Federal Reserve System,
o a "clearing corporation" within the meaning of the UCC and
o a "clearing agency" registered under the provisions of Section
17A of the Exchange Act.
DTC was created to hold securities for its participating organizations
("Participants") and facilitate the clearance and settlement of securities
transactions between Participants through electronic book-entry changes in their
accounts, eliminating the need for physical movement of certificates.
Participants include securities brokers and dealers, banks, trust companies and
clearing corporations and may include other organizations. Indirect access to
the DTC system also is available to others including banks, brokers, dealers and
trust companies that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly ("Indirect Participants").
Certificateholders that are not Participants or Indirect Participants
but desire to purchase, sell or otherwise transfer ownership of, or other
interests in, certificates may do so only through Participants and Indirect
Participants. In addition, certificateholders will receive all distributions of
principal of and interest on the certificates from the trustee through DTC and
its Participants. Under a book-entry format, certificateholders will receive
payments after the related distribution date because, while payments are
required to be forwarded to Cede, as nominee for DTC, on each distribution date,
DTC will forward the payments to its Participants which then will be required to
forward them to Indirect Participants or certificateholders. It is anticipated
that the only "Certificateholder", as that term is used in the Pooling and
Servicing Agreement, will be Cede, as nominee of DTC, and that the trustee will
not recognize certificateholders as certificateholders under the Pooling and
Servicing Agreement. Certificateholders will only be permitted to exercise the
rights of certificateholders under the Pooling and Servicing Agreement
indirectly through DTC and its Participants who in turn will exercise their
rights through DTC.
Under the rules, regulations and procedures creating and affecting DTC
and its operations, DTC must make book-entry transfers among Participants on
whose behalf it acts with respect to the certificates and must receive and
transmit distributions of principal of and interest on the certificates.
Participants and Indirect Participants with which certificateholders have
accounts with respect to the certificates also must make book-entry transfers
and receive and transmit those payments on behalf of their respective
certificateholders.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and banks, a certificateholder will have a
limited ability to pledge certificates to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of the
certificates.
DTC has told the seller that it will take any action permitted to be
taken by a certificateholder under the Pooling and Servicing Agreement only at
the direction of one or more Participants to whose account with DTC the
certificates are credited.
Clearstream 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, eliminating the need for
physical movement of certificates. Transactions may be settled in Clearstream in
any of 28 currencies, including United States dollars. 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, Clearstream is
subject to regulation by the Luxembourg Monetary Institute. Clearstream
participants are recognized financial institutions around the world, including
underwriters, securities brokers and dealers, banks, trust companies, checkering
corporations and other organizations. Indirect access to Clearstream is also
available to others, including banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a Clearstream
participant, either directly or indirectly.
The Euroclear System was created in 1968 to hold securities for
participants of the Euroclear System ("Euroclear Participants") and to clear and
settle transactions between Euroclear Participants through simultaneous
electronic book-entry delivery against payment, eliminating the need for
physical movement of certificates and any risk from lack of simultaneous
transfers of securities and cash. Transactions may now be settled in any of 27
currencies, including United States dollars. The Euroclear System includes
various other services, including securities lending and borrowing, and
interfaces with domestic markets in several countries similar to the
arrangements for cross-market transfers with DTC described above under
"Book-Entry Registration". The Euroclear System ("Euroclear") is operated by
Morgan Guaranty Trust Company of New York, Brussels, Belgium office (the
"Euroclear Operator") under contract with Euroclear S.C., a Belgian cooperative
corporation (the "Cooperative"). All operations are conducted by the Euroclear
Operator, and all Euroclear securities clearance accounts and Euroclear
Clearance System cash accounts are accounts with the Euroclear Operator, not the
Cooperative. The Cooperative establishes policy for the Euroclear System on
behalf of Euroclear Participants. Euroclear Participants include banks,
including central banks, securities brokers and dealers and other professional
financial intermediaries and may include any underwriters, agents or dealers
involved in the distribution of the certificates. Indirect access to the
Euroclear System is also available to other firms that clear through or maintain
a custodial relationship with a Euroclear Participant, either directly or
indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member of the Federal Reserve System. Because of this
fact, it is regulated and examined by the Board of Governors of the Federal
Reserve System and the New York State Banking Department, as well as the Belgian
Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operative 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 the Euroclear System, withdrawals of
securities and cash from the Euroclear System, and receipts of payments with
respect to securities in the Euroclear System. All securities in the Euroclear
System are held on a fungible basis without attribution of specific certificates
to specific securities clearance accounts. The Euroclear Operator acts under the
Terms and Conditions only on behalf of Euroclear Participants, and has no record
of or relationship with persons holding through Euroclear Participants.
Distributions with respect to certificates held through Clearstream or
Euroclear will be credited to the cash accounts of Clearstream Participants or
Euroclear Participants in accordance with the relevant system's rules and
procedures, to the extent received by its Foreign Agency Depositary. The
distributions will be subject to tax reporting in accordance with relevant
United States tax laws and regulations. See "Tax Matters". Clearstream or the
Euroclear Operator, as the case may be, will take any other action permitted to
be taken by a certificateholder under the Pooling and Servicing Agreement or the
applicable Series Supplement on behalf of a Clearstream Participant or Euroclear
Participant only in accordance with its relevant rules and procedures and
subject to its Foreign Agency Depositary's ability to effect those actions on
its behalf through DTC.
Although DTC, Clearstream and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of certificates among participants
of DTC, Clearstream and Euroclear, they are under no obligation to perform or
continue to perform the procedures and the procedures may be discontinued at any
time.
DEFINITIVE CERTIFICATES
Unless the related prospectus supplement states otherwise, the trust
will issue the certificates of a series or class in fully registered,
certificated form to certificateholders or their nominees ("Definitive
Certificates"), rather than to DTC or its nominee only if:
o the seller advises the trustee in writing that DTC is no longer
willing or able to properly discharge its responsibilities as
Depository with respect to the certificates of the series or
class and the seller is unable to locate a qualified successor,
o the seller, at its option, chooses to end the book-entry system
through DTC with respect to the series or class or
o after a Service Default occurs, certificateholders representing
not less than 50% of the aggregate unpaid principal amount of the
certificates of the series or class advise the trustee and DTC
through Participants in writing that the continuation of a
book-entry system through DTC, or a successor to DTC, is no
longer in the best interests of the certificateholders.
If any of the events described in the immediately preceding paragraph
occurs, DTC must notify all Participants of the availability of Definitive
Certificates. When DTC surrenders the certificate or certificates representing
those certificates and gives instructions for re-registration, the trustee will
issue the certificates in the form of Definitive Certificates. After doing so,
the trustee will recognize the holders of the Definitive Certificates as
certificateholders under the Pooling and Servicing Agreement ("Holders"). If the
trust issues Definitive Certificates or DTC ceases to be the clearing agency for
any series or class of certificates, the Pooling and Servicing Agreement
provides that the applicable certificateholders will be notified of that event.
The trustee will make distributions of principal of, and interest on,
the certificates directly to Holders in accordance with the procedures set forth
in this prospectus and in the Pooling and Servicing Agreement. On each
distribution date the trustee will make distributions to Holders in whose names
the Definitive Certificates were registered at the close of business on the
related record date. The trustee will make distributions by check mailed to the
address of the Holder as it appears on the register maintained by the trustee.
The trustee will make the final distribution on any Certificate, whether
Definitive Certificates or the certificate or certificates registered in the
name of Cede representing the certificates, however, only when the certificate
is presented and surrendered on the final payment date at the office or agency
that is specified in the notice of final distribution to certificateholders. The
trustee will provide that notice to registered certificateholders not later than
the fifth day of the month of the final distribution.
Definitive Certificates will be transferable and exchangeable at the
offices of the trustee, which shall initially be 101 Barclay Street, New York,
New York 10286. The trustee will not impose any service charge for any
registration of transfer or exchange, but the trustee may require payment of a
sum sufficient to cover any tax or other governmental charge imposed in
connection with a transfer exchange.
THE SELLER'S CERTIFICATE
The Pooling and Servicing Agreement provides that the entity specified in the
related prospectus supplment may, from time to time, exchange a portion of the
certificate evidencing the Seller's Interest (the "Seller's Certificate") for
another certificate (a "Supplemental Certificate") for transfer or assignment to
a person or entity chosen by the entity specified in the related prospectus
supplement upon the execution and delivery of a supplement to the Pooling and
Servicing Agreement, if
o the entity specified in the related prospectus supplement shall
at the time of that exchange and after giving effect to the
exchange have an interest in the Pool Balance of not less than 2%
of the aggregate amount of the principal balances of the
receivables (the "Pool Balance"),
o the entity specified in the related prospectus supplement shall
have delivered to the trustee, the Rating Agencies and any
Enhancement provider a Tax Opinion with respect to the exchange
and
o the entity specified in the related prospectus supplement shall
have delivered to the trustee written confirmation from the
applicable Rating Agencies that the exchange will not result in a
reduction or withdrawal of the rating of any outstanding series
or class of certificates.
Any later transfer or assignment of a Supplemental Certificate is also subject
to the second and third conditions described in the preceding sentence. The
entity specified in the related prospectus supplement may transfer a
Supplemental Certificate to a securitization vehicle that in turn issues
asset-backed securities based on that Supplemental Certificate.
NEW ISSUANCES
The Pooling and Servicing Agreement states that under one or more
Series Supplements, the trustee may issue two types of certificates:
o one or more series of certificates which are transferable and
have the characteristics described below under "New Issuances"
and
o the Seller's Certificate, and any Supplemental Certificate, which
will evidence the Seller's Interest and will be transferable only
upon the satisfaction of conditions described under "The Seller's
Certificate".
The Pooling and Servicing Agreement also provides that, under one or
more Series Supplements, the seller may cause the trustee to issue one or more
new series. Under the Pooling and Servicing Agreement, the seller may specify,
among other things, with respect to any series:
o its name or designation,
o its initial principal amount, or method for calculating that
amount,
o its certificate rate, or the method for determining its
certificate rate,
o a date on which it will begin its Accumulation Period or
Controlled Amortization Period, if any,
o the method for allocating principal and interest to
certificateholders of the series,
o the percentage used to calculate monthly servicing fees,
o the issuer and terms of any Enhancement or the level of
subordination provided by the Seller's Interest,
o the terms on which the certificates of the series may be
exchanged for certificates of another series, be subject to
repurchase, optional redemption or mandatory redemption by the
seller, servicer or originator or be remarketed by any
remarketing agent,
o the Series Termination Date and
o any other terms permitted by the Pooling and Servicing Agreement
(all of those terms, the "Principal Terms" of the series).
The seller may offer any series to the public under a prospectus or
other disclosure document in transactions either registered under the Securities
Act or exempt from registration under the Securities Act, directly or through
one or more underwriters or placement agents. There is no limit to the number of
series that may be issued under the Pooling and Servicing Agreement.
The Pooling and Servicing Agreement provides that the seller may
specify Principal Terms of a new series so that each series has a Controlled
Amortization Period or Accumulation Period which may have a different length and
begin on a different date than the Controlled Amortization Period or
Accumulation Period for any other series. Further, one or more series may be in
their Reinvestment Periods, Early Amortization Periods, Controlled Amortization
Periods or Accumulation Periods while other series are not. Thus, some series
may be amortizing or accumulating principal, while other series are not.
Moreover, different series may have the benefits of different forms of
Enhancement issued by different entities. Under the Pooling and Servicing
Agreement, the trustee will hold each form of Enhancement only on behalf of a
specified series or a particular class within that series. The seller may
specify different certificate rates and Monthly Servicing Fees with respect to
each series, or a particular class. In addition, the seller has the option to
vary among series, or classes within a series, the terms upon which the seller
may repurchase a series, or classes within a series.
Under the Pooling and Servicing Agreement and a Series Supplement, a
new series may be issued only if specified conditions are satisfied. The seller
may cause the issuance of a new series by notifying the trustee at least five
business days in advance of the applicable Series Issuance Date. The notice
shall state the designation of any series, and classes within a series, if any.
The Pooling and Servicing Agreement states that the trustee will issue a new
series only when it is delivered the following:
o a Series Supplement in form satisfactory to the trustee signed by
the seller and the servicer and specifying the Principal Terms of
the series
o the form of any Enhancement and any related agreement,
o an opinion of counsel to the effect that, for federal income and
single business tax purposes,
o the issuance will not adversely affect the characterization of
the certificates of any outstanding series or class as debt of
the seller,
o such issuance will not cause a taxable event to any
certificateholders (an opinion of counsel to the effect referred
to in the first subclause above and this subclause with respect
to any action is referred to in this prospectus as a "Tax
Opinion"), and
o the new series will be characterized as debt of the seller, and
o written confirmation from each applicable Rating Agency that the
issuance will not cause it to reduce or withdraw the rating of
any outstanding series or class of certificates.
The issuance is also subject to the conditions that
o the seller shall have represented and warranted that the issuance
shall not, in the reasonable belief of the seller, cause an Early
Amortization Event or Reinvestment Event to occur with respect to
any outstanding series, and
o after giving effect to the issuance, the entity's specified in
the related prospectus supplement interest in the Pool Balance
shall not be less than 2% of the Pool Balance.
When all of these conditions are satisfied, the trustee will issue the series.
CONVEYANCE OF RECEIVABLES AND COLLATERAL SECURITY
The seller has sold and assigned or will sell and assign to the trust
o all of its right, title and interest in and to the receivables
and the related Collateral Security as of the Initial Cut-Off
Date,
o all receivables created in the Accounts after the Initial Cut-Off
Date,
o its interests in the related Collateral Security and the
Receivables Purchase Agreement and
o the proceeds of all of the foregoing.
The "Collateral Security" in respect of the receivables is a security
interest in vehicles and parts inventory, equipment, fixtures, service accounts
and, in some cases, realty and a personal guarantee.
The seller and the originator must indicate in their computer records
that the receivables in the Accounts and the related Collateral Security have
been conveyed to the trust. In addition, the seller must provide to the trustee
a computer file or microfiche or written list containing a true and complete
list showing for each Account, as of the Initial Cut-Off Date and the applicable
Additional Cut-Off Date,
o its account number,
o the outstanding balance of the receivables in the Account and
o the outstanding balance of principal receivables in the Account.
The originator will retain and will not deliver to the trustee any
other records or agreements relating to the receivables. Except as set forth
above, the originator has not and will not segregate the records and agreements
relating to the trust's receivables from those relating to other accounts of the
originator. The originator has not and will not stamp or mark the physical
documentation relating to the receivables to reflect the transfer of the
receivables to the trust. The seller will file one or more financing statements
in accordance with applicable state law to perfect the trust's interest in the
receivables, the Collateral Security, the Receivables Purchase Agreement and the
proceeds of those items. See "Risk Factors" and "Legal Aspects of the
Receivables".
As contemplated above and as described below under "Addition of
Accounts", the seller has the right, subject to limitations and conditions, and
in some circumstances is obligated, to designate from time to time additional
accounts to be included as Additional Accounts, to purchase from the originator
the receivables then existing or created after that time in the Additional
Accounts and to convey the receivables to the trust. Each Additional Account
must be an Eligible Account. In respect of any conveyance of receivables in
Additional Accounts, the seller will follow the procedures set forth in the
preceding paragraph, except the list will show information for the Additional
Accounts as of the date the Additional Accounts are identified and selected (the
"Additional Cut-Off Date").
REPRESENTATIONS AND WARRANTIES
The seller will represent and warrant to the trust, among other
things, that
o as of each Series Cut-Off Date, and the date of issuance of any
series (a "Series Issuance Date"), or, in the case of the
Additional Accounts, as of the Additional Cut-Off Date and the
date the related receivables are transferred to the trust (an
"Addition Date"), each Account or Additional Account was an
Eligible Account,
o as of the Series Cut-Off Date, or as of the Additional Cut-Off
Date, in the case of any Additional Accounts, or as of the date
any future receivable is generated (a "Transfer Date"), each
receivable is an Eligible Receivable or, if the receivable is not
an Eligible Receivable, the receivable is conveyed to the trust
as described below under "Ineligible Receivables, the Installment
Balance Amount and the Overconcentration Amount",
o each receivable and all Collateral Security conveyed to the trust
on the Transfer Date or, in the case of Additional Accounts, on
the Addition Date, and all of the seller's right, title and
interest in the Receivables Purchase Agreement, have been
conveyed to the trust free and clear of any liens and
o all appropriate consents and governmental authorizations required
to be obtained by the seller in connection with the conveyance of
each receivable or Collateral Security have been duly obtained.
If the seller breaches any representation and warranty described in the
preceding paragraph the trust will reassign the related receivables to the
seller in the manner described in the following paragraph. However, the trust
will be entitled to make that reassignment only if
o the breach remains uncured for 30 days or a longer period as may
be agreed to by the trustee, after the earlier to occur of the
discovery of the breach by the seller or the servicer or receipt
of written notice of the breach by the seller or the servicer,
and
o the breach has a materially adverse effect on the
Certificateholders' Interest in the receivable or, in the case of
a breach relating to an Account, all receivables in the related
Account ("Ineligible Receivables").
The trust will reassign each Ineligible Receivable to the seller on or
before the end of the Collection Period in which the reassignment obligation
arises by deducting the principal balance of the receivable from the Pool
Balance. A deduction may cause the Pool Balance minus the aggregate Invested
Amounts for all outstanding series (the "Seller's Participation Amount") to be
less than the aggregate Available Subordinated Amounts for all outstanding
series (the "Trust Available Subordinated Amount") on the second business day
preceding the distribution date (each second business day preceding a
Distribution Day, a "Determination Date"), after giving effect to the
allocations, distributions, withdrawals and deposits to be made on the
distribution date. If this happens, the seller must make a deposit into the
Collection Account in immediately available funds in an amount equal to the
amount by which the Seller's Participation Amount would be less than the Trust
Available Subordinated Amount (that amount, a "Transfer Deposit Amount"). If the
Transfer Deposit Amount is not so deposited, the principal balance of the
related Ineligible Receivables will be deducted from the Pool Balance only to
the extent the Seller's Participation Amount is not reduced below the Trust
Available Subordinated Amount. Any principal balance not so deducted will not be
reassigned and will remain part of the trust. The reassignment of any receivable
to the seller and the payment of any related Transfer Deposit Amount will be the
sole remedy available against the seller for any breach of the representations
and warranties described in this section.
The seller will also represent and warrant to the trust that, among
other things, as of each Series Issuance Date
o it is duly formed and in good standing, it has the authority to
consummate the transactions contemplated by the Pooling and
Servicing Agreement and the Pooling and Servicing Agreement
constitutes a valid, binding and enforceable agreement of the
seller, and
o the Pooling and Servicing Agreement constitutes a valid sale,
transfer and assignment to the trust of all right, title and
interest of the seller in the receivables and the Collateral
Security, whether then existing or created after that time, the
Receivables Purchase Agreement, and the proceeds of those items,
including proceeds in any of the accounts established for the
benefit of the certificateholders of any series, subject to the
rights of the Purchasers with respect to some of the Collateral
Security, under the UCC, which is effective as to each receivable
existing on the Initial Closing Date, or as of the Addition Date,
if applicable, or, as to each receivable arising after those
dates, upon the creation of that receivable and until termination
of the trust.
If a breach of any of the representations and warranties described in
the preceding paragraph has a materially adverse effect on the
Certificateholders' Interest in the receivables, either the trustee or the
holders of certificates of all outstanding series evidencing not less than a
majority of the aggregate unpaid principal amount of all outstanding series, by
written notice to the seller and the servicer, and to the trustee and the
provider of any Enhancement if given by certificateholders, may direct the
seller to accept the reassignment of the Certificateholders' Interest of all
series within 60 days of the notice, or within a longer period specified in the
notice. The seller must accept the reassignment of the Certificateholders'
Interest on a distribution date occurring within the 60-day period. However, the
reassignment need not be made if at the end of the applicable period, the
representations and warranties shall then be true and correct in all material
respects and any materially adverse effect caused by the breach shall have been
cured. The price for the reassignment will typically be equal to the sum of:
o the aggregate "Invested Amounts", as specified in the related
Series Supplements, of all series on the Determination Date
preceding the distribution date on which the purchase is
scheduled to be made,
o accrued and unpaid interest on the unpaid principal amount of the
certificates at the applicable certificate rate, together with
interest on overdue interest, and
o with respect to any particular series, any other amounts stated
in its Series Supplement.
The payment of the reassignment price for all outstanding series will
be considered a payment in full of the Certificateholders' Interest. The trustee
will distribute those funds to the applicable certificateholders upon
presentation and surrender of the certificates. If the trustee or the
certificateholders give a notice as provided in the preceding paragraph, the
obligation of the seller to make any deposit will constitute the sole remedy
respecting a breach of the representations and warranties available to
certificateholders or the trustee on behalf of the certificateholders.
ELIGIBLE ACCOUNTS AND ELIGIBLE RECEIVABLES
As discussed under "Representations and Warranties" above, the seller
represents that, as of specified times, the Accounts are Eligible Accounts and
the receivables are Eligible Receivables.
An "Eligible Account" is a wholesale financing line of credit extended
by the originator to a Dealer, which, as of its date of determination:
o is established by the originator in the ordinary course of
business under a floorplan financing agreement,
o is in favor of an Eligible Dealer,
o is in existence and maintained and serviced by the servicer, and
o in respect of which no amounts have been charged off as
uncollectible or are classified as past due or delinquent.
An "Eligible Dealer" is a dealer:
o which is located in the United States of America, including its
territories and possessions,
o which has not been identified by the servicer as being the
subject of any voluntary or involuntary bankruptcy proceeding or
in voluntary or involuntary liquidation,
o in which the originator or any affiliate of the originator does
not have an equity investment and
o which has not been classified by the servicer as being under
Dealer Trouble status.
An "Eligible Receivable" is a receivable:
o which was originated or acquired by the originator in the
ordinary course of business,
o which has arisen under an Eligible Account and is payable in
United States dollars,
o which is owned by the originator at the time of sale to the
seller,
o which represents the obligation of a dealer to repay an advance
made to the Dealer to finance the acquisition of vehicles,
o which at the time of creation and at the time of transfer to the
trust is secured by a perfected first priority security interest
in the related vehicle,
o which was created in compliance in all respects with all
requirements of law applicable to the receivable and under a
floorplan financing agreement which complies in all respects with
all requirements of law applicable to any party to the agreement,
o with respect to which all consents and governmental
authorizations required to be obtained by the originator or the
seller in connection with the creation of the receivable or the
transfer of the receivable to the trust or the performance by the
originator of the floorplan financing agreement under which the
receivable was created, have been duly obtained,
o as to which at all times following the transfer of the receivable
to the trust, the trust will have good and marketable title to
the receivable free and clear of all liens arising prior to the
transfer or arising at any time, other than liens permitted under
the Pooling and Servicing Agreement,
o which has been the subject of a valid transfer and assignment
from the seller to the trust of all the seller's interest in the
receivable, including any proceeds of the receivable,
o which will at all times be the legal and assignable payment
obligation of the related Dealer, enforceable against the dealer
in accordance with its terms, except as enforceability may be
limited by applicable bankruptcy or other similar laws,
o which at the time of transfer to the trust is not subject to any
right of rescission, setoff, or any other defense, including
defenses arising out of violations of usury laws, of the Dealer,
o as to which, at the time of transfer of the receivable to the
trust, the originator and the seller have satisfied all their
respective obligations with respect to the Receivable required to
be satisfied at that time,
o as to which, at the time of transfer of the receivable to the
trust, neither the originator nor the seller has taken or failed
to take any action which would impair the rights of the trust or
the certificateholders,
o which constitutes "chattel paper" as defined in Article 9 of the
UCC and
o which was transferred to the trust with all applicable
governmental authorization.
The trustee did not and will not make any initial or periodic general
examination of the receivables or any records relating to the receivables for
the purpose of establishing the presence or absence of defects, compliance with
representations and warranties of the seller or for any other purpose. Also, the
trustee will not make any initial or periodic general examination of the
servicer for the purpose of establishing the compliance by the servicer with its
representations or warranties, the observation of its obligations under the
Pooling and Servicing Agreement or for any other purpose. The servicer, however,
will deliver to the trustee on or before March 31 of each calendar year, an
opinion of counsel with respect to the validity of the interest of the trust in
and to the receivables and other components of the trust.
INELIGIBLE RECEIVABLES, THE INSTALLMENT BALANCE AMOUNT
AND THE OVERCONCENTRATION AMOUNT
For the purpose of facilitating the administration and reporting
requirements of the servicer under the Pooling and Servicing Agreement, the
seller and the originator will transfer all Ineligible Receivables arising in an
Eligible Account to the trust. If, however, the Series Supplement for a series
so states, the Incremental Subordinated Amount for the series will be adjusted
by the portion of the aggregate principal amount of receivables included in the
series allocable to the Certificateholders' Interest of the series. Also, if the
Series Supplement for a series so states, the Incremental Subordinated Amount
for the series shall be adjusted to reflect, on each distribution date,
o the aggregate principal amount of receivables in the trust on the
distribution date which are Dealer Overconcentrations (the
"Overconcentration Amount") allocable to the Certificateholders'
Interest of the series and
o the portion of the aggregate amount of Installment Balances in
respect of which the originator has not received an offsetting
payment from the related Dealer on the distribution date (the
"Installment Balance Amount") allocable to the
Certificateholders' Interest of the series.
"Dealer Overconcentrations" on any distribution date means, with
respect to any Dealer or group of affiliated Dealers, the excess of
o the aggregate principal amount of receivables due from the Dealer
or group of affiliated Dealers on the last day of the Collection
Period immediately preceding such distribution date over
o 2% of the Pool Balance on the last day of the immediately
preceding Collection Period.
ADDITION OF ACCOUNTS
Subject to the conditions described in this paragraph, the seller has
the right to designate from time to time additional accounts to be included as
Accounts (the "Additional Accounts"). Also, the seller must add the receivables
of Additional Accounts if the Pool Balance on the last day of any Collection
Period is less than the Required Participation Amount as of the following
distribution date, after giving effect to the allocations, distributions,
withdrawals and deposits to be made on the distribution date. In that case,
unless insolvency events have occurred with respect to the seller or the
originator, then the originator under the Receivables Purchase Agreement must
sell to the seller, and the seller under the Pooling and Servicing Agreement
must transfer and assign to the trust, within 10 business days after the end of
the Collection Period, interests in all receivables arising in the Additional
Accounts, whether the receivables are then existing or created after that time.
Any designation of Additional Accounts is subject to the following conditions,
among others:
o each Additional Account must be an Eligible Account;
o the seller shall represent and warrant that the addition of the
Additional Accounts shall not, in the reasonable belief of the
seller, cause an Early Amortization Event or Reinvestment Event
to occur with respect to any series;
o the originator shall not select the Additional Accounts in a
manner that it believes is adverse to the interests of the
certificateholders or any Enhancement provider;
o if the addition is not required, the seller shall deliver a Tax
Opinion and other opinions of counsel with respect to the
addition of the Additional Accounts to the trustee, the Rating
Agencies and any Enhancement provider; and
o the applicable Rating Agencies shall have provided written
confirmation that the addition will not cause the rating of any
outstanding series or class of certificates to be reduced or
withdrawn.
The seller may, however, from time to time, at its discretion, and
subject only to the limitations specified in this paragraph, designate
Additional Accounts. Additional Accounts designated in accordance with the
provisions described in this paragraph are referred to in this prospectus as
"Automatic Additional Accounts". Unless each Rating Agency otherwise consents,
o the number of Automatic Additional Accounts designated with
respect to any of the three consecutive Collection Periods
beginning in January, April, July and October of each calendar
year shall not exceed 8% of the number of Accounts as of the
first day of the calendar year during which the Collection
Periods begin and
o the number of Automatic Additional Accounts designated during any
calendar year shall not exceed 20% of the number of Accounts as
of the first day of the calendar year.
On or before the first business day of each Collection Period beginning in
January, April, July and October of each calendar year, the seller shall have
requested and obtained notification from each Rating Agency of any limitations
to the right of the seller to designate Eligible Accounts as Automatic
Additional Accounts during any period which includes the Collection Period. On
or before the date specified in the prospectus supplement, the trustee shall
have received confirmation from each Rating Agency that the addition of all
Automatic Additional Accounts included as Accounts during the three consecutive
Collection Periods ending in the calendar month prior to that date shall not
have resulted in any applicable Rating Agency reducing or withdrawing its rating
of any outstanding series or class of certificates. On or before the date
specified in the prospectus supplement, or on or before the last day of each
month in some circumstances, the seller shall have delivered to the trustee,
each Rating Agency and any Enhancement provider an opinion of counsel with
respect to the Automatic Additional Accounts included as Accounts during the
preceding calendar year confirming the validity and perfection of each transfer
of that Automatic Additional Accounts. If the trustee has not received the
Rating Agency confirmation or opinion of counsel with respect to any Automatic
Additional Accounts, the seller must remove the Automatic Additional Accounts
from the trust.
Each Additional Account, including each Automatic Additional Account,
must be an Eligible Account at the time of its addition. However, since
Additional Accounts may not have been a part of the initial portfolio of the
originator, they may not be of the same credit quality as the initial Accounts.
Additional Accounts may have been originated by the originator at a later date
using credit criteria different from those which were applied to the initial
Accounts or may have been acquired by the originator from another wholesale
lender that had different credit criteria. In addition, the seller will be
permitted to designate Additional Accounts that contain receivables that have
been sold or pledged to third parties. Following, however, the applicable
Additional Cut-Off Date, no receivables arising after the Additional Cut-Off
Date in any of those accounts shall be sold or pledged to any third parties.
The "Required Participation Amount" for any date is an amount equal to
the sum of:
o the sum of the amounts for each series obtained by multiplying
the Required Participation Percentage for the series by the
Initial Invested Amount for the series at that time. However,
each Excluded Series will be excluded from this calculation until
the Invested Amount of the related Paired Series is reduced to
zero; and
o the Trust Available Subordinated Amount on the immediately
preceding Determination Date, after giving effect to the
allocations, distributions, withdrawals and deposits to be made
on the distribution date following the Determination Date.
o The "Required Participation Percentage" for a series will be
specified in the related Series Supplement.
REMOVAL OF ACCOUNTS
The seller shall have the right at any time to require the removal from
the trust of Eligible Accounts. To remove any Eligible Account, the seller, or
the servicer on its behalf, shall, among other things,
o furnish to the trustee, any Enhancement provider and the Rating
Agencies a written notice (the "Removal Notice") stating the
Determination Date on which removal of one or more Accounts will
commence (the "Removal Commencement Date") and the Accounts to be
removed from the trust (the "Designated Accounts"),
o determine on the Removal Commencement Date the aggregate
principal balance of receivables in respect of each the
Designated Account (the "Designated Balance"),
o from and after the Removal Commencement Date, cease to transfer
to the trust all receivables arising in the Designated Accounts,
o from and after the Removal Commencement Date, allocate all
principal collections in respect of each Designated Account,
first to the oldest outstanding principal balance of the
Designated Account, until the Determination Date on which the
Designated Balance in the Designated Account is reduced to zero
(the "Removal Date"),
o on each business day from and after the Removal Commencement Date
to and until the related Removal Date, allocate
o to the trust, to be further allocated under the Pooling and
Servicing Agreement, interest collections in respect of each
Designated Account with respect to receivables in all Designated
Accounts sold to the trust, and
o to the seller the remainder of the interest collections in all of
those Designated Accounts,
o represent and warrant that the removal of any Eligible Account on
any Removal Date shall not, in the reasonable belief of the
seller, cause an Early Amortization Event or Reinvestment Event
to occur with respect to any Series or cause the Pool Balance to
be less than the Required Participation Amount,
o represent and warrant that no selection procedures believed by
the seller to be adverse to the interests of the
certificateholders were utilized in selecting the Designated
Accounts,
o represent and warrant that the removal will not cause the rating
of any outstanding series or class of certificates to be reduced
or withdrawn, and
o on or before the related Removal Date, deliver to the trustee and
any Enhancement provider an officers' certificate confirming the
items set forth in the sixth, seventh and eighth clauses above
and a Tax Opinion with respect to the removal.
No Designated Accounts shall be removed if the removal will cause the
rating of any outstanding series or class of certificates to be reduced or
withdrawn.
On any date on which an Account becomes an Ineligible Account, which
date will be deemed the Removal Commencement Date for the Account, the seller
will start the removal of the Account from the trust by taking each of the
actions specified in the first five clauses of the preceding paragraph with
respect to the Ineligible Account.
Upon satisfaction of the above conditions, on the Removal Date with
respect to any the Designated Account, the seller will stop allocating
collections of receivables to the Designated Account, which shall be deemed
removed from the trust for all purposes (a "Removed Account").
In addition to the removal rights described in the four paragraphs
above, the seller shall have the right at any time to remove Accounts from the
trust and, in connection with the removal, repurchase the then existing
receivables in the Accounts. To remove Accounts and repurchase the then existing
receivables in those Accounts, the seller, or the servicer on its behalf, shall,
among other things:
o furnish to the trust, each Enhancement provider and the Rating
Agencies a Removal Notice stating the Designated Accounts which
are to be removed, and the then existing receivables in the
Designated Accounts (the "Designated Receivables") which are to
be repurchased from the trust and the Determination Date on which
the removal of the Designated Accounts and the purchase of the
Designated Receivables will occur (the "Removal and Repurchase
Date"),
o deliver to the trustee on the Removal and Repurchase Date a
computer file or microfiche or written list containing a true and
complete list of the Removed Accounts stating for each Account
its account number and the aggregate amount of receivables
outstanding in the Account,
o represent and warrant that the removal of any Eligible Account
and the repurchase of the receivables then existing in the
Account on any Removal and Repurchase Date shall not, in the
reasonable belief of the seller, cause an Early Amortization
Event or Reinvestment Event to occur with respect to any Series
or cause the Pool Balance to be less than the Required
Participation Amount,
o represent and warrant that no selection procedures believed by
the seller to be adverse to the interests of the
certificateholders were used in selecting the Designated
Accounts,
o represent and warrant as of the Removal and Repurchase Date that
the list of Removed Accounts delivered to the trustee as of the
Removal and Repurchase Date, is true and complete in all material
respects,
o represent and warrant that the removal and repurchase will not
cause the rating of any outstanding series or class of
certificates to be reduced or withdrawn by the applicable Rating
Agency,
o deliver to the trustee, each Rating Agency and any Enhancement
providers a Tax Opinion, dated the Removal and Repurchase Date,
with respect to the removal and repurchase, and
o deliver to the trustee and any Enhancement providers an officers'
certificate confirming the items set forth in the fourth through
seventh clauses above.
The seller may not remove Designated Accounts or repurchase Designated
Receivables unless each Rating Agency shall have notified the seller, the
servicer and the trustee in writing that the removal and repurchase will not
cause the Rating Agency's rating of any outstanding series or class of
certificates to be reduced or withdrawn.
Upon satisfaction of the above conditions, on the Removal and
Repurchase Date with respect to any Designated Account and Designated
Receivables, the Designated Account shall be deemed removed, and the Designated
Receivables ("Repurchased Receivables") shall be deemed repurchased, from the
trust for all purposes.
On each distribution date, the trustee will apply any amounts on
deposit in the Collection Account on the distribution date resulting from
payment by the seller of the Repurchased Receivables Purchase Price, first, to
fund any unpaid Miscellaneous Payment due on or prior to the distribution date.
Second, an amount equal to the product of
o the amount of any Repurchased Receivables Purchase Price
initially deposited by the seller in the Collection Account in
connection with the repurchase, and
o the Monthly Payment Rate for the immediately preceding Collection
Period
shall be treated as principal collections collected in the immediately preceding
Collection Period. The "Monthly Payment Rate" for a Collection Period is the
percentage obtained by dividing principal collections for the Collection Period
by the daily average Pool Balance for the Collection Period.
The seller, however, shall have the right to require the reassignment
to it of all the trust's right, title and interest in the receivables then
existing and created after that time in Accounts ("Automatic Removed Accounts")
designated by the seller, together with existing and future collections and
proceeds from those receivables, upon satisfaction of the following conditions:
o on or before the fifth business day immediately preceding the
date upon which the Accounts are to be removed, the seller shall
have given the trustee, each Enhancement provider and the Rating
Agencies a Removal Notice specifying the date for removal of the
Automatic Removed Accounts (the "Automatic Removal Date");
o on or prior to the date that is five business days after the
Automatic Removal Date, the seller shall have delivered to the
trustee a computer file or microfiche or written list containing
a true and complete list of the Automatic Removed Accounts
stating for each Account, as of the removal notice date, its
account number and the aggregate amount of receivables
outstanding in the Account;
o the seller shall have represented and warranted as of each
Automatic Removal Date that the list of Automatic Removed
Accounts delivered to the trustee, as of the Automatic Removal
Date, is true and complete in all material respects;
o the trustee shall have received confirmation from each Rating
Agency that the removal will not cause the Ratings Agency's
rating of any outstanding series or class of certificates to be
reduced or withdrawn;
o the seller shall have delivered to the trustee, each Rating
Agency and any Enhancement providers an officers' certificate,
dated the Automatic Removal Date, to the effect that the seller
reasonably believes the removal will not cause an Early
Amortization Event or Reinvestment Event to occur with respect to
any series; and
o the seller shall have delivered to the trustee, each Rating
Agency and any Enhancement providers a Tax Opinion, dated the
Automatic Removal Date, with respect to the removal.
o Upon satisfaction of the above conditions, on the Automatic
Removal Date the trust's interest in the receivables arising in
the Automatic Removed Accounts, all monies due and to become due
and all amounts received with respect to the receivables and all
proceeds of the receivables shall be deemed removed from the
trust for all purposes.
EXCLUDED SERIES
A series of certificates may be designated as an excluded series (an
"Excluded Series") with respect to a series of certificates previously issued by
the trust as to which the Accumulation Period or Controlled Amortization Period
has commenced (a "Paired Series"). This allows a seller, in effect, to replace
an amortizing series with a new series without waiting for the amortizing series
to be paid in full.
Each Excluded Series will be prefunded with an initial deposit to a
prefunding account in an amount equal to the initial principal balance of the
Excluded Series. The source of funds will primarily be the proceeds of the
offering of the Excluded Series. Any prefunding account will be held for the
benefit of the Excluded Series and not for the benefit of the Paired Series. As
funds are accumulated in the Principal Funding Account for the Paired Series or
distributed to holders of certificates of the Paired Series, the trustee will
distribute to the seller an equal amount of funds from any prefunding account
for the Excluded Series. Until payment in full of the Paired Series, no interest
collections, principal collections, Defaulted Amounts or Miscellaneous Payments
will be allocated to the related Excluded Series. Also, it is expected that any
Excluded Series will be excluded from the calculation of the Required
Participation Amount as described under " -- Addition of Accounts".
COLLECTION ACCOUNT
In general, either the servicer, subject to limitations, will hold the
trust's funds or the trustee will keep those funds in accounts that must be
Eligible Deposit Accounts.
The servicer will establish and will maintain an Eligible Deposit
Account for the benefit of the certificateholders in the name of the trustee, on
behalf of the trust (the "Collection Account"). "Eligible Deposit Account" means
either
o a segregated account with an Eligible Institution or
o a segregated trust account with the corporate trust department of
a depository institution organized under the laws of the United
States or any one of the states of the United States, or any
domestic branch of a foreign bank, having corporate trust powers
and acting as trustee for funds deposited in the account, so long
as any of the securities of the depository institution has a
credit rating from each Rating Agency in one of its generic
rating categories which signifies investment grade.
"Eligible Institution" means
o the corporate trust department of the trustee or
o a depository institution organized under the laws of the United
States or any one of the states of the United States, or the
District of Columbia, or a domestic branch of a foreign bank,
which at all times
o has either
o a long-term unsecured debt rating of A2 or better by Moody's
Investors Service, Inc. ("Moody's") and of AAA or better by
Standard & Poor's Ratings Services, a division of The McGraw-Hill
Companies ("Standard & Poor's") or
o a certificate of deposit rating of P-1 by Moody's or A-1+ by
Standard & Poor's, and
o is a member of the FDIC.
Funds in the Collection Account generally will be invested in Eligible
Investments. "Eligible Investments" are book-entry securities, negotiable
instruments or physical securities having original or remaining maturities of 30
days or less, but in no event occurring later than the distribution date next
succeeding the trustee's acquisition of the book-entry securitized, negotiable
instruments or physical securities, except as otherwise provided in the related
Series Supplement. Eligible Investments are limited to:
o direct obligations of, and obligations fully guaranteed as to
timely payment by, the United States of America;
o demand deposits, time deposits or certificates of deposit of any
depositary institution or trust company incorporated under the
laws of the United States of America or any state of the United
States, or any domestic branch of a foreign bank, and subject to
supervision and examination by Federal or state banking or
depository institution authorities. However, at the time of the
trust's investment or contractual commitment to invest in the
demand deposits, the deposits or certificates of deposit, the
commercial paper or other short-term unsecured debt obligations,
other than obligations the rating of which is based on the credit
of a person or entity other than the depository institution or
trust company of the depositary institution or trust company,
must have a credit rating from each of the Rating Agencies in its
highest investment category;
o commercial paper having, at the time of the trust's investment or
contractual commitment to invest in the commercial paper, a
rating from each of the Rating Agencies in its highest investment
category;
o except during a Reinvestment Period with respect to any series,
investments in money market funds having a rating from each of
the Rating Agencies in its highest investment category or
otherwise approved in writing thereby;
o bankers' acceptances issued by any depository institution or
trust company referred to in the second clause of this sentence;
o repurchase obligations, including those of appropriately rated
broker-dealers and financial institutions; and
o any other investment consisting of a financial asset that by its
terms converts to cash within a finite period of time. However,
each Rating Agency shall have notified the seller, the servicer
and the trustee that the trust's investment in the financial
asset will not cause the Rating Agency to reduce or withdraw its
then rating of any outstanding class or series.
Any earnings, net of losses and investment expenses, on funds in the
Collection Account will be credited to the Collection Account. The servicer will
have the revocable power to instruct the trustee to make withdrawals and
payments from the Collection Account for the purpose of making payments under
the Pooling and Servicing Agreement. The servicer may select an appropriate
agent as representative of the servicer for the purpose of choosing the
investments.
EXCESS FUNDING ACCOUNT
Except, to the extent provided in the related Series Supplement, during
an Early Amortization Period or Reinvestment Period for a series, we will keep
the Excess Funded Amount, if any, for that series in an Eligible Account (the
"Excess Funding Account") established with the trustee for the series. The
"Excess Funded Amount" for a series will initially equal the excess, if any, of
the initial principal balance of the certificates of the series over the Initial
Invested Amount of the series. The trustee will invest funds on deposit in the
Excess Funding Account for a series will be invested by the trustee at the
direction of the servicer in Eligible Investments. The investments must mature
on or prior to the next distribution date. The servicer may select an agent for
the purpose of designating the investments.
The trustee will distribute funds on deposit in the Excess Funding
Account for a series to the seller or allocate them to one or more other series
which are in Controlled Amortization, Early Amortization, Reinvestment or
Accumulation Periods to the extent of any increases in the Invested Amount of
that series as a result of the addition of receivables to the trust, a reduction
in the Seller's Interest, or a reduction in the Initial Invested Amount of any
other series. The trustee will deposit additional amounts in the Excess Funding
Account for a series on a distribution date to the extent that the sum of the
Certificateholders' Interest of the series in principal receivables and the
amount on deposit in the Excess Funding Account, if any, for the series prior to
that date is less than the outstanding principal balance of the certificates of
the series, but only to the extent that funds are available as provided in the
related Series Supplement. The allocation of additional receivables to increase
the Invested Amount of each series that provides for an Excess Funding Account
or similar arrangement involving fluctuating levels of investment in the
receivables will be made pro rata on the basis of the amounts in the excess
Funding Accounts or similar basis. The deposit of amounts in the Excess Funding
Accounts for each of those series will be made pro rata on the basis of their
respective Adjusted Invested Amounts.
On each distribution date, we will apply all investment income earned
on amounts in the Excess Funding Account for any series since the preceding
distribution date as described in this prospectus and in the related prospectus
supplement.
The trustee will distribute funds on deposit in the Excess Funding
Account for a series on the earliest of
o the commencement of a Reinvestment Period with respect to the
series,
o the commencement of an Early Amortization Period with respect to
the series and
o the distribution date or distribution dates specified in or
determined in the manner provided in the Series Supplement for
the series to the certificateholders of the series or a class of
the series or deposit those amounts in the Principal Funding
Account for the series or a class of the series, in each case if
and to the extent the related Series Supplement so states. Also,
except as otherwise provided in the related Series Supplement, we
will not deposit funds in the Excess Funding Account for a series
during any Early Amortization Period or Reinvestment Period with
respect to the series or with respect to any Collection Period
following the Collection Period stated in or determined in the
manner provided in the Series Supplement for the series.
ALLOCATION PERCENTAGES
We will allocate collections to each series and then between the seller
and the certificateholders of that series on the basis of various percentages.
Which percentage we use depends on whether the collections being allocated are
interest collections or principal collections or other amounts and whether or
not the collections are received in the Revolving Period for a series.
Allocations among Series. Under the Pooling and Servicing Agreement,
during each Collection Period the servicer will allocate to each outstanding
Series its share of interest collections, principal collections, Defaulted
Receivables and Miscellaneous Payments based on the applicable Series Allocable
Interest Collections, Series Allocable Principal Collections, Series Allocable
Defaulted Amount and Series Allocable Miscellaneous Payments.
"Series Allocable Interest Collections", "Series Allocable
Principal Collections", "Series Allocable Defaulted Amount" and
"Series Allocable Miscellaneous Payments" are, with respect to any
series of certificates for any Collection Period, the product of the
Series Allocation Percentage for the series and the amount of interest
collections, principal collections, the Defaulted Amount and
Miscellaneous Payments, respectively, with respect to the Collection
Period.
"Miscellaneous Payments" for any Collection Period are the sum of
o Adjustment Payments and Transfer Deposit Amounts received with
respect to the Collection Period and
o Unallocated Principal Collections on the distribution date
available to be treated as Miscellaneous Payments as described
below under "Principal Collections for all Series".
"Series Allocation Percentage" is, with respect to a series for
any Collection Period, the percentage equivalent of a fraction, the
numerator of which is the Adjusted Invested Amount of the series as of
the last day of the immediately preceding Collection Period and the
denominator of which is the Trust Adjusted Invested Amount as of that
last day.
"Adjusted Invested Amount" is, with respect to a series for any
date, an amount equal to the sum of
o the Initial Invested Amount of the series, minus unreimbursed
Investor Charge-Offs for the series and
o the Available Subordinated Amount with respect to the series,
after giving effect to the allocations, distributions,
withdrawals and deposits to be made on the distribution date
during the Collection Period in which the date occurs.
"Trust Adjusted Invested Amount" is, with respect to any
Collection Period, the sum of the Adjusted Invested Amounts for all
outstanding series.
"Initial Invested Amount" is, with respect to any series and for
any date, the amount stated in the related Series Supplement. The
Initial Invested Amount for any series may be increased or decreased
from time to time as stated in the related Series Supplement,
including as a result of deposits to or withdrawals from the Excess
Funding Account, if any, for the series.
Allocation Between the Certificateholders and the Seller's Interest.
The servicer will allocate amounts initially allocated to each series between
the Certificateholders' Interest and the Seller's Interest for each Collection
Period as stated in the related Series Supplement and described in the related
prospectus supplement. If a series consists of more than one class, the amounts
allocated to the Certificateholders' Interest of the series will be further
allocated between those classes as stated in the related Series Supplement and
described in the related prospectus supplement.
Principal Collections for all Series. We will allocate principal
collections allocated to the Certificateholders' Interest of any series, for any
Collection Period with respect to any Accumulation Period, Controlled
Amortization Period, Reinvestment Period or Early Amortization Period with
respect to the series or a class of the series, first to make required payments
of principal to the Principal Funding Account or to the Certificateholders of
the series or class, in each case if and to the extent stated in the Series
Supplement for the series. The servicer will determine the amount of available
certificateholder principal collections for each series and any Collection
Period remaining after the required payments, if any ("Excess Principal
Collections"). The servicer will allocate Excess Principal Collections to cover
any principal distributions to certificateholders of any series which are either
scheduled or permitted and which have not been covered out of principal
collections and other amounts allocated to the series ("Principal Shortfalls").
Excess Principal Collections will not be used to cover Investor Charge-Offs for
any series. If Principal Shortfalls exceed Excess Principal Collections for any
Collection Period, Excess Principal Collections will be allocated pro rata among
the applicable series based on the relative amounts of Principal Shortfalls,
unless otherwise provided in the applicable Series Supplements. To the extent
that Excess Principal Collections exceed Principal Shortfalls, the trustee will
pay the balance to the seller if the Seller's Participation Amount, determined
after giving effect to any principal receivables transferred to the trust on
that date, exceeds the Trust Available Subordinated Amount for the immediately
preceding Determination Date, after giving effect to the allocations,
distributions, withdrawals and deposits to be made on the distribution date
immediately following the Determination Date. Any amount not allocated to the
seller because the Seller's Participation Amount does not exceed the Trust
Available Subordinated Amount will be held unallocated ("Unallocated Principal
Collections") until the Seller's Participation Amount exceeds the Trust
Available Subordinated Amount, at which time we will allocate the amount to the
seller. However, if an Early Amortization Period, Accumulation Period,
Controlled Amortization Period or Reinvestment Period commences for any series,
the amount will be treated as a Series Allocable Miscellaneous Payment.
ALLOCATION OF COLLECTIONS; DEPOSITS IN COLLECTION ACCOUNT
On each Determination Date, the servicer will calculate the amounts to
be allocated in respect of collections on receivables received with respect to
the related Collection Period to the certificateholders of each outstanding
series or class or the seller in accordance with the Series Supplements.
The servicer, no later than two business days after the processing
date, will deposit all collections received with respect to the receivables,
excluding, with exceptions, portions allocable to the seller, in each Collection
Period into the Collection Account. However, the servicer need not make daily
deposits if
o the initial servicer remains the servicer under the Pooling and
Servicing Agreement,
o no Service Default has occurred and is continuing and
o the servicer has and maintains a short-term debt rating of at
least A-1 by Standard & Poor's and P-1 by Moody's, and
o the servicer arranges for and maintains a letter of credit or
other form of Enhancement in respect of the servicer's obligation
to make deposits of collections on the receivables in the
Collection Account that is acceptable in form and substance to
each Rating Agency or
o the servicer otherwise obtains the Rating Agency confirmations
described below in this paragraph.
In that case, subject to any limitations referred to below, the servicer may use
for its own benefit all collections until the related distribution date. At that
time the servicer will make the deposits in an amount equal to the net amount of
the deposits and withdrawals which would have been made if deposits were made on
a daily basis. However, before ceasing daily deposits as described above, the
seller must deliver to the trustee written confirmation from the applicable
Rating Agencies that the failure by the servicer to make daily deposits will not
cause the Rating Agencies to reduce or withdraw rating of any outstanding series
or class of certificates.
In addition, during any Collection Period the servicer will be required
to deposit interest collections and principal collections into the Collection
Account only to the extent of
o the distributions the trust must make to certificateholders,
o the amounts the trust must deposit into any account maintained
for the benefit of certificateholders of any series and other
parties and
o the amounts the trust must pay to any Enhancement provider on the
distribution date relating to the Collection Period.
Also, if, at any time prior to that distribution date, the amount of collections
deposited in the Collection Account exceeds the amount the servicer is required
to deposit, the servicer will be permitted to withdraw the excess from the
Collection Account.
On any date on which the servicer deposits collections in the
Collection Account, the servicer will distribute directly to the seller the
amount of the interest collections allocable to each series specified in the
related Series Supplement and described in the related prospectus supplement.
However, the trustee will make that distribution only if the Seller's
Participation Amount, determined after giving effect to any Principal
Receivables transferred to the trust on the date, exceeds the Trust Available
Subordinated Amount for the immediately preceding Determination Date, after
giving effect to the allocations, distributions, withdrawals and deposits
required to be made on the distribution date immediately following the
Determination Date. Also, during the Revolving Period for any series, subject to
limitations, the servicer will distribute directly to the seller on each date of
deposit the amount of principal collections allocable to each series stated in
the related Series Supplement and described in the related prospectus supplement
if the Seller's Participation Amount, determined after giving effect to any
principal receivables transferred to the trust on that date, exceeds the Trust
Available Subordinated Amount for the immediately preceding Determination Date,
after giving effect to the allocations, distributions, withdrawals and deposits
the servicer is to make on the distribution date immediately following the
Determination Date.
LIMITED SUBORDINATION OF SELLER'S INTEREST; ENHANCEMENTS
SUBORDINATION OF SELLER'S INTEREST. With respect to any series of
certificates, we will subordinate the Seller's Interest to the rights of
certificateholders of the series to the extent described in the related
prospectus supplement. This will provide credit enhancement to the series. The
amount of the subordination with respect to any series is the "Available
Subordinated Amount" for the series. We will decrease and increase the Available
Subordinated Amount for any series from time to time if and to the extent
described in the related prospectus supplement. We will describe in the
prospectus supplement for each series the manner in which the servicer may draw
upon collections attributable to the Available Subordinated Amount for the
series to make payments to or for the benefit of the holders of certificates of
the series. If we so state in the related Series Supplements, the Available
Subordinated Amount for a series may be available to more than one series of
certificates.
ENHANCEMENTS. In addition to the subordination described above, for any
series, we may provide enhancements ("Enhancements") with respect to one or more
classes of the series, including one or more of the following:
o letter of credit,
o surety bond,
o cash collateral account,
o spread account,
o guaranteed rate agreement,
o swap, including without limitation currency swaps, or other
interest protection agreement,
o repurchase obligation,
o cash deposit or
o another form of credit enhancement described in the related
prospectus supplement.
We may also provide enhancements to a series or class or classes of a series by
subordination provisions which require that distributions of principal and/or
interest be made with respect to the certificates of the series or the class or
classes before distributions are made to one or more series or one or more
classes of the series. If we so provide in the related prospectus supplement,
any form of Enhancement may be available to more than one class or series. The
trust may use a currency swap to issue certificates payable in a currency other
than United States dollars.
If we provide Enhancement with respect to a series, we will include in
the related prospectus supplement a description of
o the amount payable under the Enhancement,
o any conditions to payment we do not otherwise describe in this
prospectus,
o the conditions, if any, under which we may reduce the amount
payable under the Enhancement and under which we may terminate or
replace the Enhancement and
o any material provisions of any agreement relating to the
Enhancement.
Additionally, we may set forth in the related prospectus supplement the
information with respect to the applicable Enhancement provider, including
o a brief description of its principal business activities,
o its principal place of business, place of incorporation and the
jurisdiction under which it is chartered or licensed to do
business,
o if applicable, the identity of regulatory agencies which exercise
primary jurisdiction over the conduct of its business and
o its total assets, and its stockholders' equity or policyholders'
surplus, if applicable, as of a date we state in the prospectus
supplement.
Limitations on Subordination and Enhancements. We intend the presence
of an Available Subordinated Amount or Enhancement with respect to a series or
class to enhance the likelihood of receipt by certificateholders of the series
or class of the full amount of principal and interest and to decrease the
likelihood that the certificateholders will experience losses. However, unless
we otherwise state in the prospectus supplement for a series, neither
subordination of the Seller's Interest nor the Enhancement, if any, will provide
protection against all risks of loss or will guarantee repayment of the entire
principal balance of the certificates and interest on the certificates. If
losses exceed the amount covered by the subordination or Enhancement or are not
covered by the subordination or Enhancement, certificateholders will bear their
allocable share of deficiencies. In addition, if we provide specific Enhancement
for the benefit of more than one class or series, certificateholders of that
class or series will be subject to the risk that the Enhancement will be
exhausted by the claims of certificateholders of other classes or series.
DISTRIBUTIONS
The servicer will make payments to certificateholders of a series or a
class from the Collection Account and any accounts established for the benefit
of the certificateholders as we describe in the related prospectus supplement.
DEFAULTED RECEIVABLES AND RECOVERIES
"Defaulted Receivables" on any Determination Date are
o all receivables which the servicer charged off as uncollectible
in respect of the immediately preceding Collection Period and
o all receivables which were Eligible Receivables when transferred
to the trust, which arose in an Account which became an
Ineligible Account after the date of transfer of the receivables
to the trust and which were not Eligible Receivables for any six
consecutive Determination Dates after the date of transfer of the
receivables to the trust.
The "Defaulted Amount" for any Collection Period will be an amount, which shall
not be less than zero, equal to
o the principal amount of receivables that became Defaulted
Receivables during the preceding Collection Period minus
o the sum of
o the full amount of any Defaulted Receivables subject to
reassignment to the seller or purchase by the servicer for the
Collection Period unless events of bankruptcy, insolvency or
receivership have occurred with respect to either of the seller
or the servicer, in which event the Defaulted Amount will not be
reduced for those Defaulted Receivables, and
o the excess, if any, for the immediately preceding Determination
Date of the amount determined under this second clause for the
Determination Date over the amount determined under the first
clause for the Determination Date.
The servicer will change off receivables as uncollectible in accordance
with the servicer's customary and usual policies and procedures for servicing
its own comparable revolving dealer wholesale loan accounts. The servicer will
allocate a portion of the Series Allocable Defaulted Amount for each series and
Collection Period between the certificateholders of the series and the seller as
we state in the related Series Supplement. The portion of the Defaulted Amount
allocated to the certificateholders of a series will be the "Investor Default
Amount" for the series. The servicer will further allocate the Investor Default
Amount for any series that consists of more than one class between those classes
as we state in the related Series Supplement.
If the servicer adjusts the amount of any receivable because of a
rebate, billing error or other non-cash items to a dealer, or because the
receivable was created in respect of inventory which was refused or returned by
a dealer, we will reduce the principal amount of each of the Seller's Interest
and the Pool Balance by the amount of the adjustment or charge-off. Further, to
the extent that the reduction in the Seller's Interest would reduce the Seller's
Participation Amount below the Trust Available Subordinated Amount for the
immediately preceding Determination Date, after giving effect to the
allocations, distributions, withdrawals and deposits to be made on the
distribution date immediately following that Determination Date, the seller will
deposit a cash amount equal to the deficiency into the Collection Account in
immediately available funds (an "Adjustment Payment") on the day on which the
servicer makes the adjustment.
OPTIONAL REPURCHASE
If we so state in the prospectus supplement relating to a series of
certificates, on any distribution date occurring after the Invested Amount of
the certificates of the series is reduced to the percentage of the initial
outstanding principal amount of the certificates of the series we state in the
prospectus supplement, the servicer will have the option, subject to conditions,
to repurchase the Certificateholders' Interest of the series. The purchase price
will be equal to the Invested Amount of the series on the Determination Date
preceding the distribution date on which the servicer will make the repurchase
plus accrued and unpaid interest on the unpaid principal amount of the
certificates of the series at the applicable certificate rate, together with
interest on overdue interest, to the extent lawful, plus any other amounts we
state in the related Series Supplement. The servicer will deposit the purchase
price in the Collection Account in immediately available funds on the
distribution date on which the servicer exercises that option. Following any
purchase, the certificateholders of the series will have no further rights with
respect to the Certificateholders' Interest of the series, other than the right
to receive the final distribution on the certificates of that series. If the
servicer fails for any reason to deposit the purchase price, the servicer will
continue to make payments to the certificateholders of the series as we describe
in the related prospectus supplement.
Reinvestment Events and Early Amortization Events
Beginning on the first distribution date following the Collection
Period in which a Reinvestment Event has occurred with respect to any series,
o the servicer will no longer pay to the holder of the Seller's
Interest principal collections allocable to the
Certificateholders' Interest of the series or allocate those
collections to any other series but instead will deposit those
collections to the Principal Funding Account for the series
monthly on each distribution date, and
o the Controlled Deposit Amount or Controlled Amortization Amount,
if any, will no longer apply to distributions of principal in
respect of the certificates of the series,
in each case except as we describe below under "Reinvestment Events and Early
Amortization Events" or as we state in the related Series Supplement. A
"Reinvestment Event" is, for any series, any of the events we so describe in the
related Series Supplement and describe in the related prospectus supplement.
If any event we so define occurs, we will deem a Reinvestment Event to
have occurred with respect to the series without any notice or other action on
the part of any other party immediately upon the occurrence of the event. The
Reinvestment Period with respect to the series will begin as of the close of
business on the business day immediately preceding the day on which we deem the
Reinvestment Event to have occurred. Monthly deposits of principal to the
Principal Funding Account for the series will, except as we describe below under
"Reinvestment Events and Early Amortization Events" or state in the related
Series Supplement, begin on the first distribution date following the Collection
Period in which a Reinvestment Period has begun with respect to the series.
Beginning on the first distribution date following the Collection
Period in which an Early Amortization Event has occurred with respect to any
series,
o the servicer will no longer pay to the holder of the Seller's
Interest Principal Collections allocable to the
Certificateholders' Interest of the series, allocate those
collections to any other series or retain those collections in
the Principal Funding Account for the series but instead will be
distributed to certificateholders of the series monthly on each
distribution date and
o the Controlled Deposit Amount or Controlled Amortization Amount,
if any, will no longer apply to distributions of principal on the
certificates of the series,
in each case except as we describe below under "Reinvestment Events and Early
Amortization Events" or state in the related Series Supplement. An "Early
Amortization Event" is, for any series, any of the events we so define in the
related Series Supplement and describe in the related prospectus supplement, as
well as each of the following events:
o the occurrence of events of bankruptcy, insolvency or
receivership relating to the trust or the seller; and
o the trust or Ace Securities Corp. becomes an investment company
within the meaning of the Investment Company Act of 1940.
If any event we describe above or in the prospectus supplement for a
series occurs, we will deem an Early Amortization Event to have occurred with
respect to the series without any notice or other action on the part of any
other party immediately upon the occurrence of the event. The Early Amortization
Period with respect to the series will begin as of the close of business on the
business day immediately preceding the day on which we deem the Early
Amortization Event to have occurred. Monthly distributions of principal to the
certificateholders of the series will begin on the first distribution date
following the Collection Period in which an Early Amortization Period has begun
with respect to the series, except as we describe below under "Reinvestment
Events and Early Amortization Events". The failure of the trust to pay the
outstanding principal amount of the certificates of any series or class by their
Expected Payment Date will have the same consequences as the occurrence of an
Early Amortization Event with respect to the series or class. We shall deem all
references in this prospectus to Early Amortization Events to include that type
of failure.
Even if a Reinvestment Period or an Early Amortization Period begins
with respect to a series, that period may terminate and the Revolving Period
with respect to the series and any class may recommence when the event giving
rise to the beginning of the Reinvestment Period or Early Amortization Period no
longer exists, whether as a result of the distribution of principal to
certificateholders of the series or otherwise, in each case if and to the extent
we state in the Series Supplement for the series.
In addition, if an insolvency event occurs with respect to the
originator or the seller, or the originator or the seller violates its covenant
not to create any lien on any receivable, in each case as provided in the
Pooling and Servicing Agreement, on the day of the insolvency event or
violation, as applicable, the seller will, subject to the actions of the
certificateholders, immediately cease to transfer receivables to the trust and
promptly give notice to the trustee of the insolvency event or violation, as
applicable. Under the terms of the Pooling and Servicing Agreement, within 15
days the trustee will publish a notice of the insolvency event or violation
stating that the trustee intends to sell, liquidate or otherwise dispose of the
receivables in a commercially reasonable manner and on commercially reasonable
terms, unless within a stated period of time holders of certificates of each
outstanding series representing more than 50% of the aggregate unpaid principal
amount of the certificates of each outstanding series, or, with respect to any
series with two or more classes, the certificates of each class, and each person
holding a Supplemental Certificate, instruct the trustee not to sell, dispose of
or otherwise liquidate the receivables and to continue transferring receivables
as before the insolvency event or violation, as applicable. If the portion of
the proceeds allocated to the Certificateholders' Interest and the proceeds of
any collections on the receivables in the Collection Account allocable to the
Certificateholders' Interest are not enough to pay the aggregate unpaid
principal balance of the certificates in full plus accrued and unpaid interest
on the certificates, certificateholders will incur a loss.
TERMINATION; FULLY REINVESTED DATE
TERMINATION. The trust will terminate on the earliest to occur of
o the day following the distribution date on which the aggregate
Invested Amounts for all series is zero,
o the date specified in the prospectus supplement, and
o the date on which the servicer distributes to the
certificateholders proceeds from the sale, disposal or other
liquidation of the receivables following an insolvency event with
respect to the originator or the seller or any violation by the
originator or the seller of its covenant not to create any lien
on any receivable, in each case as stated in the Pooling and
Servicing Agreement and as we describe above under "Reinvestment
Events and Early Amortization Events".
When the trust is terminated, the trust will transfer to the entity specified in
the prospectus supplement all right, title and interest in the receivables and
other funds of the trust, other than amounts in the trust's accounts for the
final distribution of principal and interest to certificateholders.
In any event, the last payment of principal and interest on any series of
certificates will be due and payable no later than the date we state in the
related prospectus supplement (the "Series Termination Date").
FULLY REINVESTED DATE. The "Fully Reinvested Date" is the date on which
the amount on deposit in the Principal Funding Account with respect to a series
equals the outstanding principal amount of the certificates of the series. After
the Fully Reinvested Date occurs with respect to any series, certificateholders
of that series will no longer have any interest in the receivables. Further, all
the representations and covenants of the seller and the servicer relating to the
receivables, as well as other provisions of the Pooling and Servicing Agreement
and all remedies for breaches of those representations, covenants and other
provisions, will no longer accrue to the benefit of the certificateholders of
that series, in each case unless the Revolving Period with respect to the series
recommences as we state in the related Series Supplement. Those representations,
covenants and other provisions include
o the conditions to the exchange of the Seller's Certificate we
describe under "The Seller's Certificate",
o the conditions to the issuance of a new series we describe under
"New Issuances",
o the representations we describe under "Representations and
Warranties" to the extent they relate to the receivables and the
Collateral Security,
o the limitations on additions and removals of Accounts we describe
under "Addition of Accounts" and "Removal of Accounts",
respectively, and
o the obligations of the servicer with respect to servicing the
receivables we describe under "Collection and Other Servicing
Procedures" and "Servicer Covenants".
Also, if the Fully Reinvested Date occurs with respect to any series, the
servicer will allocate to that series no interest collections, principal
collections, Defaulted Receivables or Miscellaneous Payments, unless the series'
Revolving Period begins again as we describe above. However, when the servicer
has made the final distribution with respect to each series of certificates or
the series' Fully Reinvested Date has occurred, the trustee will convey and
transfer to the entity specified in the related prospectus supplement, all
right, title and interest in the receivables.
INDEMNIFICATION
The Pooling and Servicing Agreement will state that the servicer will
indemnify the trust and the trustee from and against any loss, liability,
expense, damage or injury suffered or sustained arising out of any acts,
omissions or alleged acts or omissions arising out of activities of the trust,
the trustee or the servicer under the Pooling and Servicing Agreement. The
servicer will not so indemnify the trust or the trustee, however, if the acts,
omissions or alleged acts or omissions constitute fraud, gross negligence,
breach of fiduciary duty or willful misconduct by the trustee. Also, the
servicer will not indemnify the trust, the trustee or the certificateholders for
any act taken by the trustee at the request of the certificateholders or for any
tax which the trust or the certificateholders is required to pay.
The Pooling and Servicing Agreement will state that, except as we
describe above and with other exceptions, neither the seller, the servicer nor
any of their directors, officers, employees or agents will be under any
liability to the trust, the trustee, the certificateholders or any other person
for taking any action, or for refraining from taking any action, under the
Pooling and Servicing Agreement. However, neither the seller, the servicer nor
any of their directors, officers, employees or agents will be protected against
any liability which would otherwise be imposed by reason of willful misfeasance,
bad faith or gross negligence of any of those persons in the performance of
their duties or by reason of reckless disregard of their obligations and duties
under the Pooling and Servicing Agreement.
Also, the Pooling and Servicing Agreement states that the servicer is
not under any obligation to appear in, prosecute or defend any legal action
which is not incidental to its servicing responsibilities under the Pooling and
Servicing Agreement. The servicer may, in its sole discretion, undertake any
legal action which it may deem necessary or desirable for the benefit of the
certificateholders with respect to the Pooling and Servicing Agreement and the
rights and duties of the parties to that agreement and the interest of the
certificateholders under that agreement.
COLLECTION AND OTHER SERVICING PROCEDURES
Under the Pooling and Servicing Agreement, the servicer is responsible
for servicing, collecting, enforcing and administering the receivables. The
servicer must do so in accordance with customary and usual procedures for
servicing its own revolving credit line dealer wholesale loans, except where the
failure to so act would not materially and adversely affect the rights of the
trust.
The originator covenants that it may only change the terms relating to
the Accounts if
o in the servicer's reasonable judgment, the charge will not cause
any Early Amortization Event or Reinvestment Event to occur with
respect to any series and
o the servicer applies the change to the comparable segment of the
portfolio of revolving credit line dealer wholesale loan accounts
with similar characteristics owned or serviced by the servicer
and not only to the Accounts.
When acting as a servicer, the servicer will, among other things
o collect and record payments,
o communicate with dealers,
o investigate payment delinquencies,
o evaluate the increase of credit limits, and
o maintain internal records with respect to each Account.
Managerial and custodial services performed by the servicer on behalf
of the trust include
o providing assistance in any inspections of the documents and
records relating to the Accounts and receivables by the trustee
under the Pooling and Servicing Agreement,
o maintaining the agreements, documents and files relating to the
Accounts and receivables as custodian for the trust and
o providing related data processing and reporting services for
certificateholders and on behalf of the trustee.
SERVICER COVENANTS
In the Pooling and Servicing Agreement the servicer covenants that:
o it will duly satisfy all obligations on its part to be fulfilled
under or in connection with the receivables and the Accounts,
will maintain in effect all qualifications required in order to
service the receivables and the Accounts and will comply in all
material respects with all requirements of law in connection with
servicing the receivables and the Accounts, the failure to comply
with which would have a materially adverse effect on the
certificateholders of any outstanding series;
o it will not permit any rescission or cancellation of a receivable
except as ordered by a court of competent jurisdiction or other
government authority;
o it will do nothing to impair the rights of the certificateholders
in the receivables or the Accounts; and
o it will not reschedule, revise or defer payments due on any
receivable except in accordance with its guidelines for servicing
revolving credit line dealer wholesale loans.
Under the terms of the Pooling and Servicing Agreement, if the seller
or the servicer discovers, or receives written notice, that any covenant of the
servicer set forth above has not been complied with in all material respects and
the noncompliance has not been cured within 30 days, or a longer period as the
trustee may agree to, and has a materially adverse effect on the interests of
all certificateholders in any receivable or Account, the servicer will purchase
the receivable or all receivables in the Account, as applicable. Some servicers
will purchase the receivable or receivables on the Determination Date following
the expiration of the 30-day cure period and the servicer will be obligated to
deposit into the Collection Account an amount equal to the amount of the
receivable or receivables plus accrued and unpaid interest on that amount. We
shall deem the amount of the deposit a Transfer Deposit Amount. The purchase by
the servicer constitutes the sole remedy available to the certificateholders if
the covenant or warranty of the servicer is not satisfied and the trust's
interest in any purchased receivables shall be automatically assigned to the
servicer.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
Unless we state otherwise in the related Series Supplement or
prospectus supplement, the servicer's compensation with respect to the
certificates of a series for its servicing activities and reimbursement for its
expenses will be a monthly servicing fee (the "Servicing Fee"). The Servicing
Fee is an amount payable in arrears on each distribution date on or before the
Series Termination Date of the series and the Fully Reinvested Date, if any, of
the series, and after that date during the Revolving Period with respect to the
series, if the Revolving Period begins again, equal to one-twelfth of the
product of
o the "Servicing Fee Rate" set forth in the series Supplement,
o the Pool Balance as of the last day of the second preceding
Collection Period and
o the Series Allocation Percentage for the series for the
immediately preceding Collection Period.
Unless we state otherwise in a related Series Supplement or prospectus
supplement, the share of the Servicing Fee allocable to certificateholders of
any series with respect to any distribution date (the "Monthly Servicing Fee")
shall be equal to one-twelfth of the product of
o the Servicing Fee Rate and
o the Invested Amount of the series as of the last day of the
second preceding Collection Period.
The seller shall pay the remainder of the Servicing Fee with respect to any
series. The servicer shall pay the Monthly Servicing Fee with respect to any
series solely to the extent amounts are available for distribution of the
Monthly Servicing Fee under the terms of the Pooling and Servicing Agreement.
The servicer may waive its right to receive the Servicing Fee with
respect to any series on any distribution date, so long as it believes that
enough interest collections will be available on a future distribution date to
pay the Monthly Servicing Fee relating to the waived Servicing Fee. If that
happens, we shall deem the Servicing Fee and the Monthly Servicing Fee for the
series and the distribution date to be zero.
The servicer will pay from its servicing compensation expenses it
incurs when servicing the Accounts and the receivables including, without
limitation, payment of fees and disbursements of the trustee and independent
accountants and all other fees and expenses which are not expressly stated in
the Pooling and Servicing Agreement to be payable by the trust or the
certificateholders other than federal, state and local income and franchise
taxes, if any, of the trust or the certificateholders.
MATTERS REGARDING THE SERVICER
The servicer may not resign from its obligations and duties under the
Pooling and Servicing Agreement, except upon determination that those duties are
no longer permissible under applicable law. No resignation will become effective
until the trustee or a successor to the servicer has assumed the servicer's
responsibilities and obligations under the Pooling and Servicing Agreement. The
servicer may delegate any of its duties as servicer to any of its affiliates,
but any delegation will not relieve the servicer of its obligation under the
Pooling and Servicing Agreement.
Any person into which, in accordance with the Pooling and Servicing
Agreement, the servicer may be merged or consolidated or any person resulting
from any merger or consolidation to which the servicer is a party, or any person
succeeding to the business of the servicer, will be the successor to the
servicer under the Pooling and Servicing Agreement.
SERVICE DEFAULT
In the event of any Service Default, the trustee, by written notice to
the servicer, may terminate all of the rights and obligations of the servicer,
as servicer, under the Pooling and Servicing Agreement and in and to the
receivables and the proceeds of the receivables and appoint a new servicer (a
"Service Transfer"). The rights and interest of the seller under the Pooling and
Servicing Agreement in the Seller's Interest will not be affected by any Service
Transfer. The trustee shall as promptly as possible appoint a successor servicer
and if no successor servicer has been appointed by the trustee and has accepted
the appointment by the time the servicer ceases to act as servicer, all rights,
authority, power and obligations of the servicer under the Pooling and Servicing
Agreement shall pass to and be vested in the trustee. Before any Service
Transfer, the trustee will review any bids obtained from potential servicers
meeting eligibility requirements set forth in the Pooling and Servicing
Agreement to serve as successor servicer for servicing compensation not in
excess of the Servicing Fee, plus excess amounts payable to the seller.
A "Service Default" refers to any of the following events:
o failure by the servicer to make any payment, transfer or deposit,
or to give instructions to the trustee to make any payment,
transfer or deposit, on the date the Pooling and Servicing
Agreement requires the servicer to do so, which is not cured
within a five business day grace period;
o failure by the servicer duly to observe or perform any other
covenants or agreements of the servicer in the Pooling and
Servicing Agreement which failure has a materially adverse effect
on the certificateholders of any outstanding series and which
continues unremedied for a period of 30 days after the date the
trustee shall have given written notice of the failure to the
servicer,
o the servicer delegates its duties under the Pooling and Servicing
Agreement, except as specifically permitted under that agreement;
o any representation, warranty or certification made by the
servicer in the Pooling and Servicing Agreement or in any
certificate delivered under the Pooling and Servicing Agreement
proves to have been incorrect in any material respect when made,
has a materially adverse effect on the rights of the
certificateholders of any outstanding Series, and which
materially adverse effect continues for a period of 60 days after
the trustee shall have given written notice of that fact to the
servicer; or
o events of bankruptcy, insolvency or receivership occur with
respect to the servicer.
However, a delay in or failure of performance referred to under the
first clause for a period of ten business days or referred to under the second,
third or fourth clauses for a period of 60 business days, shall not constitute a
Service Default if the delay or failure was caused by an act of God or other
similar occurrence. If any of those events occurs, the servicer shall not be
relieved from using its best efforts to perform its obligations in a timely
manner in accordance with the terms of the Pooling and Servicing Agreement and
the servicer shall provide the trustee, any Enhancement provider, the seller and
the certificateholders prompt notice of the failure or delay by it, together
with a description of its efforts to so perform its obligations. The servicer
shall immediately notify the trustee in writing of any Service Default.
REPORTS
On each distribution date, including each distribution date that
corresponds to an interest payment date or any Special Payment Date, the trustee
will forward to each certificateholder of record of any series a statement (the
"Distribution Date Statement") prepared by the servicer. The Distribution Date
Statement will set forth information with respect to the trust and the
certificates of the series, as we state in the related Series Supplement and
describe in the related prospectus supplement.
With respect to each interest payment date or Special Payment Date, the
Distribution Date Statement with respect to any Series will include the
following information with respect to the certificates of the series:
o the total amount distributed on the certificates of the series;
o the amount of the distribution allocable to principal on the
certificates of the series; and
o the amount of the distribution allocable to interest on the
certificates of the series.
On or before the date specified in the prospectus supplement, the
trustee will furnish, or cause to be furnished, to each person who at any time
during the preceding calendar year was a certificateholder of record a statement
containing the information required to be provided by an issuer of indebtedness
under the Code for the preceding calendar year or the applicable portion of that
year during which the person was a certificateholder, together with other
customary information which the Code requires issuers of indebtedness to provide
and other customary information which certificateholders need to prepare their
tax returns. See "Tax Matters".
EVIDENCE AS TO COMPLIANCE
The Pooling and Servicing Agreement states that on or before the date
specified in the related prospectus supplement of each calendar year, the
servicer will cause a firm of nationally recognized independent public
accountants, who will also render other services to the servicer or the seller,
to furnish a report regarding matters in connection with the servicing of the
originator's portfolio of wholesale receivables.
The Pooling and Servicing Agreement states that on or before the date
specified in the prospectus supplement, the servicer will deliver to the trustee
a statement, signed by an officer of the servicer. The statement will state that
the servicer has fully performed, or caused to be fully performed, its
obligations in all material respects under the Pooling and Servicing Agreement
throughout the preceding year or, if there has been a default in the performance
of any obligation, will state the nature and status of the default.
You may obtain copies of all statements, certificates and reports
furnished to the trustee by delivering a written request to the trustee.
AMENDMENTS
The seller, the servicer and the trustee may amend the Pooling and
Servicing Agreement and any Series Supplement, without certificateholder
consent, so long as any amendment shall not, as evidenced by an opinion of
counsel, adversely affect in any material respect the interests of the
certificateholders.
The seller, the servicer and the trustee may amend the Pooling and
Servicing Agreement and any Series Supplement with the consent of the holders of
certificates evidencing not less than 66-2/3% of the aggregate unpaid principal
amount of the certificates of all adversely affected series for the purpose of
adding any provisions to or changing in any manner or eliminating any of the
provisions of the Pooling and Servicing Agreement or of modifying in any manner
the rights of certificateholders. No amendment, however, may
o reduce in any manner the amount of or delay the timing of
distributions the servicer is required to make to
certificateholders or deposits of amounts to be so distributed
without the consent of each affected certificateholder,
o change the definition or the manner of calculating any
Certificateholders' Interest without the consent of each affected
certificateholder,
o reduce the amount available under any Enhancement without the
consent of each affected certificateholder,
o adversely affect the rating of any series or class by each Rating
Agency without the consent of the holders of certificates of the
series or class evidencing not less than 66-2/3% of the aggregate
unpaid principal amount of the certificates of the series or
class or
o reduce that percentage of the unpaid principal amount of
certificates the holders of which are required to consent to any
amendment without the consent of each certificateholder.
Promptly following the execution of any amendment to the Pooling and
Servicing Agreement, other than an amendment described in the preceding
paragraph, the trustee will notify each certificateholder in writing of the
substance of the amendment.
However, we will deem each holder of a certificate offered by this
prospectus, by its acceptance of the certificate, to have consented to an
amendment to the Pooling and Servicing Agreement that
o provides that funds in the Collection Account may be invested in
Eligible Investments,
o provides that the seller need not make any deposit to the
Collection Account in respect of the Repurchased Receivables
Price of any Designated Receivables repurchased from the trust,
o otherwise changes the procedures for removing receivables from
the trust as described under "Removal of Accounts",
o provides that, subject to the limitations we describe in
prospectus, the originator need not deposit collections with
respect to Collection Period in the Collection Account until the
related date or
o permits the designation of Automatic Additional Accounts as we
describe in this prospectus.
The Pooling and Servicing Agreement may not be amended in any manner
which materially adversely affects the interests of any Enhancement provider
without its prior consent.
LIST OF CERTIFICATEHOLDERS
Upon written request of any three or more certificateholders of
record, the trustee will give those certificateholders access during business
hours to the current list of certificateholders of a series or all outstanding
series, as applicable, for purposes of communicating with other
certificateholders of the series or all outstanding series, as applicable, with
respect to their rights under the Pooling and Servicing Agreement. See
"Book-Entry Registration" and "Definitive Certificates".
The Pooling and Servicing Agreement will not provide for any annual or
other meetings of certificateholders.
THE TRUSTEE
The trustee so specified in the prospectus supplement will act as
trustee under the Pooling and Servicing Agreement.
The seller, the servicer and their respective affiliates may from time
to time enter into normal banking and trustee relationships with the trustee and
its affiliates. The trustee may hold certificates in its own name with the same
rights it would have if it were not the trustee. In addition, for purposes of
meeting the legal requirements of local jurisdictions, the trustee shall have
the power to appoint a co-trustee or separate trustees of all or a part of the
trust. In the event of those appointments, all rights, powers, duties and
obligations shall be conferred or imposed upon the trustee and the separate
trustee or co-trustee jointly, or, in any jurisdiction in which the trustee
shall be incompetent or unqualified to perform some acts, singly upon the
separate trustee or co-trustee, who shall exercise and perform those rights,
powers, duties and obligations solely at the direction of the trustee.
The trustee may resign at any time, in which event the seller must
appoint a successor trustee. The servicer may also remove the trustee if the
trustee ceases to be eligible to continue as the trustee under the Pooling and
Servicing Agreement or if the trustee becomes insolvent. If that happens, the
servicer may appoint a successor trustee. Any resignation or removal of the
trustee and appointment of a successor trustee does not become effective until
the acceptance of the appointment by the successor trustee.
DESCRIPTION OF THE RECEIVABLES PURCHASE AGREEMENT
The parties to the Receivables Purchase are the originator (together
with its predecessors as appropriate, the "RPA seller"), and the seller. In the
following summary we describe terms of the Receivables Purchase Agreement. The
summary, however, is qualified in its entirety by reference to the Receivables
Purchase Agreement.
SALE OR TRANSFER OF RECEIVABLES
Under the Receivables Purchase Agreement, the RPA seller will sell or
transfer to the seller all of its right, title and interest in and to all of the
receivables and the Collateral Security as of the Initial Cut-Off Date and all
of the receivables created after that date. In addition, the RPA seller will
designate Additional Accounts, and convey to the seller the Principal
Receivables in the Additional Accounts, together with the related Collateral
Security, as of the applicable Additional Cut-Off Date and all receivables, and
related Collateral Security, created after that date. As we describe in this
prospectus, under the Pooling and Servicing Agreement, the seller will transfer
to the trust all of its right, title and interest in and to the Receivables
Purchase Agreement.
In connection with the sale or transfer of the receivables to the
seller, the RPA seller must indicate in its computer files that the receivables
have been sold or transferred to the seller, and that the receivables have been
transferred by the seller to the trust. In addition, the RPA seller must provide
to the seller a computer file or microfiche or written list containing a true
and complete list of all the receivables. The records and agreements relating to
the Accounts and receivables have not and will not be segregated by the RPA
seller from other documents and agreements relating to other accounts and
receivables and are not and will not be stamped or marked to reflect the sale or
transfer of the receivables to the seller. The computer records, however, of the
RPA seller will be marked to evidence the sale or transfer. The RPA seller will
file UCC financing statements with respect to the receivables meeting the
requirements of the applicable state law. See "Risk Factors -- Legal Aspects"
and "Legal Aspects of the Receivables -- Transfer of Receivables".
REPRESENTATIONS AND WARRANTIES
The RPA seller will make representations and warranties to the seller
that, among other things, as of the Initial Closing Date and each Series
Issuance Date, it was duly formed and in good standing and that it has the
authority to consummate the transactions contemplated by the Receivables
Purchase Agreement.
The RPA seller will also make representations and warranties to the
seller relating to the receivables to the effect, among other things, that
o as of the Initial Closing Date and each Series Issuance
Date, each of the Accounts is an Eligible Account and
o as of the date any new receivable is created, the receivable
is an Eligible Receivable.
If any representation and warranty set forth in this paragraph is breached and
the breach results in an Ineligible Receivable and the requirement that the
seller accept retransfer of the Ineligible Receivable under the Pooling and
Servicing Agreement, the RPA seller shall repurchase the Ineligible Receivable
from the seller on the date of the retransfer. The purchase price for the
Ineligible Receivable shall be the face amount of the Ineligible Receivable, of
which at least the amount of any cash deposit required to be made by the seller
under the Pooling and Servicing Agreement in respect of the retransfer of the
Ineligible Receivable shall be paid in cash.
The RPA seller will also make representations and warranties to the
seller to the effect, among other things, that as of the Initial Closing Date
and each Series Issuance Date
o the Receivables Purchase Agreement is a legal, valid and
binding obligation of the RPA seller and
o the Receivables Purchase Agreement is a valid sale or
transfer to the seller of all right, title and interest of
the RPA seller in and to the receivables, whether then
existing or created after that time in the Accounts, the
Collateral Security and the proceeds of those items which is
effective as to each receivable upon the creation of that
receivable.
If any of the representations and warranties described in this paragraph are
breached and the breach results in the obligation of the seller under the
Pooling and Servicing Agreement to accept retransfer of the receivables, the RPA
seller will repurchase the receivables retransferred to the seller for an amount
of cash equal to the amount of cash the seller is required to deposit under the
Pooling and Servicing Agreement in connection with the retransfer.
The RPA seller will agree to indemnify the seller and to hold the
seller harmless from and against any and all losses, damages and expenses,
including reasonable attorneys' fees, suffered or incurred by the seller if the
foregoing representations and warranties are materially false.
COVENANTS
In the Receivables Purchase Agreement, the RPA seller will covenant
that it will perform its obligations under the agreements relating to the
receivables and the Accounts in conformity with its current policies and
procedures relating to the receivables and the Accounts.
The RPA seller will covenant further that, except for the sale and
conveyances under the Receivables Purchase Agreement and the interests created
under the Pooling and Servicing Agreement, the RPA seller will not sell, pledge,
assign or transfer any interest in the receivables to any other person. The RPA
seller will also covenant to defend and indemnify the seller for any loss,
liability or expense incurred by the seller in connection with a breach by the
RPA seller of any of its representations, warranties or covenants contained in
the Receivables Purchase Agreement.
In addition, the RPA seller will expressly acknowledge and consented
to the seller's assignment of its rights relating to the receivables under the
Receivables Purchase Agreement to the trustee.
TERMINATION
The Receivables Purchase Agreement will terminate immediately after
the trust terminates. Also, if under provisions of federal law the RPA seller
becomes party to any bankruptcy or similar proceeding, other than as a claimant,
and if the proceeding is not voluntary and is not dismissed within 60 days of
its institution, the RPA seller will immediately cease to sell or transfer
receivables to the seller and will promptly give notice of that event to the
seller and to the trustee.
LEGAL ASPECTS OF THE RECEIVABLES
TRANSFER OF RECEIVABLES
On the Initial Closing Date, the RPA seller sold and assigned or will
sell and assign the receivables to the seller, and the seller immediately
transferred or will transfer the receivables to the trust. The seller will
represent and warranty on the Series Issuance Date with respect to each Series
that
o the transfer to the trust constituted a valid transfer to
the trust of all right, title and interest of the seller in
and to the receivables and
o under the applicable UCC there exists a valid, subsisting
and enforceable first-priority perfected ownership interest
in the receivables, in existence at the time of the
formation of the trust or at the date of addition of any
Additional Accounts, in favor of the trust and a valid,
subsisting and enforceable first-priority perfected
ownership interest in the receivables created after that
time in favor of the trust on and after their creation.
However, the transfer of receivables by the seller to the trust could be deemed
to create a security interest under the UCC. For a discussion of the trust's
rights arising from these representations and warranties not being satisfied,
see "Description of the Certificates -- Representations and Warranties".
Each of the RPA seller and the seller will represent that the
receivables are "chattel paper" for purposes of the appliable UCC. If the
receivables are deemed to be chattel paper and the transfer of the receivables
by either the RPA seller to the seller or by the seller to the trust is deemed
either to be a sale or to create a security interest, the applicable UCC
applies. In that case, the transferee must either take possession of the chattel
paper or file an appropriate financing statement or statements in order to
perfect its interest in the chattel paper. Both the seller and the trust have
filed financing statements covering the receivables under the applicable UCC to
perfect their respective interests in the receivables and continuation
statements will be filed as required to continue the perfection of those
interests. The receivables have not and will not be stamped to indicate the
interest of the seller or the trustee.
There are circumstances under the UCC and applicable federal law in
which prior or subsequent transferees of receivables could have an interest in
the receivables with priority over the trust's interest. A purchaser of the
receivables who gives new value and takes possession of the instruments which
evidence the receivables, i.e., the chattel paper, in the ordinary course of the
purchaser's business may, under some circumstances, have priority over the
interest of the trust in the receivables. A tax or other government lien on
property of the RPA seller or the seller arising prior to the time a receivable
is conveyed to the trust may also have priority over the interest of the trust
in the receivable. Under the Receivables Purchase Agreement, the RPA seller will
warrant to the seller, and under the Pooling and Servicing Agreement, the seller
will warrant to the trust, that the receivables have been transferred free and
clear of the lien of any third party. Each of the RPA seller and the seller will
also covenant that it will not sell, pledge, assign, transfer or grant any lien
on any receivable or, except as we describe under "Description of the
Certificates -- The Seller's Certificate", the Seller's Certificate, or any
interest in the Seller's Certificate, other than to the trust. Also, while the
servicer so specified in the related prospectus supplement is the servicer, cash
collections on the receivables may, in some cases, be commingled with the funds
of the originator prior to each distribution date and, in the event of the
bankruptcy of the originator, the trust may not have a perfected interest in
those collections.
MATTERS RELATING TO BANKRUPTCY
The RPA seller will warrant to the seller in the Receivables Purchase
Agreement that the sale of the receivables by it to the seller is a valid sale
of the receivables to the seller. Also, the RPA seller and the seller will agree
to treat the transactions described in this prospectus as a sale of the
receivables to the seller, and the RPA seller has or will take all actions that
are required under the applicable state law to perfect the seller's ownership
interest in the receivables. However, the RPA seller could become a debtor in a
bankruptcy case and a creditor or trustee-in-bankruptcy of the debtor or the
debtor itself could take the position that the sale of receivables from the
debtor to the seller should be recharacterized as a pledge of the receivables to
secure a borrowing from the debtor. In that event, payments of collections of
receivables to the seller could be delayed, or, if the court should rule in
favor of any trustee, debtor in possession or creditor, reduced in amount. See
"Special Considerations -- Legal Aspects".
In a 1993 case decided by the U.S. Court of Appeals for the Tenth
Circuit, Octagon Gas System, Inc. v. Rimmer, the court determined that
"accounts", as defined under the Uniform Commercial Code, would be included in
the bankruptcy estate of a transferor regardless of whether the transfer is
treated as a sale or a secured loan. Although the receivables are likely to be
viewed as "chattel paper", as defined under the Uniform Commercial Code, rather
than as accounts, the Octagon holding may be applied to chattel paper. The
circumstances under which the Octagon ruling would apply are not fully known and
the extent to which the Octagon decision will be followed in other courts or
outside of the Tenth Circuit is not certain. If the holding in the Octagon case
were applied in a bankruptcy of the originator, however, even if the transfer of
receivables to the seller and the trust were treated as a sale, the receivables
would be part of originator's bankruptcy estate and would be subject to claims
of creditors. In that event, payments to the seller and certificateholders could
be delayed or reduced.
In addition, the RPA seller could become a debtor in a bankruptcy case
and a creditor or trustee-in-bankruptcy of the debtor or the debtor itself could
request a court to order that the RPA seller should be substantively
consolidated with the seller. In that event, payments on the certificates could
be delayed, or, if a bankruptcy court should rule in favor of any creditor,
trustee-in-bankruptcy or the debtor, reduced in amount.
The seller will warrant to the trust that the transfer of the
receivables to the trust is a sale of the receivables to the trust. The seller
has or will take all actions that are required under applicable state law to
perfect the trust's ownership interest in the receivables and the seller has
warranted to the trust that the trust will at all times have a first priority
perfected ownership interest in the receivables and, with exceptions, in
proceeds of the receivables. Nevertheless, a tax or government lien on property
of the originator or the seller arising prior to the time a receivable is
conveyed to the trust may have priority over the interest of the trust in the
receivable. ACE's limited liability agreement provides that it shall not file a
voluntary application for relief under Title 11 of the United States Code (the
"Bankruptcy Code") without the affirmative vote of the two independent directors
of its member. Under the Pooling and Servicing Agreement, the trustee, all
certificateholders and any Enhancement provider will covenant that they will not
at any time institute against the seller any bankruptcy, reorganization or other
proceedings under any federal or state bankruptcy or similar law. In addition,
other steps will be taken to avoid the seller's becoming a debtor in a
bankruptcy case. However, the seller could become a debtor in a bankruptcy case,
and a bankruptcy trustee for the seller or the seller as debtor in possession or
a creditor of the seller could take the position that the transfer of the
receivables from the seller to the trust should be recharacterized as a pledge
of the receivables. In that event, payments on the certificates could be delayed
or, should the court rule in favor of any trustee, debtor in possession or
creditor, reduced in amount.
The seller does not intend to file, and the originator will agree that
it will not cause the seller to file, a voluntary application for relief under
the Bankruptcy Code or any similar applicable state law with respect to the
seller so long as the seller is solvent and does not foresee becoming insolvent.
If the RPA seller or the seller were to become a debtor in a
bankruptcy case, a Reinvestment Event or an Early Amortization Event would occur
with respect to the certificates of each series. In that event, under the
Receivables Purchase Agreement, new receivables would no longer be transferred
to the seller and, under the Pooling and Servicing Agreement, only collections
on receivables already sold to the seller and transferred to the trust would be
available to be applied to pay interest accruing on the certificates and to pay
the principal amount of the certificates. If that happens, the servicer must
allocate all collections on Principal Receivables to the oldest principal
balance first. If the bankruptcy court were to alter the allocation method, the
rate of payment on the certificates might be adversely affected. In addition,
distributions in respect of principal on each certificate would not be subject
to any applicable Controlled Distribution Amount.
The occurrence of events of bankruptcy, insolvency or receivership
with respect to the servicer will result in a Service Default. The Service
Default, in turn, may result in a Reinvestment Event or an Early Amortization
Event with respect to a series. If no other Service Default other than the
commencement of the bankruptcy or similar event exists, a trustee-in-bankruptcy
of the servicer may have the power to prevent either the trustee or the
certificateholders from appointing a successor servicer.
Payments made in respect of repurchases of receivables by the
originator or the seller under the Pooling and Servicing Agreement may be
recoverable by the originator or the seller, as debtor in possession, or by a
creditor or a trustee-in-bankruptcy of the originator or the seller as a
preferential transfer from the originator or the seller if the payments are made
within one year prior to the filing of a bankruptcy case in respect of the
originator.
Neither the originator nor the seller intends to file, and the
originator will agree that it will not cause an affiliate of the originator or
the seller to file, a voluntary application for relief under the Bankruptcy Code
or any similar applicable state law with respect to the originator or an
affiliate thereof so long as the originator, an affiliate thereof and the seller
are solvent and do not foresee becoming insolvent.
TAX MATTERS
FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the anticipated material
United States federal income tax consequences of the purchase, ownership and
disposition of the certificates. The summary does not purport to deal with
federal income tax consequences applicable to all categories of holders, some of
which may be subject to special rules. For example, it does not discuss the tax
treatment of beneficial owners of certificates that are insurance companies,
regulated investment companies or dealers in securities. Moreover, there are no
cases or Internal Revenue Service ("IRS") rulings on similar transactions
involving interests issued by a trust with terms similar to those of the
certificates. As a result, the IRS might disagree with all or part of the
discussion below. Prospective investors are urged to consult their own tax
advisors in determining the federal, state, local, foreign and any other tax
consequences to them of the purchase, ownership and disposition of the
certificates.
The following summary is based upon current provisions of the Internal
Revenue Code of 1986, as amended (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. Each trust will be provided
with an opinion of tax counsel specified in the related prospectus supplement
("Federal Tax Counsel") regarding some related federal income tax matters
discussed below. An opinion of Federal 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. The opinion of Federal Tax Counsel specifically addresses
only those issues specifically identified below as being covered by that
opinion; however, the opinion also states that the additional discussion set
forth below accurately sets forth the advice of Federal Tax Counsel with respect
to material federal income tax issues.
CERTIFICATES TREATED AS INDEBTEDNESS
Upon the issuance of certificates that are intended to be treated as
indebtedness for federal income tax purposes, Federal Tax Counsel will opine
that based upon its analysis of the factors discussed below and certain
assumptions and qualifications, the certificates will be properly classified as
indebtedness for federal income tax purposes. However, opinions of counsel are
not binding on the IRS and there can be no assurance that the IRS could not
successfully challenge this conclusion. Such certificates that are intended to
be treated as indebtedness are herein referred to as "Debt Certificates" and
holders of such certificates are herein referred to as "Debt
Certificateholders."
ACE will express in the Pooling and Servicing Agreement its intent
that for federal, state and local income and franchise tax purposes, the Debt
Certificates will be indebtedness secured by the assets of the trust. ACE agrees
and each Debt Certificateholder, by acquiring an interest in a Debt Certificate,
agrees or will be deemed to agree to treat the Debt Certificates as indebtedness
for federal, state and local income or franchise tax purposes. However, because
different criteria are used to determine the non-tax accounting characterization
of the transactions contemplated by the Pooling and Servicing Agreement, ACE
expects to treat such transactions for financial accounting purposes as a sale
of ownership interests in the assets of the trust and not as debt obligations.
In general, whether for federal income tax purposes a transaction
constitutes a sale of property or a loan the repayment of which is secured by
the property, is a question of fact, the resolution of which is based upon the
economic substance of the transaction. The form of a transaction, while a
relevant factor, is not conclusive evidence of its economic substance. In
appropriate circumstances, the courts have allowed taxpayers, as well as the
IRS, to treat a transaction in accordance with its economic substance, as
determined under federal income tax laws, notwithstanding that the participants
characterize the transaction differently for non-tax purposes. In some
instances, however, courts have held that a taxpayer is bound by a particular
form it has chosen for a transaction, even if the substance of the transaction
does not accord with its form. It is expected that Federal Tax Counsel will
advise that the rationale of those cases will not apply to the transactions
evidenced by a series of Debt Certificates.
While the IRS and the courts have set forth several factors to be
taken into account in determining whether the substance of a transaction is a
sale of property or a secured indebtedness for federal income tax purposes, the
primary factor in making this determination is whether the transferee has
assumed the risk of loss or other economic burdens relating to the property and
has obtained the economic benefits of ownership thereof. Federal Tax Counsel
will analyze and rely on several factors in reaching its opinion that the weight
of the benefits and burdens of ownership of the assets of the trust has not been
transferred to the Debt Certificateholders and that the Debt Certificates are
properly characterized as indebtedness for federal income tax purposes. Contrary
characterizations that could be asserted by the IRS are described below under
"--Possible Classification of the Transaction as a Partnership or as an
Association Taxable as a Corporation."
TAXATION OF INCOME OF DEBT CERTIFICATEHOLDERS
As set forth above, it is expected that Federal Tax Counsel will
advise the seller that the Debt Certificates will constitute indebtedness for
federal income tax purposes, and this discussion assumes that the Debt
Certificates will be characterized as debt for federal income tax purposes.
INTEREST INCOME ON THE DEBT CERTIFICATES
GENERAL. Expect as discussed below, interest on a Debt Certificate
generally is includable in a Debt Certificateholder's income as ordinary
interest income when actually or constructively received, if the Debt
Certificateholder uses the cash method of accounting for federal income tax
purposes, or when accrued, if the Debt Certificateholder uses an accrual method
of accounting for federal income tax purposes.
ORIGINAL ISSUE DISCOUNT. Debt Certificates of certain series may be
issued with "original issue discount" within the meaning of Section 1273(a) of
the Code. Holders of debt issued with original issue discount generally must
include original issue discount in gross income for federal income tax purposes
as it accrues, in advance of receipt of the cash attributable to such income,
under a method that takes account of the compounding of interest. The Code
requires that information with respect to the original issue discount accruing
on any debt obligation be reported periodically to the IRS and to certain
categories of holders.
Each trust will report original issue discount, if any, to the Debt
Certificateholders based on the Treasury regulations relating to original issue
discount (the "OID Regulations"). The OID Regulations concerning contingent
payment debt instruments do not apply to prepayable debt instruments, such as
the Debt Certificates.
The OID Regulations provide that, in the case of prepayable debt
instruments, (i) the amount and rate of accrual of original issue discount will
be calculated based on a reasonable assumed prepayment rate (the "Prepayment
Assumption"), and (ii) adjustments will be made in the amount and rate of
accrual of such discount to reflect differences between the actual prepayment
rate and the Prepayment Assumption. The method for determining the appropriate
assumed prepayment rate will eventually be set forth in Treasury regulations,
but those regulations have not yet been issued. The applicable legislative
history indicates, however, that such regulations will provide that the assumed
prepayment rate for securities such as the Debt Certificates will be the rate
used in pricing the initial offering of those securities. If the Debt
Certificates of a series are issued with original issue discount, the Prospectus
Supplement for that series of Debt Certificates will specify the Prepayment
Assumption. However, no representation is made that the Debt Certificates of
that series will, in fact, prepay at a rate based on the Prepayment Assumption
or at any other rate.
In general, a debt obligation will be considered to be issued with
original issue discount if its stated redemption price at maturity exceeds its
issue price. Except as discussed below under "--Payment Lag Debt Certificates;
Initial Period Considerations," and "--Qualified Stated Interest," and in the
case of certain Variable Rate Debt Certificates (as defined below) and accrual
Debt Certificates, the stated redemption price at maturity of a Debt Certificate
is its principal amount. The issue price of a debt obligation is the initial
offering price to the public (excluding bond houses and brokers) at which a
substantial amount of the class of obligations is sold. Notwithstanding the
general definition of original issue discount, such discount will be considered
to be zero for any debt obligation on which such discount is less than 0.25% of
its stated redemption price at maturity multiplied by its weighted average life.
The weighted average life of a Debt Certificate apparently is computed for
purposes of this DE MINIMIS rule as the sum, for all distributions included in
the stated redemption price at maturity of the Debt Certificate, of the amounts
determined by multiplying (i) the number of complete years (rounding down for
partial years) from the applicable closing date to the date on which each such
distribution is expected to be made, determined under the Prepayment Assumption,
by (ii) a fraction, the numerator of which is the amount of such distribution
and the denominator of which is the Debt Certificate's stated redemption price
at maturity. The OID Regulations provide that holders will include any DE
MINIMIS original issue discount ratably as payments of stated principal are made
on the debt obligation.
The Debt Certificateholder of a Debt Certificate issued with original
issue discount must include in gross income the sum of the "daily portions" of
such original issue discount for each day during its taxable year on which it
held such Debt Certificate. In the case of an original Debt Certificateholder,
the daily portions of original issue discount are determined first by
calculating the portion of the original issue discount that accrued during each
period (an "accrual period") that begins on the day following a payment date (or
in the case of the first such period, begins on the applicable closing date) and
ends on the next succeeding payment date. The original issue discount accruing
during each accrual period is then allocated ratably to each day during such
period to determine the daily portion of original issue discount for that day.
The portion of the original issue discount that accrues in any accrual
period will equal the excess, if any, of (i) the sum of (A) the present value,
as of the end of the accrual period, of all of the distributions to be made on
the Debt Certificate, if any, in future periods and (B) the distributions made
on the Debt Certificate during the accrual period that are included in such Debt
Certificate's stated redemption price at maturity, over (ii) the adjusted issue
price of such Debt Certificate at the beginning of the accrual period. The
present value of the remaining distributions referred to in the preceding
sentence will be calculated (i) assuming that the Debt Certificates will be
prepaid in future periods at a rate computed in accordance with the Prepayment
Assumption and (ii) using a discount rate equal to the original yield to
maturity of the Debt Certificates. For these purposes, the original yield to
maturity of the Debt Certificates will be calculated based on their issue price
and assuming that the Debt Certificates will be prepaid in accordance with the
Prepayment Assumption. The adjusted issue price of a Debt Certificate at the
beginning of any accrual period will equal the issue price of such Debt
Certificate, increased by the portion of the original issue discount that has
accrued during prior accrual periods, and reduced by the amount of any
distributions made on such Debt Certificate in prior accrual periods that were
included in such Debt Certificate's stated redemption price at maturity.
The daily portions of original issue discount may increase or decrease
depending on the extent to which the actual rate of prepayments diverges from
the Prepayment Assumption. If original issue discount accruing during any
accrual period computed as described above is negative, a Debt Certificateholder
may only be entitled to offset such amount against positive original issue
discount accruing on such Debt Certificate in future accrual periods. Such a
Debt Certificateholder may be entitled to deduct a loss to the extent that its
remaining basis would exceed the maximum amount of future payments to which such
Debt Certificateholder is entitled. However, Treasury regulations do not address
this issue.
A subsequent Debt Certificateholder that purchases a Debt Certificate
issued with original issue discount at a cost that is less than its remaining
stated redemption price at maturity will also generally be required to include
in gross income, for each day on which it holds such Debt Certificate, the daily
portions of original issue discount with respect to the Debt Certificate,
calculated as described above. However, if (i) the excess of the remaining
stated redemption price at maturity over such cost is less than (ii) the
aggregate amount of such daily portions for all days after the date of purchase
until final retirement of such Debt Certificate, then such daily portions will
be reduced proportionately in determining the income of such Debt
Certificateholder.
QUALIFIED STATED INTEREST. Interest payable on a Debt Certificate
which qualifies as "qualified stated interest" for purposes of the OID
Regulations will not be includable in the stated redemption price at maturity of
the Debt Certificate. Conversely, if the interest on a Debt Certificate does not
constitute "qualified stated interest," such interest will be includable in the
stated redemption price at maturity of the Debt Certificate and the Debt
Certificate, consequently, will have original issue discount. Interest payments
will not qualify as qualified stated interest unless the interest payments are
"unconditionally payable." The OID Regulations state that interest is
unconditionally payable if reasonable legal remedies exist to compel timely
payment, or the debt instrument otherwise provides terms and conditions that
make the likelihood of late payment (other than a late payment that occurs
within a reasonable grace period) or nonpayment of interest a remote
contingency, as defined in the OID Regulations. Any terms or conditions that do
not reflect arm's length dealing or that the Debt Certificateholder does not
intend to enforce are not considered.
PREMIUM. A purchaser of a Debt Certificate that purchases such Debt
Certificate at a cost greater than its remaining stated redemption price at
maturity will be considered to have purchased such Debt Certificate at a
premium, and may, under Section 171 of the Code, elect to amortize such premium
under a constant yield method over the life of the Debt Certificate. The
Prepayment Assumption is probably taken into account in determining the life of
the Debt Certificate for this purpose. Except as provided in regulations,
amortizable premium will be treated as an offset to interest income on the Debt
Certificate.
PAYMENT LAG DEBT CERTIFICATES; INITIAL PERIOD CONSIDERATIONS. Certain
Debt Certificates may provide for distributions of interest based on a period
that is the same length as the interval between payment dates but ends prior to
each payment date. Any interest that accrues prior to the applicable closing
date may be treated under the OID Regulations either (i) as part of the issue
price and the stated redemption price at maturity of the Debt Certificates or
(ii) as not included in the issue price or the stated redemption price. The OID
Regulations provide a special application of the DE MINIMIS rule for debt
instruments with long first accrual periods where the interest payable for the
first period is at a rate which is effectively less than that which applies in
all other periods. In such cases, for the sole purpose of determining whether
original issue discount is DE MINIMIS, the OID Regulations provide that the
stated redemption price is equal to the instrument's issue price plus the
greater of the amount of foregone interest or the excess (if any) of the
instrument's stated principal amount over its issue price.
VARIABLE RATE DEBT CERTIFICATES. Under the OID Regulations, Debt
Certificates paying interest at a variable rate (each, a "Variable Rate Debt
Certificate") are subject to special rules. A Variable Rate Debt Certificate
will qualify as a "variable rate debt instrument" if (i) its issue price does
not exceed the total noncontingent principal payments due under the Variable
Rate Debt Certificate by more than a specified DE MINIMIS amount; (ii) it
provides for stated interest, paid or compounded at least annually, at a current
value of (a) one or more qualified floating rates, (b) a single fixed rate and
one or more qualified floating rates, (c) a single objective rate or (d) a
single fixed rate and a single objective rate that is a qualified inverse
floating rate; and (iii) it does not provide for any principal payments that are
contingent, as defined in the OID Regulations, except as provided in (i), above.
Because the OID Regulations relating to contingent payment debt instruments do
not apply to prepayable debt instruments, such as the Debt Certificates,
principal payments on the Debt Certificates should not be considered contingent
for this purpose.
A "qualified floating rate" is any variable rate where variations in
the value of such rate can reasonably be expected to measure contemporaneous
variations in the cost of newly borrowed funds in the currency in which the
Variable Rate Debt Certificate is denominated. A multiple of a qualified
floating rate will generally not itself constitute a qualified floating rate for
purposes of the OID Regulations. However, a variable rate equal to (i) the
product of a qualified floating rate and a fixed multiple that is greater than
0.65 but not more than 1.35 or (ii) the product of a qualified floating rate and
a fixed multiple that is greater than 0.65 but not more than 1.35, increased or
decreased by a fixed rate will constitute a qualified floating rate for purposes
of the OID Regulations. In addition, under the OID Regulations, two or more
qualified floating rates that can reasonably be expected to have approximately
the same values throughout the term of the Variable Rate Debt Certificate will
be treated as a single qualified floating rate (a "Presumed Single Qualified
Floating Rate"). Two or more qualified floating rates with values within 25
basis points of each other as determined on the Variable Rate Debt Certificate's
issue date will be conclusively presumed to be a Presumed Single Qualified
Floating Rate. Notwithstanding the foregoing, a variable rate that would
otherwise constitute a qualified floating rate, but which is subject to one or
more restrictions such as a cap or floor, will not be a qualified floating rate
for purposes of the OID Regulations unless the restriction is fixed throughout
the term of the Variable Rate Debt Certificate or the restriction is not
reasonably expected as of the issue date to significantly affect the yield of
the Variable Rate Debt Certificate.
An "objective rate" is a rate that is not itself a qualified floating
rate but which is determined using a single fixed formula and which is based
upon objective financial or economic information. The OID Regulations also
provide that other variable rates may be treated as objective rates if so
designated by the IRS in the future. Despite the foregoing, a variable rate of
interest on a Variable Rate Debt Certificate will not constitute an objective
rate if it is reasonably expected that the average value of such rate during the
first half of the Variable Rate Debt Certificate's term will be either
significantly less than or significantly greater than the average value of the
rate during the final half of the Variable Rate Debt Certificate's term.
Further, an objective rate does not include a rate that is based on information
that is within the control of the issuer (or a party related to the issuer) or
that is unique to the circumstances of the issuer (or a party related to the
issuer). An objective rate will qualify as a "qualified inverse floating rate"
if such rate is equal to a fixed rate minus a qualified floating rate and
variations in the rate can reasonably be expected to inversely reflect
contemporaneous variations in the qualified floating rate. The OID Regulations
also provide that if a Variable Rate Debt Certificate provides for stated
interest at a fixed rate for an initial period of less than one year followed by
a variable rate that is either a qualified floating rate or an objective rate
and if the variable rate on the Variable Rate Debt Certificate's issue date is
intended to approximate the fixed rate, then the fixed rate and the variable
rate together will constitute either a single qualified floating rate or
objective rate, as the case may be (a "Presumed Single Variable Rate"). If the
value of the variable rate and the initial fixed rate are within 25 basis points
of each other as determined on the Variable Rate Debt Certificate's issue date,
the variable rate will be conclusively presumed to approximate the fixed rate.
For Variable Rate Debt Certificates that qualify as "variable rate
debt instruments" under the OID Regulations and provide for interest at either a
single qualified floating rate, a single objective rate, a Presumed Single
Qualified Floating Rate or a Presumed Single Variable Rate throughout the term
(a "Single Variable Rate Debt Certificate"), original issue discount is computed
as described above in "--Interest Income on the Debt Certificates--Original
Issue Discount" based on the following: (i) stated interest on the Single
Variable Rate Debt Certificate which is unconditionally payable in cash or
property (other than debt instruments of the issuer) at least annually will
constitute qualified stated interest; (ii) by assuming that the variable rate on
the Single Variable Rate Debt Certificate is a fixed rate equal to: (a) in the
case of a Single Variable Rate Debt Certificate with a qualified floating rate
or a qualified inverse floating rate, the value, as of the issue date, of the
qualified floating rate or the qualified inverse floating rate or (b) in the
case of a Single Variable Rate Debt Certificate with an objective rate (other
than a qualified inverse floating rate), a fixed rate which reflects the
reasonably expected yield for such Single Variable Rate Debt Certificate; and
(iii) the qualified stated interest allocable to an accrual period is increased
(or decreased) if the interest actually paid during an accrual period exceeds
(or is less than) the interest assumed to be paid under the assumed fixed rate
described in (ii), above.
In general, any Variable Rate Debt Certificate other than a Single
Variable Rate Debt Certificate (a "Multiple Variable Rate Debt Certificate")
that qualifies as a "variable rate debt instrument" will be converted into an
"equivalent" fixed rate debt instrument for purposes of determining the amount
and accrual of original issue discount and qualified stated interest on the
Multiple Variable Rate Debt Certificate. The OID Regulations generally require
that such a Multiple Variable Rate Debt Certificate be converted into an
"equivalent" fixed rate debt instrument by substituting any qualified floating
rate or qualified inverse floating rate provided for under the terms of the
Multiple Variable Rate Debt Certificate with a fixed rate equal to the value of
the qualified floating rate or qualified inverse floating rate, as the case may
be, as of the Multiple Variable Rate Debt Certificate's issue date. Any
objective rate (other than a qualified inverse floating rate) provided for under
the terms of the Multiple Variable Rate Debt Certificate is converted into a
fixed rate that reflects the yield that is reasonably expected for the Multiple
Variable Rate Debt Certificate. In the case of a Multiple Variable Rate Debt
Certificate that qualifies as a "variable rate debt instrument" and provides for
stated interest at a fixed rate in addition to either one or more qualified
floating rates or a qualified inverse floating rate, the fixed rate is initially
converted into a qualified floating rate (or a qualified inverse floating rate,
if the Multiple Variable Rate Debt Certificate provides for a qualified inverse
floating rate). Under such circumstances, the qualified floating rate or
qualified inverse floating rate that replaces the fixed rate must be such that
the fair market value of the Multiple Variable Rate Debt Certificate as of the
Multiple Variable Rate Debt Certificate's issue date is approximately the same
as the fair market value of an otherwise identical debt instrument that provides
for either the qualified floating rate or qualified inverse floating rate rather
than the fixed rate. Subsequent to converting the fixed rate into either a
qualified floating rate or a qualified inverse floating rate, the Multiple
Variable Rate Debt Certificate is then converted into an "equivalent" fixed rate
debt instrument in the manner described above.
Once the Multiple Variable Rate Debt Certificate is converted into an
"equivalent" fixed rate debt instrument pursuant to the foregoing rules, the
amounts of original issue discount and qualified stated interest, if any, are
determined for the "equivalent" fixed rate debt instrument by applying the
original issue discount rules to the "equivalent" fixed rate debt instrument in
the manner described above in "--Interest Income on the Debt
Certificates--Original Issue Discount." A holder of the Multiple Variable Rate
Debt Certificate will account for such original issue discount and qualified
stated interest as if the holder held the "equivalent" fixed rate debt
instrument. In each accrual period, appropriate adjustments will be made to the
amount of qualified stated interest or original issue discount assumed to have
been accrued or paid with respect to the "equivalent" fixed rate debt instrument
in the event that such amounts differ from the actual amount of interest accrued
or paid on the Multiple Variable Rate Debt Certificate during the accrual
period.
If a Variable Rate Debt Certificate does not qualify as a "variable
rate debt instrument" under the OID Regulations, then the Variable Rate Debt
Certificate would be treated as a contingent payment debt obligation. The manner
in which a Variable Rate Debt Certificate would be taxed if such debt instrument
were treated as a contingent payment debt obligation is not governed by the OID
Regulations relating to contingent payment debt obligations which do not apply
to prepayable debt instruments, such as the Debt Certificates, and Treasury
regulations do not otherwise address this point.
MARKET DISCOUNT. A Debt Certificateholder that acquires a Debt
Certificate at a market discount (that is, a discount that exceeds any unaccrued
original issue discount) will recognize gain upon receipt of a principal
distribution, regardless of whether the distribution is scheduled or is a
prepayment. In particular, the Debt Certificateholder will be required to
allocate that principal distribution first to the portion of the market discount
on such Debt Certificate that has accrued but has not previously been includable
in income, and will recognize ordinary income to that extent. In general terms,
unless Treasury regulations when issued provide otherwise, market discount on a
Debt Certificate may be treated, at the election of the Debt Certificateholder,
as accruing either (i) under a constant yield method, taking into account the
Prepayment Assumption, or (ii) in proportion to accruals of original issue
discount (or, if there is no original issue discount, in proportion to stated
interest on the Debt Certificate).
In addition, a Debt Certificateholder may be required to defer
deductions for a portion of the Debt Certificateholder's interest expense on any
debt incurred or continued to purchase or carry a Debt Certificate purchased
with market discount. The deferred portion of any interest deduction would not
exceed the portion of the market discount on the Debt Certificate that accrues
during the taxable year in which such interest would otherwise be deductible
and, in general, would be deductible when such market discount is included in
income upon receipt of a principal distribution on, or upon the sale of, the
Debt Certificate. The Code requires that information necessary to compute
accruals of market discount be reported periodically to the IRS and to certain
categories of Debt Certificateholders.
Notwithstanding the above rules, market discount on a Debt Certificate
will be considered to be zero if such discount is less than 0.25% of the
remaining stated redemption price at maturity of such Debt Certificate
multiplied by its weighted average remaining life. Weighted average remaining
life presumably is calculated in a manner similar to weighted average life
(described above under "--Interest Income on the Debt Certificates--Original
Issue Discount"), taking into account distributions (including prepayments)
prior to the date of acquisition of such Debt Certificate by the subsequent
purchaser. If market discount on a Debt Certificate is treated as zero under
this rule, the actual amount of such discount must be allocated to the remaining
principal distributions on such Debt Certificate in proportion to the amounts of
such principal distributions, and when each such distribution is made, gain
equal to the discount, if any, allocated to the distribution will be recognized.
ELECTION TO TREAT ALL INTEREST UNDER THE CONSTANT YIELD RULES. The OID
Regulations provide that the holder of a debt instrument issued after April 4,
1994 may elect to include in gross income all interest that accrues on such debt
instrument using the constant yield method. For purposes of this election,
interest includes stated interest, original issue discount, and market discount,
as adjusted to account for any premium. Debt Certificateholders should consult
their own tax advisors regarding the availability or advisability of such an
election.
SALES OF DEBT CERTIFICATES
If a Debt Certificate is sold, the seller will recognize gain or loss
equal to the difference between the amount realized on the sale and its adjusted
basis in the Debt Certificate. A holder's adjusted basis in a Debt Certificate
generally equals the cost of the Debt Certificate to the holder, increased by
income reported by the holder with respect to the Debt Certificate and reduced
(but not below zero) by distributions on the Debt Certificate (other than
qualified stated interest) received by the holder and by amortized premium.
While any such gain or loss generally will be capital gain or loss provided the
Debt Certificate is held as a capital asset, gain recognized on the sale of a
Debt Certificate by a seller who purchased the Debt Certificate at a market
discount would be taxable as ordinary income in an amount not exceeding the
portion of such discount that accrued during the period the Debt Certificate was
held by such seller, reduced by any market discount includable in income under
the rules described above under "--Interest Income on the Debt
Certificates--Market Discount." Further, the Debt Certificates will be
"evidences of indebtedness" within the meaning of Section 582(c)(1) of the Code,
so that gain or loss recognized from a sale of a Debt Certificate by a bank or
other financial institution to which such section applies would be ordinary
income or loss.
SHORT-TERM DEBT CERTIFICATES
In the case of a Debt Certificate with a maturity of one year or less
from its issue date (a "Short-Term Debt Certificate"), no interest is treated as
qualified stated interest, and therefore all interest is included in original
issue discount. Debt Certificateholders that report income for federal income
tax purposes on an accrual method and some other Debt Certificateholders,
including banks and certain dealers in securities, are required to include
original issue discount in income on Short-Term Debt Certificates on a
straight-line basis, unless an election is made to accrue the original issue
discount according to a constant yield method based on daily compounding.
Any other Debt Certificateholder of a Short-Term Debt Certificate is
not required to accrue original issue discount for federal income tax purposes,
unless it elects to do so. In the case of a Debt Certificateholder that is not
required, and does not elect, to include original issue discount in income
currently, any gain realized on the sale, exchange or retirement of a Short-Term
Debt Certificate is ordinary income to the extent of the original issue discount
accrued on a straight-line basis, or, if elected, according to a constant yield
method based on daily compounding, through the date of sale, exchange or
retirement. In addition, Debt Certificateholders that are not required, and do
not elect, to include original issue discount in income currently are required
to defer deductions for any interest paid on indebtedness incurred or continued
to purchase or carry a Short-Term Debt Certificate in an amount not exceeding
the deferred interest income with respect to the Short-Term Debt Certificate,
which includes both the accrued original issue discount and accrued interest
that are payable but that have not been included in gross income, until the
deferred interest income is realized. A Debt Certificateholder may elect to
apply the foregoing rules, except for the rule characterizing gain on sale,
exchange or retirement as ordinary, with respect to "acquisition discount"
rather than original issue discount. Acquisition discount is the excess of the
stated redemption price at maturity of the Short-Term Debt Certificate over the
Debt Certificateholder's basis in the Short-Term Debt Certificate. This election
applies to all obligations acquired by the taxpayer on or after the first day of
the first taxable year to which the election applies, unless revoked with the
consent of the IRS. A Debt Certificateholder's tax basis in a Short-Term Debt
Certificate is increased by the amount included in the Debt Certificateholder's
income with respect to the Debt Certificate.
BACKUP WITHHOLDING ON DEBT CERTIFICATES
Distributions made on the Debt Certificates and proceeds from the sale
of Debt Certificates to or through certain brokers may be subject to a "backup"
withholding tax of 31 percent of "reportable payments" (including interest
accruals, original issue discount, and, under certain circumstances,
distributions in reduction of principal amount) if the holder of the Debt
Certificates fails to comply with certain identification procedures, unless the
Debt Certificateholder is an exempt recipient under applicable provisions of the
Code and, if necessary, demonstrates such status. Any amounts so withheld from
distributions on the Debt Certificates would be refunded by the IRS or allowable
as a credit against the Debt Certificateholder's federal income tax.
TAX CHARACTERIZATION OF THE TRUST.
Consistent with the treatment of the Debt Certificates as
indebtedness, the trust will be treated as a security device to hold assets
securing the repayment of the Debt Certificates. In connection with the issuance
of Debt Certificates of any series, Federal Tax Counsel will render an opinion
that, based on the assumptions and qualifications set forth therein, under then
current law, the applicable trust will not be characterized for federal income
tax purposes as an association (or publicly traded partnership) taxable as a
corporation.
POSSIBLE CLASSIFICATION OF THE TRANSACTION AS A PARTNERSHIP OR AS AN ASSOCIATION
TAXABLE AS A CORPORATION.
The opinion of Federal Tax Counsel with respect to Debt Certificates
will not be binding on the courts or the IRS. It is possible that the IRS could
assert that, for federal income tax purposes, the transactions contemplated
constitute a sale of the trust's assets (or an interest therein) to the Debt
Certificateholders and that the proper classification of the legal relationship
between ACE, the originators, and some or all of the Debt Certificateholders
resulting from the transactions is that of a partnership (including a publicly
traded partnership), a publicly traded partnership taxable as a corporation, or
an association taxable as a corporation. Neither ACE nor the trustee intends to
comply with the federal income tax reporting requirements that would apply if
any Classes of Debt Certificates were treated as interests in a partnership or
corporation.
If a transaction were treated as creating a partnership between the
seller and/or the originators and the Debt Certificateholders, the partnership
itself would not be subject to federal income tax (unless it were characterized
as a publicly traded partnership taxable as a corporation); rather, the partners
of such partnership, including the Debt Certificateholders, would be taxed
individually on their respective distributive shares of the partnership's
income, gain, loss, deductions and credits. The amount and timing of items of
income and deductions of a Debt Certificate could differ if the Debt
Certificates were held to constitute partnership interests, rather than
indebtedness. Moreover, unless the partnership were treated as engaged in a
trade or business, an individual's share of expenses of the partnership would be
miscellaneous itemized deductions that, in the aggregate, are allowed as
deductions only to the extent they exceed two percent of the individual's
adjusted gross income, and would be subject to reduction under Section 68 of the
Code if the individual's adjusted gross income exceeded certain limits. As a
result, the individual might be taxed on a greater amount of income than the
stated rate on the Debt Certificates. Finally, all or a portion of any taxable
income allocated to a Debt Certificateholder that is a pension, profit-sharing
or employee benefit plan or other tax-exempt entity (including an individual
retirement account) may, under certain circumstances, constitute "unrelated
business taxable income" which generally would be taxable to the holder under
the Code.
If it were determined that a transaction created an entity classified
as an association or as a publicly traded partnership taxable as a corporation,
the trust would be subject to federal income tax at corporate income tax rates
on the income it derives from the assets it holds, which would reduce the
amounts available for distribution to the Debt Certificateholders. Such
classification may also have adverse state and local tax consequences that would
reduce amounts available for distribution to Debt Certificateholders. Moreover,
distributions on Debt Certificates that are recharacterized as equity in an
entity taxable as a corporation would not be deductible in computing the
entity's taxable income, and cash distributions on such Debt Certificates
generally would be treated as dividends for tax purposes to the extent of such
deemed corporation's earnings and profits.
FOREIGN INVESTORS IN DEBT CERTIFICATES
Except as discussed below, a Debt Certificateholder that is not a
"United States person" (as defined below) generally will not be subject to
United States income or withholding tax in respect of a distribution on a Debt
Certificate provided that (i) the holder complies to the extent necessary with
certain certification requirements, which generally relate to the identity of
the beneficial owner and the status of the beneficial owner as a person that is
not a United States person (as defined below), (ii) the holder is not a
"10-percent shareholder" within the meaning of Section 871(h)(3)(B) of the Code,
which could be interpreted to include a person that directly or indirectly owns
10% or more of the equity interests in the trust, (iii) the holder is not a
"controlled foreign corporation" (as defined in the Code) related to the trust
or related to a 10 percent holder of equity interests in the trust, and (iv) the
holder is not engaged in a United States trade or business, or otherwise subject
to federal income tax as a result of any direct or indirect connection to the
United States other than through its ownership of a Debt Certificate. For these
purposes, the term "United States person" means (i) a citizen or resident of the
United States, (ii) a corporation or partnership (or other entity properly
treated as a corporation or partnership for federal income tax purposes) created
or organized in or under the laws of the United States or any political
subdivision thereof, (iii) an estate whose income is includable in gross income
for United States federal income taxation regardless of its source, and (iv) a
trust for which one or more United States fiduciaries have the authority to
control all substantial decisions and for which a court of the United States can
exercise primary supervision over the trust's administration. A "Foreign Person"
is any person that is not a United States person. Each Debt Certificateholder
should consult its tax advisors regarding the tax documentation and
certifications that must be provided to secure the exemption from United States
withholding taxes.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Debt Certificate by a Foreign Person generally will be
exempt from United States federal income and withholding tax, provided that (i)
such gain is not effectively connected with the conduct of a trade or business
in the United States by the Foreign Person and (ii) in the case of an individual
Foreign Person, the Foreign Person is not present in the United States for 183
days or more in the taxable year.
If the interest, gain or income on a Debt Certificate held by a
Foreign Person is effectively connected with the conduct of a trade or business
in the United States by the Foreign Person (although exempt from the withholding
tax previously discussed if the holder provides an appropriate statement
establishing that such income is so effectively connected), the holder generally
will be subject to United States federal income tax on the interest, gain or
income at regular federal income tax rates. In addition, if the Foreign Person
is a foreign corporation, it may be subject to a branch profits tax equal to 30%
of its "effectively connected earnings and profits," within the meaning of the
Code, for the taxable year, as adjusted for certain items, unless it qualifies
for a lower rate under an applicable tax treaty (as modified by the branch
profits tax rules).
If the IRS were to contend successfully that the Debt Certificates are
interests in a partnership and if such partnership were considered to be engaged
in a trade or business in the United States, the partnership would be subject to
a withholding tax on income of the trust that is allocable to a Foreign Person
and such Foreign Person would be credited for his or her share of the
withholding tax paid by the partnership. In such case, the Foreign Person
generally would be subject to United States federal income tax at regular income
tax rates, and possibly a branch profits tax in the case of a corporate holder.
Alternatively, although there may be arguments to the contrary, if
such partnership is not considered to be engaged in a trade or business within
the United States and if income with respect to the Debt Certificates is not
otherwise effectively connected with the conduct of a trade or business in the
United States by the Foreign Person, the Foreign Person would be subject to
United States income tax and withholding at a rate of 30% (unless reduced by an
applicable tax treaty) on the holder's distributive share of the partnership's
interest income.
If the trust were recharacterized as an association or publicly traded
partnership taxable as a corporation, distribution to Debt Certificateholders
that are Foreign Persons, to the extent treated as dividends, would generally be
subject to withholding at the rate of 30%, unless such rate were reduced or
eliminated by an applicable income tax treaty. If such dividend were effectively
connected with the Foreign Person's United States trade or business (and, if
necessary, the Foreign Person establishes that it is so effectively connected)
the dividend would not be subject to withholding tax, but would be subject to
United States federal income tax at regular federal income tax rates, and if the
holder is a corporation, might be subject to a branch profits tax.
STATE AND LOCAL TAX CONSIDERATIONS
The discussion above does not address the tax consequences of
purchase, ownership or disposition of certificates under any state or local tax
laws. We recommend that investors consult their own tax advisors regarding state
and local tax consequences.
* * *
THE TAX DISCUSSIONS SET FORTH ABOVE ARE INCLUDED FOR GENERAL INFORMATION ONLY
AND MAY NOT BE APPLICABLE DEPENDING UPON A DEBT CERTIFICATEHOLDER'S PARTICULAR
TAX SITUATION. PROSPECTIVE PURCHASERS OF DEBT CERTIFICATES SHOULD CONSULT THEIR
TAX ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE,
OWNERSHIP AND DISPOSITION OF DEBT CERTIFICATES, INCLUDING THE TAX CONSEQUENCES
UNDER STATE, LOCAL AND FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF
CHANGES IN FEDERAL OR OTHER TAX LAWS.
ERISA CONSIDERATIONS
GENERAL
Section 406 of ERISA and Section 4975 of the Code prohibit a pension,
profit-sharing or other employee benefit plan from engaging in transactions
involving "plan assets" with persons that are "parties in interest" under ERISA
or "disqualified persons" under the Code with respect to the plan. A violation
of these "prohibited transaction" rules may generate excise tax and other
liabilities under ERISA and the Code for that person. For example, a prohibited
transaction would arise, unless an exemption were available, if the certificates
of a series or class were viewed as debt of the seller and the seller were a
disqualified person or party in interest with respect to a plan that acquired
certificates of that series or class.
Moreover, additional prohibited transactions could arise if the assets
of the trust were deemed to constitute assets of any plan that owned
certificates. The Department of Labor ("DOL") has issued a final regulation (the
"Plan Assets Regulation") concerning the definition of what constitutes the
"plan assets" of an employee benefit plan subject to ERISA or the Code or an
individual retirement account ("IRA") (collectively referred to as "Benefit
Plans"). Under the Plan Assets Regulation the assets and properties of
corporations, partnerships and other entities in which a Benefit Plan acquires
an "equity interest" could be deemed to be assets of the Benefit Plan in some
circumstances. Accordingly, if Benefit Plans purchase certificates, the trust
could be deemed to hold plan assets of the Benefit Plan unless one of the
exceptions under the Plan Assets Regulation is applicable to the trust.
The Plan Assets Regulation only applies to the purchase by a Benefit
Plan of an "equity interest" in an entity. Assuming that the certificates of a
series or class are equity interests, the Plan Assets Regulation contains an
exception that provides that if a Benefit Plan acquires a "publicly-offered
security", the issuer of the security is not deemed to hold plan assets. A
publicly-offered security is a security that is
o freely transferable,
o part of a class of securities that is owned by 100 or more
investors independent of the issuer and of one another and
o either is
o part of a class of securities registered under Section 12(b)
or 12(g) of the Exchange Act or
o sold to the plan as part of an offering of securities to the
public under an effective registration statement under the
Securities Act and the class of securities of which the
security is a part is registered under the Exchange Act
within 120 days, or a later time as may be allowed by the
Commission, after the end of the fiscal year of the issuer
during which the offering of the securities to the public
occurred.
The certificates of each series and class must be separately tested
under, and may each meet, the criteria of publicly-offered securities as
described above. There are no restrictions imposed on the transfer of the
certificates. The certificates will be sold as part of an offering under an
effective registration statement under the Securities Act, and may or may not be
timely registered under the Exchange Act. Based on information provided by the
underwriter or placement agent for certificates of any series or class that will
be registered under the Exchange Act, the seller will notify the trustee as to
whether or not certificates of the series or, if the series consists of more
than one class, each class will be held by at least 100 separately named persons
at the conclusion of the offering, unless the related prospectus supplement
states otherwise. The seller will not determine whether the 100-investor
requirement of the exception for publicly offered securities is satisfied as to
the certificates of any series or class. Prospective purchasers may obtain a
copy of the notification described in the third preceding sentence from the
trustee at 101 Barclay Street, New York, New York 10286.
If the certificates of any series or class fail to meet the criteria
of publicly-offered securities and the trust's assets are deemed to include
assets of Benefit Plans that are holders of the certificates, transactions
involving the trust and "parties in interest" or "disqualified persons" with
respect to the plans might be prohibited under Section 406 of ERISA and Section
4975 of the Code unless an exemption is applicable. Thus, for example, if a
participant in any Benefit Plan is an obligor or guarantor of one of the
receivables, under DOL interpretations the purchase of the certificates by the
plan could constitute a prohibited transaction. There are a number of class
exemptions issued by the DOL that may apply in that event. However, even if all
of the conditions specified in the exemptions are satisfied, they would probably
not apply to all transactions involving the trust's assets.
In light of the foregoing, fiduciaries of a Benefit Plan considering
the purchase of certificates of any series or class should consult their own
counsel as to whether the assets of the trust which are represented by the
certificates would be considered plan assets, and the consequences that would
apply if the trust's assets were considered plan assets.
In addition, based on the reasoning of the United States Supreme
Court's decision in John Hancock Life Ins. Co. v. Harris Trust and Sav. Bank,
510 U.S. 86 (1993), under some circumstances assets in the general account of an
insurance company may be deemed to be plan assets for some purposes. Under that
reasoning a purchase of certificates with assets of an insurance company's
general account might be subject to the prohibited transaction rules described
above. Insurance companies investing assets of their general accounts should
also consider the potential effects of the enactment of Section 401(c) of ERISA,
Prohibited Transaction Exemption 95-60, and Labor Department Regulation Section
2550.401c-1.
Unless the applicable prospectus supplement states otherwise, if the
certificates will not be timely registered under the Exchange Act, or if the
seller does not notify the trustee, as described above, that the certificates of
any particular series or class will be expected to be held by at least 100
persons, the certificates of the series or class, as the case may be, may not be
acquired by any Benefit Plan or by any entity investing assets that are treated
as assets of a Benefit Plan. Furthermore, in that case, the Pooling and
Servicing Agreement, the Series Supplement and each certificate will provide
that each holder of the certificate shall be deemed to have represented and
warranted that it is not a Benefit Plan and is not purchasing the certificate on
behalf of a Benefit Plan or with assets that are treated as assets of a Benefit
Plan.
PLAN OF DISTRIBUTION
The seller may sell certificates offered by this prospectus in any of
three ways:
o through underwriters or dealers;
o directly to one or more purchasers; or
o through agents.
We will set forth in the related prospectus supplement the terms of
the offering of any series certificates, including, without limitation
o the names of any underwriters,
o the purchase price of the certificates and the proceeds to
the seller from the sale,
o any underwriting discounts and other items constituting
underwriter's compensation,
o any initial public offering price and
o any discounts or concessions allowed or reallowed or paid to
dealers.
If the seller uses underwriters in a sale of any certificates of a
series, the certificates will be acquired by the underwriters for their own
account and may be resold from time to time in one or more transactions,
including negotiated transactions, at a fixed public offering price or at
varying prices to be determined at the time of sale or at the time of commitment
for the certificates. The certificates may be offered to the public either
through underwriting syndicates represented by managing underwriters or by
underwriters without a syndicate. Unless we set forth otherwise in the related
prospectus supplement, the obligations of the underwriters to purchase the
certificates will be subject to conditions precedent, and the underwriters will
be obligated to purchase all of the certificates if any of the certificates are
purchased. Any initial public offering price and any discounts or concessions
allowed or reallowed or paid to dealers may be changed from time to time.
Certificates of a series may also be offered and sold, if we so state
in the related prospectus supplement, in connection with a remarketing upon
their purchase, in accordance with a redemption or repayment under their terms,
by one or more firms ("remarketing firms") acting as principals for their own
accounts or as agents for the seller. We will identify in the related prospectus
supplement any remarketing firm and describe the terms of its agreement, if any,
with the seller and its compensation. Remarketing firms may be deemed to be
underwriters in connection with the certificates they remarket.
Certificates may also be sold directly by the seller or through agents
designated by the seller from time to time. We will name any agent involved in
the offer or sale of certificates, and we will set forth any commissions payable
by the seller to the agent, in the related prospectus supplement. Unless we
indicate otherwise in the related prospectus supplement, any agent will act on a
best efforts basis for the period of its appointment.
Each underwriting agreement and placement agreement will provide that
the seller and the originator will indemnify the underwriters and agents,
respectively, against civil liabilities, including liabilities under the
Securities Act, or contribute to payments the several underwriters and agents,
as applicable, may be required to make in respect of those civil liabilities.
The trust may, from time to time, invest the funds in its accounts in
Eligible Investments acquired from the underwriters, agents or the seller.
We will set forth the place and time of delivery for a series of
certificates in the prospectus supplement.
Until the distribution of the certificates of a series is completed,
rules of the Commission may limit the ability of the underwriters and selling
group members to bid for and purchase those certificates. As an exception to
these rules, the underwriters are permitted to engage in transactions that
stabilize the price of those certificates. Those transactions consist of bids or
purchases for the purpose of pegging, fixing or maintaining the price of the
certificates. Purchases of a certificate for the purpose of stabilization could
cause the price of the certificate to be higher than it might be in the absence
of the purchases.
In connection with the offering of a series, the underwriters may make
short sales of the certificates of that series and may purchase those
certificates on the open market to cover positions created by short sales. Short
sales involve the sale by the underwriters of a greater number of certificates
than they are required to purchase in the offering. The underwriters must close
out any short position by purchasing certificates in the open market. The
underwriters are more likely to create a short position if they are concerned
that there may be downward pressure on the price of the certificates in the open
market after pricing that could adversely affect investors who purchase in the
offering. Similar to other purchase transactions, the underwriters' purchases to
cover the short sales may have the effect of raising or maintaining the market
price of the certificates or preventing or retarding a decline in the market
price of certificates. As a result, the price of the certificates may be higher
than the price that might otherwise exist in the open market.
Neither the originator, the seller nor any of the underwriters makes
any representation or prediction as to the direction or magnitude of any effect
that the transactions described above may have on the prices of the certificates
of any series. In addition, neither the originator, the seller nor any of the
underwriters makes any representation that the underwriters will engage in the
transactions or that the transactions, once commenced, will not be discontinued
without notice.
If any certificates of a series are offered in the United Kingdom,
each underwriter and placement agent will represent and agree that
o it has not offered or sold, and will not offer or sell, any
of those certificates to persons in the United Kingdom
except to persons whose ordinary activities involve them in
acquiring, holding, managing or disposing of investments, as
principal or agent, for the purposes of their businesses or
otherwise in circumstances that do not constitute an offer
to the public in the United Kingdom for the purposes of the
Public Offers of Securities Regulations 1995,
o it has complied and will comply with all applicable
provisions of the Financial Services Act of 1986 of Great
Britain with respect to anything done by it in relation to
those securities in, from or otherwise involving the United
Kingdom and
o it has only issued or passed on and will only issue or pass
on in the United Kingdom any document in connection with the
issue of those securities to a person who is of a kind
described in Article 11(3) of the Financial Services Act of
1986 (Investment Advertisements) (Exemptions) Order 1995 or
is a person to whom the document may otherwise lawfully be
issued or passed on.
o If you initially receive an electronic copy of the
prospectus and prospectus supplement from an underwriter,
you will receive a paper copy of the prospectus and
prospectus supplement upon request to the underwriter. Upon
receipt of a qualifying request, the underwriter will
promptly deliver a paper copy of the prospectus and
prospectus supplement to you free of charge.
LEGAL MATTERS
Certain legal matters relating to the certificates will be passed upon
for the seller by Stroock & Stroock & Lavan LLP, New York, New York, and for any
underwriters, agents or dealers by the counsel we name in the applicable
prospectus supplement, which may be Stroock & Stroock & Lavan LLP. Federal
income tax and ERISA matters will be passed upon for the seller and the trust by
the counsel we named in the applicable prospectus supplement, which may also be
Stroock & Stroock & Lavan LLP.
WHERE YOU CAN FIND MORE INFORMATION
The seller has filed a Registration Statement (together with all
amendments and exhibits, the "Registration Statement") under the Securities Act
of 1933, as amended (the "Securities Act"), with the Securities and Exchange
Commission (the "Commission") with respect to the certificates offered by this
prospectus. This prospectus, which forms part of the Registration Statement,
does not contain all of the information contained in the Registration Statement
and the exhibits to the Registration Statement.
The Registration Statement may be inspected and copied at:
o the public reference facilities maintained by the SEC at 450
Fifth Street, N.W., Washington, D.C. 20549 (telephone
1-800-732-0330),
o the SEC's regional office at Citicorp Center, 500 West
Madison Street, Chicago, Illinois 60661, and
o the SEC's regional office at Seven World Trade Center, New
York, New York 10048.
Also, the Commission maintains a Web site at http://www.sec.gov containing
reports, proxy and information statements and other information regarding
registrants, including Ace Securities Corp., that file electronically with the
SEC.
GLOSSARY OF TERMS FOR PROSPECTUS
"Accounts" means the revolving financing arrangements with dealers
franchised by automobile manufacturers specified in the related prospectus
supplement in which the receivables arise.
"Accumulation Period" means, for any applicable series, the period
beginning at the close of business on the date specified in or determined in the
manner specified in the prospectus supplement and ending on the earliest of:
o the beginning of a Reinvestment Period with respect to the
series,
o the beginning of an Early Amortization Period with respect
to the series and
o payment in full of the outstanding principal amount of the
series certificates.
"Addition Date" means, in the case of an Additional Account, the date
on which the receivables in the Additional Account are first transferred to the
trust.
"Additional Accounts" means the additional accounts which the seller
has the right, subject to conditions, to designate from time to time to be
included as Accounts.
"Additional Cut-Off Date" means, with respect to any Additional
Accounts, the date those Additional Accounts are identified and selected.
"Adjusted Invested Amount" means, with respect to a series for any
date, an amount equal to the sum of
o the Initial Invested Amount of the series, minus
unreimbursed Investor Charge-Offs for the series and
o the Available Subordinated Amount with respect to the
series, after giving effect to the allocations,
distributions, withdrawals and deposits to be made on the
distribution date during the Collection Period in which that
date occurs.
"Adjustment Payment" means, to the extent that a reduction in the
Seller's Interest would reduce the Seller's Participation Amount below the Trust
Available Subordinated Amount for the immediately preceding Determination Date,
after giving effect to the allocations, distributions, withdrawals and deposits
to be made on the distribution date, a cash amount equal to the deficiency which
will be deposited by the seller into the Collection Account in immediately
available funds on the day on which the adjustment occurs.
"Auction Vehicles" means, collectively, the vehicles purchased by a
dealer at a closed auction.
"Automatic Additional Accounts" means the Additional Accounts which
the seller may designate from time to time, at its discretion, subject only to
some limitations.
"Automatic Removal Date" means the date upon which the Automatic
Removed Accounts are to be removed.
"Automatic Removed Accounts" means the Accounts, designated by the
seller, with respect to which the seller shall have the right to require the
reassignment to it of all the trust's right, title and interest in, to and under
the receivables then existing and created after that time, all monies due or to
become due and all amounts received with respect to those receivables and all
proceeds of those receivables in or with respect to the Accounts, upon
satisfaction of the following conditions:
o on or before the fifth business day immediately preceding
the date upon which the Accounts are to be removed, the
seller shall have given the trust, each Enhancement provider
and the Rating Agencies a Removal Notice specifying the
Automatic Removal Date of the Automatic Removed Accounts;
o on or prior to the date that is five business days after the
Automatic Removal Date, the seller shall have delivered to
the trustee a computer file or microfiche or written list
containing a true and complete list of the Automatic Removed
Accounts stating for each Account, as of the removal notice
date, its account number and the aggregate amount of
receivables outstanding in the Account;
o the seller shall have represented and warranted as of each
Automatic Removal Date that the list of Automatic Removed
Accounts delivered pursuant to the second clause above, as
of the Automatic Removal Date, is true and complete in all
material respects;
o the trustee shall have received confirmation from each
Rating Agency that the removal will not cause the Ratings
Agency's rating of any outstanding series or class of
certificates to be reduced or withdrawn;
o the seller shall have delivered to the trustee, each Rating
Agency and any Enhancement providers an officers'
certificate, dated the Automatic Removal Date, to the effect
that the seller reasonably believes the removal will not
cause an Early Amortization Event or Reinvestment Event to
occur with respect to any series; and
o the seller shall have delivered to the trustee, each Rating
Agency and any Enhancement providers a Tax Opinion, dated
the Automatic Removal Date, with respect to the removal.
"Available Subordinated Amount" means the amount of the subordination
for a series.
"Bankruptcy Code" means Title 11 of the United States Code.
"Benefit Plans" means, collectively, employee benefit plans subject to
ERISA or the Code or individual retirement accounts.
"Certificateholders' Interest" means, for any series, the undivided
beneficial interests in certain assets of the trust allocated to the Interest of
the Certificateholders of the series.
"certificates" means the Asset Backed Certificates.
"Citibank" means Citibank, N.A.
"Clearstream" means Clearstream Banking, societe anonyme.
"Code" means the Internal Revenue Code of 1986.
"Collateral Security" means, in respect of the receivables, a security
interest in vehicles and parts inventory, equipment, fixtures, service accounts
and, in some cases, realty and a personal guarantee.
"Collection Account" means an Eligible Deposit Account which the
servicer has established and will maintain for the benefit of the
certificateholders in the name of the trustee, on behalf of the trust.
"Commission" means the Securities and Exchange Commission.
"Controlled Amortization Period" means, for any applicable series, a
controlled amortization period which will begin at the close of business on the
date stated in or determined in the manner stated in the related prospectus
supplement and will end on the earliest of:
o the beginning of a Reinvestment Period with respect to the
series,
o the beginning of an Early Amortization Period with respect
to the series and payment in full of the outstanding
principal amount of the certificates of that series.
"Controlled Deposit Amount" means, for any series, an amount stated in
the related prospectus supplement plus, in the case of some distribution dates,
any amounts in the Excess Funding Account allocable to the series.
"Cooperative" means Euroclear S.C., a Belgian cooperative corporation.
"Dealer Overconcentrations" means, on any distribution date, with
respect to any Dealer or group of affiliated Dealers, the excess of
o the aggregate principal amount of receivables due from the
Dealer or group of affiliated Dealers on the last day of the
Collection Period immediately preceding that distribution
date over
o 2% (or another percentage specified in the related
prospectus supplment) of the Pool Balance on the last day of
the immediately preceding Collection Period.
"Dealer Trouble" means a status under which a dealer will be
classified by the originator under some circumstances which include
o failure to remit any principal or interest payment when due,
o any notifications of liens, levies or attachments and
o a general deterioration of its financial condition.
"dealers" means domestic automobile dealers franchised by automobile
manufacturers specified in the related prospectus supplment.
"Defaulted Amount" means for any Collection Period will be an amount,
which shall not be less than zero, equal to (a) the principal amount of
receivables that became Defaulted Receivables during the preceding Collection
Period minus (b) the sum of (i) the full amount of any Defaulted Receivables
subject to reassignment to the seller or purchase by the servicer for the
Collection Period unless events of bankruptcy, insolvency or receivership have
occurred with respect to either of the seller or the servicer, in which event
the Defaulted Amount will not be reduced for those Defaulted Receivables and
(ii) the excess, if any, for the immediately preceding Determination Date of the
amount determined pursuant to this clause (b) for that Determination Date over
the amount determined pursuant to clause (a) for that Determination Date.
"Defaulted Receivables" means on any Determination Date
o all receivables which were charged off as uncollectible in
respect of the immediately preceding Collection Period and
o all receivables which were Eligible Receivables when
transferred to the trust, which arose in an Account which
became an Ineligible Account after the date of transfer of
the receivables to the trust and which were not Eligible
Receivables for any six consecutive Determination Dates
after that date.
"Definitive Certificates" means the certificates of a series or class
issued in fully registered, certificated form to certificateholders or their
nominees.
"Depository" means DTC, together with any successor depository
selected by the seller.
"Designated Accounts" means the Accounts to be removed from the trust.
"Designated Balance" means the aggregate principal balance of
receivables in respect of each of the Designated Accounts.
"Designated Receivables" means, at any time, the then existing
receivables in the Designated Accounts.
"Determination Date" means each second business day preceding a
Distribution Day.
"Distribution Date Statement" means a statement prepared by the
servicer and forwarded by the trustee to each certificateholder of record of any
series on each distribution date, including each distribution date that
corresponds to an interest payment date or any Special Payment Date, that sets
forth information with respect to the trust and the certificates of the series,
as stated in the related Series Supplement and described in the related
prospectus supplement.
"DOL" means the Department of Labor.
"Early Amortization Event" means any of the events so defined in the
related Series Supplement and, described in the related prospectus supplement,
as well as each of the following events:
o the occurrence of events of bankruptcy, insolvency or
receivership relating to the trust, the originator or the
seller; and
o the trust or the seller becomes an investment company within
the meaning of the Investment Company Act of 1940.
"Early Amortization Period" means the period beginning on the day on
which an Early Amortization Event has occurred with respect to a series and
ending on the earliest of:
o payment in full of the outstanding principal amount of the
certificates of that series,
o the recommencement of the Revolving Period in accordance
with the related Series Supplement and
o the Termination Date for the series.
"Eligible Account" means a wholesale financing line of credit extended
by the originator, directly or as successor to the originator, to a Dealer,
which, as of its date of determination:
o is established by the originator, directly or as successor
to the originator, in the ordinary course of business
pursuant to a floorplan financing agreement,
o is in favor of an Eligible Dealer,
o is in existence and maintained and serviced by the initial
servicer, directly or as successor to the initial servicer,
and
o in respect of which no amounts have been charged off as
uncollectible or are classified as past due or delinquent.
"Eligible Dealer" means a Dealer:
o which is located in the United States of America, including
its territories and possessions,
o which has not been identified by the servicer as being the
subject of any voluntary or involuntary bankruptcy
proceeding or in voluntary or involuntary liquidation,
o in which the originator or any affiliate of the originator
does not have an equity investment and
o which has not been classified by the servicer as being under
Dealer Trouble status.
"Eligible Deposit Account" means either
o a segregated account with an Eligible Institution or
o a segregated trust account with the corporate trust
department of a depository institution organized under the
laws of the United States or any one of the states of the
United States, 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 the depository institution has a credit rating
from each Rating Agency in one of its generic rating
categories which signifies investment grade.
"Eligible Institution" means
o the corporate trust department of the trustee or
o a depository institution organized under the laws of the
United States or any one of the states of the United States,
or the District of Columbia, or a domestic branch of a
foreign bank, which at all times (i) has either (x) a
long-term unsecured debt rating of A2 or better by Moody's
and of AAA or better by Standard & Poor's or (y) a
certificate of deposit rating of P-1 by Moody's or A-1+ by
Standard & Poor's and (ii) is a member of the FDIC.
"Eligible Investments" means book-entry securities, negotiable
instruments or physical securities having original or remaining maturities of 30
days or less, but in no event occurring later than the distribution date next
succeeding the trustee's acquisition of those securities or instruments, except
as otherwise provided in the related Series Supplement. Eligible Investments are
limited to:
o direct obligations of, and obligations fully guaranteed as
to timely payment by, the United States of America;
o demand deposits, time deposits or certificates of deposit of
any depositary institution or trust company incorporated
under the laws of the United States of America or any state
of the United States, or any domestic branch of a foreign
bank, and subject to supervision and examination by Federal
or state banking or depository institution authorities.
However, at the time of the trust's investment or
contractual commitment to invest in those investments, the
commercial paper or other short-term unsecured debt
obligations, other than obligations the rating of which is
based on the credit of a person or entity other than the
depository institution or trust company, of that entity
shall have a credit rating from each of the Rating Agencies
in its highest investment category;
o commercial paper having, at the time of the trust's
investment or contractual commitment to invest in the
commercial paper, a rating from each of the Rating Agencies
in its highest investment category;
o except during a Reinvestment Period with respect to any
series, investments in money market funds having a rating
from each of the Rating Agencies in its highest investment
category or
o otherwise approved in writing by each of the Rating
Agencies;
o bankers' acceptances issued by any depository institution or
trust company referred to in the second clause of this
sentence;
o certain repurchase obligations, including those of
appropriately rated broker-dealers and financial
institutions; and
o any other investment consisting of a financial asset that by
its terms converts to cash within a finite period of time,
provided that each Rating Agency shall have notified the
seller, the servicer and the trustee that the trust's
investment in that investment will not cause its then rating
of any outstanding class or series with respect to which it
is a Rating Agency to be reduced or withdrawn.
"Eligible Portfolio" means all the wholesale accounts in the Wholesale
Portfolio that are Eligible Accounts.
"Eligible Receivable" means a receivable
o which was originated or acquired by the originator, directly
or as successor to the originator, in the ordinary course of
business,
o which has arisen under an Eligible Account and is payable in
United States dollars,
o which is owned by the originator at the time of sale to the
seller,
o which represents the obligation of a Dealer to repay an
advance made to the Dealer to finance the acquisition of
vehicles,
o which at the time of creation and at the time of transfer to
the trust is secured by a perfected first priority security
interest in the related vehicle,
o which was created in compliance in all respects with all
requirements of law applicable to it and pursuant to a
floorplan financing agreement which complies in all respects
with all requirements of law applicable to any party to the
agreement,
o with respect to which all consents and governmental
authorizations required to be obtained by the originator or
an affiliate of the originator or the seller in connection
with the creation of the receivable or the transfer of the
receivable to the trust or the performance by the originator
or an affiliate of the originator of the floorplan financing
agreement under which the receivable was created, have been
duly obtained,
o as to which at all times following the transfer of the
receivable to the trust, the trust will have good and
marketable title to the receivable free and clear of all
liens arising prior to the transfer or arising at any time,
other than liens permitted under the Pooling and Servicing
Agreement,
o which has been the subject of a valid transfer and
assignment from the seller to the trust of all the seller's
interest in the receivable, including any proceeds of the
receivable,
o which will at all times be the legal and assignable payment
obligation of the related Dealer, enforceable against the
Dealer in accordance with its terms, except as
enforceability may be limited by applicable bankruptcy or
other similar laws,
o which at the time of transfer to the trust is not subject to
any right of rescission, setoff, or any other defense,
including defenses arising out of violations of usury laws,
of the Dealer,
o as to which, at the time of transfer of the Receivable to
the trust, the originator and each affiliate of the
originator and the seller have satisfied all their
respective obligations with respect to the Receivable
required to be satisfied at that time,
o as to which, at the time of transfer of the Receivable to
the trust, neither the originator, any affiliate of the
originator nor the seller has taken or failed to take any
action which would impair the rights of the trust or the
certificateholders,
o which constitutes "chattel paper" as defined in Article 9 of
the applicable UCC as then in effect and
o which was transferred to the trust with all applicable
governmental authorization.
"Enhancements" means enhancements which may be provided with respect
to one or more classes of a series, including one or more of the following:
o letter of credit,
o surety bond,
o cash collateral account,
o spread account,
o guaranteed rate agreement,
o swap, including without limitation currency swaps, or other
interest protection agreement,
o repurchase obligation,
o cash deposit or
o another form of credit enhancement described in the related
prospectus supplement.
"Euroclear" means the Euroclear System.
"Euroclear Operator" means Morgan Guaranty trust Company of New York,
Brussels, Belgium office.
"Euroclear Participants" means participants of Euroclear.
"Excess Funded Amount" means, initially, the initial principal balance
of the certificates of a series over the Initial Invested Amount of the series.
"Excess Funding Account" means an Eligible Account established with
the trustee for a series in which the Excess Funding Amount will be maintained,
except, to the extent provided in the related Series Supplement, during an Early
Amortization Period or Reinvestment Period for the series.
"Excess Principal Collections" means the amount of available
certificateholder principal collections for each series and any Collection
Period remaining after required payments, if any.
"Excluded Series" means a series of certificates designated as an
excluded series with respect to a Paired Series.
"Fleet Receivables" means receivables originated in connection with
multiple new vehicle orders of at least five vehicles by specified Dealers.
"Foreign Agency Depositaries" means Citibank, when acting in its
capacity as depositary for Clearstream, and Morgan, when acting in its capacity
as depositary for Euroclear.
"Fully Reinvested Date" means the date on which the amount on deposit
in the Principal Funding Account with respect to a series equals the outstanding
principal amount of the certificates of the series.
"Global Securities" means the globally offered certificates.
"Holders" means the certificateholders under the Pooling and Servicing
Agreement.
"Indirect Participants" means entities including banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly.
"Ineligible Receivables" means any receivable as to which the
Certificateholders' Interest with respect to the receivable will be reassigned
to the seller on the terms and conditions set forth in this prospectus as a
result of a breach by the seller of any representation and warranty described in
the first paragraph of "Representations and Warranties" in this prospectus,
which breach remains uncured for 30 days or a longer period as may be agreed to
by the trustee, after the earlier to occur of the discovery of such breach by
the seller or the servicer or receipt of written notice of such breach by the
seller or the servicer, and which breach has a materially adverse effect on the
Certificateholders' Interest in any receivable or Account.
"Initial Cut-Off Date" means the date specified in the related
prospectus supplement.
"Initial Invested Amount" means with respect to any series and for any
date, the amount stated as the "Initial Invested Amount" in the related Series
Supplement. The Initial Invested Amount for any series may be increased or
decreased from time to time as stated in the related Series Supplement,
including as a result of deposits to or withdrawals from the Excess Funding
Account, if any, for the series.
"Insolvency Laws" means the United States Bankruptcy Code or similar
applicable state laws.
"Installment Balance Amount" means the portion of the aggregate amount
of Installment Balances in respect of which the originator has not received an
offsetting payment from the related Dealer on a distribution date.
"interest collections" means collections under the receivables that
consist of interest and other non-principal charges, including insurance fees,
amounts recorded on Defaulted Receivables and insurance proceeds.
"Interest Funding Account" means the one or more trust accounts in
which collections or other amounts, or the portion allocable to a class, will be
deposited if the interest payment dates for a series or class occur less than
monthly.
"Investor Default Amount" means the portion of the Defaulted Amount
allocated to the certificateholders of a series.
"IRA" means an individual retirement account.
"Miscellaneous Payments" means, for any Collection Period, the sum of
o Adjustment Payments and Transfer Deposit Amounts received
with respect to the Collection Period and
o Unallocated Principal Collections on the distribution date
available to be treated as Miscellaneous Payments as
described in this prospectus under "Principal Collections
for all Series".
"Monthly Payment Rate" means, for a Collection Period, the percentage
obtained by dividing Principal Collections for the Collection Period by the
daily average Pool Balance for the Collection Period.
"Monthly Servicing Fee" means, unless a related Series Supplement or
prospectus supplement states otherwise, the share of the Servicing Fee allocable
to certificateholders of any series with respect to any distribution date, which
shall generally be equal to one-twelfth of the product of
o the Servicing Fee Rate and
o the Invested Amount of the series as of the last day of the
second preceding Collection Period.
"Moody's" means Moody's Investors Service, Inc.
"Morgan" means Morgan Guaranty Trust Company of New York, Brussels,
Belgium office.
"New Vehicles" means
o current and prior model year unmiled vehicles,
o current model year miled vehicles purchased at a closed
auction conducted by the entity or entity specified in the
related prospectus supplement and
o prior model year and two year old miled vehicles.
"New Withholding Regulations" means the Treasury regulations published
in the Federal Register on October 14, 1997.
"OID" means original issue discount.
"OID regulations" means the Treasury regulations relating to OID.
"Overconcentration Amount" means the aggregate principal amount of
receivables in the trust on a distribution date which are Dealer
Overconcentrations.
"Paired Series" means a series of certificates previously issued by
the trust as to which the Accumulation Period or Controlled Amortization Period
has commenced with respect to which a series of certificates may be designated
as an excluded series.
"Participants" means the participating organizations of DTC which
include securities brokers and dealers, banks, trust companies and clearing
corporations and may include certain other organizations.
"Plan Assets Regulation" means the final regulation issued by DOL
concerning the definition of what constitutes the "plan assets" of Benefit
Plans.
"Pool Balance" means the aggregate amount of the principal balances of
the receivables.
"Pooling and Servicing Agreement" means the Pooling and Servicing
Agreement, as amended and supplemented from time to time, among Ace Securities
Corp., as seller of the receivables, the servicer of the receivables, and the
trustee.
"prime rate" means the rate designated as the "prime rate" from time
to time by certain financial institutions selected by the originator or the
seller, as applicable.
"principal collections" means collections of principal on the
receivables.
"Principal Funding Account" means the trust account established for
the benefit of the certificateholders of a series in which, during the
Accumulation Period for the series, Principal Collections and other amounts
allocable to the Certificateholders' Interest of the series, which may include
some Excess Principal Collections, will be deposited.
"principal receivables" means the portion of the receivables that
represents principal.
"Principal Shortfalls" means any principal distributions to
Certificateholders of any series which are either scheduled or permitted and
which have not been covered out of Principal Collections and certain other
amounts allocated to the series.
"Principal Terms" means the terms of a series which, under the Pooling
and Servicing Agreement, the seller may specify, including, among other things:
o its name or designation,
o its initial principal amount, or method for calculating such
amount,
o its certificate rate, or the method for determining its
certificate rate,
o a date on which it will begin its Accumulation Period or
Controlled Amortization Period, if any,
o the method for allocating principal and interest to
certificateholders of such series,
o the percentage used to calculate monthly servicing fees,
o the issuer and terms of any Enhancement or the level of
subordination provided by the Seller's Interest,
o the terms on which the certificates of such series may be
exchanged for certificates of another Series, be subject to
repurchase, optional redemption or mandatory redemption by
the seller or be remarketed by any remarketing agent,
o the Series Termination Date and
o any other terms permitted by the Pooling and Servicing
Agreement.
"Rating Agency" means each rating agency designated by the seller in
the related Series Supplement in respect of any outstanding series or class.
"Registration Statement" means the registration statement, together
with all amendments and exhibits, which the seller has filed under the
Securities Act with the Commission with respect to the certificates offered
pursuant to this prospectus.
"Reinvestment Event" means, for any series, any of the events so
defined in the related Series Supplement and described in the related prospectus
supplement.
"Reinvestment Period" means, for any applicable series, the period
beginning on the day on which a Reinvestment Event has occurred and ending on
the earliest of:
o the beginning of an Early Amortization Period with respect
to the series,
o the recommencement of the Revolving Period in accordance
with the related Series Supplement and
o payment in full of the outstanding principal amount of the
certificates of that series.
"remarketing firms" means one or more firms which, acting as
principals for their own accounts or as agents for the seller, may offer and
sell the Certificates of a series, if the related prospectus supplement so
states, in connection with a remarketing upon their purchase, in accordance with
a redemption or repayment pursuant to their terms.
"Removal and Repurchase Date" means the Determination Date on which
the removal of the Designated Accounts and the purchase of the Designated
Receivables will occur.
"Removal Commencement Date" means the Determination Date on which
removal of one or more Accounts will commence.
"Removal Date" means the Determination Date on which the Designated
Balance in a Designated Account is reduced to zero.
"Removal Notice" means a written notice furnished to the trustee, any
Enhancement provider and the Rating Agencies by the seller, or the servicer on
its behalf stating the Removal Commencement Date and the Designated Accounts.
"Removed Account" means a Designated Account as to which the seller
has stopped allocating collections of receivables and which has been deemed
removed from the trust for all purposes.
"Repurchased Receivables" means Designated Receivables which have been
deemed repurchased from the trust for all purposes.
"Required Participation Amount" means for any date an amount equal to
the sum of:
o the sum of the amounts for each series obtained by
multiplying the Required Participation Percentage for the
series by the Initial Invested Amount for the series at that
time. However, each Excluded Series will be excluded from
this calculation until the Invested Amount of the related
Paired Series is reduced to zero; and
o the Trust Available Subordinated Amount on the immediately
preceding Determination Date, after giving effect to the
allocations, distributions, withdrawals and deposits to be
made on the distribution date following that Determination
Date.
"Required Participation Percentage" means, for a series, the required
participation percentage specified in the related Series Supplement.
"Revolving Period" means the revolving period, for the certificates of
each series and class, during which Principal Collections and other amounts
otherwise allocable to the Certificateholders' Interest of that series or class
will be
o paid to the seller,
o deposited to the Excess Funding Account, if any, for that
series or
o distributed to, or for the benefit of, the
certificateholders of other classes or series,
A Revolving Period for a series will begin on the Series Cut-off Date
and end on the earlier of:
o the day immediately before the Accumulation Period
commencement date or the controlled amortization period
commencement date for the series and
o the day immediately before the day on which an Early
Amortization Event or a Reinvestment Event occurs with
respect to the series.
"RPA seller" means the originator, together with its predecessors as
appropriate, under the Receivables Purchase Agreement.
"Securities Act" means the Securities Act of 1933.
"Seller's Certificate" means the certificate evidencing the Seller's
Interest.
"Seller's Participation Amount" means the Pool Balance minus the
aggregate Invested Amounts for all outstanding series.
"Series Allocable Defaulted Amount" means, with respect to any series
of certificates for any Collection Period, the product of the Series Allocation
Percentage for the series and the amount of the Defaulted Amount with respect to
the Collection Period.
"Series Allocable Interest Collections" means, with respect to any
series of certificates for any Collection Period, the product of the Series
Allocation Percentage for the series and the amount of Interest Collections,
with respect to the Collection Period.
"Series Allocable Miscellaneous Payments" means, with respect to any
series of certificates for any Collection Period, the product of the Series
Allocation Percentage for the series and the amount of Miscellaneous Payments,
with respect to the Collection Period.
"Series Allocable Principal Collections" means, with respect to any
series of certificates for any Collection Period, the product of the Series
Allocation Percentage for the series and the amount of Principal Collections,
with respect to the Collection Period.
"Series Allocation Percentage" means, with respect to a series for any
Collection Period, the percentage equivalent of a fraction, the numerator of
which is the Adjusted Invested Amount of the series as of the last day of the
immediately preceding Collection Period and the denominator of which is the
Trust Adjusted Invested Amount as of that last day.
"Series Cut-off Date" means, for a series, the date stated in the
related prospectus supplement on which a revolving period for the series will
begin.
"Series Issuance Date" means the date of issuance of any series.
"Series Termination Date" means, for any series, the date stated in
the related prospectus supplement, on which the last payment of principal and
interest on any series of certificates will be due and payable, if not
previously paid.
"Service Default" means any of the following events:
o failure by the servicer to make any payment, transfer or
deposit, or to give instructions to the trustee to make any
payment, transfer or deposit, on the date the servicer is
required to do so under the Pooling and Servicing Agreement,
which is not cured within a five business day grace period;
o failure by the servicer duly to observe or perform any other
covenants or agreements of the servicer in the Pooling and
Servicing Agreement which failure has a materially adverse
effect on the certificateholders of any outstanding series
and which continues unremedied for a period of 30 days after
the date written notice of the failure shall have been given
to the servicer by the trustee,
o the servicer delegates its duties under the Pooling and
Servicing Agreement, except as specifically permitted
thereunder;
o any representation, warranty or certification made by the
servicer in the Pooling and Servicing Agreement or in any
certificate delivered pursuant to the Pooling and Servicing
Agreement proves to have been incorrect in any material
respect when made, has a materially adverse effect on the
rights of the certificateholders of any outstanding Series,
and which materially adverse effect continues for a period
of 60 days after written notice of that fact shall have been
given to the servicer by the trustee; or
o events of bankruptcy, insolvency or receivership occur with
respect to the servicer.
Notwithstanding the foregoing, a delay in or failure of performance
referred to under the first clause for a period of ten business days or referred
to under the second, third or fourth clauses for a period of 60 business days,
shall not constitute a Service Default if the delay or failure was caused by an
act of God or other similar occurrence.
"Service Transfer" means, in the event of any Service Default, an
action by the trustee, by written notice to the servicer, terminating all of the
rights and obligations of the servicer, as servicer, under the Pooling and
Servicing Agreement and in and to the receivables and the proceeds thereof and
appointing a new servicer.
"servicer" means the servicer specified in the related prospectus
supplement or any successor servicer.
"Servicing Fee" means a monthly servicing fee which constitutes the
servicer's compensation with respect to the certificates of a series for its
servicing activities and reimbursement for its expenses, unless the related
Series Supplement or prospectus supplement states otherwise.
"Servicing Fee Rate" means, for a series, the servicing fee rate set
forth in the related Series Supplement.
"Special Payment Date" means, during an Early Amortization Period for
a series, each distribution date beginning with the distribution date following
the Collection Period in which the Early Amortization Period begins.
"Standard & Poor's" means Standard & Poor's Ratings Services, a
division of The McGraw-Hill Companies.
"Supplemental Certificate" means a certificate for which the seller or
the seller originator, as applicable, may, from time to time, exchange a portion
of the Seller's Certificate for transfer or assignment to a person or entity
chosen by the seller, or originator, as applicable upon the execution and
delivery of a supplement to the Pooling and Servicing Agreement, if
o the seller shall at the time of that exchange and after
giving effect to the exchange have an interest of not less
than 2% in the Pool Balance,
o the seller or originator, as applicable, shall have
delivered to the trustee, the Rating Agencies and any
Enhancement provider a Tax Opinion with respect to the
exchange and
o the seller or originator, as applicable, shall have
delivered to the trustee written confirmation from the
applicable Rating Agencies that the exchange will not result
in a reduction or withdrawal of the rating of any
outstanding series or class of certificates. Any later
transfer or assignment of a Supplemental Certificate is also
subject to the second and third conditions described in the
preceding sentence.
"Tax Counsel" means Stroock & Stroock & Lavan LLP, special federal
income tax counsel to the seller and the trust.
"Tax Opinion" means an opinion of counsel to the effect that, for
federal income and state income and single business tax purposes,
o such action (other than some specified actions) will not
adversely affect the characterization of the certificates of
any outstanding series or class as debt of the seller and
o the issuance will not cause a taxable event to any
certificateholders.
"Terms and Conditions" means, collectively, the Terms and Conditions
Governing Use of Euroclear and the related Operative Procedures of the Euroclear
System, and applicable Belgian law.
"Transfer Date" means the Series Cut-Off Date, or the Additional
Cut-Off Date, in the case of any Additional Accounts, or the date any future
receivable is generated.
"Transfer Deposit Amount" means, for any Determination Date, the
amount by which the Seller's Participation Amount would be less than the Trust
Available Subordinated Amount, after giving effect to the allocations,
distributions, withdrawals and deposits to be made on that distribution date,
following a deduction by the servicer of the principal balance of a receivable
from the Pool Balance.
"trust" means ACE Securities Corp. Dealer Floorplan Master Loan Trust.
"Trust Adjusted Invested Amount" means with respect to any Collection
Period, the sum of the Adjusted Invested Amounts for all outstanding series.
"Trust Available Subordinated Amount" means the aggregate Available
Subordinated Amounts for all outstanding series.
"UCC" means the Uniform Commercial Code.
"Unallocated Principal Collections" means any amount of Principal
Collections which are held unallocated.
"Used Vehicles" means previously owned vehicles, other than current
model year miled vehicles purchased at a closed auction conducted by the entity
or entities specified in the related prospectus supplement and prior model year
and two year old miled vehicles.
"Wholesale Portfolio" means the accounts of domestic dealers financed
and serviced by the servicer specified in the related prospectus supplement.
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT
AND TAX DOCUMENTATION PROCEDURES
Except in limited circumstances, we will make available the globally
offered certificates (the "Global Securities") only in book-entry form. Unless
we state otherwise in a prospectus supplement for a series, investors in the
Global Securities may hold the Global Securities through any of DTC, Clearstream
or Euroclear. Investors may trade the Global Securities as home market
instruments in both the European and U.S. domestic markets. Initial settlement
and all secondary trades will settle in same-day funds.
Investors holding Global Securities through Clearstream and Euroclear
will conduct secondary market trades between each other in the ordinary way
under their normal rules and operating procedures and under conventional
eurobond practice, i.e., seven calendar day settlement.
Investors holding Global Securities through DTC will conduct secondary
market trades between each other under the rules and procedures applicable to
U.S. corporate debt obligations.
Clearstream or Euroclear and DTC participants holding Global
Securities will effect secondary cross-market trades between each other on a
delivery-against-payment basis through Citibank, N.A. ("Citibank") and Morgan
Guaranty Trust Company of New York ("Morgan") as the respective depositaries of
Clearstream and Euroclear and as participants in DTC.
Non-U.S. holders of Global Securities will be exempt from U.S.
withholding taxes if those holders meet requirements and deliver appropriate
U.S. tax documents to the securities clearing organizations or their
participants.
INITIAL SETTLEMENT
DTC, in the name of Cede & Co. as nominee of DTC, will hold all Global
Securities in book-entry form. Financial institutions acting on the behalf of
investors as direct and indirect participants in DTC will represent those
investors' interests in the Global Securities. As a result, Clearstream and
Euroclear will hold positions on behalf of their participants through their
respective depositaries, Citibank and Morgan, which in turn will hold those
positions in accounts as participants of DTC.
Investors electing to hold their Global Securities through DTC will
follow the settlement practices applicable to securities previously issued by
the trust. DTC will credit investor securities custody accounts with their
holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Clearstream
or Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Clearstream or Euroclear will credit
Global Securities to the securities custody accounts on the settlement date
against payment in same-day funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that purchasers and sellers can settle on the
desired value date.
TRADING BETWEEN DTC PARTICIPANTS. DTC participants will settle
secondary market trades between each other using the procedures applicable to
securities previously issued by the trust in same-day funds.
TRADING BETWEEN CLEARSTREAM AND/OR PARTICIPANTS. Clearstream
participants and/or Euroclear participants will settle secondary market trades
between each other using the procedures applicable to conventional eurobonds in
same-day funds.
TRADING BETWEEN DTC SELLER AND CLEARSTREAM OR EUROCLEAR PURCHASER.
When a DTC participant desires to transfer Global Securities from its account to
the account of a Clearstream participant or a Euroclear participant the
purchaser will send instructions to Clearstream or Euroclear through a
participant at least one business day prior to settlement. Clearstream or
Euroclear will instruct Citibank or Morgan, respectively, as the case may be, to
receive the Global Securities against payment. Payment will include interest
accrued on the Global Securities from and including the last coupon payment date
to and excluding the settlement date. For transactions settling on the 31st day
of the month, payment will include interest accrued to and excluding the first
day of the following month. Citibank or Morgan will then make payment to the DTC
participant's account against delivery of the Global Securities. After
settlement has been completed, the respective clearing system will credit the
Global Securities to its system and, in accordance with its usual procedures, to
the Clearstream participant's or Euroclear participant's account. The Global
Securities credit will appear the next day, European time, and the cash debit
will be back-valued to, and the interest on the Global Securities will accrue
from, the value date, which would be the preceding day when settlement occurred
in New York. If settlement is not completed on the intended value date, i.e.,
the trade fails, the Clearstream or Euroclear cash debit will be valued instead
as of the actual settlement date.
Clearstream participants and Euroclear participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. They may do so the most directly by prepositioning
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Clearstream or Euroclear. Under
this approach, they may take on credit exposure to Clearstream or Euroclear
until the Global Securities are credited to their accounts one day later.
As an alternative, if Clearstream or Euroclear has extended a line of
credit to them, participants can elect not to preposition funds and allow that
credit line to be drawn upon to finance settlement. Under this procedure,
Clearstream participants or Euroclear participants purchasing Global Securities
would incur overdraft charges for one day, assuming they cleared the overdraft
when the Global Securities were credited to their accounts. However, interest on
the Global Securities would accrue from the value date. Therefore, in many cases
the investment income on the Global Securities earned during that one-day period
may substantially reduce or offset the amount of the overdraft charges, although
this result will depend on each participant's particular cost of funds.
Since the settlement is taking place during New York business hours,
DTC participants can employ their usual procedures for sending Global Securities
to Citibank or Morgan for the benefit of Clearstream participants or Euroclear
participants. The sale proceeds will be available to the DTC seller on the
settlement date. Thus, to the DTC participant a cross-market transaction will
settle no differently than a trade between two DTC participants.
Trading between Clearstream or Euroclear seller and DTC purchaser. Due
to time zone differences in their favor, Clearstream and Euroclear participants
may employ their customary procedures for transactions in which they are to
transfer Global Securities by the respective clearing system, through Citibank
or Morgan, to a DTC participant. The seller will send instructions to
Clearstream or Euroclear through a participant at least one business day prior
to settlement. In these cases, Clearstream or Euroclear will instruct Citibank
or Morgan, as appropriate, to deliver the bonds to the DTC participant's account
against payment. Payment will include interest accrued on the Global Securities
from and including the last coupon payment date to and excluding the settlement
date. For transactions settling on the 31st day of the month, payment will
include interest accrued to and excluding the first day of the following month.
Clearstream or Euroclear will then reflect the payment in the account of the
Clearstream participant or Euroclear participant the following day, and
back-value to the value date, which would be the preceding day, when settlement
occurred in New York, the receipt of the cash proceeds in the Clearstream or
Euroclear participant's account. Should the Clearstream or Euroclear participant
have a line of credit with its respective clearing system and elect to be in
debit in anticipation of receipt of the sale proceeds in its account, the
back-valuation will extinguish any overdraft charges incurred over that one-day
period. If settlement is not completed on the intended value date, i.e., the
trade fails, Clearstream or Euroclear would instead value as of the settlement
date the receipt of the cash proceeds in the Clearstream or Euroclear
participant's account.
Finally, day traders that use Clearstream or Euroclear and that
purchase Global Securities from DTC participants for delivery to Clearstream
participants or Euroclear participants should note that these trades would
automatically fail on the sale side unless affirmative action were taken. At
least three techniques should be readily available to eliminate this potential
problem:
o borrowing through Clearstream or Euroclear for one day,
until the purchase side of the day trade is reflected in
their Clearstream or Euroclear accounts, in accordance with
the clearing system's customary procedures;
o borrowing the Global Securities in the U.S. from a DTC
participant no later than one day prior to settlement, which
would give the Global Securities enough time to be reflected
in their Clearstream or Euroclear account in order to settle
the sale side of the trade; or
o staggering the value dates for the buy and sell sides of the
trade so that the value date for the purchase from the DTC
participant is at least one day prior to the value date for
the sale to the Clearstream participant or Euroclear
participant.
U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global securities holding securities through
Clearstream, Luxembourg or Euroclear, or through DTC will be subject to the 30%
U.S. withholding tax that generally applies to payments of interest, including
original issue discount, on registered debt issued by U.S. Persons or to 31%
backup withholding, unless (1) each clearing system, bank or other financial
institution that holds customers' securities in the ordinary course of its trade
or business in the chain of intermediaries between the beneficial owner and the
U.S. entity required to withhold tax complies with applicable certification
requirements and (2) the beneficial owner takes one of the following steps to
obtain an exemption or reduced tax rate:
EXEMPTION FOR NON-U.S. PERSONS (FORM W-8BEN). Beneficial owners of
securities that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8BEN (Certificate of Foreign Status of
Beneficial Owner for United States Tax Withholding. If the information shown on
Form W-8 BEN changes, a new Form W-8 must be filed within 30 days of the change.
EXEMPTION FOR NON-U.S. PERSONS WITH EFFECTIVELY CONNECTED INCOME (FORM
W-8ECI). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form W-8ECI (Certificate of Foreign Person's Claim for
Exemption from Withholding on Income Effectively Connected with the Conduct of a
Trade or Business in the United States).
EXEMPTION OR REDUCED RATE FOR NON-U.S. PERSONS RESIDENT IN TREATY
COUNTRIES (FORM W-8BEN). Non-U.S. Persons that are beneficial owners of
securities residing in a country that has a tax treaty with the United States
can obtain an exemption or reduced tax rate, depending on the treaty terms, by
filing Form W-8BEN (including Part II thereof). If the treaty provides only for
a reduced rate, the beneficial owner may still be entitled to complete exemption
from withholding under item (1) above.
EXEMPTION FOR U.S. PERSONS (FORM W-9). U.S. Persons can obtain
complete exemption from the withholding tax by filing Form W-9 (Request for
Taxpayer Identification Number and Certification).
U.S. FEDERAL INCOME TAX REPORTING PROCEDURE. The beneficial owner of a
Global Security files by submitting the appropriate form to the person through
whom it holds, the clearing agency, in the case of persons holding directly on
the books of the clearing agency. Form W-8BEN and Form W-8ECI are generally
effective for three calendar years from the close of the calendar year in which
it is collected.
The term "U.S. Person" means (1) a citizen or resident of the United
States, (2) a corporation or partnership (or other entity properly classified as
a corporation or partnership for U.S. Federal income tax purposes) organized in
or under the laws of the United States or any state or the District of Columbia,
(3) an estate the income of which is includible in gross income for United
States tax purposes, regardless of its source, or (4) a trust if a court within
the United States is able to exercise primary supervision over the
administration of the trust and one or more United States persons have authority
to control all substantial decisions of the trust. Notwithstanding the preceding
sentence, to the extent provided in regulations, trusts in existence on August
20, 1996 and treated as United States persons prior to that date that elect to
continue to be so treated also will be considered U.S. Persons. Treasury
regulations provide certain presumptions regarding the entity classification and
foreign or U.S. status of a holder that a payor generally must apply in the
absence of appropriate documentation from the holder, and provide detailed
documentation and procedures for holders claiming withholding tax exemptions
through intermediaries. Prospective investors are urged to consult their tax
advisors regarding the effect of these regulations on their ability to claim and
the means for claiming exemptions from or reduced rates of U.S. withholding
taxes.
This summary does not deal with all aspects of U.S. Federal income tax
withholding that may be relevant to foreign holders of the Global securities.
Investors are advised to consult their own tax advisers for specific tax advice
concerning their holding and disposing of the Global securities.
SUBJECT TO COMPLETION, [ ]
PROSPECTUS SUPPLEMENT (to prospectus date [ ])
$[ ] (APPROXIMATE)
ACE SECURITIES CORP.
SPONSOR
[ ] EQUIPMENT TRUST SECURITIES [ ]-[ ]
OWNER TRUST
RECEIVABLE-BACKED NOTES
[ ]
DEPOSITOR
[ ]
SERVICER
The information in this prospectus supplement is not complete and may be
changed. We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This prospectus
supplement is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-[ ] OF THIS
PROSPECTUS SUPPLEMENT AND ON PAGE [ ] OF THE PROSPECTUS.
For a list of capitalized terms used in this prospectus supplement and
the prospectus, see the index of defined terms beginning on page S-[ ] of this
prospectus supplement and on page [ ] of the prospectus.
The notes will represent interests in the trust fund only and
will not represent interests in or obligations of any other entity.
This prospectus supplement may be used to offer and sell the
notes only if accompanied by the prospectus.
The owner trust will issue the following classes of notes:
Initial
Aggregate Interest First Stated Price to Underwriting
Class of Principal Rate per Payment Maturity Public Discount
Notes Amount annum) Date Date Per Note Per Note
- -------------------------------------------------------------------------------
A-1
$ [ ] [ ]% [ ] [ ] [ ]% [ ]%
- -------------------------------------------------------------------------------
A-2 $ [ ] [ ]% [ ] [ ] [ ]% [ ]%
- -------------------------------------------------------------------------------
A-3 $ [ ] Floating [ ] [ ] [ ]% [ ]%
- -------------------------------------------------------------------------------
A-4 $ [ ] [ ]% [ ] [ ] [ ]% [ ]%
- -------------------------------------------------------------------------------
A-5 $ [ ] [ ]% [ ] [ ] [ ]% [ ]%
- -------------------------------------------------------------------------------
B $ [ ] [ ]% [ ] [ ] [ ]% [ ]%
- -------------------------------------------------------------------------------
C $ [ ] [ ]% [ ] [ ] [ ]% [ ]%
- -------------------------------------------------------------------------------
D $ [ ] [ ]% [ ] [ ] [ ]% [ ]%
- -------------------------------------------------------------------------------
The total price to the public is $[ ].
The total underwriting discount is $[ ].
The total proceeds to the owner trust are $[ ].
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR
DETERMINED IF THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS IS
ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
UNDERWRITER:
DEUTSCHE BANC ALEX. BROWN
The date of this prospectus supplement is [ ]
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS:
We provide information to you about the notes offered by this
prospectus supplement in two separate documents that progressively provide more
detail: (1) the accompanying prospectus, which provides general information,
some of which may not apply to your notes, and (2) this prospectus supplement,
which describes the specific terms of your notes.
IF INFORMATION VARIES BETWEEN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS, YOU SHOULD RELY ON THE INFORMATION IN THIS PROSPECTUS
SUPPLEMENT.
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We have
not authorized anyone to provide you with different information.
We are not offering the notes in any state where the offer is not
permitted. We do not claim that the information in this prospectus supplement
and prospectus is accurate as of any date other than the dates stated on their
respective covers.
---------------------
Dealers will deliver a prospectus supplement and prospectus when
acting as underwriters of the notes and with respect to their unsold allotments
or subscriptions. In addition, all dealers selling the notes will be required to
deliver a prospectus supplement and prospectus for ninety days following the
date of this prospectus supplement.
---------------------
We include cross-references in this prospectus supplement and the accompanying
prospectus to captions in these materials where you can find further related
discussions. The following table of contents and the table of contents included
in the accompanying prospectus provide the pages on which these captions are
located.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
PAGE
Summary of Terms.........................................................
Background Information...................................................
Risk Factors.............................................................
The Owner Trust..........................................................
The Originators, the Servicer, the Seller and the Depositor..............
The Contracts............................................................
Weighted Average Life Of The Notes.......................................
Description Of The Notes And Indenture...................................
Ratings of the Notes.....................................................
Use of Proceeds..........................................................
Legal Proceedings........................................................
Plan of Distribution.....................................................
Legal Matters............................................................
Index of Defined Terms...................................................
PROSPECTUS
PAGE
Risk Factors.............................................................
The Sponsor..............................................................
The Depositor............................................................
The Owner Trusts.........................................................
The Originators, the Seller and the Servicer.............................
The Contracts............................................................
Description of the Notes and Indenture...................................
Description of the Pooling and Servicing
Agreement...........................................................
Certain Legal Matters Affecting the
Contracts...........................................................
Material Federal Income Tax
Consequences........................................................
ERISA Considerations.....................................................
Ratings of the Notes.....................................................
Use of Proceeds..........................................................
Plan of Distribution.....................................................
Legal Matters............................................................
Where You Can Find More Information......................................
Index of Terms...........................................................
SUMMARY OF TERMS
O THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROSPECTUS
SUPPLEMENT AND DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU NEED TO
CONSIDER IN MAKING YOUR INVESTMENT DECISION. TO UNDERSTAND ALL OF THE TERMS
OF THE OFFERING OF THE NOTES, IT IS NECESSARY THAT YOU READ CAREFULLY THIS
ENTIRE PROSPECTUS SUPPLEMENT AND ACCOMPANYING PROSPECTUS.
o WHILE THIS SUMMARY CONTAINS AN OVERVIEW OF CERTAIN CALCULATIONS, CASH FLOW
PRIORITIES, AND OTHER INFORMATION TO AID YOUR UNDERSTANDING, YOU SHOULD
READ CAREFULLY THE FULL DESCRIPTION OF THESE CALCULATIONS, CASH FLOW
PRIORITIES AND OTHER INFORMATION IN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS BEFORE MAKING ANY INVESTMENT DECISION.
Owner Trustee....................... The owner trustee is [ ], acting not in
its individual capacity but solely as
owner trustee under the trust agreement
with the sponsor and the depositor, and
its telephone number is [ ]. See "THE
OWNER TRUST" in this prospectus
supplement.
Originators......................... [ ] and [ ].
The address of each originator is [ ].
Sponsor............................. ACE Securities Corp., an affiliate of
Deutsche Banc Alex. Brown. Neither
Deutsche Banc Alex. Brown nor any of its
affiliates has guaranteed, will guarantee
or is or will be otherwise obligated with
respect to any notes.
Indenture and Indenture
Trustee.......................... The notes will be issued under an
indenture. [ ] will serve as indenture
trustee. See "DESCRIPTION OF THE NOTES AND
INDENTURE-- THE INDENTURE TRUSTEE," in this
prospectus supplement.
Terms of the Notes:
o Payment Dates.................. The [20]th day of each month, beginning
[ ], or if that day is not a business day,
the next business day.
o Interest....................... See the cover page for the rates as to all
classes other than Class A-3. The Class A-3
interest rate will be the one-month London
interbank offered rate, plus [ ]%. See
"DESCRIPTION OF THE NOTES AND INDENTURE--
INTEREST." The owner trust will calculate
interest on the Class A-1 and Class A-3
Notes on the basis of the actual number of
days elapsed and a 360-day year. The owner
trust will calculate interest on the Class
A-2, Class A-4, Class A-5, Class B, Class C
and Class D Notes on the basis of a 360-day
year comprised of twelve 30-day months.
On each payment date and after the owner
trust repays any outstanding servicer
advances and pays the servicer's monthly
servicing fee, the owner trust will pay
interest on the notes in the following
order:
CLASS OF RECEIVES INTEREST
NOTES BEFORE CLASS
-------- ------------------
A-1, A-2, A-3, A-4 and A-5 B C and D
B C and D
C D
D None
If the available funds are insufficient to
pay interest on all classes of Class A
Notes, the owner trust will apply the
available funds pro rata to the classes of
Class A Notes based on their respective
principal balances.
See "DESCRIPTION OF THE NOTES AND INDENTURE
-- DISTRIBUTIONS" in this prospectus
supplement.
o Principal...................... After paying interest on the notes, the
owner trust will pay principal on the notes
on each payment date. The owner trust will
pay principal in the following order:
BEFORE AN EVENT OF DEFAULT:
1. (A) Until the Class A-1 Note
principal amount becomes zero,
[ ]% of the total principal
payment amount to the Class
A-1 Notes and [ ]% of the
total principal payment amount
to the Class A-5 Notes;
(B) on the payment date when the
Class A-1 Note principal
amount becomes zero, first,
the remaining Class A-1
principal amount to the Class
A-1 noteholders, second, [ ]%
of the total principal payment
amount, but not greater than
the Class A principal payment
amount, to the Class A-5
noteholders and third, the
remaining Class A principal
payment amount to the Class
A-2, A-3, A-4 and A-5 Notes in
that order, with each
successive class not being
entitled to principal until
the prior class' principal
amount is reduced to zero;
(C) after the Class A-1 Note
principal amount is reduced to
zero, [ ]% of the total
principal payment amount, but
not greater than the Class A
principal payment amount to
the Class A-5 Notes and then
the remaining Class A
principal payment amount to
the Class A-2, A-3, A-4 and
A-5 Notes in that order, with
each successive class not
being entitled to principal
until the prior class'
principal amount is reduced to
zero.
If the available amount is insufficient for
the full payment of the amounts called for
in (A), (B), or (C) above, the allocation
of the available amount will be as provided
in "DESCRIPTION OF THE NOTES AND INDENTURE
-- PRINCIPAL" in this prospectus
supplement;
2. after the Class A-1 Note principal
amount is reduced to zero, the Class
B principal payment amount to the
Class B Notes;
3. after the Class A-1 Note principal
amount is reduced to zero, the Class
C principal payment amount to the
Class C Notes; and
4. after the Class A-1 Note principal
amount is reduced to zero, the Class
D principal payment amount to the
Class D Notes.
The principal payment amount on each class
of the notes on each payment date will be
based on the difference between the
aggregate principal balance of that class
of notes on that payment date and the
target amount set for the class or in the
case of Class B, C and D a floor amount set
for the class, if greater than the target
amount.
AFTER AN EVENT OF DEFAULT:
Following an event of default with respect
to the notes, the owner trust will pay
principal in the following order:
CLASS OF
NOTES RECEIVES PRINCIPAL BEFORE CLASSES
----- ---------------------------------
A-1 A-2, A-3, A-4, A-5, B, C and D
A-2 A-3, A-4, A-5, B, C and D
A-3 A-4, A-5, B, C and D
A-4 A-5, B, C and D
A-5 B, C and D
B C and D
C D
D None
See "DESCRIPTION OF THE NOTES AND INDENTURE
-- DISTRIBUTIONS" in this prospectus
supplement.
o Class A-3 Swap
Agreement...................... The owner trust will enter into a swap
agreement with a swap counterparty solely
for the benefit of the Class A-3
noteholders. Under the swap agreement, the
swap counterparty's payments will be
calculated at the Class A-3 Note interest
rate and the owner trust's payments will be
calculated at the assumed fixed rate of
[ ]%.
To the extent that interest on any payment
date at the Class A-3 Note interest rate
exceeds interest calculated at the assumed
fixed rate:
o the swap counterparty will be
obligated to pay an amount equal to
the excess to the owner trust,
o that payment will constitute a
portion of the amount available but
only in respect of the Class A-3
Notes and
o the Class A-3 Notes will be dependent
upon that payment for receipt of
interest to the extent of the excess.
Likewise under the swap agreement, to the
extent that interest calculated at the
assumed fixed rate exceeds interest
calculated at the Class A-3 Note interest
rate
o the owner trust will be obligated to
pay an amount equal to the excess to
the swap counterparty, and
o the payment will have the same
priority, in terms of application of
the amount available, as payment of
interest on the Class A-3 Notes.
Any shortfall in the payment of interest on
the Class A-3 Notes due entirely to the
failure of the swap counterparty to make a
required payment under the swap agreement
will not constitute an event of default
under the indenture. Except to the extent
the amount available on any payment date
exceeds the amount needed to pay:
o the servicing fee and servicer
advances,
o all interest and principal payable on
the notes, with Class A-3 Note
interest being calculated at the
assumed fixed rate for this purpose,
and
o all amounts payable in connection
with the cash collateral account,
no amounts in addition to those available
under the swap agreement will be available
under the indenture to make up the
shortfall. The only remedies in these
circumstances will be those available to
the owner trust under the swap agreement.
See "DESCRIPTION OF THE NOTES AND INDENTURE
-- THE CLASS A-3 SWAP AGREEMENT" in this
prospectus supplement.
o Class A-3 Swap
Counterparty................... [ ] will be the counterparty to the
owner trust under the swap agreement. The
swap counterparty currently has an "[ ]"
long-term unsecured senior debt credit
rating from [ ] and an "[ ]" long-term
unsecured senior debt credit rating from [
]. See "DESCRIPTION OF THE NOTES AND
INDENTURE-- THE CLASS A-3 SWAP
COUNTERPARTY" in this prospectus
supplement.
o Stated Maturity Dates........... The notes will mature on the respective
dates shown on the cover of this prospectus
supplement. However, if the stated maturity
date is not a business day, then the stated
maturity date will be the next business
day.
o Optional Purchase of
Class A-5 Notes................ The owner trust will have the right
to purchase all of the Class A-5 Notes, on
any payment date, at a purchase price equal
to the principal balance of the Class A-5
Notes plus a premium.
Following any purchase, the Class A-5 Notes
will not be retired, but will continue to
be entitled to interest and principal
payments. See "DESCRIPTION OF THE NOTES AND
INDENTURE -- OPTIONAL PURCHASE OF CLASS A-5
NOTES" in this prospectus supplement.
o Optional Redemption When
the Aggregate Note Principal
Amount is Less Than 10%
of Initial Contract Pool
Principal Balance.............. [ ], the seller of contracts to the
depositor, has the option to purchase the
owner trust's assets when the outstanding
note principal balance is less than 10% of
the initial contract pool principal
balance. If the seller exercises this
option, the indenture trustee will redeem
all notes on the next payment date. The
redemption price for each note will be the
note's principal amount plus unpaid accrued
interest to but excluding the redemption
date.
The contract principal balance of any
contract is the present value of the unpaid
scheduled payments due on that contract
discounted at the discount rate, called the
"discount rate," of [ ]%. This prospectus
supplement uses this discount rate to
calculate principal balances of contracts
throughout. The "contract pool principal
balance" is the aggregate of the individual
discounted contract principal balances.
See "DESCRIPTION OF THE NOTES AND INDENTURE
-- OPTIONAL PURCHASE OF CONTRACTS" in this
prospectus supplement.
Cut-off Date........................ [ ].
Closing Date........................ On or about [ ].
Servicing; Servicing Fee............ The servicer will be responsible for
servicing, managing and administering the
contracts and related interests, and
enforcing and making collections on the
contracts. The servicer may make advances
for delinquent scheduled payments, to the
extent it determines that advances will be
recoverable in future periods. Servicer
advances are reimbursable from contract
payments. See "Description of the Pooling
and Servicing Agreement-- Servicing" in the
accompanying prospectus.
The servicer's monthly fee will equal the
product of
o one twelfth of one percent and
o the aggregate contract pool principal
balance as of the last day of the second
preceding collection period.
The servicer fee is payable out of contract
payments. The servicer will pay any
sub-servicer servicing fees from its
monthly servicing fee. See "DESCRIPTION OF
THE NOTES AND INDENTURE-- SERVICING" in
this prospectus supplement.
Ratings............................. The owner trust will not issue any class
of notes unless [ ], and [ ]. assign at
least the following ratings to each class
of notes:
CLASS [ ] [ ]
-----
A-1
A-2
A-3
A-4
A-5
B
C
D
See "RATINGS OF THE NOTES" in this
prospectus supplement and the accompanying
prospectus.
Owner Trust Assets
A. The Contracts............... The contracts will consist of the
following:
o equipment lease contracts,
o installment payment agreements,
o conditional sales/financing agreements,
o promissory notes, and
o loan and security agreements.
As of [ ]the pool of contracts for the
owner trust had the following
characteristics. Percentages are based on
the contract pool principal balance:
o Initial contract pool principal
balance..........................$[ ]
o Number of contracts [ ]
o Average contract principal
balance..........................$[ ]
o Leases as a percentage of the
contracts........................[ ]%
o Loans and other financing arrangements
as a percentage of the
contracts........................[ ]%;
o Underlying equipment type concentration:
PRINCIPAL BALANCE
EQUIPMENT TYPE CONCENTRATION
[ ]................................. [ ]%
[ ]................................. [ ]%
[ ]................................. [ ]%
[ ]................................. [ ]%
[ ]................................. [ ]%
[ ]................................. [ ]%
[ ]................................. [ ]%
No other single type of equipment accounted
for more than 5% of the initial contract
pool principal balance.
o Geographic concentration:
PRINCIPAL BALANCE
STATE CONCENTRATION
----- -------------
[ ]................................. [ ]%
[ ]................................. [ ]%
[ ]................................. [ ]%
[ ]................................. [ ]%
[ ]................................. [ ]
No other state represented more than 5% of
the initial contract pool principal
balance.
o Remaining terms of the
contracts.................[ ] month to
[ ] months
o The weighted average
remaining term of the
contracts ................[ ] months
o Weighted average
age of the contracts......[ ] months
See "THE CONTRACTS -- STATISTICS RELATING
TO THE CUT-OFF DATE CONTRACT POOL" in this
prospectus supplement.
B. Cash Collateral
Account......................... The indenture trustee will establish a
cash collateral account having an initial
balance of $[ ] ([ ]% of initial contract
pool principal balance) for the benefit of
the noteholders, which may include proceeds
of loans from third party lenders to the
owner trust under a cash collateral account
loan agreement. The indenture trustee will
use cash collateral account funds to pay
the following amounts if payments on the
contracts are insufficient:
o interest due on the notes, with interest
on the Class A-3 Notes being calculated
for this purpose at the assumed fixed
rate of [ ]% in connection with the swap
agreement;
o the lesser of
o losses on liquidation of defaulted
contracts during the relevant
collection period, and
o the excess of the aggregate note
principal amount over the contract
pool principal balance, including
all scheduled payments for the
relevant collection period and
unpaid scheduled payments from
prior periods; and
o principal on the notes on the applicable
stated maturity date.
See "DESCRIPTION OF THE NOTES AND INDENTURE
-- CASH COLLATERAL ACCOUNT" in this
prospectus supplement.
Use of Proceeds..................... After the deposit of funds from the note
sale proceeds into the cash collateral
account and payment of expenses, the
indenture trustee will pay the remaining
proceeds of the sale of notes to the
depositor. The depositor will pay the
proceeds to a warehousing trustor to [ ].
in payment of the purchase price of
contracts acquired from them, respectively.
See "USE OF PROCEEDS" in this prospectus
supplement.
Federal Income Tax
Considerations...................... Stroock & Stroock & Lavan LLP,
special federal tax counsel, will
deliver an opinion of counsel that for
federal income tax purposes, the notes
will be treated as indebtedness and the
trust will not be an association, or
publicly traded partnership, taxable as
a corporation. See "Federal Income Tax
Considerations" in this prospectus
supplement and "Material Federal Income
Tax Consequences" in the accompanying
prospectus.
Erisa Considerations................ Subject to particular
considerations discussed in this
prospectus supplement under "ERISA
Considerations," the notes are eligible
for purchase by employee benefit plans.
Legal Investment.................... The Class A-1 Notes will be eligible
securities for purchase by money market
funds under Rule 2a-7 under the Investment
Company Act of 1940.
BACKGROUND INFORMATION
The information in this section will help you understand the
information in this prospectus supplement and the accompanying prospectus.
The principal balance of any contract is the present value of the
unpaid scheduled payments due on the contract after a cut-off date. The
principal balance of a contract excludes all scheduled payments due on or prior
to, but not received as of, that date, as well as any scheduled payments due
after but received before that date. The principal balance also excludes any
prepayments received on or prior to that date. The scheduled payments are
discounted monthly at the rate of [ ]% per annum.
The aggregate principal balance of the contracts expected to be held
by the owner trust as of any particular date is referred to as the contract pool
principal balance. The contract pool principal balance, as of the initial
cut-off date, is referred to as the initial cut-off date contract pool principal
balance or the initial contract pool. The initial cut-off date is [ ] for all
contracts transferred to the owner trust on the closing date for the sale of the
notes. It will be the first day of the month of transfer to the owner trust for
each substitute contract.
Contract balance percentages and amounts discussed below are based on
the aggregate principal balance of the contracts being transferred to the owner
trust as of the initial cut-off date, unless a different date is noted. Changes
in the characteristics of the contract pool between the initial cut-off date and
the closing date will not affect more than 5% of the initial cut-off date
contract pool principal balance.
RISK FACTORS
THE FOLLOWING INFORMATION, WHICH YOU SHOULD CAREFULLY CONSIDER,
IDENTIFIES CERTAIN SIGNIFICANT SOURCES OF RISK ASSOCIATED WITH AN INVESTMENT IN
THE NOTES.
FUTURE CONTRACT DELINQUENCY AND The sponsor presents the historical
LOSS EXPERIENCE OF THE CONTRACT contract delinquency and loss experience
POOL MAY VARY SUBSTANTIALLY FROM of the originators' portfolios of
THE ORIGINATORS' HISTORICAL contracts similar to those being
EXPERIENCE transferred to the owner trust under
"THE CONTRACTS -- STATISTICS RELATING TO
DELINQUENCIES AND DEFAULTS." However,
the actual results for the owner trust's
contracts could be substantially worse.
If so, you may not receive note interest
and principal payments in the amounts
and at the times you expect.
SOME NOTE CLASSES WILL BE ENTITLED The owner trust will pay interest,
TO INTEREST OR PRINCIPAL PAYMENTS principal or both on some classes of
BEFORE OTHER NOTE CLASSES AND notes prior to paying interest,
THE SWAP COUNTERPARTY WILL BE principal or both on other classes of
ENTITLED TO PAYMENT BEFORE SOME notes. The subordination of some
NOTE CLASSES classes of notes to others means that
the subordinated classes are more likely
to suffer the consequences of delinquent
payments and defaults on the contracts
than the classes having prior payment
rights. See "DESCRIPTION OF THE NOTES
AND INDENTURE -- DISTRIBUTIONS," "--
SUBORDINATION OF SUBORDINATE NOTES" and
"-- CASH COLLATERAL ACCOUNT" in this
prospectus supplement.
Similarly, if the owner trust has
to pay any amounts to the swap
counterparty under the Class A-3 Notes
swap agreement, that amount will have the
same priority of payment as interest owed
to the Class A-3 noteholders. This means
that the amount owed to the swap
counterparty must be paid before the
payment of interest to the Class B, C and
D noteholders and before the payment of
principal to any noteholders. See
"DESCRIPTION OF THE NOTES AND INDENTURE
-- CLASS A-3 SWAP AGREEMENT" in this
prospectus supplement.
Moreover, the more senior classes
of notes could lose the credit
enhancement provided by the more
subordinate classes and the cash
collateral account if delinquencies and
defaults on contracts increase and the
collections on contracts and amounts in
the cash collateral account are
insufficient to pay even the more senior
classes of notes.
ANY FAILURE BY THE SWAP The Class A-3 Notes will be
COUNTERPARTY TO PAY AMOUNTS dependent upon payments to be made by the
OWED UNDER THE SWAP AGREEMENT swap counterparty under the swap
WOULD REDUCE THE FUNDS agreement for receipt of the full amount
AVAILABLE TO PAY INTEREST of interest on the Class A-3 Notes. This
ON THE CLASS A-3 NOTES will be the case if the interest due on
the Class A-3 Notes at their floating
rate exceeds the amount available to the
owner trust to pay the Class A-3 Note
interest at the assumed fixed rate of [
]%. Any shortfall in the payment of
interest on the Class A-3 Notes due
entirely to the failure of the swap
counterparty to make a required payment
under the swap agreement will not
constitute an event of default under the
indenture. Except to the extent the
amount available on any payment date
exceeds the amount necessary to pay
o the servicing fee and
servicer advances,
o all interest and
principal payable on the
notes, with Class A-3
Note interest being
calculated at the assumed
fixed rate for this
purpose and
o all amounts payable in
connection with the cash
collateral account, no
amounts in addition to
those available under the
swap agreement will be
available under the
indenture to make up the
shortfall. The only
remedies in these
circumstances will be
those available to the
owner trust under the
swap agreement.
As a general matter, the
obligations of the swap counterparty
under the swap agreement are unsecured.
However, in the event that the swap
counterparty's long-term unsecured senior
debt ceases to be rated at a level
acceptable to [ ] and [ ], the swap
counterparty will be obligated either to
(a) post collateral or establish other
arrangements to secure its obligations
under the swap agreement or (b) arrange
for a substitute swap counterparty to
assume the rights and obligations of the
swap counterparty under the swap
agreement, in either case so that the
ratings of the notes are maintained or,
if applicable, restored to their level
immediately prior to the downgrading or
withdrawal of the swap counterparty's
debt. If the swap counterparty fails to
take either of these actions, the owner
trust will be entitled to terminate the
swap agreement and to claim from the swap
counterparty the cost of obtaining a
replacement swap from a swap counterparty
satisfactory to the note rating agencies.
The Class A-3 noteholders bear the risk
of any failure by the swap counterparty
to take the actions required of it and
the risk of any inability of the owner
trust to obtain a replacement swap
agreement.
ADVERSE EVENTS IN [ ] HIGH If adverse events or economic
CONCENTRATION STATES MAY conditions were particularly severe in a
CAUSE INCREASED DEFAULTS geographic region where there is a
AND DELINQUENCIES substantial concentration of obligors,
the amount of delinquent payments and
defaults on the contracts may increase.
As a result, the overall timing and
amount of collections on the contracts
held by the owner trust may differ from
what you expect, and you may experience
delays or reductions in payments.
The following are the approximate
percentages of the initial contract pool
principal balance of the owner trust's
contracts whose obligors are located in
the following states:
o [ ]% in [ ],
o [ ]% in [ ],
o [ ]% in [ ],
o [ ]% in [ ] and
o [ ]% in [ ].
The remaining states accounted for
[ ]% of the initial contract pool
principal balance, and none of these
remaining states accounted for more than
5% of the initial contract pool principal
balance.
[Although the sponsor does not know
of any matters likely to increase the
rate of delinquencies or defaults in
these states, an example of an adverse
event specific to a geographic region is
the possibility of a catastrophic
earthquake in California. An earthquake
in California could have negative
regional economic repercussions and
potentially cause obligors in that region
to delay or reduce their payments on
contracts. Additionally, a substantial
downturn in the financial services
industry, which is highly concentrated in
the states of New York and New Jersey, or
in the oil and gas industry, which is
concentrated in the state of Texas could
reduce revenues for obligors in those
states and ultimately reduce the
associated obligors' ability to make
timely payments on their related
contracts].
ADVERSE ECONOMIC CONDITIONS If the industries in which there is
IN HIGH CONCENTRATION a substantial concentration of contracts
INDUSTRIES MAY CAUSE INCREASED experience adverse events or economic
DEFAULTS AND DELINQUENCIES conditions, the timing and amount of
collections on the contracts held by the
owner trust may differ from what you
expect. This could result in delays or
reduced payments to you. As of the
initial cut-off date, of the contract
pool principal balance, approximately
o [ ]% related to the
manufacturing industry,
o [ ]% related to equipment
used in the services
industry, excluding
medical and professional
services,
o [ ]% related to the
retail and wholesale
trade industry,
o [ ]% related to equipment
used in transportation,
o [ ]% related to equipment
used in professional
services, and
o [ ]% related to the
financial services
industry.
While the sponsor does not know of
any industry conditions, practices or
other matters likely to increase the rate
of delinquencies or defaults on contracts
with end-users in these industries, some
of them may be adversely affected by
various economic conditions. For example,
a rise in interest rates may weaken the
demand for construction services.
Moreover, the retail trade industry is
dependent upon the level of consumer
confidence and spending. Adverse
developments concerning these conditions
will tend to increase the rate of
delinquencies and defaults by contract
obligors in those industries. This, in
turn, could result in reductions of or
delays in the collection of funds for
payment of the notes.
The sponsor does not believe that
any other industry accounts for more than
5.00% of the contract pool principal
balance. However, as shown in the table
below under the heading "Types of
Obligor," the depositor's records list [
]% of the contract pool principal balance
in the category of "Other" obligor. The
depositor has not analyzed this category
to determine whether or not the contracts
included in it could be grouped into some
other more specific type of equipment
category. Any contracts in this "Other"
category that relate to any particular
industry would be subject to all economic
and other risks associated with that
industry. Any adverse developments in
that industry will tend to increase the
rate of delinquencies and defaults by
contract obligors in that industry. This,
in turn, could result in reductions or
delays in collection of funds for payment
of the notes.
PRODUCT DEFECTS OR OBSOLESCENCE [ ], a [ ]and [ ] a [ ] is the
OR ADVERSE ECONOMIC EVENTS vendor of equipment for approximately
FOR TWO VENDORS ACCOUNTING FOR [ ]% of the contract pool principal
HIGH PROPORTIONS OF THE CONTRACTS balance calculated as of the initial
MAY CAUSE INCREASED DEFAULTS AND cut-off date. Products of [ ], a leading
DELINQUENCIES producer of computer systems, accounted
for approximately [ ]% of the contract
pool balance calculated as of the initial
cut-off date. Although the sponsor is
unaware of conditions likely to increase
the rate of defaults or delinquencies on
contracts pertaining to equipment
produced by these two vendors, some
events concerning these vendors or their
products could have that effect. For
example, if either of these vendors were
to experience financial difficulties, the
obligors' payment performance with
respect to the related contracts may
decline as the obligors may be less
inclined to make payments on contracts
with respect to a vendor which is
suffering financial difficulties.
Additionally, the occurrence of a
substantial number of defects in products
produced by either of these vendors may
result in decisions by the obligors on
the contracts relating to equipment that
proved defective not to pay the contract
amounts, to pay late or to pay smaller
amounts. This could result in reductions
of or delays in payments you expect on
the notes. Moreover, obsolescence of the
products of either of these vendors could
result in prepayments of contracts that
would cause the notes to be paid earlier
than you expect. No other single vendor
originated more than [ ]% of the contract
pool principal balance as of the initial
cut-off date.
PRODUCT DEFECTS OR OBSOLESCENCE If the types of equipment in which
OF TYPES OF EQUIPMENT ACCOUNTING contracts are concentrated suffer
FOR HIGH PROPORTIONS OF THE unexpectedly high rates of defects or
CONTRACTS MAY CAUSE INCREASED become obsolete, the obligors on the
DEFAULTS OR DELINQUENCIES contracts may default, pay late or pay
less than the amounts owed on the
contracts. This could result in
reductions of or delays in payments you
expect on the notes.
As of the initial cut-off date, of
the contract pool principal balance,
approximately
o [ ]% related to contracts
involving
telecommunications
equipment,
o [ ]% related to contracts
involving transportation
equipment,
o [ ]% related to contracts
involving computer and
point-of-sale equipment,
o [ ]% related to contracts
involving computer
software,
o [ ]% related to contracts
involving manufacturing,
o [ ]% related to contracts
involving construction
equipment, and
o [ ]% related to contracts
involving medical
equipment.
The depositor does not believe that
any other type of equipment accounts for
more than [ ]% of the contract pool
principal balance. However, as shown in
the table below under the heading "Types
of Equipment," the depositor's records
list [ ]% of the contract pool principal
balance in the category of "Other" types
of equipment. The depositor has not
analyzed this category to determine
whether or not the contracts included in
it could be grouped into some other more
specific type of equipment category. Any
contracts in this "Other" category that
relate to any particular type of
equipment would be subject to all defect,
obsolescence and other risks associated
with that type of equipment. Any adverse
developments concerning that type of
equipment will tend to increase the rate
of delinquencies and defaults by obligors
on contracts involving that type of
equipment. This, in turn, could result in
reductions or delays in collection of
funds for payment of the notes.
THE OWNER TRUST'S NOT HAVING The owner trust will have no
SECURITY INTERESTS IN COMPUTER security interest in computer software
SOFTWARE AND SERVICES AND THE and computer services contracts, which
OWNER TRUST'S NOT BEING NAMED accounted for [ ]% of the initial
AS SECURED PARTY IN MOTOR VEHICLE contract pool balance, and the owner
TITLE CERTIFICATES WILL LEAVE trust will not be named as a secured
THE OWNER TRUST WITHOUT COLLATERAL party in the title certificates for motor
FOR THE ASSOCIATED CONTRACTS vehicle contracts, which accounted for a
substantial portion of the [ ]% of the
initial contract pool principal balance
attributable to the transportation
industry. If the obligor on this type of
contract fails to pay or is late in
paying, the owner trust will have no
recourse to the software, services or
motor vehicles, as the case may be,
underlying the contracts. This increases
the risk that the owner trust will be
unable to pay or will be late in paying
the amounts you expect on the notes.
THE TRUST ASSETS ARE THE ONLY All distributions on the notes will
SOURCE OF PAYMENTS ON THE NOTES be made from payments by borrowers under
the receivables. The Trust has no other
assets [other than[ ]] to make
distributions on the notes. The
receivables are NOT insured or guaranteed
by any person. The Trust is the only
person that is obligated to make
distributions of the notes.
THE OWNER TRUST
THE OWNER TRUST
The sponsor created the owner trust on [ ] under a trust agreement,
which the parties will amend and restate on the closing date for the sale of the
notes, among the sponsor the depositor and the owner trustee.
Under a pooling and servicing agreement, dated as of [ ], among
o the depositor,
o the owner trust,
o [ ], an originator and the seller of contracts to the
depositor and
o the servicer.
The depositor will transfer all of the contracts and the related security
interests to the owner trust. As noted in "THE ORIGINATORS, THE SELLER, THE
SERVICER AND THE DEPOSITOR "in this prospectus supplement and "THE CONTRACTS --
SOFTWARE AND SERVICES" in the accompanying prospectus, some transferred
contracts will not have associated security interests.
The owner trust will issue an equity certificate, representing the
beneficial ownership interest in the owner trust, to the depositor. The equity
certificate will be entitled to any excess amount available on any payment date
after reimbursement of servicer advances and payment of servicing fees,
principal and interest on the notes, any amount owed to the swap counterparty
and amounts payable in connection with the cash collateral account. See
"DESCRIPTION OF THE NOTES AND INDENTURE -- DISTRIBUTIONS" in this prospectus
supplement. The sponsor is not offering and selling the equity certificate under
this prospectus supplement and the accompanying prospectus.
THE INDENTURE
Under an indenture dated as of [ ] between the owner trust and [ ], as
indenture trustee, the indenture trustee will authenticate and deliver the
notes.
CAPITALIZATION OF THE OWNER TRUST
If the issuance and sale of the notes had taken place on the initial
cut-off date, the capitalization of the owner trust on that date would have
consisted of notes with an aggregate principal amount of $[ ] and an equity
certificate.
THE OWNER TRUSTEE
[ ] will be the owner trustee under the trust agreement. The owner
trustee is a [ ] and its principal offices are located at [ ].
THE ORIGINATORS, THE SERVICER, THE SELLER AND THE DEPOSITOR
[TO BE INSERTED]
ORIGINATION OF THE CONTRACTS
[TO BE INSERTED]
THE CONTRACTS
DESCRIPTION OF THE CONTRACTS
All of the contracts are commercial, rather than consumer, leases,
loans or agreements. See "THE CONTRACTS" in the accompanying prospectus.
STATISTICS RELATING TO THE INITIAL CUT-OFF DATE CONTRACT POOL
The initial contract pool principal balance is $[ ]. This amount is
based upon the contract pool principal balance determined as of the initial
cut-off date, but also includes an amount in respect of scheduled payments on
the contracts due prior to, but not received as of, the cut-off date. The
following tables set forth the characteristics of the contracts as of the
cut-off date. Tables presented in this section may not total due to rounding.
COMPOSITION OF THE INITIAL CUT-OFF DATE CONTRACT POOL
WEIGHTED WEIGHTED AVERAGE
INITIAL AVERAGE AVERAGE CONTRACT
CONTRACT POOL ORIGINAL REMAINING PRINCIPAL
NUMBER OF PRINCIPAL TERM TERM BALANCE
CONTRACTS BALANCE (RANGE) (RANGE) (RANGE)
--------- ------------ --------- --------- ---------
[ ] $[ ] [ ] months [ ] months $[ ]
([ ] months to ([ ] month to ($[ ] to
[ ] months) [ ] months) $[ ])
TYPE OF CONTRACTS
AGGREGATE % OF INITIAL
AGGREGATE % OF TOTAL CONTRACT CONTRACT POOL
NUMBER OF NUMBER OF PRINCIPAL PRINCIPAL
TYPE OF CONTRACT CONTRACTS CONTRACTS BALANCE BALANCE
---------------- --------- --------- ------- --------------
True Lease.....................
Finance Leases.................
Loans/Conditional Sales........
Installment Payment
Agreements.................
Total................... 100.00% $ 100.00%
========= =========== ========= ===========
GEOGRAPHICAL DIVERSITY
AGGREGATE % OF INITIAL
AGGREGATE % OF TOTAL CONTRACT CONTRACT POOL
NUMBER OF NUMBER OF PRINCIPAL PRINCIPAL
STATE CONTRACTS CONTRACTS BALANCE BALANCE
----- --------- --------- -------- -------------
- ---------.....................
- ----------....................
- ---------.....................
- ---------.....................
- -----------...................
- ----------....................
- ----------....................
- ----------....................
- --------......................
- ---------.....................
- --------......................
- -------.......................
- -----.........................
- -------.......................
- ---------.....................
- -------.......................
- ---------.....................
- --------......................
- --------......................
- --------......................
- ---------.....................
- --------......................
- ------........................
- --------......................
- -------.......................
Total................. 100.00% $ 100.00%
========= ============ ========= ===========
PAYMENT STATUS
AGGREGATE % OF INITIAL
AGGREGATE % OF TOTAL CONTRACT CONTRACT POOL
NUMBER OF NUMBER OF PRINCIPAL PRINCIPAL
DAYS DELINQUENT CONTRACTS CONTRACTS BALANCE BALANCE
--------------- --------- --------- --------- ------------
Current, including 1 to 30
day delinquent contracts.............
31 - 60 days delinquent.................
Total........................... 100.00% 100.00%
========= ====== ========= ========
TYPES OF EQUIPMENT
AGGREGATE % OF INITIAL
AGGREGATE % OF TOTAL CONTRACT CONTRACT POOL
NUMBER OF NUMBER OF PRINCIPAL PRINCIPAL
TYPE OF EQUIPMENT CONTRACTS CONTRACTS BALANCE BALANCE
- ----------------- --------- --------- ------- -------------
Telecommunications....................
Transportation........................
Computer..............................
Computer Software.....................
Manufacturing.........................
Construction..........................
Medical...............................
Automotive Diagnostic
Equipment..........................
Printing..............................
Resources.............................
Office Equipment......................
Commercial Retail Fixtures
Industrial............................
Other, including $[ ]
as the largest and $[ ]
as the average contract
principal balance..................
Total........................... 100.00% $ 100.00%
========= ====== ========= ========
The depositor does not believe that any other type of equipment accounts for
more than 5% of the contract pool principal balance. However, the depositor has
not analyzed the contracts included in the category "Other" in the above table
to determine whether or not the contracts included in it could be grouped into
some other more specific type of equipment category.
CONTRACT PRINCIPAL BALANCES
AGGREGATE % OF INITIAL
AGGREGATE % OF TOTAL CONTRACT CONTRACT POOL
NUMBER OF NUMBER OF PRINCIPAL PRINCIPAL
CONTRACT PRINCIPAL BALANCE CONTRACTS CONTRACTS BALANCE BALANCE
-------------------------- --------- --------- ------- -------------
$ 0.01 to $ 5,000.00.....
$ 5,000.01 to $ 25,000.00.....
$ 25,000.01 to $ 50,000.00.....
$ 50,000.01 to $ 100,000.00.....
$ 100,000.01 to $ 500,000.00.....
$ 500,000.01 to $1,000,000.00
$ 1,000,000.01 to $2,000,000.00.....
$ 2,000,000.01 to $3,000,000.00.....
$3,000,000.01 to $4,000,000.00
$ 4,000,000.01 to $5,000,000.00.....
Over $5,000,000, the largest
single contract principal
balance being $[ ]...........
Total...................... 100.00% $ 100.00%
========= ======== ========= =========
REMAINING TERMS OF CONTRACTS
AGGREGATE % OF INITIAL
AGGREGATE % OF TOTAL CONTRACT CONTRACT POOL
NUMBER OF NUMBER OF PRINCIPAL PRINCIPAL
REMAINING TERMS OF CONTRACTS CONTRACTS CONTRACTS BALANCE BALANCE
---------------------------- --------- --------- --------- -------------
(MONTHS)
0 - 12.............................
13 - 24............................
25 - 36............................
37 - 48............................
49 - 60............................
61 - 72............................
73 - 84............................
85 - 96............................
97 - 108............................
Over 108............................
Total......................... 100.00 $ 100.00
========= ====== ======== ======
TYPES OF OBLIGOR
AGGREGATE % OF INITIAL
AGGREGATE % OF TOTAL CONTRACT CONTRACT POOL
NUMBER OF NUMBER OF PRINCIPAL PRINCIPAL
TYPE OF OBLIGOR CONTRACTS CONTRACTS BALANCE BALANCE
- --------------- --------- --------- ------- ------------
Manufacturing......................
Service Organizations..............
Retail & Wholesale.................
Transportation.....................
Professional.......................
Financial Services.................
Manufacturing &
Construction....................
Machine tools......................
Medical............................
Resources..........................
Government.........................
Print Center.......................
Other, including $[ ]
as the largest and $[ ]
as the average principal
balance.........................
Total......................... 100.00% $ 100.00%
=============== ====== ============== ======
The sponsor does not believe that any other industry accounts for more than
5.00% of the contract pool principal balance. However, the depositor has not
analyzed the contracts included in the category "Other" in the above table to
determine whether or not the contracts could be grouped into some other more
specific industry category.
OBLIGOR CONCENTRATION
AGGREGATE
AGGREGATE CONTRACT % OF INITIAL
OBLIGORS (INCLUDING CONTRACTS NUMBER OF PRINCIPAL CONTRACT POOL
SECURING VENDOR LOANS) CONTRACTS BALANCE PRINCIPAL BALANCE
---------------------- --------- ------- -----------------
Top 5.............................. [ ] $[ ] [ ]%
STATISTICS RELATING TO DELINQUENCIES AND DEFAULTS
The following table shows contract delinquency statistics for the
originators' portfolios of receivables similar to the contracts, on an aggregate
basis, as of December 31 in each of the past five years and as of [ ] and [ ].
The applicable originators used the underwriting standards described in the
prospectus under the section titled "THE ORIGINATORS, THE SERVICER, THE SELLER
AND THE DEPOSITOR-- UNDERWRITING--" for all of these receivables. For these
purposes, a "DELINQUENCY" means that the obligor on the contract has failed to
make a required scheduled payment in an amount equal to at least 90% of the
required scheduled payment within 60 days of the due date. For these purposes,
any payment made by the obligor on a contract subsequent to the required payment
date is applied to the earliest payment which was unpaid. These statistics are
not necessarily indicative of the future performance of the contracts. The
following table is based on the net investment for all contracts originated by [
]. and the gross receivable for contracts originated by the other originators.
Net investment is the sum of all payments plus any expected equipment residual
value under a contract discounted to present value using the contract's implicit
interest rate. The gross receivable is the undiscounted sum of all payments
under a contract.
CONTRACT DELINQUENCIES
PERCENT OF CONTRACT BALANCES
WHICH WERE DELINQUENT
-----------------------------------------------------
CONTRACT 31 TO 60 61 TO 90 OVER 90
BALANCE DAYS DAYS DAYS TOTAL
------- ---- ---- ---- -----
AS OF (IN THOUSANDS)
- -----
12/31/[ ]........................ $[ ] [ ]% [ ]% [ ]% [ ]%
12/31/[ ]........................ $[ ] [ ]% [ ]% [ ]% [ ]%
12/31/[ ]........................ $[ ] [ ]% [ ]% [ ]% [ ]%
12/31/[ ]........................ [ ] [ ]% [ ]% [ ]% [ ]%
12/31/[ ]........................ $[ ] [ ]% [ ]% [ ]% [ ]%
03/31/[ ]........................ $[ ] [ ]% [ ]% [ ]% [ ]%
03/31/[ ]........................ $[ ] [ ]% [ ]% [ ]% [ ]%
LOSSES AND RECOVERIES
The following table shows statistics for gross losses and losses net
of recoveries on defaulted contracts within the originators' portfolios of
receivables similar to the contracts during the twelve-month period ending
December 31 in each of the past five years and the three-month periods ended
March 31, [ ] and [ ]. Gross losses means total losses before recoveries
measured against the net investment of the contracts, gross of any allowance for
losses. Losses net of recoveries means losses after recoveries measured against
the net investment of the contracts, gross of any allowance for losses. These
statistics are not necessarily indicative of the future performance of the
contracts.
AGGREGATE NET GROSS LOSSES AS A NET LOSSES AS A
INVESTMENT OF PERCENTAGE OF NET PERCENTAGE OF NET
TWELVE MONTHS ENDED CONTRACTS INVESTMENT INVESTMENT
------------------- ------------- --------------- ----------------
(IN THOUSANDS)
12/31/[ ]................... $[ ] [ ]% [ ]%
12/31/[ ]................... $[ ] [ ]% [ ]%
12/31/[ ]................... $[ ] [ ]% [ ]%
12/31/[ ]................... $[ ] [ ]% [ ]%
12/31/[ ]................... $[ ] [ ]% [ ]%
THREE MONTHS ENDED
- ------------------
03/31/[ ]................... $[ ] [ ]% [ ]%
03/31/[ ]................... $[ ] [ ]% [ ]%
WEIGHTED AVERAGE LIFE OF THE NOTES
The rate of payments on contracts will directly affect
o the rate of note principal payments;
o the aggregate amount of each note interest payment; and
o the yield to maturity of the notes.
The payments on the contracts may be in the form of payments scheduled
to be made under the terms of the contracts, prepayments or liquidations due to
default, casualty and other events which cannot be predicted. [ ] may purchase
contracts from the owner trust if the contracts were ineligible for transfer at
the time of transfer to the owner trust. Any payments for these reasons, other
than scheduled payments may result in distributions to you of amounts which
would otherwise have been distributed over the remaining term of the contracts.
Each prepayment, liquidation or repurchase of a contract, if the contract is not
replaced by the depositor with a comparable substitute contract as described
under "THE CONTRACTS -- SUBSTITUTION OF CONTRACTS" in the accompanying
prospectus, will shorten the weighted average remaining term of the contracts
and the weighted average life of the notes. See "RISK FACTORS -- CONTRACT
PREPAYMENT, INELIGIBILITY OR DEFAULT MAY CAUSE EARLIER REPAYMENT OF THE NOTES
THAN YOU EXPECT AND YOU MAY NOT BE ABLE TO FIND INVESTMENTS WITH THE SAME YIELD
AS THE NOTES AT THE TIME OF REPAYMENT" in the accompanying prospectus.
The following chart sets forth the percentage of the initial principal
amount of each class of notes which would be outstanding on the distribution
dates set forth below assuming the conditional prepayment rates ("CPR")
indicated in the chart. This information is hypothetical. The conditional
prepayment rate assumes that a fraction of the outstanding contracts is prepaid
on each payment date, which implies that each contract in the pool of contracts
is equally likely to prepay. This fraction, expressed as a percentage, is
annualized to arrive at the conditional prepayment rate for the contracts. The
conditional prepayment rate measures prepayments based on the contract pool
principal balance, after the payment of all payments scheduled to be made under
the terms of the contracts during each collection period. The conditional
prepayment rate further assumes that all contracts are the same size and
amortize at the same rate. The conditional prepayment rate also assumes that
each contract will be either paid as scheduled or prepaid in full. The amounts
set forth below are based upon the timely receipt of scheduled monthly contract
payments, and assume that:
o the seller exercises its option to cause a redemption of the
notes when the aggregate note principal balance is less than 10%
of the initial aggregate discounted contract balance of the
contracts, and
o the closing date for the sale of the contracts to the owner trust
is [ ].
These tables are based upon the contract pool principal balance
determined using the discount rate of [ ]%. In addition, it is assumed for the
purposes of these tables only, that the owner trust issues the notes in the
following initial principal amounts and at the following fixed interest rates:
CLASS INITIAL PRINCIPAL AMOUNT INTEREST RATE
----- ------------------------ -------------
A-1...................... $[ ] [ ]%
A-2...................... [ ] [ ]
A-3...................... [ ] [ ]
A-4...................... [ ] [ ]
A-5...................... [ ] [ ]
B........................ [ ] [ ]
C........................ [ ] [ ]
D........................ [ ] [ ]
PERCENTAGE OF THE INITIAL PRINCIPAL
OF THE CLASS A-1 NOTES
CPR
--------------------------------------------------
PAYMENT DATE 0% 6% 9% 12% 18%
Closing Date..........................................
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Weighted Average Life To Call (in years...............
Weighted Average Life To Maturity (in years)..........
PERCENTAGE OF THE INITIAL PRINCIPAL
OF THE CLASS A-2 NOTES
CPR
--------------------------------------------------
PAYMENT DATE 0% 6% 9% 12% 18%
------------ -- -- -- --- ---
Closing Date...........................................
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Weighted Average Life To Call (in years)...............
Weighted Average Life To Maturity (in years)...........
PERCENTAGE OF THE INITIAL PRINCIPAL
OF THE CLASS A-3 NOTES
CPR
---------------------------------------------------
PAYMENT DATE 0% 6% 9% 12% 18%
------------ -- -- -- --- ---
Closing Date...........................................
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___________
Weighted Average Life To Call (in years)...............
Weighted Average Life To Maturity (in years)...........
PERCENTAGE OF THE INITIAL PRINCIPAL
OF THE CLASS A-4 NOTES
CPR
-------------------------------------------------
PAYMENT DATE 0% 6% 9% 12% 18%
------------ -- -- -- --- ---
Closing Date...........................................
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_________
Weighted Average Life To Call (in years)...............
Weighted Average Life To Maturity (in years)...........
PERCENTAGE OF THE INITIAL PRINCIPAL
OF THE CLASS A-5 NOTES
CPR
--------------------------------------------------
PAYMENT DATE 0% 6% 9% 12% 18%
------------ -- -- -- --- ---
Closing Date...........................................
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Weighted Average Life To Call (in years)...............
Weighted Average Life To Maturity (in years)...........
PERCENTAGE OF THE INITIAL PRINCIPAL
OF THE CLASS B NOTES
CPR
-------------------------------------------------
PAYMENT DATE 0% 6% 9% 12% 18%
------------ -- -- -- --- ---
Closing Date...........................................
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Weighted Average Life To Call (in years)...............
Weighted Average Life To Maturity (in years)...........
PERCENTAGE OF THE INITIAL PRINCIPAL
OF THE CLASS C NOTES
CPR
---
CPR
--------------------------------------------------
PAYMENT DATE 0% 6% 9% 12% 18%
------------ -- -- -- --- ---
Closing Date...........................................
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Weighted Average Life To Call (in years)...............
Weighted Average Life To Maturity (in years)...........
DESCRIPTION OF THE NOTES AND INDENTURE
This section adds to the information in the accompanying prospectus
under the caption "DESCRIPTION OF THE NOTES AND INDENTURE." However, as these
statements are only summaries, you should read the pooling and servicing
agreement and the indenture. The sponsor filed the forms of these documents as
exhibits to the registration statement it filed with the Securities and Exchange
Commission for the notes.
The notes will be issued under an indenture between the owner trust
and the indenture trustee.
The owner trust will issue eight classes of notes, consisting of five
classes of senior notes, designated as the
o Class A-1 Notes,
o Class A-2 Notes,
o Class A-3 Notes,
o Class A-4 Notes and
o Class A-5 Notes.
These are referred to in this document as "Class A Notes." The owner trust will
also issue three classes of subordinate notes, designated as the Class B Notes,
the Class C Notes and the Class D Notes. The Class B, Class C and Class D Notes
are the "Subordinate Classes."
Investors may purchase the notes in book-entry form in minimum
denominations of $1,000 and in integral multiples of $1 in excess of $1,000.
Each class will initially be represented by one or more notes registered in the
name of the nominee of The Depository Trust Company. The owner trustee will pay
note interest and principal on the 20th day of each month, or, if not a business
day, the next succeeding business day, commencing in [ ], to registered
noteholders as of the related record date. So long as the notes remain in
book-entry form, the record date for any payment date will be the business day
immediately preceding the payment date. If the notes are no longer in book-entry
form, the record date will be the last business day of the month immediately
preceding the payment date. However, the owner trust will make the final payment
on the notes only upon presentation and surrender of the notes to the indenture
trustee. The owner trust will make all payments on the notes in immediately
available funds. See "DESCRIPTION OF THE NOTES AND INDENTURE -- BOOK-ENTRY
REGISTRATION" in the accompanying prospectus.
DISTRIBUTIONS
The owner trust will pay note principal and interest on each payment
date from the "Available Pledged Revenues" for the payment date, as well as
amounts permitted to be withdrawn from the cash collateral account. See "--CASH
COLLATERAL ACCOUNT" below. The "Available Pledged Revenues" as of any payment
date are the sum of
(a) the following amounts on deposit in the collection account which
the owner trust received during the related collection period
(1) scheduled contract payments, except payments in respect of
o taxes,
o insurance premium reimbursements,
o security deposits,
o late charges,
o documentation fees,
o extension fees,
o administrative charges or,
o maintenance premiums,
(2) prepayments of contracts, and
(3) proceeds of liquidating defaulted contracts,
(b) the purchase price paid by the seller in repurchasing ineligible
contracts from the owner trust,
(c) the amounts that the seller paid to purchase the contracts in
exercise of its option to do so when the aggregate note principal
amount is reduced to less than 10% of the initial contract pool
principal balance and that were on deposit in the collection
account as of the business day before the payment date,
(d) investment earnings on amounts held in the collection or note
distribution account and
(e) to the extent necessary to pay interest, amounts of the type
described in (a) above that the owner trust received after the
end of the related collection period.
However, Available Pledged Revenues do not include any amount
allocable to the depositor as representing the residual value of equipment
subject to a lease, except to the extent that the end-user or a vendor
guaranteed the equipment residual value.
On each payment date, the servicer will direct the indenture trustee
to apply Available Pledged Revenues to the following payments in the following
order of priority:
(1) reimbursement of servicer advances;
(2) the servicing fee;
(3) interest on the notes in the following order of priority:
(a) interest on the Class A-1, A-2, A-3, A-4, and A-5 Notes,
including any overdue interest, allocated pro rata based on
the respective principal amounts of the Class A-1, A-2, A-3,
A-4 and A-5 Notes,
(b) interest on the Class B Notes, including any overdue
interest,
(c) interest on the Class C Notes, including any overdue
interest,
(d) interest on the Class D Notes, including any overdue
interest,
(4) principal on the notes in the amounts and priority described
under "PRINCIPAL" below;
(5) any amount necessary to increase the cash collateral account
balance to its required level;
(6) amounts payable in connection with the cash collateral account;
(7) any shortfall in the payment of interest on the Class A-3 Notes
due to the failure of the swap counterparty to pay amounts owed
to the owner trust under the swap agreement, together with
interest on the shortfall; and
(8) any remainder to the holder of the equity certificate.
The owner trust is to make payments first from the Available Pledged Revenues,
and second, but only as to amounts described in clauses (3) and (4) immediately
above, from amounts permitted to be withdrawn from the cash collateral account
as described under "CASH COLLATERAL ACCOUNT" below. For purposes of the above
allocation of Available Pledged Revenues in respect of interest, the Class A-3
interest rate will be assumed to be the assumed fixed rate of [ ]% determined in
connection with the swap agreement.
INTEREST
The priorities of interest payments are set forth under
"DISTRIBUTIONS" above.
The owner trust will pay interest on each class of notes from and
including the closing date to but excluding [ ], and after that date for each
successive interest period. Interest on the Class A-1 and A-3 Notes will be
computed on the basis of the actual number of days elapsed and a 360-day year.
Interest on the other classes of notes will be computed on the basis of a
360-day year comprised of twelve 30-day months.
The rates for classes other than Class A-3 are set forth on the cover
page of this prospectus supplement. The Class A-3 interest rate shall be the
one-month London interbank offered rate, referred to as One-Month LIBOR, plus
[ ]%.
One-Month LIBOR means as of any LIBOR Determination Date and with
respect to the related interest period, the rate of interest per annum equal to
the London interbank offered rate for deposits in U.S. dollars having a maturity
of one month which appears on Telerate Page 3750 as of 11:00 a.m., London time,
on the LIBOR Determination Date. If the rate does not appear on Telerate Page
3750, One-Month LIBOR for the LIBOR Determination Date will be determined on the
basis of the rates at which deposits in U.S. dollars having a maturity of one
month and in a principal amount of not less than U.S. $1,000,000, are offered at
approximately 11:00 a.m., London time, on the LIBOR Determination Date to prime
banks in the London interbank market by the Reference Banks. The servicer will
request the principal London office of each of the Reference Banks to provide a
quotation of its rate to the indenture trustee. If at least two quotations are
provided, One-Month LIBOR will be the arithmetic mean, rounded upwards, if
necessary, to the nearest .01%, of the offered rates. If fewer than two
quotations are provided, One-Month LIBOR will be the arithmetic mean, rounded
upwards, if necessary to the nearest .01%, of the rates quoted at approximately
11:00 a.m., New York City time, on the LIBOR Determination Date to the indenture
trustee by three major banks in New York, New York, selected by the servicer,
for loans in United States dollars to leading European banks having a maturity
of one month and in a principal amount of not less than U.S. $1,000,000.
However, if those banks do not quote a rate to the indenture trustee as
described in this sentence, One-Month LIBOR will be the One-Month LIBOR in
effect for the immediately preceding interest period.
LIBOR Determination Date means for the interest period from and
including the closing date to but excluding [ ] the second business day
preceding the closing date for the sale of the notes, and for each subsequent
interest period the second business day preceding the interest period. For
purposes of computing One-Month LIBOR, a business day is any business day on
which dealings in deposits in United States dollars are transacted in the London
interbank market.
Telerate Page 3750 means the display page so designated on the Dow
Jones Telerate Service, or another page replacing that page on that service for
the purpose of displaying comparable rates or prices.
Reference Banks means four leading banks, selected by the servicer,
engaged in transactions in Eurodollar deposits in the international Eurocurrency
market and having an established place of business in London.
If on any payment date, the owner trust does not have sufficient
funds, after payment of servicer advances and the servicing fee, to make a full
payment of interest on any class of notes, the amount of the shortfall will be
carried forward and, together with interest on the shortfall amount at the
applicable interest rate for that class, added to the amount of interest the
affected class of noteholders will be entitled to receive on the next payment
date.
PRINCIPAL
This section gives only an overview of how the owner trust will pay
principal. The sponsor recommends that you read this section in connection with
the more detailed terms set forth in the pooling and servicing agreement
included as an exhibit to the registration statement filed with the Securities
and Exchange Commission for the notes.
OVERVIEW OF PRINCIPAL DISTRIBUTIONS
The principal required to be paid on the notes on each payment date
will be the amount necessary to pay the notes down so that their aggregate
principal balance equals the contract pool principal balance as of the last day
of the prior month. This amount will be allocated among the various classes of
notes according to the priorities described in this section.
For so long as the Class A-1 Notes are outstanding, 100% of the
principal will be allocated between the Class A-1 Notes and the Class A-5 Notes.
After the Class A-1 note principal balance has been paid to zero, the principal
will be allocated:
first, among the Class A Notes as a group, between the Class A-5
Notes on one hand and the Class A-2, Class A-3 and Class A-4
Notes, on the other hand, sequentially in that order, then again
to the Class A-5 Notes;
second, to the Class B Notes;
third, to the Class C Notes; and
fourth, to the Class D Notes
Subject to the operation of the floors for each of the Subordinate
Classes, after the payment date on which the Class A-1 note principal amount has
been paid to zero, the owner trust will pay principal proportionately, among the
Class A Notes as a group, the Class B Notes, the Class C Notes and the Class D
Notes, in the priorities listed above. However, the principal paydown rules
incorporate a concept of a floor on each class of the Subordinate Classes, which
means that the Subordinate Classes, for so long as any notes senior to that
class are outstanding, cannot be paid an amount of principal which would reduce
that Subordinate Class below its floor principal amount. If a Subordinate Class
is at its floor level, that Subordinate Class is "locked out" from receiving
further principal payments, with the additional effect of reallocating the
principal that would otherwise have been paid to that Subordinate Class to the
most senior class then outstanding. The levels of the floors are not static, but
are subject to increase if the owner trust experiences contract pool losses that
cannot be funded from the current period's Available Pledged Revenues or the
cash collateral account. This increase in the level of the floors tends to "lock
out" the Subordinate Classes earlier, which accelerates the payment of the
reallocated principal to the senior classes. If unfunded losses become severe
and the cash collateral account is depleted, the unfunded loss amount could be
so large that the principal paydown rules result in a sequential-pay senior
subordinated structure among the various note classes, with no principal being
paid to a Subordinate Class unless the note principal amount of each class
senior to it has been paid in full. The floors operate both before and after an
event of default.
BEFORE AN EVENT OF DEFAULT
This chart summarizes how principal will be paid on the notes before
any event of default. The section headed "Definitions Concerning Principal
Payments" below defines various terms relating to the payment of principal.
CLASS PRINCIPAL PAYMENTS
- -------------------------------------------------------------------------------
Class A-1 o Begins receiving principal on first payment date
o Receives [ ]% of Total Principal Payment Amount until
paid in full, but will receive 100% of the Total
Principal Payment Amount if any of its principal is
outstanding after its stated maturity date until paid
in full
- -------------------------------------------------------------------------------
Class A-2 o Begins receiving principal once Class A-1 is paid in
full
o Receives the Class A Principal Payment Amount reduced
by any amount paid to Class A-5, until Class A-2 is
paid in full, but will receive 100% of the Class A
Principal Payment Amount if any of its principal is
outstanding after its stated maturity date, until paid
in full
o May also receive principal payments reallocated away
from the Subordinate Classes through the operation of
the floors
- -------------------------------------------------------------------------------
Class A-3 o Begins receiving principal once Class A-2 is paid in
full
o Receives the Class A Principal Payment Amount reduced
by any amount paid to Class A-5, until Class A-3 is
paid in full, but will receive 100% of the Class A
Principal Payment Amount if any of its principal is
outstanding after its stated maturity date, until paid
in full o May also receive principal payments
reallocated away from the Subordinate Classes through
the operation of the floors
- -------------------------------------------------------------------------------
Class A-4 o Begins receiving principal once Class A-3 is paid in
full
o Receives the Class A Principal Payment Amount reduced
by any amount paid to Class A-5, until Class A-4 is
paid in full, but will receive 100% of the Class A
Principal Payment Amount if any of its principal is
outstanding after its stated maturity date, until paid
in full
o May also receive principal payments reallocated away
from the Subordinate Classes through the operation of
the floors
- -------------------------------------------------------------------------------
Class A-5 o Begins receiving principal on first payment
date
o Receives [ ]% of the Total Principal Payment Amount
until Class A-1 is paid in full and the same percentage
after Class A-1 is paid in full until Class A-4 is paid
in full but only to the extent of the Class A Principal
Payment Amount
o Once Class A-4 is paid in full, Class A-5 receives 100%
of the Class A Principal Payment Amount until paid in
full
o May also receive principal payments reallocated away
from the Subordinate Classes through the operation of
the floors
- -------------------------------------------------------------------------------
Class B o Begins receiving principal once Class A-1 is paid in
full
o Receives the Class B Principal Payment Amount until
paid in full
o Through the operation of its floor, Class B's principal
payments are subject to reallocation for the benefit of
Class A
o May also receive principal payments reallocated away
from Class C and Class D through the operation of the
floors
- -------------------------------------------------------------------------------
Class C o Begins receiving principal once Class A-1 is paid in
full
o Receives the Class C Principal Payment Amount until
paid in full
o Through the operation of its floor, Class C's principal
payments are subject to reallocation for the benefit of
Class A and Class B o May also receive principal
payments reallocated away from Class D through the
operation of the floors
- -------------------------------------------------------------------------------
Class D o Begins receiving principal once Class A-1 is paid in
full
o Receives the Class D Principal Payment Amount until
paid in full
o Through the operation of its floor, Class D's principal
payments are subject to re-allocation for the benefit
of Class A, Class B and Class C
- -------------------------------------------------------------------------------
DETAILED PRINCIPAL DISTRIBUTION RULES
The priority of principal payments will be in the following order:
(1) prior to the payment date on which the Class A-1 Note principal
amount has been reduced to zero, the Class A Principal Payment
Amount will be equal to the Total Principal Payment Amount and
will be allocated [ ]% to the Class A-1 Notes and [ ]% to the
Class A-5 Notes. However, if the Class A-1 Notes have not been
paid to zero by their stated maturity date, 100% of the Class A
Principal Payment Amount will be paid to the Class A-1 Notes on
their stated maturity date and on each subsequent payment date
until their note principal amount is zero;
(2) on and after the payment date on which the Class A-1 principal
amount has been reduced to zero, and disregarding the amount that
must first be applied to reduce the Class A-1 principal amount to
zero, the Total Principal Payment Amount will be allocated among
the various classes in the following order of priority:
(a) the Class A Principal Payment Amount to the Class A
noteholders, allocated as follows:
(1) [ ]% of the Total Principal Payment Amount, but in no
event greater than the Class A Principal Payment
Amount, to the Class A-5 noteholders, and
(2) the Class A Principal Payment Amount reduced by any
payments to the Class A-5 noteholders under clause
(2)(a)(1) to the Class A-2 noteholders until the Class
A-2 principal amount equals zero, then to the Class A-3
noteholders until the Class A-3 principal amount equals
zero, then to the Class A-4 noteholders until the Class
A-4 principal amount equals zero and then to the Class
A-5 noteholders until the Class A-5 principal amount
equals zero;
However, if the Class A-2, Class A-3 or Class A-4 Notes
have not been paid to zero by their respective stated
maturity dates, 100% of the Class A Principal Payment
Amount will be paid to that class on its stated
maturity date and on each subsequent payment date until
its note principal amount is zero;
(b) the Class B Principal Payment Amount to the Class B
noteholders;
(c) the Class C Principal Payment Amount to the Class C
noteholders;
(d) the Class D Principal Payment Amount to the Class D
noteholders; and
(e) any Reallocated Principal, sequentially to the Class A-2,
Class A-3, Class A-4, Class A-5, Class B, Class C and Class
D Notes.
PRINCIPAL DISTRIBUTIONS AFTER AN EVENT OF DEFAULT
After an event of default occurs, all principal distributions among
the classes will be made as follows:
CLASS PRINCIPAL PAYMENTS
----- ------------------
Class A-1 100% of the Class A Principal Payment Amount until paid in full
Class A-2 100% of the Class A Principal Payment Amount until paid in full
Class A-3 100% of the Class A Principal Payment Amount until paid in full
Class A-4 100% of the Class A Principal Payment Amount until paid in full
Class A-5 100% of the Class A Principal Payment Amount until paid in full
Class B 100% of the Class B Principal Payment Amount until paid in full
Class C 100% of the Class C Principal Payment Amount until paid in full
Class D 100% of the Class D Principal Payment Amount until paid in full
The principles described above in the sections labeled
"PRINCIPAL--OVERVIEW OF PRINCIPAL DISTRIBUTIONS," "--BEFORE AN EVENT OF DEFAULT"
and "DETAILED PRINCIPAL DISTRIBUTION RULES" will also apply after an event of
default except that the allocations between Class A-5, on the one hand, and the
other classes of Class A Notes, on the other hand, as described in those
sections, will not apply after an event of default.
Also, any Reallocated Principal will be allocated sequentially to the
Class A-1, A-2, A-3, A-4, A-5, B, C and D noteholders in that order.
DEFINITIONS CONCERNING PRINCIPAL PAYMENTS
The CLASS A BASE PRINCIPAL PAYMENT AMOUNT is:
(1) as to any payment date until the payment date on which the Class
A-1 principal amount equals zero, 100% of the Total Principal
Payment Amount; and
(2) for any subsequent payment date, and disregarding any amount
first used on the payment date on which the Class A-1 principal
amount is paid to zero, the excess of:
(x) the sum of the Class A-2, A-3, A-4 and A-5 notes principal
amounts over
(y) the Class A Target Principal Amount;
However, the Class A Principal Payment Amount may not exceed the Class
A principal balance.
The CLASS A PERCENTAGE will be approximately [ ]%.
The CLASS A TARGET PRINCIPAL AMOUNT for any payment date will be the
product of (a) the Class A Percentage and (b) the contract pool principal
balance as of the last day of the collection period immediately preceding the
payment date.
The CLASS A PRINCIPAL PAYMENT AMOUNT is the sum of the Class A Base
Principal Payment Amount plus the Class A Principal Shortfall Amount.
The CLASS A PRINCIPAL SHORTFALL AMOUNT means, for any payment date
that is the stated maturity date for a class of Class A Notes and any subsequent
payment date until that class' principal amount is zero, the excess of (a) sum
of the principal amount of that class, plus, until the Class A-4 principal
amount has been reduced to zero, [ ]% of the Total Principal Payment Amount,
over (b) the Total Principal Payment Amount.
The CLASS B FLOOR for any payment date will equal:
(1) [ ]% of the initial contract pool principal balance, plus
(2) the Unfunded Loss Amount, if any, for that payment date, minus,
(3) the sum of the Class C principal amount, and the Class D principal
amount, prior to giving effect to any payments of principal on the Class C or D
Notes on that payment date, and the amount on deposit in the cash collateral
account after giving effect to withdrawals to be made on the payment date.
However, the Class B Floor may not be greater than the Class B principal amount
or less than zero.
The CLASS B PERCENTAGE will be approximately [ ]%.
The CLASS B PRINCIPAL PAYMENT AMOUNT will equal
(1) zero until the payment date on which the Class A-1 principal
amount equals zero; and
(2) for any subsequent payment date the excess, if any, of:
(a) the Class B principal amount over
(b) the greater of
(x) the Class B Target Principal Amount and
(y) the Class B Floor.
However, the Class B Principal Payment Amount may not exceed the Class
B principal amount.
The CLASS B TARGET PRINCIPAL AMOUNT for any payment date will be the
product of (a) the Class B Percentage and (b) the contract pool principal
balance as of the last day of the collection period immediately preceding the
payment date.
The CLASS C FLOOR for any payment date will equal:
(1) [ ]% of the initial contract pool principal balance, plus
(2) the Unfunded Loss Amount, if any, for the payment date, minus
(3) the sum of the Class D principal amount, prior to giving effect to
any payments of principal on the Class D Notes on the payment date, and the
amount on deposit in the cash collateral account after giving effect to
withdrawals to be made on the payment date.
However, the Class C Floor may not be greater than the Class C principal amount
or less than zero. Furthermore, if the Class B principal amount immediately
prior to any payment date is less than or equal to the Class B Floor for that
payment date, the Class C Floor for that payment date will equal the Class C
principal amount immediately prior to that payment date.
The CLASS C PERCENTAGE will be approximately [ ]%.
The CLASS C PRINCIPAL PAYMENT AMOUNT will equal
(1) zero until the payment date on which the Class A-1 principal
amount equals zero; and
(2) for any subsequent payment date, the excess, if any, of:
(a) the Class C principal amount over
(b) the greater of
(x) the Class C Target Principal Amount and
(y) the Class C Floor.
However, the Class C Principal Payment Amount may not exceed the Class
C principal amount.
The CLASS C TARGET PRINCIPAL AMOUNT for any payment date will be the
product of (a) the Class C Percentage and (b) the contract pool principal
balance as of the last day of the collection period immediately preceding the
payment date.
The CLASS D FLOOR for any payment date will equal:
(1) [ ]% of the initial contract pool principal balance, plus
(2) the Unfunded Loss Amount, if any, for the payment date, minus,
(3) the amount on deposit in the cash collateral account after giving
effect to withdrawals to be made on the payment date.
However, the Class D Floor may not be greater than the Class D principal amount
or less than zero. Furthermore, if the Class C principal amount on any payment
date is less than or equal to the Class C Floor on that payment date, the Class
D Floor for that payment date will equal the Class D principal amount
immediately prior to that payment date.
The CLASS D PERCENTAGE will be approximately [ ]%.
The CLASS D PRINCIPAL PAYMENT AMOUNT will equal:
(1) zero until the payment date on which the Class A-1 principal
amount equals zero; and
(2) for any subsequent payment date, the excess, if any, of:
(a) the Class D principal amount minus
(b) the greater of
(x) the Class D Target Principal Amount and
(y) the Class D Floor.
However, Class D Principal Payment Amount may not exceed the Class D
principal balance.
The CLASS D TARGET PRINCIPAL AMOUNT for any payment date will be the
product of (a) the Class D Percentage and (b) the contract pool principal
balance as of the last day of the collection period immediately preceding the
payment date.
The COLLECTION PERIOD for any payment date is the calendar month
preceding the month in which the payment date occurs.
A DEFAULTED CONTRACT as to any collection period is any contract:
(a) which the servicer has determined is uncollectible in accordance
with its credit and collection policies and procedures,
(b) as to which during the collection period 10% or more of a
scheduled payment shall have become delinquent 180 days or more, or
(c) as to which the end-user has suffered an insolvency event.
PLEDGED REVENUES means the sum of
o all scheduled payments on the contracts received on or after the
cut-off date;
o any prepayment received on the contracts on or after the cut-off
date;
o the purchase amount of any contracts purchased by the seller;
o the amount paid by the depositor to purchase the contracts under
its option to purchase all contracts when the aggregate principal
amount of the notes is less than 10% of the initial contract pool
principal balance;
o the liquidation proceeds received in respect of any contracts;
and
o any earnings on the investment of amounts credited to the
collection account or the note distribution account.
However, Pledged Revenues shall not include any amounts received with
respect to any residual value of leased equipment except to the extent
guaranteed by a vendor or end-user.
PRINCIPAL AMOUNT means, when used with respect to a class of notes,
the initial principal balance of the class set forth on the cover page of this
prospectus supplement, less the sum of all distributions previously made to the
class and all amounts held on deposit for payment to that class in respect of
principal.
The REALLOCATED PRINCIPAL for any payment date will equal the excess,
if any, of (1) the Total Principal Payment Amount, over (2) the sum of the Class
A Principal Payment Amount, the Class B Principal Payment Amount, the Class C
Principal Payment Amount and the Class D Principal Payment Amount.
The RELATED COLLECTION PERIOD PLEDGED REVENUE means as to any payment
date, the amount of Pledged Revenues in the collection account as of the
business day preceding the payment date which were received by the depositor
during the related collection period, including all liquidation proceeds as to
Defaulted Contracts, but not including the residual value of leased equipment
except to the extent guaranteed by a vendor or end-user.
The REQUIRED PAYOFF AMOUNT as to a collection period for any contract
is the sum of
(1) the scheduled payment due in that collection period plus any
scheduled payments not received that were due in prior collection
periods and
(2) the contract principal balance determined as if the scheduled
payment due in that collection period had been received.
The TOTAL PRINCIPAL PAYMENT AMOUNT for any payment date is the excess
of (x) the aggregate note principal amount immediately prior to that payment
date over (y) the contract pool principal balance as of the last day of the
collection period immediately preceding the payment date. For this purpose, the
contract pool principal balance will be deemed to be zero on any payment date on
which the contract pool principal balance is less than $10,000,000. The contract
principal balance of any contract which became a defaulted contract during a
given collection period or which was a contract subject to a warranty claim
which the depositor was obligated to purchase as of the end of a given
collection period will, for purposes of computing the Total Principal Payment
Amount and the requisite amount for the cash collateral account, be deemed to be
zero on and after the last day of the collection period.
The UNFUNDED LOSS AMOUNT for any payment date will equal any excess
of:
(a) the remainder of
(1) the aggregate note principal amount, prior to giving
effect to the payment of principal on the notes on the
payment date, minus
(2) the lesser of
(A) the contract pool principal balance as of the
last day of the collection period immediately
preceding the preceding payment date, minus
the contract pool principal balance as of the
last day of the collection period immediately
preceding the payment date, or
(B) the Related Collection Period Pledged Revenue
remaining after payment of amounts owing to
the servicer and note interest on the payment
date plus any withdrawal from the cash
collateral account for payment of note
principal on the payment date,
over
(b) the Required Payoff Amount for all contracts as of the end
of the related collection period.
CLASS A-3 SWAP AGREEMENT
The owner trust will enter into a swap agreement with [ ] as swap
counterparty for the sole benefit of the Class A-3 Notes. Under the swap
agreement, the swap counterparty's payments will be calculated at the Class A-3
Note interest rate and the owner trust's payments will be calculated at an
assumed fixed rate of [ ]%. To the extent that on any payment date interest
calculated at the Class A-3 Note interest rate exceeds interest calculated at
the assumed fixed rate:
o the swap counterparty will be obligated to pay an amount
equal to the excess to the owner trust,
o the payment will constitute a portion of the Available
Pledged Revenues, but only in respect of the Class A-3
Notes, and
o the Class A-3 Notes will be dependent upon the payment for
receipt of the interest to the extent of the excess.
Likewise, under the swap agreement to the extent that interest calculated at the
assumed fixed rate exceeds interest calculated at the Class A-3 Note interest
rate,
o the owner trust will be obligated to pay an amount equal to
the excess to the swap counterparty, and
o the payment will have the same priority, in terms of
application of the Available Pledged Revenues, as payment of
interest on the Class A-3 Notes.
Any shortfall in the payment of interest on the Class A-3 Notes due
entirely to the failure of the swap counterparty to make a required payment
under the swap agreement will not constitute an event of default under the
indenture. Except to the extent the amount available on any payment date exceeds
the amount necessary to pay the servicing fee, all interest and principal
payable on the notes, with Class A-3 Note interest being calculated at the
assumed fixed rate for this purpose, and all amounts payable in connection with
the cash collateral account, no amounts in addition to those available under the
swap agreement will be available under the indenture to make up the shortfall.
The only remedies in these circumstances will be those available to the owner
trust under the swap agreement.
As a general matter, the obligations of the swap counterparty under
the swap agreement are unsecured. However, if the swap counterparty's long-term
unsecured senior debt ceases to be rated at a level acceptable to [ ] and [ ],
the swap counterparty will be obligated either to (a) post collateral or
establish other arrangements to secure its obligations under the swap agreement
or (b) arrange for a substitute swap counterparty to assume the rights and
obligations of the swap counterparty under the swap agreement, in either case so
that the ratings of the notes are maintained or, if applicable, restored to
their level immediately prior to the downgrading or withdrawal of the swap
counterparty's debt. If the swap counterparty fails to take either of these
actions, the owner trust will be entitled to terminate the swap agreement and to
claim from the swap counterparty the cost of obtaining a replacement swap
agreement from a swap counterparty satisfactory to the note rating agencies. The
Class A-3 noteholders bear the risk of any failure by the swap counterparty to
take the actions required of it and the risk of any inability of the owner trust
to obtain a replacement swap agreement.
The swap counterparty currently has an "[ ]" long-term unsecured
senior debt credit rating from [ ] and an "[ ]" long-term unsecured senior debt
credit rating from [ ].
OPTIONAL PURCHASE OF CLASS A-5 NOTES
The depositor may purchase all of the Class A-5 Notes, on any payment
date. The purchase price shall be equal to the Class A-5 principal amount plus a
premium equal to the excess, discounted as described below, of (1) the scheduled
future interest payments on the Class A-5 Notes, over (2) the interest that
would have accrued on the Class A-5 Notes over the same period at a per annum
rate of interest equal to [ ]% plus the bond equivalent yield to maturity on the
fifth business day preceding that payment date on a United States Treasury
security maturing on a date closest to the end of the remaining weighted average
life of the Class A-5 Notes. That excess shall be discounted to present value to
the payment date at the yield described in clause (2) above. For purposes of
this paragraph only, the depositor will determine (1) the Class A-5 principal
amount upon which interest will be deemed to accrue, and (2) the weighted
average remaining life of the Class A-5 Notes, based upon the amortization of
the contract pool principal balance remaining at the payment date at a
conditional prepayment rate of [ ]%. The depositor will pay the holders of
record on the related record date interest payable on the Class A-5 Notes on the
payment date in the ordinary manner. Following purchase, the owner trust will
not retire the Class A-5 Notes, but will, after the authentication and issuance
of replacement notes to the depositor, continue to treat them as being entitled
to interest and principal payments on each payment date in the manner described
above. Following the giving of proper notice of purchase, all holders of Class
A-5 Notes must surrender them for purchase on the relevant purchase date.
Effective on the purchase date, the owner trust will not treat the former
holders of the Class A-5 Notes as the holders of the notes except for purposes
of their right to be paid the purchase price.
CASH COLLATERAL ACCOUNT
The indenture trustee will establish the cash collateral account on or
prior to the closing date. It will be available to the indenture trustee for the
benefit of the noteholders. The depositor will initially fund the cash
collateral account in the amount of $[ ] ([ ]% of initial contract pool
principal balance), which may include proceeds of loans from third party lenders
to the owner trust under a cash collateral account loan agreement. Available
amounts on deposit from time to time in the cash collateral account shall be
used to fund the amounts specified below in the following order of priority to
the extent that amounts on deposit in the collection account, after payment of
servicer fees and advances, as of any deposit date are insufficient:
(1) to pay interest on the notes in the order of priority
described under "DISTRIBUTIONS" above;
(2) to pay any principal deficiency amount, which is equal to
the lesser of:
(a) the aggregate Liquidation Losses on all contracts that
became Defaulted Contracts during the related
collection period, or
(b) the excess, if any, of
(A) the aggregate principal amount of the notes, after
giving effect to all distributions of principal
from Available Pledged Revenues on the payment
date, over
(B) the aggregate of the Required Payoff Amounts for
all contracts as of the last day of the related
collection period; and
(3) to pay principal on the notes at the applicable stated
maturity dates and on the first payment date on which the
contract pool principal balance is less than $10,000,000.
Liquidation Loss means, as to any Defaulted Contract, the excess, if
any, of
(1) the required payoff amount of the contract for the
collection period during which the contract became a
Defaulted Contract, over
(2) that portion of the liquidation proceeds for the Defaulted
Contract allocated to the owner trust, as described under
"DESCRIPTION OF THE NOTES AND INDENTURE--LIQUIDATION
PROCEEDS" in the accompanying prospectus.
To the extent that the amount on deposit in the cash collateral
account as of any payment date is less than the required amount, the servicer is
to restore this deficiency from the remaining amount available in the collection
account, after payment of any servicer advances, the servicing fee, interest and
principal on the notes and amounts due to the swap counterparty under the swap
agreement, as described under "DISTRIBUTIONS" above.
The required amount of the cash collateral account will be
(1) for any payment date on or prior to the payment date
occurring in [ ], $[ ] ([ ]% of the initial contract pool
principal balance), and
(2) for any payment date after that, the greater of
(a) the sum of
(1) [ ]% of the contract pool principal balance for
the payment date, plus
(2) the excess, if any, of
(A) the sum of the principal amounts of the
notes, after giving effect to all
distributions of principal on the payment
date, over
(B) the contract pool principal balance for the
payment date, and
(b) $[ ] ([ ]% of the initial contract pool principal
balance).
However, in no event will the requisite amount exceed the sum of the
principal amounts of the notes.
The servicer or the indenture trustee acting at the direction of the
servicer will release any amount on deposit in the cash collateral account in
excess of the required amount and all investment earnings on funds in the cash
collateral account. The indenture trustee will pay these amounts to or upon the
servicer's order, and they will not be available to make payments on the notes.
The cash collateral account must be maintained with a qualified
institution. Funds on deposit in the cash collateral account will be invested in
eligible investments, as defined under "DESCRIPTION OF THE NOTES AND
INDENTURE--TRUST ACCOUNTS" in the accompanying prospectus.
OPTIONAL PURCHASE OF CONTRACTS AND REDEMPTION OF NOTES
The seller may purchase all of the contracts on any payment date
following the date on which the aggregate note principal amount at the time is
less than 10% of the initial contract pool principal balance. The purchase price
that the seller would pay in connection with a purchase shall be the sum of the
o unpaid servicer fees and advances,
o remaining principal amount of the notes, together with
accrued interest calculated at the swap agreement assumed
fixed rate in the case of the Class A-3 Notes,
o unreimbursed servicer advances and unpaid servicer fees, and
o any other amounts payable at the time from Available Pledged
Revenues, minus
o available amounts on deposit in the collection account.
If the seller does purchase the contracts, the notes shall be redeemed
on the payment date on which the purchase occurs. The redemption price will be
the principal amount of the notes redeemed plus accrued and unpaid interest on
the principal amount of each class of notes to but excluding the redemption
date.
REPORTS TO NOTEHOLDERS
The servicer will furnish to the indenture trustee, and the indenture
trustee will include with each distribution, a statement in respect of the
related payment date. The statement shall set forth, among other things, all
information necessary to enable the indenture trustee to make the distribution
required for the notes and to reconcile all deposits to and withdrawals from
accounts. See "DESCRIPTION OF THE NOTES AND INDENTURE--REPORTS TO NOTEHOLDERS"
in the accompanying prospectus. You will not receive reports directly from the
indenture trustee. The servicer will file the reports with the Securities and
Exchange Commission. However, in accordance with the Securities Exchange Act of
1934 and the rules and regulations of the Securities and Exchange Commission,
the owner trust expects that its obligation to file these reports will be
terminated at the end of [ ].
SERVICING
The servicer will be responsible for
o managing,
o administering,
o servicing and
o making collections
on the contracts. Compensation to the servicer will include
(1) a monthly servicing fee, which will be payable to the
servicer from the amount available on each payment date, in
an amount equal to the product of one-twelfth of one percent
per annum multiplied by the contract pool principal balance
determined as of the first day of the related collection
period;
(2) any late fees, late payment interest, documentation fees,
insurance administration charges, extension fees and other
administrative charges, collectively, the administrative
fees, collected with respect to the contracts during the
related collection period; and
(3) any investment earnings on collections prior to their
deposit in the collection account.
The indenture trustee may terminate the servicer as servicer under
some circumstances, in which event the indenture trustee would appoint a
successor servicer to service the contracts. See "DESCRIPTION OF THE POOLING AND
SERVICING AGREEMENT--SERVICING--EVENTS OF TERMINATION" in the accompanying
prospectus.
THE INDENTURE TRUSTEE
[ ] will serve as the indenture trustee. The indenture trustee may
resign at any time, in which event the owner trust will be obligated to appoint
a successor trustee. The owner trust may also remove the indenture trustee if
(1) the indenture trustee ceases to be eligible to continue as
indenture trustee under the indenture,
(2) a bankruptcy proceeding results in the event of relief or
appointment of a receiver as to the indenture trustee,
(3) the indenture trustee commences bankruptcy or similar
proceedings or
(4) the indenture trustee becomes incapable of acting.
Any resignation or removal of the indenture trustee and appointment of a
successor trustee will not become effective until acceptance of the appointment
by a successor trustee.
REPRESENTATION AND WARRANTIES
The seller will make representations and warranties with respect to
the contracts as described in the accompanying prospectus under "THE
CONTRACTS--REPRESENTATIONS AND WARRANTIES MADE BY THE SELLER."
On the date that the depositor adds a substitute contract to the
contract pool, the seller and the depositor will make the same representations
and warranties as if the transfer occurred on the closing date. However, for
these purposes (a) the contract pool on the closing date shall be deemed to
include the substitute contract in lieu of the contract being replaced or
substituted and (b) the contract principal balance of the substitute contract
shall be equal to or greater than the contract principal balance of the contract
being replaced or substituted as of the related cut-off date.
The owner trust shall reassign to the depositor, and the seller will
be obligated to purchase from the depositor, any contract transferred by the
owner trust at any time there is a breach of any of these representations or
warranties. However, the cure of the breach in all material respects, or the
waiver of the breach, will be an adequate remedy. This purchase shall occur no
later than the second deposit date after the servicer becomes aware, or receives
written notice, of the breach. The "deposit date" means the business day
preceding a payment date. This purchase obligation will constitute the sole
remedy against the depositor and the seller available to the owner trust, the
indenture trustee and the noteholders or equity certificateholder for a breach
of these representations or warranties.
Under the pooling and servicing agreement, a contract transferred by
the owner trust shall be reassigned to the seller and the seller shall make a
deposit in the collection account in immediately available funds in an amount
equal to the contract principal balance of the contract. Any amount the seller
deposits into the collection account in connection with the reassignment of a
contract transferred by the owner trust shall be considered payment in full of
the ineligible contract. This amount shall be treated as Available Pledged
Revenues. In the alternative, the seller may cause the depositor to convey to
the owner trust a substitute contract satisfying the terms and conditions
applicable to substitute contracts in replacement for the affected contract. The
affected contract shall be deemed released by the owner trust and indenture
trustee and reconveyed to the depositor and by the depositor to the seller.
INDEMNIFICATION
The pooling and servicing agreement provides that the servicer will
indemnify
o the depositor,
o the sponsor,
o the owner trust,
o the owner trustee,
o the indenture trustee,
o the holder of the equity certificate and
o the noteholders
from and against any loss or injury sustained from third party claims resulting
from acts or omissions of the servicer with respect to trust assets or any duty
or obligations of the servicer under the agreement, except where the claims
result from willful misconduct, gross negligence or bad faith of the indemnified
person.
AMENDMENTS
When the pooling and servicing agreement and the indenture may be
amended only with the consent of the required majority of the noteholders, see
"DESCRIPTION OF THE NOTES AND INDENTURE--MODIFICATION OF INDENTURE WITH
NOTEHOLDER CONSENT" and "DESCRIPTION OF THE POOLING AND SERVICING
AGREEMENTS--AMENDMENT," the required majority means 66 2/3% of the principal
amount of the Class A Notes until paid in full, then of the Class B Notes until
paid in full, then of the Class C Notes until paid in full and then of the Class
D Notes.
The parties may amend the cash collateral account loan agreement
without noteholder consent to cure any ambiguity or inconsistency or to address
any other matter but only if the amendment will not adversely affect the
noteholders. The parties may also amend the cash collateral account loan
agreement in any other manner with the consent of the required majority of
noteholders determined as provided above. However, without the consent of all
noteholders, no amendment may reduce the amount available in the cash collateral
account for the payment of interest or principal on notes or reduce the
noteholder consent required for any amendment.
The parties may amend the swap agreement without noteholder consent to
cure any ambiguity or inconsistency or to address any other matter but only if
the amendment will not adversely affect the Class A-3 noteholders. The parties
may also amend the swap agreement in any other manner with the consent of at
least 66 2/3% of the principal amount of the Class A-3 Notes. However, without
the consent of all Class A-3 noteholders, no amendment may reduce the amount
available under the swap agreement for paying Class A-3 Note interest or reduce
the Class A-3 noteholder consent required for any amendment. Also, without the
consent of the swap counterparty, the parties may not amend the pooling and
servicing agreement so as to adversely affect the priority of payments from the
owner trust to the swap counterparty under the swap agreement.
Also, any amendment of the cash collateral account loan agreement or
the swap agreement requiring noteholder approval will not be effective unless
each rating agency confirms that the amendment will not result in a reduction,
qualification or withdrawal of the ratings on the relevant notes.
RATINGS OF THE NOTES
It is a condition of issuance that each of [ ] and [ ].
o rate the Class A-1 Notes [in its highest short-term rating
category],
o rate the Class A-2, Class A-3, Class A-4 and Class A-5 Notes
in its highest long-term rating category,
o rate the Class B Notes at least [ ] and [ ], respectively,
o rate the Class C Notes at least [ ], [ ] and [ ],
respectively, and
o rate the Class D Notes at least [ ], [ ] and [ ],
respectively.
The ratings address the likelihood of the timely receipt of interest
and payment of principal on each class of notes on or before the stated maturity
date for the class. The ratings will be based primarily upon the Available
Pledged Revenues, the cash collateral account and the subordination provided by
o the Subordinate Classes, in the case of the Class A Notes,
o the Class C and Class D Notes, in the case of the Class B
Notes and
o the Class D Notes, in the case of the Class C Notes.
There is no assurance that any rating will not be lowered or withdrawn
by the assigning rating agency. In the event that ratings with respect to the
notes are qualified, reduced or withdrawn, no person or entity will be obligated
to provide any additional credit enhancement with respect to the notes.
The ratings should be evaluated independently from similar ratings on
other types of securities. A rating is not a recommendation to buy, sell or hold
notes, inasmuch as these ratings do not comment as to market price or
suitability for a particular investor. The ratings do not address the likelihood
of payment of principal on any class of notes prior to the stated maturity date
or the possibility of the imposition of United States withholding tax with
respect to non-United States Persons.
The term "United States Person" means
(1) a citizen or resident of the United States,
(2) a corporation or partnership organized in or under the laws
of the United States or any political subdivision of the United
States,
(3) an estate the income of which is includable in gross income
for United States federal income tax purposes, regardless of its
source, or
(4) a trust,
(A) with respect to which a court within the United States
is able to exercise primary supervision over its administration,
and one or more United States persons have the authority to
control all of its substantial decisions.
FEDERAL INCOME TAX CONSIDERATIONS
Upon the issuance of the notes, Stroock & Stroock & Lavan LLP, special
federal tax counsel, will deliver an opinion of counsel that for federal income
tax purposes, the notes will be treated as indebtedness and the trust will not
be an association, or publicly traded partnership, taxable as a corporation. All
prospective purchasers of the notes should see "Material Federal Income Tax
Consequences" in the accompanying prospectus for a summary of the anticipated
federal income tax consequences of the purchase, ownership and disposition of
the notes.
[The trust does not anticipate treating the Class [ ] Notes as having
been issued with original issue discount.] [It is anticipated that the Class [ ]
Notes will be treated as issued with original issue discount. The prepayment
assumption that will be used in determining the rate of accrual of original
issue discount with respect those classes of notes is [ ]. However, this rate
does not represent the rate at which prepayments have actually occurred and no
representation is made as to the rate at which prepayments actually will occur
in the future. See "Material Federal Income Tax Consequences--Tax Consequences
to Note Owners--Interest Income on the Notes--Original Issue Discount" in the
accompanying prospectus.]
ERISA CONSIDERATIONS
Subject to particular considerations discussed in this prospectus
supplement under "ERISA Considerations," the notes are eligible for purchase by
employee benefit plans.
USE OF PROCEEDS
The owner trust will use the proceeds from the sale of notes, after
paying funds into the cash collateral account and paying expenses, to pay the
purchase price for the contracts to the depositor. The depositor will use the
proceeds to pay amounts owed to another trust for the acquisition of contracts
from the trust. The trust from which the owner trust acquired contracts will use
the proceeds it receives to pay down a warehouse receivables securitization
facility.
LEGAL PROCEEDINGS
None of
o the depositor,
o the sponsor,
o the servicer,
o the originators,
o the seller or
o the owner trust
are parties to any legal proceedings which could have a material adverse
impact on noteholders' interests in notes or the owner trust's assets.
PLAN OF DISTRIBUTION
Under the terms of an underwriting agreement dated [ ], the
underwriters have severally agreed to purchase the following respective initial
principal amounts of notes at the respective public offering prices less the
respective underwriting discounts shown on the cover page of this prospectus
supplement:
INITIAL INITIAL INITIAL INITIAL INITIAL INITIAL INITIAL INITIAL
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT OF AMOUNT OF
CLASS A-1 CLASS A-2 CLASS A-3 CLASS A-4 CLASS A-5 CLASS B CLASS C CLASS D
UNDERWRITER NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES
----------- -------- -------- -------- -------- -------- -------- -------- --------
Deutsche Banc Alex. Brown
[ ]
In the underwriting agreement, the underwriters have agreed to
purchase all of the notes being offered, if any of the notes are purchased. The
underwriters have advised the sponsor that they propose initially to offer the
notes to the public at the respective public offering prices shown on the cover
page of this prospectus supplement, and to dealers at that price, less a
concession not in excess of the amount noted in the table below. The
underwriters may allow and the dealers may reallow to other dealers a discount
not in excess of the amount noted in the table below.
DEALER DEALER
CONCESSION DISCOUNT
CLASS OF NOTE NOT TO EXCEED NOT TO EXCEED
A-1
A-2
A-3
A-4
A-5
B
C
D
After the notes are released for sale to the public, the offering
prices and other selling terms may be varied by the underwriters.
In connection with the offering of the notes, Deutsche Banc Alex.
Brown, on behalf of the underwriters, may engage in overallotment, stabilizing
transactions and syndicate covering transactions in accordance with Regulation M
under the Securities Exchange Act of 1934. Overallotment involves sales in
excess of the offering size, which creates a short position for the
underwriters. Stabilizing transactions involve bids to purchase the notes in the
open markets for the purpose of pegging, fixing or maintaining the price of the
notes. Syndicate covering transactions involve purchases of notes in the open
market after the distribution has been completed in order to cover short
positions. Stabilizing and syndicate covering transactions may cause the price
of the notes to be higher than it would otherwise be in the absence of those
transactions. If Deutsche Banc Alex. Brown, on behalf of the Underwriters,
engages in stabilizing or syndicate covering transactions, it may discontinue
them at any time.
The sponsor, the depositor and some of its affiliates have agreed to
indemnify the underwriters against some liabilities in connection with the sale
of notes, including liabilities under the Securities Act of 1933, as amended.
The notes are new issues of securities with no established trading
market. The underwriters have advised the sponsor that the underwriters intend
to make a market in the notes but are not obligated to do so and may discontinue
market making at any time without notice. No assurance can be given as to the
liquidity of the trading market for the notes.
The sponsor has estimated that it will spend approximately $[ ] for
printing, rating agency, trustee and legal fees and other expenses related to
the offering.
LEGAL MATTERS
Stroock & Stroock & Lavan LLP, has provided a legal opinion relating
to the notes in its capacity as special counsel to the owner trust, the
Underwriters and the sponsor. Other legal matters for the underwriters will be
passed upon by [ ]. The indenture, the pooling and servicing agreement, the
trust agreement and the notes will be governed by the laws of the State of New
York.
Index of Defined Terms
Available Pledged Revenues.............................................S-36
Class A Base Principal Payment Amount..................................S-43
Class A Percentage.....................................................S-44
Class A Principal Payment Amount.......................................S-44
Class A Principal Shortfall Amount.....................................S-44
Class B Floor..........................................................S-44
Class B Percentage.....................................................S-44
Class B Principal Payment Amount.......................................S-44
Class B Target Principal Amount........................................S-45
Class C Floor..........................................................S-45
Class C Percentage.....................................................S-45
Class C Principal Payment Amount.......................................S-45
Class C Target Principal Amount........................................S-46
Class D Floor..........................................................S-46
Class D Percentage.....................................................S-46
Class D Principal Payment Amount.......................................S-46
Class D Target Principal Amount........................................S-46
collection period......................................................S-10
contract pool principal balance........................................S-10
contract principal balance.............................................S-10
CPR....................................................................S-26
Defaulted Contract.....................................................S-47
delinquency............................................................S-14
deposit date...........................................................S-51
LIBOR Determination Date...............................................S-38
Liquidation Loss.......................................................S-51
One-Month LIBOR........................................................S-38
Pledged Revenues.......................................................S-47
principal amount.......................................................S-47
principal deficiency amount............................................S-51
Reallocated Principal..................................................S-47
Reference Banks........................................................S-38
Related Collection Period Pledged Revenue..............................S-48
Required Payoff Amount.................................................S-48
Subordinate Classes....................................................S-35
Telerate Page 3750.....................................................S-38
Total Principal Payment Amount.........................................S-48
Unfunded Loss Amount...................................................S-48
United States Person...................................................S-57
SUBJECT TO COMPLETION, [ ]
PROSPECTUS
EQUIPMENT RECEIVABLE-BACKED NOTES
(ISSUABLE IN SERIES)
ACE SECURITIES CORP.
SPONSOR
The information in this prospectus supplement is not complete and may be
changed. We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This prospectus
supplement is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
THE OWNER TRUST:
The sponsor will form an owner trust for each series of notes. Each
owner trust will offer equipment receivable-backed notes under this prospectus
and a prospectus supplement. The prospectus supplement will be prepared
separately for each series of notes. Each series may include one or more classes
of notes.
Each owner trust will use the note sale proceeds to acquire a pool of
contracts from the depositor specified in your prospectus supplement.
The assets in your owner trust are specified in the prospectus
supplement for that particular owner trust, while the types of assets that may
be included in a owner trust, whether or not in your owner trust, are described
in greater detail in this prospectus.
THE SECURITIES:
ACE Securities Corp. will sell the securities pursuant to a prospectus
supplement. The securities will be grouped into one or more series, each having
its own distinct designation. Each series will be issued in one or more classes
and will evidence beneficial ownership of, or be secured by, the assets in the
owner trust that the series relates to. A prospectus supplement for a series
will specify all of the terms of the series and of each of the classes in the
series.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is [ ]
TABLE OF CONTENTS
Risk Factors.............................................................
The Sponsor..............................................................
The Depositor............................................................
The Owner Trusts.........................................................
The Originators, the Seller and the Servicer.............................
The Contracts............................................................
Description of the Notes and Indenture...................................
Description of the Pooling and Servicing Agreement.......................
Certain Legal Matters Affecting the Contracts............................
Material Federal Income Tax Consequences.................................
ERISA Considerations.....................................................
Ratings of the Notes.....................................................
Use of Proceeds..........................................................
Plan of Distribution.....................................................
Legal Matters............................................................
Where You Can Find More Information......................................
Index of Terms...........................................................
RISK FACTORS
THE FOLLOWING INFORMATION, WHICH YOU SHOULD CAREFULLY CONSIDER,
IDENTIFIES CERTAIN SIGNIFICANT SOURCES OF RISK ASSOCIATED WITH AN INVESTMENT IN
THE CERTIFICATES. YOU SHOULD ALSO CAREFULLY CONSIDER THE INFORMATION SET FORTH
UNDER "RISK FACTORS" IN THE PROSPECTUS SUPPLEMENT.
THE ABSENCE OF AN EXISTING MARKET There is currently no public market for
FOR THE NOTES MAY LIMIT YOUR the notes and the sponsor cannot assure
ABILITY TO RESELL THE NOTES you that one will develop. Thus, you may
not be able to resell your notes at all,
or may be able to do so only at a
substantial discount. The underwriters
may assist in resales of the notes but
they are not obligated to do so. The
sponsor does not intend to apply for
listing of the notes on any securities
exchange or for the inclusion of the
notes on any automated quotation system.
Even if a secondary market does develop,
it may not continue.
CONTRACT PREPAYMENT, A higher than anticipated level of
INELIGIBILITY OR DEFAULT prepayments or liquidation of contracts
MAY CAUSE EARLIER REPAYMENT that become defaulted may cause an owner
OF THE NOTES THAN YOU EXPECT trust to pay principal on the notes
AND YOU MAY NOT BE ABLE TO sooner than you expected. Also, an owner
FIND INVESTMENTS WITH THE trust may pay principal sooner than you
SAME YIELD AS THE NOTES AT expected if the depositor or a seller
THE TIME OF REPAYMENT repurchases ineligible contracts.
Similarly, upon the occurrence of an
event of default under the indenture,
you may receive principal of the notes
sooner than you expected. See
"DESCRIPTION OF THE NOTES AND INDENTURE
-- EVENTS OF DEFAULT; RIGHTS UPON EVENT
OF DEFAULT." You may not be able to
reinvest those distributions of
principal at yields equivalent to the
yield on the notes; therefore, the
ultimate return you receive on your
investment in the notes may be less than
the return you expected on the notes.
The rate of early terminations or
repurchases of contracts due to
prepayments ineligibility, or defaults
is influenced by various factors
including:
o technological change;
o changes in customer
requirements;
o the level of interest rates;
o the level of casualty losses;
and
o the overall economic
environment.
Unless otherwise set forth in your
prospectus supplement, under the pooling
and servicing agreement, the servicer
may allow an obligor to prepay a
contract at any time if the payment,
alone, or together with the contract's
remaining contract principal balance and
any scheduled payment owed and not yet
received, is equal to the entire
contract principal balance of the
contract. The principal balance of a
contract is the present value of the
future scheduled payments under the
contract, discounted at a discount rate
that will be specified in the prospectus
supplement for your notes.
The sponsor cannot predict the
actual rate of prepayments which will be
experienced on the contracts. However,
your prospectus supplement will present
information as to the principal balances
of the notes remaining at various times
under several hypothetical prepayment
rates. See "WEIGHTED AVERAGE LIFE OF THE
NOTES" in your prospectus supplement.
THE PRICE AT WHICH YOU CAN At any time, the rating agencies
RESELL YOUR NOTES MAY DECREASE may lower their respective ratings of
IF THE RATINGS OF YOUR NOTES the notes or withdraw their ratings
CHANGE entirely. In the event that a rating
assigned to any note is subsequently
lowered or withdrawn for any reason, you
may not be able to resell your notes or
to resell them without a substantial
discount. For more detailed information
regarding the ratings assigned to any
class of the notes, see "RATINGS OF THE
NOTES" in this prospectus and the
prospectus supplement.
THE SUBORDINATION OF SOME An owner trust will pay interest
CLASSES OF NOTES IS ONLY A and principal on some classes of notes
LIMITED FORM OF CREDIT prior to paying interest and principal
ENHANCEMENT AND DOES NOT on other classes of notes. The
ENSURE PAYMENT OF THE subordination of some classes of notes
MORE SENIOR CLASSES to others means that the subordinated
classes of notes are more likely to
suffer the consequences of delinquent
payments and defaults on the contracts
than the more senior classes of notes.
The more senior classes of notes
could lose the credit enhancement
provided by the more subordinate classes
if delinquencies and defaults on the
contracts increase and if the
collections on the contracts and any
credit enhancement described in your
prospectus supplement are insufficient
to pay even the more senior classes of
notes.
Your prospectus supplement will
describe any subordination provisions
applicable to your notes.
LIMITED ASSETS ARE AVAILABLE Each owner trust will be a limited
FOR PAYMENT OF THE NOTES; purpose trust with limited assets.
NOTEHOLDERS WILL HAVE NO Moreover, you have no recourse to the
RECOURSE TO THE ORIGINATORS, general credit of the servicer, sponsor,
SPONSOR, DEPOSITOR, SERVICER depositor, originator or their
OR THEIR AFFILIATES IN THE affiliates. Therefore, you must rely
EVENT DELINQUENCIES AND LOSSES solely upon the contracts and any credit
REDUCE THE TRUST'S ASSETS enhancement described in your prospectus
supplement for payment of principal and
interest on the notes.
An increase in delinquent or
defaulted payments on contracts could
result in your being paid less than you
expect on the notes or in delays in
payment.
If a contract is a vendor loan, you
must rely solely upon the end-user
contracts securing the vendor loan for
payments in respect of that contract.
Most vendor loans are non-recourse to
the vendors. In non-recourse loans you
are limited to recovering amounts due
solely from the end-user contracts and
related security.
EVEN IF AN OWNER TRUST If a contract held by the trust
REPOSSESSES AND SELLS THE becomes a defaulted contract, the only
EQUIPMENT RELATING TO A sources of payment for amounts owed on
CONTRACT AFTER AN OBLIGOR that contract will be the income and
DEFAULTS, SHORTFALLS IN proceeds from the sale of any related
AMOUNTS AVAILABLE TO PAY equipment and a deficiency judgment, if
THE NOTES MAY OCCUR IF THE any, against the obligor under the
MARKET VALUE OF THE EQUIPMENT defaulted contract. Since the market
HAS DECLINED value of the equipment may decline
faster than the discounted contract
balance, the owner trust may not recover
the entire amount due on the contract
and might not receive any recoveries on
the equipment. The prospectus supplement
for your notes may describe some forms
of credit enhancement which are intended
to make up for deficiencies in the
proceeds and recoveries on the
contracts. However, this protection is
limited and could be depleted if those
deficiencies are larger than the sponsor
anticipates.
NOT HAVING POSSESSION OF CONTRACT To facilitate servicing and reduce
FILES MAY HINDER AN OWNER TRUST'S administrative costs, the servicer or a
ABILITY TO REALIZE THE VALUE OF sub-servicer, unless otherwise specified
EQUIPMENT SECURING THE CONTRACTS in your prospectus supplement, will
retain possession of the documents
evidencing the contracts held by the
owner trust. As a result, a subsequent
purchaser of contracts could take
physical possession of the documents
without knowledge of their assignment.
That subsequent purchaser could then
have a security interest in the
contracts senior to the owner trust's
security interest. In the event that the
owner trust must rely upon repossession
and sale of the equipment securing
defaulted contracts to recover amounts
due on the defaulted contracts, the
owner trust's ability to realize upon
the equipment would be limited by the
existence of the third party's senior
security interest in those contracts. In
this event, there may be a delay or
reduction in distributions to you.
Similarly, with respect to
contracts securing vendor loans, the
vendor will retain the original
documents associated with some
contracts. The applicable originator
will file Uniform Commercial Code
financing statements reflecting the
pledge of those contracts to the
applicable originator as security for
the vendor loans. However, the related
documents will remain in the vendor's
possession. If a subsequent purchaser
were able to take physical possession of
the related documents without knowledge
of the pledge to the originator, the
owner trust's security interest in those
contracts could be defeated. In this
event, there may be a delay or reduction
in distributions to you.
FAILURE TO TAKE ALL STEPS The depositor will receive security
NECESSARY TO PERFECT SECURITY interests in financed equipment
INTERESTS IN EQUIPMENT, TO securing contracts from the seller of
RECORD ASSIGNMENT OF SECURITY such financed equipment, which will
INTERESTS TO THE OWNER TRUST obtain security interests in financed
OR TO RECORD SECURITY INTERESTS equipment from other originator or
IN TITLED EQUIPMENT MAY HINDER through its own origination activities.
THE OWNER TRUST'S ABILITY TO The depositor will assign the security
REALIZE THE VALUE OF EQUIPMENT interests to the owner trust. However,
SECURING THE CONTRACTS in some instances, the originators may
not file financing statements for
equipment relating to a single obligor
in a single jurisdiction when the value
of the equipment is less than a minimum
amount which will be specified in the
related prospectus supplement. As a
result, the originator will not acquire,
and the depositor and owner trust will
not have, a perfected security interest
in the equipment. As a result, creditors
of the end-user may acquire superior
interests in the equipment.
Additionally, regardless of
equipment value, the sponsor will
require the originators to annotate
their records to note the depositor's
security interest but may not require
the filing of assignments of financing
statements for the equipment to reflect
the depositor's, the owner trust's or
the indenture trustee's interests.
Because of this, an originator or the
servicer could inadvertently release the
security interest in the equipment
securing a contract. The owner trust
would then not have a security interest
in the equipment.
Also, any transfer to the depositor
of an originator's security interest in
motor vehicles securing the contracts is
subject to state vehicle registration
laws. The depositor's transfer of a
security interest in motor vehicles to
the owner trust is also subject to these
registration laws. These registration
laws require that the secured party's
name appear on the certificate of title
or similar registration of title to a
motor vehicle in order for the secured
party's security interest to be
perfected. The applicable originator
will be identified on the certificates
or similar registrations of title.
However, the certificates of title or
similar registrations of title will not
identify the depositor or owner trust as
secured party. In addition, some
equipment related to the contracts may
constitute fixtures under the real
estate or Uniform Commercial Code
provisions of the state in which the
equipment is located. The relevant
originator will not file assignments of
fixture filings in favor of the
depositor or owner trusts. Therefore, a
third party could acquire an interest in
the motor vehicles or real estate
fixtures superior to that of the owner
trusts.
REPURCHASE OBLIGATION OF THE Federal or state law may grant
SELLER PROVIDES YOU ONLY liens on contracts or equipment that
LIMITED PROTECTION AGAINST have priority over the EQUIPMENT owner
PRIOR LIENS ON THE CONTRACTS OR trust's interest. If the creditor
associated with any prior lien exercises
its remedies it is unlikely that
sufficient cash proceeds from the
contract and related equipment will be
available to pay the contract balance to
the trust. In that event, there may be a
delay or reduction in distributions to
you. An example of a lien arising under
federal or state law is a tax lien on
property of the originator or the
depositor arising prior to the time a
contract is conveyed to the owner trust.
The tax lien has priority over the
interest of the owner trust in the
contracts.
In most cases where vendors have
assigned contracts to originators, the
vendors have warranted to the
originators that there are no prior
liens on the contracts. Additionally,
where vendors have assigned contracts to
originators, the vendors have agreed not
to grant any lien on any contracts
transferred to the originators. In all
cases, the seller will warrant to the
depositor and the owner trust that there
are no prior liens on the contracts. The
seller also will warrant to the
depositor and the owner trust that it
will not grant any lien on the
contracts. In the event that those
warranties are not true as to any
contract, the seller will be required
under the pooling and servicing
agreement to repurchase the contract.
There can be no assurance that the
seller will be able to repurchase a
contract at the time when it is asked to
do so.
IF A BANKRUPTCY COURT RULES Vendors sell contracts to the
THAT THE TRANSFER OF CONTRACTS originators, which contracts will be
FROM A VENDOR TO AN ORIGINATOR transferred directly or indirectly to
WAS NOT A TRUE SALE THEN PAYMENTS the depositor and then the owner trust.
ON THE CONTRACTS MAY BE REDUCED If a bankruptcy court decides that the
OR DELAYED acquisition of a contract by an
originator is not a sale of the contract
from the vendor to the originator, the
contract would be part of the vendor's
bankruptcy estate. Accordingly, the
contract would be available to the
vendor's creditors. In that case, it is
unlikely the trust will receive all of
the scheduled payments on the contracts,
and there may be a delay or reduction in
distributions to you. In order to treat
the transfer of contracts to the trust
as not being a true sale, the bankruptcy
court would recharacterize the transfer
as a pledge of the contracts to secure
borrowings by the vendor. Additionally,
if the transfer of contracts to an
originator from a vendor is
recharacterized as a pledge, then a tax
or government lien on the property of
the pledging vendor arising before the
contracts came into existence may have
priority over the owner trust's interest
in the contracts.
A BANKRUPTCY COURT DETERMINATION If an originator, the seller or the
THAT THE TRANSFER OF CONTRACTS depositor became a debtor in a
FROM ORIGINATORS TO THE SELLER, bankruptcy case, creditors of that
FROM THE SELLER TO THE DEPOSITOR party, or that party acting as a
OR FROM THE DEPOSITOR TO THE debtor-in-possession, may assert that
OWNER TRUST WAS NOT A TRUE SALE the transfer of the contracts was
THEN PAYMENTS ON THE CONTRACTS COULD ineffective to remove the contracts from
BE REDUCED OR DELAYED that party's estate. In that case, the
distribution of contract payments to the
trust might be subject to the automatic
stay provisions of the United States
Bankruptcy Code. This would delay the
distribution of those payments to the
noteholders for an uncertain period of
time. Furthermore, if the bankruptcy
court rules in favor of the creditors or
the debtor in possession, the result may
be reductions in payments under the
contracts to the trust. In either case,
you may experience delays or reduction
in distributions to you. In addition, a
bankruptcy trustee would have the power
to sell the contracts if the proceeds of
the sale could satisfy the amount of the
debt deemed owed by the originator, the
seller or the depositor, as the case may
be. The bankruptcy trustee could also
substitute other collateral in lieu of
the contracts to secure the debt.
Additionally, the bankruptcy court could
adjust the debt if the originator, the
seller or the depositor were to file for
reorganization under Chapter 11 of the
Bankruptcy Code. Each of these parties
will represent and warrant that the
conveyance of the contracts by it is in
each case a valid sale and transfer of
the contracts. In addition, in
agreements conveying the contracts, the
originators, the seller and the
depositor have agreed that they will
each treat the transactions described in
this prospectus as a sale of the
contracts.
INSOLVENCY OF THE VENDORS In the event a vendor under a
COULD DELAY OR REDUCE PAYMENTS vendor loan becomes subject to
TO YOU insolvency proceedings, the end-user
contracts and equipment securing the
vendor loan as well as the vendor's
obligation to make payments would also
become subject to the insolvency
proceedings. In that event, payments to
the owner trust in respect of those
vendor contracts may be reduced or
delayed. Payments to you may be reduced
if collections from the remaining
unaffected contracts are insufficient to
cover losses to the owner trust. In
those cases in which transfers of
end-user contracts by vendors to
originator provide that the originator
have recourse to the vendor for all or a
portion of the losses the originator may
incur as a result of a default under
those end-user contracts, the vendor's
bankruptcy, may similarly result in
reductions or payment delays in amounts
due from the vendor.
END-USER BANKRUPTCY MAY Bankruptcy and insolvency laws
REDUCE OR DELAY COLLECTIONS could affect your interests in contracts
ON THE CONTRACTS, AND with end-user obligors who E become
DISPOSITION OF EQUIPMENT subject to bankruptcy proceedings. Those
RELATING TO THESE OR OTHER laws could result in contracts of a
DEFAULTING ND-USERS MAY BE bankrupt end-user being written off as
DELAYED OR MAY NOT RESULT IN uncollectible or result in delay in
COMPLETE RECOVERY OF AMOUNTS DUE payments due on the contracts. As a
result, you may be subject to delays in
receiving payments, and you may also
suffer losses if collections from the
remaining unaffected contracts are
insufficient to cover losses to the
trust. Foreclosure sales of equipment
and obtaining deficiency judgments
following foreclosure sales may not
yield sufficient proceeds to pay off the
balance owed on a contract. If you must
rely on repossession and disposition of
equipment to recover amounts due on
defaulted contracts, those amounts may
be insufficient. Factors that may affect
whether you receive the full amount due
on a contract include the failure to
file financing statements to perfect the
originator's or owner trust's security
interest in the equipment securing the
contract. The depreciation,
obsolescence, damage, or loss of any
item of equipment will also affect
whether you receive the full amount due
on a contract.
COMMINGLING OF COLLECTIONS COULD Cash held by the servicer may be
RESULT IN REDUCED PAYMENTS TO YOU commingled and used for the benefit of
the servicer prior to the date on which
the collections are required to be
deposited in a collection account as
described under "DESCRIPTION OF THE
POOLING AND SERVICING AGREEMENT --
COLLECTIONS ON CONTRACTS." In the event
of the insolvency or receivership of the
servicer, an owner trust may not have a
perfected ownership or security interest
in these collections. In that case, you
may suffer losses on your investment as
a result.
BANKRUPTCY OF DEPOSITOR OR THE If an owner trust or the depositor
OWNER TRUST MAY CAUSE DELAYS IN becomes insolvent under any federal
OR REDUCE COLLECTIONS UNDER THE bankruptcy or similar state laws, the
CONTRACTS right of an indenture trustee to
foreclose upon and sell the assets of an
owner trust is likely to be
significantly impaired by applicable
bankruptcy laws. This would be the case
before or possibly even after an
indenture trustee has foreclosed upon
and sold the assets of an owner trust.
Under the bankruptcy laws, payments on
debts are not made, and secured
creditors are prohibited from
repossessing their security from a
debtor in a bankruptcy case or from
disposing of security repossessed from
the debtor, without bankruptcy court
approval. Moreover, the bankruptcy laws
may permit the debtor to continue to
retain and to use collateral even though
the debtor is in default under the
applicable debt instruments, if the
secured creditor is provided adequate
protection. The meaning of the term
adequate protection may vary according
to circumstances, but it is intended in
general to protect the value of the
security from any diminution in the
value of the collateral as a result of
its use by the debtor during the
pendency of the bankruptcy case. Because
there is no precise definition of the
term adequate protection and because the
bankruptcy court has broad discretionary
powers, it is impossible to predict if
or how you would be compensated for any
diminution in value of the owner trust
assets.
THE SELLER'S OBLIGATION TO The seller of contracts to the
REPURCHASE CONTACTS COULD BE depositor, will make representations and
IMPAIRED BY BANKRUPTCY warranties regarding the contracts, the
equipment and other matters. See "THE
CONTRACTS -- REPRESENTATIONS AND
WARRANTIES MADE BY THE SELLER." If any
representation or warranty with regard
to a specific contract is breached, is
not cured within a specified period of
time, and the value of the contract is
materially and adversely affected by the
breach, the seller must purchase the
contract from the applicable owner trust
at a price equal to the amount required
to pay off the contract. If the seller
becomes bankrupt or insolvent, each
indenture trustee's right to compel a
purchase would both be impaired and have
to be satisfied out of any available
"assets" of the seller's bankruptcy
estate. In that case, you may suffer a
loss on your investment in a note as a
result.
CONTRACTS RELATING TO SOFTWARE Some of the contracts held by the
OR RELATED SUPPORT AND CONSULTING owner trust may relate to software that
SERVICES ARE NOT SECURED BY THE is not owned by an originator or related
SOFTWARE OR RELATED SERVICES support and consulting services. In
these cases, the vendor or a licensor
traditionally owns the software, and the
software and related support and
consulting services do not serve as
collateral for the contracts. Thus, the
owner trust will not have an interest in
the software or related support and
consulting services. The owner trust
will own solely the associated
contracts' cash flow. Accordingly, if
any of these contracts becomes a
defaulted contract, the owner trust will
not be able to foreclose on the software
or related support and consulting
services. Because there will be no
proceeds from the software or related
support and consulting services which
could be used to make payments to you,
the owner trust must look solely to the
obligor to collect amounts due on the
contract. There can be no assurance that
the obligor will be able to pay in full
amounts due under the contract.
LIMITATIONS ON ENFORCEABILITY State law limitations on the
OF SECURITY INTERESTS IN THE enforceability of security interests and
EQUIPMENT MAY HINDER THE OWNER the manner in which a secured party may
TRUST'S ABILITY TO REALIZE dispose of collateral may limit the
THE VALUE OF EQUIPMENT SECURING owner trust's ability to obtain or
THE CONTRACTS dispose of collateral in a timely
fashion. This could reduce or delay the
availability of funds to pay the notes.
Under these state law limitations:
o if the obligor becomes
bankrupt or insolvent, the
owner trust may need the
permission of a bankruptcy
court to obtain and sell its
collateral;
o some jurisdictions require
that the obligor be notified
of the default and be given a
time period within which it
may cure the default prior to
repossession; and
o the obligor may have the right
to redeem collateral for its
obligations prior to actual
sale by paying the lessor or
secured party the unpaid
balance of the obligation plus
the secured party's expenses
for repossessing, holding and
preparing the collateral for
disposition.
BANKRUPTCY COURT REJECTION OF A bankruptcy trustee or
"TRUE LEASES" MAY REDUCE FUNDS debtor-in-possession S under federal
AVAILABLE TO PAY NOTE bankruptcy or similar state laws has the
right to assume or reject any executory
contract or unexpired lease which is
considered to be a "true lease" under
applicable law. A "true lease" is a
contract under which the applicable
originator or vendor holds a residual
interest in equipment of more than a
nominal amount. Some contracts will be
true leases and thus subject to
rejection by the lessor under federal
bankruptcy or similar state laws. For
this reason, the originator, as
debtor-in-possession or the originator's
bankruptcy trustee may reject the leases
of which that originator is the lessor.
Upon any rejection, payments to the
applicable originator under the rejected
contract may terminate and your
investment may be subject to losses. In
addition, any contract which is a true
lease that a vendor originated and
transferred to an originator in a
transaction in which the vendor
continues to be the lessor, will be
subject to rejection by the vendor, as
debtor in possession, or by the vendor's
bankruptcy trustee. An example of this
transaction is a transfer by a vendor to
an originator of a security interest in
the lease contract or a transfer by a
vendor to an originator of an interest
in the right to payments only under the
lease contract. Upon any rejection,
payments to the applicable originator
under the rejected contract may
terminate and your investment may be
subject to losses.
THE SPONSOR
ACE Securities Corp., the sponsor, is a special purpose corporation
incorporated in the State of Delaware on June 3, 1998. The principal executive
offices of the depositor are located at 6525 Morrison Boulevard, Suite 318,
Charlotte, North Carolina 28211. Its telephone number is (704) 365-0569. The
sponsor does not have, nor is it expected in the future to have, any significant
assets.
The limited purposes of the depositor are, in general, to acquire, own and sell
loans, leases and financial assets; to issue, acquire, own, hold and sell
securities and notes secured by or representing ownership interests in loans,
leases and other financial assets, collections on the loans, leases and related
assets; and to engage in any acts that are incidental to, or necessary, suitable
or convenient to accomplish, these purposes.
THE DEPOSITOR
The depositor will be a special purpose entity specified in your
prospectus supplement. The depositor will not be responsible for payment of any
principal, interest or any other amount in respect of any series of notes.
THE OWNER TRUSTS
The sponsor will form each owner trust under a trust agreement among
the sponsor, the depositor and the owner trustee, as described in your
prospectus supplement. Each owner trust may issue one or more classes of
securities, representing debt of or beneficial ownership interests in the owner
trust. The trust will not offer the beneficial ownership interests under this
prospectus.
The assets of each owner trust, as further specified in your
prospectus supplement, will consist of:
(1) a pool including some or all of the following types of contracts:
o equipment lease contracts,
o conditional sale/financing agreements,
o installment payment agreements,
o promissory notes, and
o loan and security agreements;
(2) amounts on deposit in, and any eligible investments allocated to,
accounts established under the related indenture and the pooling
and servicing agreement;
(3) the depositor's rights under the related purchase and sale
agreement or other instrument by which it acquired contracts, if
any; and
(4) the depositor's rights with respect to any cash collateral
account or other form of credit enhancement for the notes.
The owner trust will have the right, as set forth in your prospectus
supplement, to:
o all funds payable under the contracts after the cut-off
date, the date on which the owner trust's right to contract
payments commences. This includes all scheduled but unpaid
amounts due prior to the cut-off date, but excludes any
scheduled payments due on or after, but received prior to,
the date the depositor transfers the contracts to an owner
trust. This does not include contract payments in respect of
taxes, insurance premiums, security deposits, late charges,
administrative fees or charges;
o prepayments, except for any portion allocated to the
depositor in respect of equipment leases;
o liquidation proceeds received with respect to defaulted
contracts, except for any portion allocable to the depositor
under an equipment lease;
o earnings from the investment of funds in the collection
account and note distribution account maintained by the
servicer; and
o security interests in the equipment related to the
contracts, but excluding ownership rights.
No owner trust will engage in any business activity unless otherwise
specified in your prospectus supplement, other than
o issuing notes and ownership interests in the owner trust;
o purchasing contracts and related assets;
o holding and dealing with the assets of the owner trust;
o making payments on the notes and other securities it issued;
o entering into and performing the duties, responsibilities
and functions required under any of the related pooling and
servicing agreement, indenture, contracts, and related
documents; and
o matters incidental to the above.
The assets of an owner trust will be separate from the assets of all
other owner trusts the sponsor or depositor creates. Accordingly, the assets of
one owner trust will not be available to make payments on the securities issued
by any other owner trust.
The sponsor will specify the owner trustee of the owner trust for
notes being offered to you in your prospectus supplement. The owner trustee's
liability in connection with the sale of notes will be limited to the express
obligations of the owner trustee in the related trust agreement and indenture.
An owner trustee may resign at any time, in which event the depositor or the
sponsor, as specified in your prospectus supplement or any designee must appoint
a successor owner trustee. The depositor or the sponsor, as specified in your
prospectus supplement or any designee may also remove an owner trustee if the
owner trustee ceases to be eligible to continue as such under the related trust
agreement or if the owner trustee becomes insolvent. Any resignation or removal
of an owner trustee will not become effective until acceptance of the
appointment of a successor owner trustee.
THE ORIGINATORS, THE SELLER AND THE SERVICER
Your prospectus supplement will provide information on the
originators, the seller and the servicer.
THE CONTRACTS
With respect to any series of notes, this prospectus and any
prospectus supplement refer to the aggregate of the contracts in an owner trust,
as of any particular date, as the contract pool. This prospectus and any
prospectus supplement refer to the contract pool, as of the cut-off date
specified in the prospectus supplement for your notes, as the cut-off date or
initial contract pool. This prospectus and any prospectus supplement refer to
equipment, software and services collectively as financed items.
DESCRIPTION OF THE CONTRACTS
The following description of the contracts describes the material
terms of the contracts to be included in each contract pool, although an
immaterial number of contracts in a contract pool may differ in one or more
provisions from the description below.
END-USER CONTRACTS
Each owner trust will include contracts to which the end-user of the
equipment is a party. The sponsor lists the types of contracts under "THE OWNER
TRUSTS" above.
There will be no limit on the number of contracts in a particular
contract pool which may consist of any of those types. Each contract is
required, however, to be an "eligible contract," as of the date the depositor
transfers the contracts to the respective owner trusts. An eligible contract is
a contract as to which the representations and warranties listed below under
"--REPRESENTATIONS AND WARRANTIES MADE BY THE SELLER" are true as of the
transfer date.
CONDITIONAL SALE AGREEMENTS
Each originator may offer financing for equipment under conditional
sale agreements assigned to the applicable originator by the vendor of the
equipment. Each originator will either use its standard pre-printed form or a
vendor's standard, pre-printed form to document the conditional sale agreements
in a contract pool. The conditional sale agreement sets forth the description of
each financed item and the schedule of installment payments. Typically, loans
under conditional sale agreements are fixed rate and are for a term of one to
seven years. Payments under conditional sale agreements typically are due
monthly. Conditional sale agreements typically:
o provide for a grant by the end-user of the equipment of a
security interest in the equipment, which security interest
is assigned by the vendor to the originator;
o may allow prepayment of the obligation upon payment, where
allowed by applicable state law, of an additional prepayment
fee;
o require the end-user to maintain the equipment, keep it free
and clear of liens and encumbrances and pay all taxes
related to the equipment;
o restrict the modification or disposal of the equipment
without the vendor's, or its assignee's, consent;
o include a disclaimer of warranties;
o include the end-user's indemnity against liabilities arising
from the use, possession or ownership of the equipment;
o include the end-user's absolute and unconditional obligation
to pay the installment payments on the loan; and
o include specific events of default and remedies for default.
A conditional sale agreement typically requires each end-user to maintain
insurance, the terms of which may vary. The terms of a conditional sale
agreement often may be modified at its inception at the end-user's request.
LEASES
The originators, either directly or by assignment from vendors, may
offer financing of equipment, software and services under leases. Leases may
consist of individual lease agreements relating to a single, separate
transaction and financed item. Alternatively, the individual leases may be
governed by a master lease agreement which contains the general terms and
conditions of the transaction. Specific terms and conditions, such as
descriptions of the specific equipment, software and services being leased or
financed and the schedule of related rental payments, are typically contained in
a supplement or schedule to the master lease agreement, which is signed by the
end-user as lessee, and either the vendor or the originator, as lessor. The
supplement to the master lease agreement incorporates the master lease agreement
by reference, and is treated by the originator as a separate lease. The
originator or the vendor originates each lease in the ordinary course of
business. Vendors who originate leases assign them to the originator. An
originator also may purchase leases on a portfolio basis.
The initial terms of the leases in the contract pool typically range
from one to seven years. Each lease provides for the periodic payment by the
end-user of rent in advance or arrears, generally monthly or quarterly. The
periodic payments represent the amortization, generally on a level basis, of the
total amount that an end-user is required to pay throughout the term of a lease.
A contract pool will include "NET LEASES" under which the end-user
assumes responsibility for
o the financed items, including operation, maintenance,
repair, and insurance or self-insurance,
o return of the equipment at the expiration or termination of
the lease, and
o the payment of all sales, use and property taxes relating to
the financed items during the lease term.
The end-user further agrees to indemnify the lessor for any
liabilities arising out of the use or operation of the financed items. In most
cases, the end-user also authorized the lessor to perform the end-user's
obligations under the lease at the end-user's expense, if it so elects, in cases
where the end-user has failed to perform. In addition, the leases often contain
"HELL OR HIGH WATER" clauses unconditionally obligating the end-user to make
periodic payments, without setoff, at the times and in the amounts specified in
the lease. If an originator is the lessor, the lease will often contain no
express or implied warranties with respect to the financed items other than a
warranty of quiet enjoyment. If a vendor is the lessor, the lease or a related
agreement may contain representations and warranties with respect to the
financed items in addition to a warranty of quiet enjoyment. However, the
end-user typically agrees not to assert any warranty claims against any
assignee, including the originator, of the vendor by way of setoff, counterclaim
or otherwise, and further agrees that it may only bring that type of claim
against the vendor. Leases of equipment often require the end-user to maintain,
at its expense, casualty insurance covering damage to or loss of the equipment
during the lease term or to self-insure against these risks, if approved in
advance by the originator or vendor, as applicable.
The leases may include both "TRUE LEASES" and leases intended for
security as defined in Section 1-201(37) of the Uniform Commercial Code. Under a
"TRUE LEASE", the lessor bears the risk of ownership, except for the risk of
loss of the equipment, which is passed to the end-user under the leases. The
lessor also takes any tax benefits associated with the ownership of depreciable
property under applicable law. No title is conferred upon the lessee. The lessee
under a "TRUE LEASE" has the right to the temporary use of property for a term
shorter than the economic life of the property in exchange for payments at
scheduled intervals during the lease term. Additionally, the lessor retains a
significant "RESIDUAL" economic interest in the leased property. End of lease
options for "TRUE LEASES" include purchase or renewal at fair market value.
Under leases intended for security, the lessor in effect finances the
"PURCHASE" of the leased property by the lessee and retains a security interest
in the leased property. The lessee retains the leased property for substantially
all its economic life and the lessor retains no significant residual interest.
Such leases are considered conditional sales type leases for federal income tax
purposes and, accordingly, the lessor does not take any federal tax benefits
associated with the ownership of depreciable property. End of lease options for
these leases depend on the terms of the related individual lease agreement or
master lease agreement supplement, but often these terms provide for the
purchase of the equipment at a prestated price, which may be nominal. The
inclusion of "TRUE LEASES" in a contract pool should have no federal income tax
impact on holders of notes since the notes are treated as debt for federal
income tax purposes. However, the inclusion of "TRUE LEASES" may result in the
imposition of state and local taxes which would reduce cash available for
payment on the notes.
A lease will either prohibit the end-user from altering or modifying
the equipment or permit the end-user to alter or modify the equipment only to
the extent the alterations or modifications are readily removable without damage
to the equipment. Under some master lease agreements, the end-user may assign
its rights and obligations under the lease, but only upon receiving the prior
written consent of the lessor. Under some leases, the lessee may relocate the
equipment upon giving the lessor prompt written notice of the relocation. The
right to grant or deny consent or to receive written notice will be exercised by
the servicer under the authority delegated to it in the related pooling and
servicing agreement. Some leases will permit the end-user to substitute
substantially identical leased equipment for leased equipment scheduled to be
returned to the lessor under the lease.
While the terms and conditions of the leases will not usually permit
cancellation by the end-user, the lessor and the end-user may modify or
terminate some leases before the end of the lease term. The originator, or a
vendor, with the consent of the originator, may permit the modifications to a
lease term or early lease terminations. The modifications typically arise in
connection with additional financing opportunities from the same end-user.
End-users may also negotiate with the originator, at the originator's
discretion, an early termination arrangement allowing the end-user to purchase
the equipment during the term of a lease. The early-termination purchase price
is often equal to or in excess of the present value of the remaining rental
payments under the lease plus the anticipated market value of the related
equipment as of the end of the lease term. The originator may permit early
termination of a lease in connection with the acquisition of new technology
requiring replacement of the equipment. In these cases, the end-user returns the
related equipment to the vendor or originator and pays an amount generally equal
to the present value of the remaining rental payments under the lease plus an
early termination fee to the originator. Modifications usually involve repricing
a lease or modification of the lease term. Occasionally the lessor and the
end-user may modify a lease in connection with an increase in the capacity or
performance of equipment by adding additional equipment that includes new
technology. Coincident with the financing of an upgrade to the equipment, the
originator may reprice and extend the related base lease term to be coterminous
with the desired term of the lease relating to the upgrade. In some cases,
subject to conditions described under "DESCRIPTION OF THE POOLING AND SERVICING
AGREEMENTS -- SERVICING," base lease extensions may remain in a contract pool.
The sponsor expects that the servicer will continue to permit these
modifications and terminations with respect to leases included in a contract
pool under the authority delegated to it in the related pooling and servicing
agreement. The servicer's ability to modify leases is limited by the conditions
and covenants of the servicer described under "DESCRIPTION OF THE POOLING AND
SERVICING AGREEMENTS -- SERVICING."
The originator may modify the standard terms and conditions of the
lease agreement at the inception of a lease at the request of the end-user.
Common permitted modifications include, but are not limited to:
o prearranged mid-lease purchase options, early termination
options and lease extension options as described above;
o modifications to the lessor's equipment inspection rights;
o modifications to the end-user's insurance requirements
permitting the end-user to self-insure against casualty to
the equipment;
o the end-user's right to assign the lease or sub-lease the
financed items to an affiliated entity, so long as the
end-user remains liable under the lease and promptly
notifies the lessor or its assignee of the assignment or
sublease; and
o extended grace periods for late payments of rent.
In some cases, after a lease term expires the originator may permit the
end-user to continue to use the related equipment for so long as the end-user
continues to make lease payments. After the expiration of the term of a lease,
any continued lease payments will belong to the depositor, not the owner trust.
SECURED NOTES
Each originator may also provide direct initial financing or
refinancing of equipment and software under secured promissory notes, which
consist of an installment note and a separate security agreement. In an initial
financing transaction, the originator pays to the vendor the purchase price for
the equipment or software. In a refinancing transaction, the originator pays off
an end-user's existing financing source, and the initial financing or
refinancing is documented as a direct loan by the originator to the end-user of
the equipment or software using a secured note. In the case of a refinancing
transaction, upon payment to the existing financing source, the originator
obtains a release of the original financing party's lien on the financed
equipment. In either case, the originator records its own lien against the
financed equipment or software and takes possession of the secured note. Except
for the lack of references to "sale" or "purchase" of equipment, a secured note
contains terms and conditions substantially similar to those contained in
conditional sale agreements.
INSTALLMENT PAYMENT/FINANCING AGREEMENTS
Each originator may provide financing for software license fees and
related support and consulting services under
o installment payment supplements to software license
agreements,
o separate installment payment agreements, and
o other forms of financing agreements assigned to the
originator by vendors of software.
Each financing agreement of this type:
o generally is an unsecured obligation of the end-user;
o generally provides for a fixed schedule of payments with no
end-user right of prepayment;
o generally is noncancellable for its term;
o generally contains a "HELL OR HIGH WATER" clause
unconditionally obligating the end-user to make periodic
payments, without setoff, at the times and in the amounts
specified. If a financing agreement does not provide for
noncancellability or a "HELL OR HIGH WATER" clause, the
financing agreement will typically have the benefit of a
vendor guarantee;
o generally permits the assignment of the payment agreement to
a third party, including the originator, and includes the
end-user's agreement not to assert against assignee any
claims or defenses the end-user may have against the vendor;
and
o generally contains default and remedy provisions that
usually include acceleration of amounts due and to become
due and, in some cases, the right of the vendor, or the
originator by assignment, to terminate the underlying
software license and all related support and consulting
activities.
EQUIPMENT
The end-user contracts may consist of some or all of the following
types of new and used equipment:
1) information technology equipment, including:
o computer work stations,
o mainframe, mid-range and personal computers,
o data storage devices,
o media and video production/post production equipment,
o servers and
o computer related peripheral equipment,
2) communications equipment, such as telephone switching and
networking systems,
3) commercial business and industrial equipment, such as:
o printing presses,
o machine tools and other manufacturing equipment,
o photocopiers, facsimile machines and other office equipment,
o energy savings and control equipment,
o corrugated boards,
o plastic injections,
o folding cartons
o silk screening equipment,
o automotive diagnostic and
o automated testing equipment,
4) retail equipment, such as
o petroleum retail equipment,
o fuel dispensers,
o ATM units,
o convenience store operating equipment,
o embroidery machines,
o coin operated, vending, amusement and coffee service
equipment and
o restaurant equipment,
5) medical and dental equipment, such as diagnostic and
therapeutic examination equipment for radiology, nuclear medicine
and ultrasound and laboratory analysis equipment,
6) resources equipment, such as feller-bunchers and grapplers,
7) transportation and construction equipment, such as:
o heavy and medium duty trucks, highway trailers and other
title vehicles,
o school buses,
o bulldozers,
o loaders,
o graders,
o excavators,
o machine tools,
o forklifts,
o other materials handling equipment,
o golf carts,
o aircraft engines,
o other road and off-road machinery and
o electronics manufacturing and testing equipment,
8) other equipment
o forestry,
o pollution control,
o mining and steel mill equipment,
o laundry, janitorial, and cleaning equipment,
o photographic equipment,
o refuse equipment and
o furniture and fixtures equipment.
In each case, the depositor will transfer the security interests of
the originator in the equipment subject to each related end-user contract, but
not ownership interests in the case of leased equipment, to the relevant owner
trust.
SOFTWARE AND SERVICES
Some end-user contracts may cover license fees and other fees owed by
the end-user under either perpetual or term software license agreements and
other related agreements in connection with the end-user's use of computer
software programs. The end-user contracts may also cover related support and
consulting services which are provided by the vendor, an affiliate of the vendor
or a third party contract party and which facilitate the obligor's use of the
software. Neither the vendors or licensors of the software nor the end-users
under the related end-user contracts will convey to the originator any interest
in the software or the software license agreement, other than the right to
collect the payment of software license fees. However, in some cases, the
vendors may convey to the originator the right to exercise rights and remedies
under the relevant software license agreement or related agreements.
Consequently, unless otherwise specified in your prospectus supplement, an owner
trust will not have title to or a security interest in the software, nor will it
own the related services, and would not be able to realize any value from the
software or related servicer under a related end-user contract upon a default by
the end-user.
VENDOR LOANS
The contracts may include limited recourse loan or repayment
obligations of a vendor. These may take the form of promissory notes with
related security interests documented by security agreements or specific
provisions in related program agreements. Each of the obligations is secured by
all of the vendor's interest in an individual end-user contract originated by
the vendor and by the equipment related to the end-user contract.
The originator may originate vendor loans through, and the vendor
loans may incorporate terms and conditions of, a program agreement. See "PROGRAM
AGREEMENTS WITH VENDORS." Vendor loans generally are non-recourse to the vendor,
meaning that the originator may obtain repayment solely from the proceeds of the
end-user contracts and related equipment securing the vendor loan. However, the
originator may have recourse to a vendor for nonpayment of a vendor loan through
a limited recourse arrangement in the related program agreement or other related
agreement. The repayment terms under a vendor loan, including periodic amounts
payable and schedule of payments, will correspond to the payment terms of the
end-user under the end-user contract collaterally assigned under the vendor
loan. Each vendor loan will either include most, if not all, of the
representations and warranties regarding the end-user contract and related
equipment typically included in a vendor agreement, or incorporate these
representations and warranties included in any related program agreement by
reference.
PROGRAM AGREEMENTS WITH VENDORS
An originator's program agreement is typically an agreement with
equipment manufacturers, dealers and distributors, or software licensors or
distributors, located in the United States. The program agreement provides an
originator with the opportunity to finance transactions relating to the
acquisition or use by an end-user of a vendor's equipment, software, services or
other products. Vendor program arrangements provide an originator with a steady,
sustainable flow of new business, often with lower costs of origination than
asset-based financings marketed directly to end-users. Some of the program
agreements take the form of a referral relationship, which is less formal, and
may or may not include credit or remarketing support to the originator from the
vendor.
Each program agreement under which vendors or another party originate
and document contracts and assign them to the originator typically includes
vendor representations, warranties and covenants regarding each contract
assigned to an originator, including that:
o the obligations of the end-user under the assigned contract
are absolute, unconditional, noncancellable, enforceable in
accordance with their terms and free from any rights of
offset, counterclaim or defense;
o the originator holds the sole original of the contract and
has either title to or a first priority perfected security
interest in the equipment, except with respect to situations
where no financing statement is filed due to the minimum
value involved;
o the equipment and the contract are free and clear of all
liens, claims or encumbrances except for permitted liens;
o the end-user has irrevocably accepted the equipment or the
software; and
o the end-user duly authorized and signed the assigned
contract;
Each program agreement under which the originators document and
originate contracts typically include vendor representations, warranties and
covenants regarding each contract, including that
o the equipment has been delivered to and accepted by the
end-user;
o the vendor has not received any advance payments;
o the vendor has good title to the equipment; and
o the vendor has not made any misrepresentations to the
end-user.
In each of the two above described program structures, relevant
agreements also typically provide for
o remedies for misrepresentations or breaches of warranties or
covenants by the vendor regarding an assigned contract.
These remedies usually require the vendor to repurchase the
affected end-user contract for the originator's investment
balance in the contract plus costs incurred by the
originator in breaking any underlying funding arrangement;
and
o the right of an originator to further assign its interests
in assigned contracts, all related payments and any related
interest in equipment.
In addition, the originators may enter into profit sharing
arrangements with some vendors. These arrangements typically will provide for
sharing of revenues generated under the program and for joint participation in
management. Under the terms of these arrangements, the originators typically
maintain direct or indirect control over all credit decision-making activities.
Also, a program agreement or profit sharing arrangement may include
recourse against a vendor with respect to end-user defaults under some end-user
contracts,
o by specifying that the assignment of the contract from the
vendor to the originator is with full recourse against the
vendor;
o by specifying that the vendor will absorb a limited fixed
dollar or percentage amount of "FIRST LOSSES" on the
contract;
o by inclusion of the contract in an ultimate net loss pool
created under the program agreement as well as guarantees by
the applicable vendor with respect to certain contracts
which are cancelable or which do not contain "HELL OR HIGH
WATER" provisions; or
o by providing for vendor repurchase of the contract or vendor
indemnification payments for breaches of certain
representations and warranties made by the vendor with
respect to the contract.
If an end-user defaults under a contract subject to a net loss pool, the
originator may be permitted to draw against the net loss pool up to the amount
of the originator's remaining unpaid investment balance in the defaulted
contract. The originator may also be permitted to draw against the net loss pool
with respect to contracts that are not included in the pool of contracts in a
particular owner trust and, accordingly, there can be no assurance that any
amounts contributed by a vendor to a net loss pool will be available with
respect to a defaulted contract included in the pool of contracts owned by a
particular owner trust.
The manner in which the vendor assigns contracts to the originator
varies from one program agreement to another, depending upon
o the nature of the items financed,
o the form of the contract,
o the accounting treatment sought by the vendor and the
end-user, and
o tax considerations.
For example, an originator might:
o accept a vendor loan and collateral assignment of the
contract and related equipment or security interest in the
equipment from the vendor; or
o accept a full assignment of the contract and a collateral
assignment of the related equipment or security interest
from the vendor, which collateral assignment secures the
end-user's obligations under the contract or lease.
The originator also may receive, from a vendor with respect to software, a full
assignment of leases, installment payment agreements, installment payment
supplements to license agreements, and other types of financing agreements used
in financing software license payments and related support and consulting
services. These assignments may include an assignment of the software vendor's
or licensor's right, or the agreement of the vendor or licensor, at the
originator's instructions, to terminate the software license covered by the
contract and suspend related support in the event of an end-user default under
the contract. In some cases, the software vendor also agrees not to relicense
the same or similar software to a defaulted end-user for some period of time,
e.g., one year, unless the end-user cures its default.
Some portion of the contracts included in the pool of contracts,
especially in the case of conditional sale agreements, may consist of contracts
originated by vendors and assigned to the originator in vendor assignments, each
of which relates to an individual contract, rather than under a program
agreement. Each vendor assignment will either be with or without recourse
against the vendor for end-user defaults. Each vendor assignment will typically
contain many, if not all, of the representations, warranties and covenants
typically contained in program agreements, as well as a vendor repurchase
requirement in the event of a breach by the vendor of the representations,
warranties or covenants. Vendor assignments may or may not provide for any
vendor remarketing support in the event of an end-user default.
RESIDUAL INVESTMENTS
Any of the originators may finance all or a portion of the residual
interest in the equipment under program agreements and under direct transactions
between an obligor and the applicable originator. Any investment by the
originator in a residual interest shall be referred to as a residual investment.
Program agreements may provide that the originator may, at its sole discretion
and in connection with the funding of a lease of equipment, make a residual
investment in that equipment by advancing additional funds against a portion of
the anticipated residual value of the equipment, and not just against the
discounted present value of the rental payments due under the contract. Residual
investments may take the form of an advance of the present value of some
specified percentage of the anticipated residual value of the equipment or a
specified percentage, typically not greater than 10%, of the amount to be paid
by the originator in funding the present value of the rental payments due under
the contract.
With respect to vendor assignments, the originator may advance the
entire purchase price of the equipment subject to a true lease, take title to
the equipment, and accept an assignment of the true lease contract from a
vendor. With respect to the leases originated by the originator the originator
may advance the entire purchase price of the equipment to the vendor, take title
to the equipment from the vendor, and enter into a true lease contract with an
obligor. In either of the two foregoing types of transactions, the originator
will have advanced more than the discounted present value of the rents payable
under the true lease contracts by paying the purchase price for the equipment,
and so will have made a residual investment in the equipment.
In some program agreements, the originator may make the residual
investment in the form of a full recourse loan of additional funds to the
vendor. That loan is repayable by the vendor at the expiration or termination of
the contract with interest and is secured by a security interest in the financed
equipment. In some transactions involving vendor assignments or direct
transactions with obligors under true lease contracts, the originator may obtain
the obligation of either the vendor or the obligor to purchase the equipment at
the end of the lease term for the full amount of the originator's residual
investment in the equipment with accrued interest. Any transaction in which the
originator may look to either the vendor or the obligor, and not just the value
of equipment itself, to recover its residual investment with interest shall be
referred to as a "GUARANTEED RESIDUAL INVESTMENT". Other than guaranteed
residual investments, a residual investment will not be included in the
discounted contract balance of any contract and, therefore, would not be
financed with the proceeds of the notes. This type residual investment is
referred to in this prospectus as the "EXCLUDED RESIDUAL INVESTMENT."
The seller or an affiliate of the seller will transfer the excluded
residual investment associated with any contract included in a pool of contracts
to the depositor or another affiliate under the terms of a purchase and sale
agreement or other transfer agreement. Unless otherwise specified in your
prospectus supplement, the depositor will not transfer the excluded residual
investment to an owner trust under the related pooling and servicing agreement.
The related owner trust's interest in contracts with associated residual
investments, other than with guaranteed residual investments, will typically be
limited to the discounted present value of the rental payments due under the
contract and a security interest in the related equipment. The originator may
assign its excluded residual investment to a third party, including the security
interest in the equipment in respect of the residual investment.
CONTRACT FILES
Each originator will indicate in the appropriate computer files
relating to the contracts being transferred to an owner trust that the
originator has transferred the contracts for the benefit of the holders of the
notes. Each originator will also deliver to the indenture trustee a computer
file, microfiche or written list containing a true and complete list of all
contracts which it has transferred, identified by account number and by the
discounted contract balance of the contracts as of the transfer date.
COLLECTION ON CONTRACTS
Your prospectus supplement will describe how all collections received
with respect to the contracts will be allocated.
PAYMENTS GENERALLY
The contracts usually require that an obligor make periodic payments
on a monthly basis. Some contracts, however, provide for quarterly, semi-annual
or annual payments. Obligors typically must make the payments under all of the
contracts in United States dollars. Payment requirements usually are fixed and
specified, rather than being tied to a formula or are otherwise at a floating
rate. Payments under the contracts are ordinarily payable in advance, although a
small percentage provide for payments in arrears.
EXPENSES RELATING TO EQUIPMENT
The contracts require the obligors to assume the responsibility for
payment of all expenses of the related equipment including, without limitation,
o any expenses in connection with the maintenance and repair
of the related equipment,
o the payment of any and all premiums for casualty and
liability insurance, and
o the payment of all taxes relating to the equipment.
INSURANCE; REPAIR AND REPLACEMENT
Unless otherwise set forth in your prospectus supplement, lease
contracts require that the obligors will maintain liability insurance and which
must name the lessor as additional insured.
o leases, or
o loan and security agreements
An originator may waive this requirement from time to time. For some lease
contracts, the obligor's already existing self-insurance program permits the
obligor to self-insure the equipment. The originators may not track or verify
insurance coverage as to the equipment related to a contract after the
commencement of the contract.
Often, the failure to maintain this insurance constitutes an event of
default under the applicable contract. Usually, the obligor also agrees to
indemnify the originator for all liability and expenses arising from the use,
condition or ownership of the equipment.
If the equipment is damaged or destroyed, each lease contract, unless
otherwise set forth in your prospectus supplement, requires that the obligor:
o repair the equipment;
o make a termination payment to the lessor in an amount not
less than the amount required to pay off the contract; or
o in some cases, replace the damaged or destroyed equipment
with other equipment of comparable use and value.
The related pooling and servicing agreement, unless otherwise set forth in your
prospectus supplement, permits the servicer, in the case of the destruction of
the equipment related to a particular lease contract, either to:
o allow the lessee to replace this equipment, provided that
the replacement equipment is, in the judgment of the
servicer, of comparable use and at least equivalent value to
the value of the equipment which was destroyed, or
o accept the termination payment referred to above.
ASSIGNMENT OF CONTRACTS
Typically the contracts will permit the assignment of the contract by
the lessor or secured party without the consent of the obligor. However,
occasionally, contracts require notification of the assignment to, or the
consent of, the obligor. The seller will represent and warrant in the purchase
and sale agreement that these notices have been given, or approvals will have
been received, not more than ten days following the date of the transfer of the
contract to the depositor. Typically, the contracts do not permit assignment of
the contracts, or the related equipment, by the obligor without the prior
consent of the lessor or secured party, except the contracts often may permit:
o assignments to a parent, subsidiary or affiliate;
o the assignment to a third party, provided the obligor
remains liable under the contract; or
o assignment to a third party with a credit standing, which
the originator determines in accordance with its
underwriting policy and practice at the time for an
equivalent contract type, term and amount, to be equal to or
better than the original obligor.
Under the related pooling and servicing agreement, the servicer may permit an
assignment of a particular contract from an obligor to a third party only if the
servicer, utilizing the current underwriting criteria for its contract
origination activities, determines that the third party is of sufficient credit
quality that the servicer would permit the third party to become an obligor with
respect to a contract that the servicer originates.
EVENTS OF DEFAULT AND REMEDIES
Events of default under the contracts ordinarily include:
o the failure to pay all amounts required by the contract when
due;
o the failure of the obligor to perform its agreements and
covenants under the applicable contract;
o material misrepresentations made by the obligor;
o the bankruptcy or insolvency of the obligor or the
appointment of a receiver for the obligor; and
o in some cases, default by the obligor under other contracts
or agreements.
Some of these default provisions are, in some instances, subject to notice
provisions and cure periods. Remedies available to the lessor or secured party
upon the occurrence of an event of default by the obligor typically include the
right
o to cancel or terminate in the case of a contract subject to
a true lease,
o to accelerate payments in the case of a contract subject to
financing,
o to recover possession of the related equipment and
o to receive an amount intended to make the lessor or secured
party, as the case may be, whole plus costs and expenses,
including legal fees, which the lessor or secured party
incurs as a result of the default.
Notwithstanding these events of default and remedies, unless otherwise set forth
in your prospectus supplement, the pooling and servicing agreement, permits the
servicer to take the actions, with respect to delinquent and defaulted
contracts, a reasonably prudent creditor would take under similar circumstances.
See "DESCRIPTION OF THE POOLING AND SERVICING AGREEMENT -- SERVICING". The
originators may occasionally provide payment extensions, typically of three
months or less. Longer extensions are occasionally granted to customers
experiencing delays in payment due to cash flow shortages or other reasons.
However, originators do not intend extensions to be used to provide a temporary
solution for a delinquent account. Rather, extensions are intended to be used
when, in the judgment of the relevant credit authority, the extension is
necessary to avoid a termination and liquidation of the contract and will
maximize the amount to be received by the related owner trust with respect to
the contract.
PREPAYMENTS AND EARLY TERMINATION
Any contract may either:
o not permit the obligor to prepay the amounts due under the
contract or otherwise terminate the contract prior to its
scheduled expiration date;
o allow for a prepayment or early termination upon payment of
an amount that is at least equal to the contract principal
balance, determined using a discount rate specified in your
prospectus supplement; or
o allow for a prepayment or early termination without the
payment of the contract principal balance.
Some contracts, often written as installment sales contracts, promissory notes
or loan and security agreements, permit the obligor to prepay the contract, in
whole or in part, at any time at par plus accrued interest.
Under each pooling and servicing agreement, the servicer may allow the
prepayment of any contract, but only if the amount paid, or, in the case of a
partial prepayment, the sum of that amount and the remaining principal balance
of the contract after application of that amount, is at least equal to the
amount required to pay off the contract. The required payoff amount, with
respect to any collection period for any contract, is equal to the sum of:
o the scheduled payment due in that collection period and not
yet received, together with any scheduled payments due in
prior collection periods and not yet received; plus
o the discounted contract principal balance of the contract as
of the last day of that collection period, after taking into
account the scheduled payment due in that collection period.
In no event will revenues pledged for a series of notes include, nor
will the notes otherwise be payable from, any portion of a prepayment on a
contract that exceeds the required payoff amount for that contract.
Under the pooling and servicing agreement, the depositor may replace
any prepaid contract with a substitute contract. See " -- SUBSTITUTION OF
CONTRACTS" below.
DISCLAIMER OF WARRANTIES
The contracts which are subject to a true lease contain provisions by
which the lessor, or the originator, as assignee of the lessor, disclaims all
warranties with respect to the equipment. The lessor often assigns the
manufacturer's warranties to the obligor for the term of the lease. Under true
leases, the obligor accepts the equipment under the applicable contract
following delivery and an opportunity to inspect the related equipment.
ADDITIONAL EQUIPMENT
If specified in your prospectus supplement, some of the contracts
which are subject to a true lease constitute leases of additional equipment,
generally costing $25,000 or less, with existing obligors. Pursuant to the terms
of the original contract between the lessor and the obligor, the parties
document leases for additional equipment on a written form that the lessor
prepares and delivers to the obligor, but the obligor does not execute, which
written form describes all of the terms of the lease. Under the terms of the
contract, the obligor agrees that unless it objects in writing within a
specified period of time, it is deemed to have accepted the lease of this
additional equipment.
REPRESENTATIONS AND WARRANTIES MADE BY THE SELLER
Unless otherwise set forth in your prospectus supplement, the seller
of contracts to the depositor, will make the representations and warranties set
forth below regarding the contracts and the related equipment included in each
pool of contracts transferred to an owner trust as of the related transfer date.
The representations and warranties will also apply to contracts that the
depositor reacquires from a trust to which the depositor previously transferred
the contracts in connection with a warehouse receivables securitization
facility.
(1) the information with respect to the contracts is true and correct
in all material respects;
(2) immediately prior to the transfer of a contract, the contract was
owned by the transferring party free and clear of any adverse
claim except for permitted claims;
(3) the contract is not a defaulted or delinquent contract;
(4) no provision of the contract has been waived, altered or modified
in any material respect, except by instruments or documents
contained in the files relating to the contract;
(5) the contract is a valid and binding payment obligation of the
obligor and its terms are enforceable, except as may be limited
by insolvency, bankruptcy, moratorium, reorganization, or other
similar laws affecting enforceability of creditors' rights and
the availability of equitable remedies;
(6) the contract is not and will not be subject to rights of
rescission, setoff, counterclaim or defense;
(7) the contract, at the time it was made, did not violate the laws
of the United States or any state in any material respect;
(8) (A) the contract and any related equipment have not been sold,
transferred, assigned or pledged by the originator to any
person other than the end-user, the seller, the depositor or
any related financing trust; and
(B) either
(x) the contract is secured by a perfected lien, subject to
permitted liens and subject to minimum filing value
exceptions, on the related equipment or, in the case of
any vendor loan, related end-user contract or equipment
or
(y) in the case of a contract secured by a vehicle, within
90 calendar days of the origination or a acquisition of
the contract by the originator all required state
registration or recording procedures were initiated,
and the originator's interest will be so noted or
recorded within 180 days of the acquisition or
origination;
(9) if the contract constitutes either an "INSTRUMENT" or "CHATTEL
PAPER" for purposes of the Uniform Commercial Code, there is not
more than one "SECURED PARTY'S ORIGINAL" counterpart of the
contract;
(10) all filings necessary to evidence the conveyance or transfer of
the contract to the depositor have been made or provided for in
all appropriate jurisdictions, except that the parties have not
made filings to note the seller;
(11) the obligor is not, to the seller's knowledge, subject to
bankruptcy or other insolvency proceedings;
(12) the contract is a U.S. dollar-denominated obligation and the
obligor's billing address is located in the United States or
Puerto Rico;
(13) the contract does not require the prior written notifications to
a consent of an obligor or contain any other restriction on the
transfer or assignment of the contract other than notifications
that will have been given and consents or waivers of restrictions
that will have been obtained within ten days after the date the
contract was sold to the trust;
(14) the obligations of the related obligor under the contract are
irrevocable and unconditional and non-cancelable or, if not
irrevocable and unconditional, are guaranteed by the vendor; or
in the case of leases with governments, upon a cancellation of
the lease, either the vendor is obligated to repurchase the lease
or the seller will indemnify the depositor in respect of the
cancellation;
(15) no adverse selection procedure was used in selecting the contract
for transfer;
(16) the obligor under the contract is required to maintain casualty
insurance with respect to the related equipment or to self-insure
against casualty with respect to the related equipment in an
amount that is consistent with servicer's normal servicing
requirements;
(17) the contract constitutes chattel paper, an account, an instrument
or a general intangible as defined under the Uniform Commercial
Code;
(18) no lease is a "CONSUMER LEASE" as defined in Section 2A-103(1)(e)
of the Uniform Commercial Code;
(19) to the best knowledge of the relevant originator each lessee has
accepted the related equipment and has had a reasonable
opportunity to inspect the equipment;
(20) except as provided in (14) above, the contract is not guaranteed
by any originator nor has the originator established any specific
credit reserve with respect to the related obligor;
(21) each lease is a "TRIPLE NET LEASE" under which the obligor is
responsible for the maintenance of the related equipment in a
manner that conforms with general industry standards;
(22) each vendor loan is secured by an eligible end-user contract(s)
having an aggregate contract principal balance(s) equal to the
outstanding principal amount of the vendor loan. In this context,
an eligible end-user contract is one that
A. satisfies all of these representations and warranties
except number (2) above and number (8) above, in
respect of ownership by the applicable originator;
B. in which the relevant originator or financing trust has
a perfected lien; and
C. in which the transfer of the relevant originator's or
financing trust's security interest in the contract to
the owner trust creates a duly perfected lien;
(23) the obligor is not the United States of America or any agency,
department, subdivision or instrumentality of the United States
of America;
(24) the contract contains customary provisions for this type of
financing, and the provisions are sufficient and enforceable,
except as listed as noted in (5) above, to enable the relevant
originator or its assignees to realize against the financed items
securing the contract; and
(25) if the obligor is a state or local government entity, the
transfer of the contract does not violate any applicable state or
local laws restricting or prohibiting transfer.
The owner trust may modify the above representations and warranties
and will describe any modification in the relevant prospectus supplement.
In the event of a breach of any representation or warranty with
respect to a contract that materially and adversely affects the owner trust's or
any noteholder's or equity certificateholder's interest in the contract or the
collectibility of the contract, the owner trust will have a warranty claim
against the seller. The seller will then be obligated to repurchase the
contract. However, the seller need not do so if the seller cures the breach by
the second deposit date after the date on which the servicer becomes aware and
gives notice to the seller of the breach. Any purchase shall be made on the
deposit date immediately following the end of the second collection period at a
price equal to the required payoff amount of the contract. The purchase price
will be allocated to the related owner trust plus, if applicable, the book value
of the related equipment which will be allocated to the depositor. The related
indenture trustee may enforce this purchase obligation on your behalf, and this
will constitute your sole remedy available against the seller, the depositor,
the trust or the originators for any uncured breach, except that the seller will
indemnify
o the related indenture trustee,
o the related owner trustee, and
o the related owner trust
against losses, damages, liabilities and claims which may be asserted against
any of them as a result of third-party claims arising out of the facts giving
rise to that breach. The seller may, in lieu of repurchasing the contract, cause
the depositor to deliver a substitute contract as provided in the next-following
section of this prospectus.
Upon the purchase by the seller of a contract, the depositor will
release the contract and related equipment to the seller.
SUBSTITUTION OF CONTRACTS
The depositor will have the option to substitute one or more contracts
having similar characteristics for contracts which are in default or have been
prepaid or which have undergone material modification. In addition, in the case
of a contract subject to a warranty claim, as described in " -- REPRESENTATIONS
AND WARRANTIES MADE BY THE SELLER" above, the seller may choose to replace the
contract with a substitute contract.
Some contracts may permit the obligor to prepay the amounts due under
the contract or otherwise to terminate the contract prior to its scheduled
expiration date. The depositor may replace any prepaid contract with a
substitute contract in lieu of applying the proceeds of the prepaid contract to
the pledged revenues as described in this section.
Material modification of a contract means a termination, release,
amendment, modification or waiver of a contract that is not otherwise permitted
under the pooling and servicing agreement. The depositor may provide substitute
contracts for any that have been so materially modified. The depositor may also
replace any defaulted contract with a substitute contract. The aggregate
contract principal balances of the defaulted contracts for which the depositor
may cause substitution is limited to 10% of the cut-off contract pool principal
balance. The depositor may replace a prepaid contract with a substitute contract
and the seller may choose to replace contracts subject to a warranty claim or a
material modification with substitute contracts, in either case without regard
to the 10% limitation described above.
The same credit criteria and eligibility standards for the contracts
in the contract pool on the closing date will also apply to substitute contracts
added to the assets of the owner trust. The servicer will include information
with respect to these substitute contracts, to the extent the servicer deems
them material, in required periodic reports under the Securities Exchange Act of
1934 filed with the Securities and Exchange Commission on behalf of the owner
trust. The substitute contracts will have contract principal balances equal to
or greater than the contracts being replaced. The representations and warranties
the seller makes with respect to the contracts in " -- REPRESENTATIONS AND
WARRANTIES MADE BY THE SELLER" above will be equally applicable to substitute
contracts.
DELINQUENCY AND NET LOSS EXPERIENCE
Your prospectus supplement will set forth statistics relating to the
delinquency and net loss experience on contracts within the originators' owned
and managed portfolios of receivables similar to the contracts in a contract
pool.
DESCRIPTION OF THE NOTES AND INDENTURE
The issuance of each series of notes will be under an indenture, a
form of which was filed with the Securities and Exchange Commission as an
exhibit to the registration statement of which this prospectus is a part. In
addition, a copy of the indenture for a series of notes will be filed with the
Securities and Exchange Commission following the issuance of each series. The
following summary describes certain material terms which may be common to each
indenture and the related notes, but does not purport to be complete and is
subject to all of the provisions of the indenture, the related notes and the
description set forth in your prospectus supplement.
The notes of each series will be issued in fully registered form only
and will represent the obligations of a separate owner trust.
Payments on the notes will be made by the indenture trustee on each
payment date to persons in whose names the notes are registered as of the
related record date. Unless otherwise specified in your prospectus supplement,
the payment date for the notes will be the 20th day of each month, or if the
20th is not a business day, the next succeeding business day. Unless otherwise
specified in your prospectus supplement, for so long as the notes are in
book-entry form, the record date for any payment date will be the business day
immediately preceding the payment date. Unless otherwise specified in your
prospectus supplement, if the owner trust issues certificated notes, the record
date will be the last business day of the month immediately preceding the
payment date.
A business day is any day other than a Saturday, Sunday or legal
holiday on which commercial banks in New York City or such other jurisdictions
specified in your prospectus supplement are open for regular business.
DISTRIBUTIONS
Your prospectus supplement will describe as to your series of notes
o the timing and priority of distributions,
o the amount or method of determining distributions,
o allocations of loss and
o the interest rates.
If specified in the related prospectus supplement, the trust may issue
securities from time to time and use the proceeds of this issuance to make
principal payments with respect to the notes of your series.
CREDIT ENHANCEMENT
As further specified in the your prospectus supplement,
o a cash collateral account,
o a financial guaranty insurance policy,
o subordination of one or more classes of notes,
o overcollateralization,
o letters of credit or liquidity facilities,
o repurchase obligations,
o third party payments or other support,
o cash deposits,
o a reserve fund or
o other form of credit enhancement which may become suitable
in light of credit enhancement practices or developments in
the future
may be established on or prior to the date the contracts are transferred. The
credit enhancement would be available to the related indenture trustee to pay
interest and principal on the notes in the manner and to the extent specified in
your prospectus supplement.
LIQUIDATION AND INSURANCE PROCEEDS
The allocation of liquidation proceeds which will consist generally of
all amounts the servicer receives in connection with the liquidation of a
contract and disposition of the related equipment, net of any related
out-of-pocket liquidation expenses, and the allocation of insurance proceeds for
physical damage to or loss of equipment covered by contracts, will be as follows
unless otherwise specified in your prospectus supplement:
1) with respect to any contract subject to financing, the
proceeds will be allocated to the owner trust; and
2) with respect to any contract subject to a lease, the
proceeds will, unless otherwise specified in your
prospectus supplement, be allocated on a pro rata basis
between the depositor, on the one hand, and the owner
trust, on the other, based respectively on
(a) the book value of the related equipment and
(b) the required payoff amount for the contract.
However, if the proceeds in respect of any contract subject to a lease and the
related equipment exceed the sum of the required payoff amount for the contract
and the book value of the equipment, the excess shall be allocated solely to the
depositor. For example, if the servicer, in connection with a defaulted contract
subject to a lease, derived liquidation proceeds in the amount of $100 from the
liquidation of the contract and disposition of the related equipment, and if the
required payoff amount of the contract was, as of the collection period during
which the contract became a liquidated contract, $120 and the book value of the
equipment was $30, the liquidation proceeds would be allocated to the owner
trust in the amount of $80 and to the depositor in the amount of $20. All
liquidation proceeds which are so allocable to the owner trust will be deposited
in a collection account and constitute pledged revenues to be applied to the
payment of interest and principal on the notes in accordance with the priorities
described under " -- DISTRIBUTIONS" above.
OPTIONAL PURCHASE OF CONTRACTS AND REDEMPTION OF NOTES
The seller or other entity specified in your prospectus supplement may
purchase all of the contracts owned by an owner trust on any payment date
following the date on which the unpaid principal balance of the related notes is
less than 10%, or such other percentage specified in your prospectus supplement,
of the initial contract pool principal balance. Except as otherwise described in
the prospectus supplement for your notes, the purchase price to be paid in
connection with the purchase shall be at least equal to the sum of
o the unpaid principal balance of the related notes as of that
payment date,
o accrued but unpaid interest,
o unreimbursed servicer advances, and
o accrued but unpaid servicer fees.
If the seller or another entity does purchase the contracts, the related notes
shall be redeemed on the payment date on which the purchase occurs. The
redemption price will be the principal amount of the notes plus accrued and
unpaid interest to but excluding the redemption date.
TRUST ACCOUNTS
Except as otherwise specified in your prospectus supplement, the
applicable indenture trustee will establish and maintain under each indenture
segregated trust accounts which need not be deposit accounts, but which must be
with a qualified institution. These accounts will include, among others, the
"COLLECTION ACCOUNT" and the "DISTRIBUTION ACCOUNT." The accounts may, as
described in the prospectus supplement for your notes, also include a cash
collateral or reserve fund account as credit enhancement. All of these accounts
are referred to collectively as the "TRUST ACCOUNTS."
"Qualified institution" means the corporate trust department of the
indenture trustee or any other depository institution
o organized under the laws of the United States or any state
or any domestic branch of a foreign bank,
o the deposits of which are insured by the Federal Deposit
Insurance Corporation and
o which has, or whose parent corporation has, short-term or
long-term debt ratings acceptable to Moody's Investors
Service, Inc., and Standard & Poor's Ratings Services, a
division of The McGraw-Hill Companies, Inc.
The servicer, as agent for the indenture trustee of any series, may
designate, or otherwise arrange for the purchase by the indenture trustee of,
investments to be made with funds in the trust accounts. All investments shall
be eligible investments as defined in the related indenture that will mature not
later than the business day preceding the applicable monthly payment date or any
other date approved by the rating agencies. Eligible investments include, among
other investments:
o obligations of the United States or of any agency of the
United States backed by the full faith and credit of the
United States;
o demand deposits, certificates of deposit, time deposits
demand notes or bankers acceptance of eligible financial
institutions;
o highly rated commercial paper or money market funds;
o repurchase agreements in respect of United States government
securities or securities guaranteed or otherwise backed by
the full faith and credit of the United States Government
with eligible institutions; and
o other investments which have been approved by each rating
agency.
REPORTS TO NOTEHOLDERS
With respect to each series of notes, the servicer will furnish to the
applicable indenture trustee, and the indenture trustee will include with each
distribution to you, a statement, as specified in your prospectus supplement, in
respect of the related payment date.
If you purchase a note, you may receive these reports by making a
written request to The Depository Trust Company. These reports do not constitute
financial statements prepared in accordance with generally accepted accounting
principles. None of the depositor, the sponsor, nor the servicer intends to send
any of their respective financial reports to owners of notes. The servicer, on
behalf of an owner trust, will file with the Securities and Exchange Commission
legally required periodic reports concerning the owner trust.
With respect to any series, the notes will be registered in the name
of a nominee of The Depository Trust Company and will not be registered in the
names of the beneficial owners or their nominees. As a result, unless and until
definitive notes are issued in the limited circumstances described under " --
ISSUANCE OF CERTIFICATED NOTES AT A LATER DATE" below, the indenture trustee
will not recognize you as a noteholder, as that term is used in the related
indenture. Hence, until that time, you will receive reports and other
information provided for under the related indenture only if, when and to the
extent The Depository Trust Company and its participating organizations provide
this information. The servicer will file a copy of each report with the
Securities and Exchange Commission on Form 8-K to the extent the Securities
Exchange Act of 1934 and the rules and regulations of the Securities and
Exchange Commission under the Exchange Act require it.
BOOK-ENTRY REGISTRATION
Unless your prospectus supplement states otherwise, you may hold your
notes through The Depository Trust Company, referred to as "DTC," in the United
States, or Clearstream, Luxembourg or Euroclear System in Europe, if you are a
participant of those systems, or indirectly through organizations that are
participants in those systems.
DTC is a limited purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code and a
"clearing agency" registered under to Section 17A of the Exchange Act. DTC was
created to hold securities for its direct participants and to facilitate the
clearance and settlement of securities transactions between its direct
participants through electronic book-entries, thus eliminating the need for
physical movement of certificates. DTC's direct participants include
o the underwriters offering the notes to you,
o securities brokers and dealers,
o banks,
o trust companies and
o clearing corporations, and may include other organizations.
Indirect access to the DTC system is also available to others such as banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a direct participant, either directly or indirectly.
To facilitate subsequent transfers, DTC will register all deposited
notes in the name of DTC's nominee, Cede & Co. You will maintain beneficial
ownership of the notes despite the deposit of notes with DTC and their
registration in the name of Cede. DTC has no knowledge of the actual
noteholders; DTC's records reflect only the identity of its direct participants
to whose accounts the notes are credited, which may or may not be the
noteholders. DTC's direct and indirect participants will remain responsible for
keeping account of their holdings on behalf of their customers.
You have no entitlement to receive a certificate representing your
interest in a class of notes. As long as the notes are registered in the name of
Cede & Co., any action to be taken by you or any other noteholders will be taken
by DTC upon instructions from DTC's participants. All distributions, notices,
reports and statements to noteholders will be delivered to Cede, as the
registered holder of the notes, for distribution to noteholders in compliance
with DTC procedures.
You will receive all payments of principal and interest on the notes
through direct participants or indirect participants. DTC will forward the
payments to its direct participants which will forward them to indirect
participants or noteholders. Under a book-entry format, you may experience some
delay in their receipt of payments, since payments will be forwarded to Cede as
nominee of DTC. The indenture trustee will not recognize you as a noteholder, as
that term is used in the indenture. You may exercise the rights of noteholders
only indirectly through DTC and its direct participants and indirect
participants. Because DTC can act only on behalf of direct participants, who in
turn act on behalf of indirect participants, and on behalf of banks, trust
companies and other persons approved by it, there may be limits on your ability
to pledge the notes to persons or entities that do not participate in the DTC
system, or to otherwise act with respect to notes, due to the absence of
physical notes for the notes.
Arrangements among the various parties govern conveyance of notices
and other communications by
o DTC to direct participants,
o by direct participants to indirect participants and
o by direct participants and indirect participants to
noteholders, subject to any statutory or regulatory
requirements as may be in effect from time to time.
Standing instructions and customary practices govern payments by DTC
participants to noteholders, 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 DTC participant and not of DTC, the indenture trustee,
the owner trustee, the originators or the originator, 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 the indenture trustee,
disbursement of the payments to direct participants shall be the responsibility
of DTC and disbursement of payments to noteholders shall be the responsibility
of direct participants and indirect participants.
Purchases of notes under the DTC system must be made by or through
direct participants, which will receive a credit for the notes on DTC's records.
The ownership interest of each actual noteholder is in turn to be recorded on
the direct participants' and indirect participants' records. Noteholders will
not receive written confirmation from DTC of their purchase, but noteholders are
expected to receive written confirmations providing details of the transaction,
as well as periodic statements of their holders, from the direct participant or
indirect participant through which the noteholder entered into the transaction.
Entries made on the books of DTC's participants acting on behalf of noteholders
evidence transfers of ownership interests in the notes.
DTC will not comment or vote with respect to the notes. DTC has
advised that it will take any action permitted to be taken by a noteholder under
the indenture only at the direction of one or more direct participants to whose
accounts with DTC the notes are credited. Additionally, DTC has advised that to
the extent that the indenture requires that any action may be taken only by
noteholders representing a specified percentage of the aggregate outstanding
principal amount of the notes, DTC will take the action only at the direction of
and on behalf of direct participants, whose holdings include undivided interests
that satisfy the specified percentage.
DTC may discontinue providing its services as securities depositary
with respect to the notes at any time by giving reasonable notice to the
indenture trustee. Under these circumstances, in the event that a successor
securities depositary is not obtained, fully registered, certificated notes are
required to be printed and delivered. The originator may decide to discontinue
use of the system of book-entry transfers through DTC or a successor securities
depositary. In that event, fully registered, certificated notes will be
delivered to noteholders. See " -- ISSUANCE OF DEFINITIVE NOTES AT A LATER
DATE."
The information in this section concerning DTC and DTC's book-entry
system are from sources that the sponsor believes to be reliable, but neither
the sponsor nor the owner trustee take any responsibility for the accuracy of
this information.
Clearstream Banking, societe anonyme, 67 Bd Grande-Duchesse Charlotte,
L-2967 Luxembourg ("Clearstream, Luxembourg"), was incorporated in 1970 as
"Cedel S.A.", a company with limited liability under Luxembourg law (a societe
anonyme). Cedel S.A. subsequently changed its name to Cedelbank. On January 10,
2000, Cedelbank's parent company, Cedel International, societe anonyme ("CI")
merged its clearing, settlement and custody business with that of Deutsche Borse
Clearing AG ("DBC"). The merger involved the transfer by CI of substantially all
of its assets and liabilities (including its shares in CB) to a new Luxembourg
company, New Cedel International, societe anonyme ("New CI"), which is 50% owned
by CI and 50% owned by DBC's parent company Deutsche Borse AG. The shareholders
of these two entities are banks, securities dealers and financial institutions.
Cedel International currently has 92 shareholders, including U.S. financial
institutions or their subsidiaries. No single entity may own more than 5 percent
of Cedel International's stock.
Further to the merger, the Board of Directors of New Cedel
International decided to rename the companies in the group in order to give them
a cohesive brand name. The new brand name that was chosen is "Clearstream". With
effect from January 14, 2000 New CI has been renamed "Clearstream International,
societe anonyme". On January 18, 2000, Cedelbank was renamed "Clearstream
Banking, societe anonyme", and Cedel Global Services was renamed "Clearstream
Services, societe anonyme".
On January 17, 2000 DBC was renamed "Clearstream Banking AG". This
means that there are now two entities in the corporate group headed by
Clearstream International which share the name "Clearstream Banking", the entity
previously named "Cedelbank" and the entity previously named "Deutsche Brse
Clearing AG".
Clearstream, Luxembourg holds securities for its customers
("Clearstream, Luxembourg Participants") and facilitates the clearance and
settlement of securities transactions between Clearstream, Luxembourg customers
through electronic book-entry changes in accounts of Clearstream, Luxembourg
customers, thereby eliminating the need for physical movement of certificates.
Transactions may be settled by Clearstream, Luxembourg in any of 36 currencies,
including United States Dollars. Clearstream, Luxembourg provides to its
customers, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Clearstream, Luxembourg also deals with domestic
securities markets in over 30 countries through established depository and
custodial relationships. Clearstream, Luxembourg is registered as a bank in
Luxembourg, and as such is subject to regulation by the Commission de
Surveillance du Secteur Financier, "CSSF", which supervises Luxembourg banks.
Clearstream, Luxembourg's customers are world-wide financial institutions
including underwriters, securities brokers and dealers, banks, trust companies
and clearing corporations. Clearstream, Luxembourg's U.S. customers are limited
to securities brokers and dealers, and banks. Currently, Clearstream, Luxembourg
has approximately 2,000 customers located in over 80 countries, including all
major European countries, Canada, and the United States. Indirect access to
Clearstream, Luxembourg is available to other institutions that clear through or
maintain a custodial relationship with an account holder of Clearstream,
Luxembourg. Clearstream, Luxembourg has established an electronic bridge with
Morgan Guaranty Trust Company of New York as the Operator of the Euroclear
System (MGT/EOC) in Brussels to facilitate settlement of trades between
Clearstream, Luxembourg and MGT/EOC.
Clearstream, Luxembourg and Euroclear will hold omnibus positions on
behalf of the participants in the Clearstream, Luxembourg and Euroclear systems,
respectively, through customers' securities accounts in Clearstream,
Luxembourg's and Euroclear's names on the books of their respective depositaries
which in turn will hold these positions in customers' securities accounts in the
depositaries' names on the books of DTC.
Clearstream, Luxembourg is incorporated under the laws of Luxembourg
as a professional depositary. Clearstream, Luxembourg holds securities for its
participants and facilitates the clearance and settlement of securities
transactions between its participants through electronic book-entry changes in
accounts of its participants, thus eliminating the need for physical movement of
certificates.
Indirect access to Clearstream, Luxembourg is also available to
others, such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a Clearstream, Luxembourg participant,
either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear and to clear and settle transactions between Euroclear's participants
through simultaneous electronic book-entry delivery against payment, thus
eliminating the need for physical movement of certificates and any risk from
lack of simultaneous transfers of securities and cash. The Brussels, Belgium
office of Morgan Guaranty Trust Company of New York operates Euroclear, under
contract with Euroclear Clearance Systems S.C., a Belgian cooperative
corporation. Euroclear's operator conducts all operations and all Euroclear
securities clearance accounts and Euroclear cash accounts are accounts with
Euroclear's operator. Euroclear Clearance Systems S.C. establishes policy for
Euroclear on behalf of Euroclear's participants, including banks, securities
brokers and dealers, and other professional financial intermediaries.
Indirect access to Euroclear is also available to other firms that
clear through or maintain a custodial relationship with a Euroclear participant,
either directly or indirectly.
Morgan Guaranty Trust Company of New York is the Belgian branch of a
New York banking corporation which is a member bank of the Federal Reserve
System. As such, the Board of Governors of the Federal Reserve System and the
New York Banking Department, as well as the Belgian Banking Commission,
regulates and examines it.
Euroclear holds all securities on a fungible basis without attribution
of specific certificates to specific securities clearance accounts. The
Euroclear operator acts under the Euroclear Terms and Conditions only on behalf
of Euroclear's participants, and has no record of or relationship with persons
holding through Euroclear's participants.
Transfers between direct participants will comply with DTC rules.
Transfers between Clearstream, Luxembourg 's participants and Euroclear's
participants will comply with their rules and operating procedures.
DTC will effect, under DTC rules, cross-market transfers between
persons holding directly or indirectly through DTC in the United States, on the
one hand, and directly or indirectly through Clearstream, Luxembourg or
Euroclear, on the other, through the relevant European international clearing
system through its Depositary; however, these cross-market transactions will
require delivery of instructions to the relevant European international clearing
system by the counterparty in this system as required by its rules and
procedures and within its established deadlines, European time. The relevant
European international clearing system will, if the transaction meets its
settlement requirements, deliver instructions to its depositary to take action
to effect final settlement on its behalf by delivering or receiving securities
in DTC, and making or receiving payment using its normal procedures for same-day
funds settlement applicable to DTC. Clearstream, Luxembourg participants and
Euroclear participants may not deliver instructions directly to the
depositaries.
Because of time-zone differences, credits of securities in
Clearstream, Luxembourg or Euroclear as a result of a transaction with a DTC
participant will be made during the subsequent securities settlement processing
day, dated the business day following the DTC settlement date, and the credits
or any transactions in the securities settled during the processing day will be
reported to the relevant Clearstream, Luxembourg participant or Euroclear
participant on that business day. Cash received in Clearstream, Luxembourg or
Euroclear as a result of sales of securities by or through a Clearstream,
Luxembourg participant or a Euroclear participant to a DTC participant will be
received with value on the DTC settlement date but will be available in the
relevant Clearstream, Luxembourg or Euroclear cash account only as of the
business day following settlement in DTC.
Although DTC, Clearstream, Luxembourg and Euroclear have agreed to the
foregoing procedures in order to facilitate transfers of notes among
participants of DTC, Clearstream, Luxembourg and Euroclear, they are under no
obligation to perform or continue to perform these procedures and these
procedures may be discontinued at any time.
Except as required by law, none of the seller, the company, any
originator, the owner trustee, the depositor or the indenture trustee will have
any liability for any aspect of the records relating to, actions taken or
implemented by, or payments made on account of, beneficial ownership interests
in the notes held through DTC, or for maintaining, supervising or reviewing any
records or actions relating to beneficial ownership interests.
ISSUANCE OF CERTIFIED NOTES AT A LATER DATE
The owner trust will issue notes in fully registered, certificated
form to beneficial owners or their nominees rather than to DTC or its nominee,
only if:
(1) the owner trustee advises the indenture trustee in writing
that DTC is no longer willing or able to discharge properly its
responsibilities as depository with respect to the notes, and the
owner trustee or the indenture trustee is unable to locate a qualified
successor,
(2) the owner trustee elects to terminate the book-entry system,
or
(3) after the occurrence of an event of default under the
indenture, the holder of at least 66 2/3% of the principal amount of
its outstanding notes advises the indenture trustee that the
continuation of the book-entry system is met in their best interests.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the indenture trustee must notify all beneficial owners for
each class of notes held through DTC of the availability of notes in fully
registered, certificated form. Upon surrender by DTC of the global note
representing the notes and instructions for reregistration, the indenture
trustee will issue these fully registered, certificated notes, and the indenture
trustee will recognize the holders of fully registered, certificated notes as
noteholders under the indenture.
Additionally, upon the occurrence of any event described above, the
indenture trustee will distribute principal of and interest on the notes
directly to you as required by the indenture. Distributions will be made by
check, mailed to your address as it appears on the note register. Upon at least
five days' notice to noteholders for the class, however, the indenture trustee
will make the final payment on any note only upon presentation and surrender of
the note at the office or agency specified in the notice of final distribution
to noteholders. The indenture trustee will make the final payment in this manner
whether the notes are fully registered, certificated notes or the note for the
class registered in the name of Cede & Co. representing the notes of the class.
You may transfer any fully registered, certificated notes of any class
at the offices of the indenture trustee or its agent in New York, New York,
which the indenture trustee shall designate on or prior to the issuance of any
fully registered, certificated notes with respect to that class. There is no
service charge for any registration of transfer or exchange, but the indenture
trustee may require payment of a sum sufficient to cover any tax or other
governmental charge imposed in connection with the transfer or exchange.
MODIFICATION OF INDENTURE WITHOUT NOTEHOLDER CONSENT
Unless your prospectus supplement states otherwise, the owner trust
and the indenture trustee for a note series may, without your consent, enter
into one or more supplemental indentures for any of the following purposes:
o to change the collateral description;
o to provide for a successor to the owner trust to assume the
notes and the indenture obligations;
o to add additional covenants for your benefit, or to
surrender any rights or power of the owner trust;
o to transfer or pledge any property to the indenture trustee;
o if not adverse to the interests of noteholders, to correct
or supplement any provision in the indenture that is
ambiguous or inconsistent with any other provision of the
indenture or to make any other provision in respect of
matters under the indenture;
o to accept a successor indenture trustee or to change the
provisions of the indenture to facilitate the administration
by more than one trustee;
o to comply with the Trust Indenture Act of 1939, as amended;
or
o to elect to come under the FASIT provision of the Internal
Revenue Code, if the owner trust provides an opinion of
counsel as to no adverse impact on noteholders.
MODIFICATION OF INDENTURE WITH NOTEHOLDER CONSENT
Unless your prospectus supplement states otherwise, with the consent
of the required majority of the noteholders determined as described in the
prospectus supplement for your notes, prior notice to each rating agency and an
opinion of counsel, the owner trustee and the indenture trustee may modify the
indenture and your rights under it.
Without the consent of the holder of each outstanding note affected,
however, no modification of the indenture may:
o reduce the note principal amount, interest rate or
redemption price or change the timing of payments;
o modify the manner of application of payments in respect to
contracts to the notes;
o impair your right to sue to enforce payment provisions of
the indenture;
o reduce the percentage needed for consents of noteholders;
o permit the creation of any lien on collateral under the
indenture ranking prior to or on a parity with the lien of
the indenture;
o adversely affect the manner of determining notes outstanding
or the requisite note for liquidating the trust estate; or
o modify the provisions of the indenture relating to these
types of indenture modification without the consent of all
noteholders.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
Except as otherwise provided in the prospectus supplement for your
notes, events of default under each indenture will consist of:
o a default for five calendar days or more in the payment of
interest due on any note;
o failure to pay the unpaid principal amount of any class of
notes on the maturity date for the notes;
o failure of the owner trust or the depositor to observe any
provisions set forth in the pooling and servicing agreement
or the indenture, which failure has a material adverse
effect on the noteholders and continues for 60 calendar days
after written notice;
o any representation or warranty made by the owner trust or
the depositor in the pooling and servicing agreement or
indenture was incorrect as of the time made, and continues
to be incorrect for a period of 60 calendar days after
notice is given and as a result of which the noteholders are
materially and adversely affected. A breach of a
representation or warranty as to a contract will be
considered not to have occurred if the seller purchases the
contract or effects a substitution for it, as provided in
"THE CONTRACTS -- REPRESENTATIONS AND WARRANTIES MADE BY THE
SELLER" and " -- SUBSTITUTION OF CONTRACTS" above;
o events of bankruptcy, insolvency, receivership or
liquidation of the owner trust or the depositor; or
o the owner trust becomes an investment company.
If an event of default should occur and be continuing with respect to
the notes of a series, the required holders may, except as to a bankruptcy or
insolvency event of default, deem the event not to have occurred.
If the indenture trustee declares the notes of a series due and
payable following an event of default, the indenture trustee may:
o institute proceedings to collect amounts due or foreclose on
the indenture collateral,
o exercise remedies as a secured party, or
o sell the indenture collateral, or elect to have the owner
trust maintain possession of the pledged revenues.
Unless otherwise provided in your prospectus supplement, the indenture
trustee, however, may not sell the indenture collateral following an event of
default, except an event arising from the owner trust's failure to pay interest
or principal, unless:
o the holders of all the outstanding notes consent to the
sale;
o the proceeds of the sale distributable to holders of the
notes are sufficient to pay in full the principal and
accrued interest on all the outstanding notes at the date of
the sale; or
o the indenture trustee determines, in complete reliance on
investment banking or accounting firm certifications, that
the trust estate would not be sufficient on an ongoing basis
to make all payments on the notes as the payments would have
become due if the obligations had not been declared due and
payable, and the indenture trustee obtains the consent of
the required holders.
Following a declaration upon an event of default that the notes are immediately
due and payable, the application of any proceeds of liquidation of the pledged
revenues will be in the order of priority described in the prospectus supplement
for your class of notes.
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 the notes, if the
indenture trustee reasonably believes it will not be adequately indemnified
against the costs, expenses and liabilities which it may incur in complying with
that request. A majority of the noteholders will have the right to direct the
time, method and place of conducting any proceeding or any remedy available to
the indenture trustee. Additionally, a majority of the noteholders may, in some
cases, waive any default, except a default in the payment of principal or
interest or a default in respect of a covenant or provision of the indenture
that cannot be modified without the waiver or consent of all of the holders of
the outstanding notes.
Unless otherwise provided in your prospectus supplement, no holder of
a note will have the right to institute any proceeding with respect to the
indenture, unless:
o the holder previously has given to the indenture trustee
written notice of a continuing event of default;
o the holders of not less than 25% in principal amount of the
outstanding notes make written request of the indenture
trustee to institute the proceeding in its own name as
indenture trustee;
o the holder or holders offer the indenture trustee reasonable
indemnity;
o the indenture trustee has for 60 days failed to institute
the proceeding; and
o no direction inconsistent with that written request has been
given to the indenture trustee during the 60-day period by
the holders of a majority in principal amount of the
outstanding notes.
In addition, the indenture trustee and you, by accepting the notes,
will covenant that they will not at any time institute against the sponsor, the
seller, the depositor or the owner trust any bankruptcy, reorganization or other
proceeding under any federal or state bankruptcy or similar law.
Neither the indenture trustee nor the owner trustee in its individual
capacity, nor the sponsor, the seller, the depositor, nor any of their
respective owners, beneficiaries, agents, officers, directors, employees,
affiliates, successors or assigns will be personally liable for the payment of
the notes or for any agreement or covenant of the owner trust contained in the
indenture.
OWNER TRUST COVENANTS
Each indenture will provide that the related owner trust may not
consolidate with or merge into any other entity, unless:
o the entity formed by or surviving the consolidation or
merger is organized under the laws of the United States or
any state;
o the entity expressly assumes the owner trust's obligation to
make due and punctual payments upon the notes and the
performance or observance of every agreement and covenant of
the owner trust under the indenture;
o no event of default shall have occurred and be continuing
immediately after the merger or consolidation; o the rating
agencies advise the owner trustee that the rating of the
notes then in effect would not be reduced or withdrawn as a
result of the merger or consolidation;
o the owner trustee has received an opinion of counsel to the
effect that the consolidation or merger would have no
material adverse tax consequence to the owner trust or to
any noteholder or equity certificate holder; and
o the owner trust or the person, if other than the owner
trust, formed by or surviving the consolidation or merger
has a net worth, immediately after the consolidation or
merger, that is (a) greater than zero and (b) not less than
the net worth of the owner trust immediately prior to giving
effect to the consolidation or merger.
Each owner trust will not, among other things:
o except as expressly permitted by the related indenture or
trust agreement, transfer any of the assets of the owner
trust;
o claim any credit on or make any deduction from, the
principal and interest payable in respect of the related
notes, other than amounts withheld under the bankruptcy code
or applicable state law, or assert any claim against any
present or former holder of notes because of the payment of
taxes levied or assessed upon the owner trust;
o dissolve or liquidate in whole or in part;
o permit the validity or effectiveness of the indenture to be
impaired or permit the release of any person from any
covenants or obligations relating to the notes under the
indenture except as expressly permitted in the indenture; or
o except as expressly permitted in the indenture, the pooling
and servicing agreement or the trust agreement, permit any
lien or claim to burden any assets of the owner trust.
No owner trust may engage in any activity other than as specified
above under "THE OWNER TRUSTS." Each owner trust will not incur, assume or
guarantee any indebtedness other than indebtedness incurred under the related
notes and the related indenture or otherwise in accordance with the related
indenture, trust agreement and pooling and servicing agreement.
ANNUAL COMPLIANCE STATEMENT
Each owner trust will be required to file annually with the applicable
indenture trustee a written statement as to the fulfillment of its obligations
under the indenture.
INDENTURE TRUSTEE'S ANNUAL REPORT
Each indenture trustee will be required to mail each year to all
noteholders of the related series a brief report relating to:
o its eligibility and qualification to continue as indenture
trustee under the related indenture,
o any amounts advanced by it under the indenture,
o the amount, interest rate and maturity date of certain
indebtedness owing by the owner trust to the indenture
trustee in its individual capacity,
o the property and funds physically held by the indenture
trustee and
o any action taken by it that materially affects the notes and
that has not been previously reported.
SATISFACTION AND DISCHARGE OF INDENTURE
The discharge of an indenture will occur with respect to the
collateral securing the notes of a series upon the delivery to the related
indenture trustee for cancellation of all the notes or, with certain
limitations, upon deposit with the indenture trustee of funds sufficient for the
payment in full of all of the notes.
THE INDENTURE TRUSTEE
The indenture trustee for any series will be specified in your
prospectus supplement. An indenture trustee may resign at any time, in which
event the depositor or the sponsor will be obligated to appoint a successor
trustee. The owner trust may also remove an indenture trustee
o if the indenture trustee ceases to be eligible to continue
to serve under the indenture,
o if the indenture trustee becomes subject to bankruptcy
proceedings, or
o if the indenture trustee becomes incapable of acting.
In these circumstances, the owner trust will be obligated to appoint a successor
trustee. Any resignation or removal of an indenture trustee and appointment of a
successor trustee will not become effective until acceptance of the appointment
by a successor trustee.
DESCRIPTION OF THE POOLING AND SERVICING AGREEMENT
The following summarizes the material terms of each pooling and
servicing agreement, a form of which was filed with the registration statement
of which this prospectus is a part. In addition, a copy of the pooling and
servicing agreement relating to a series of notes will be filed with the
Securities and Exchange Commission following the sale of those notes. This
summary describes terms expected to be common to each pooling and servicing
agreement, but the sponsor does not intend this summary to be complete. This
summary is subject to the provisions of the pooling and servicing agreement
relating to a particular series and the description set forth in your prospectus
supplement. You should read the form of the pooling and servicing agreement
filed as noted above.
TRANSFER OF CONTRACTS AND EQUIPMENT
Prior to the offering of a series of notes, the seller may have sold
contracts to the depositor for deposit into a trust used in connection with
temporary financing arrangements. The depositor may reacquire some or all of
these contracts for deposit into the owner trust in connection with the offering
and sale of a particular series of notes. On or before the applicable closing
date, the seller will transfer to the depositor under one or more purchase
agreements all of its interest in the following:
o the contracts, its security interest in the related
equipment and the related equipment,
o the right to receive all scheduled payments and prepayments
received on the contracts on or after the date of transfer,
but excluding any scheduled payments due on or after, but
received prior to, the transfer date,
o all rights under insurance policies maintained on the
equipment under the contracts,
o all documents contained in the files and
o all proceeds derived from any of the above.
Under the pooling and servicing agreement, on the applicable closing
date, the depositor will transfer to the owner trust:
o all of its rights in the contracts and rights in the
equipment and other rights listed above, except that in the
case of leased equipment, the depositor will typically
retain ownership of the equipment, any rights to payments
made or attributable to the leased equipment upon expiration
of the related lease contract, of contract prepayments and
liquidation proceeds allocable to the depositor under the
pooling and servicing agreement and of any portion of the
purchase amount attributable to the book value of the leased
equipment, other than any guaranteed residual investment;
o all funds on deposit from time to time in the trust
accounts; and
o all its rights under the purchase and sale agreement.
Each pooling and servicing agreement will designate the servicer as
custodian to maintain possession, as the owner trust's agent, of the contracts
and all related documents. To facilitate servicing and save administrative
costs, the documents often will not be physically segregated from other similar
documents that are in the servicer's possession. Financing statements will be
filed on the transfer date in the applicable jurisdictions reflecting:
o the transfer of the contracts and the equipment by the
originators, other than the seller, to the seller,
o the transfer of the contracts and the equipment by the
seller to the depositor and, as applicable by any temporary
financing trust to the depositor,
o the transfer by the depositor to the owner trust, and
o the pledge by the owner trust to the indenture trustee.
The originators' accounting records and computer systems will also
reflect these assignments and this pledge.
COLLECTIONS ON CONTRACTS
The applicable indenture trustee will maintain a collection account,
into which the servicer will deposit the following amounts no later than, unless
otherwise set forth in your prospectus supplement, the second business day after
their processing:
o all scheduled payments made under the contracts;
o all prepayments, excluding any portion which your prospectus
supplement states is allocable to the depositor;
o amounts constituting liquidation proceeds on liquidated
contracts, to the extent specified in your prospectus
supplement;
o all payments made by the seller under the pooling and
servicing agreement to repurchase any contract as a result
of a breach of a representation or warranty, as described
under "THE CONTRACTS -- REPRESENTATIONS AND WARRANTIES MADE
BY THE SELLER," excluding, in the case of a lease contract,
any portion which your prospectus supplement states is
allocable to the depositor; and
o the amount paid by the depositor to purchase the contracts,
as described under "DESCRIPTION OF THE NOTES AND INDENTURE."
So long as no event of termination shall have occurred and be
continuing with respect to the servicer, the servicer may make the required
remittances to the collection account net of its servicing fees.
The servicer may withdraw from the collection account any amounts
deposited in error or required to be repaid to an obligor, based on the
servicer's good-faith determination that the amount was deposited in error or
must be returned to the obligor.
The servicer will pay to the depositor all proceeds from the
disposition of equipment subject to a true lease, to the extent allocable to the
depositor.
SERVICING
Your prospectus supplement will identify the servicer for your trust.
The servicer will be obligated under each pooling and servicing agreement to
service the contracts typically with reasonable care, using that degree of skill
and attention that the servicer generally exercises with respect to all
comparable contracts and related assets that it services for itself or others in
accordance with its credit and collections policy and applicable law. The
servicer may delegate servicing responsibilities to third parties or affiliates,
provided that the servicer will remain obligated to the related owner trust and
the depositor for the proper performance of the servicing responsibilities.
The servicer is obligated to act in a commercially reasonable manner
with respect to the repossession and disposition of equipment following a
contract default with a view to realizing proceeds at least equal to the
equipment's fair market value. The servicer may choose to dispose of equipment
through a new lease or in some other manner which provides for payment for the
equipment over time. In these cases, the servicer will be required to pay from
its own funds an amount which, in its reasonable judgment, is equal to the fair
market value of the equipment, less liquidation expenses, and the servicer will
be entitled to all subsequent payments in respect of the equipment. Any amounts
the servicer pays will constitute additional liquidation proceeds with respect
to the related contract and equipment and will be allocated as described under
"DESCRIPTION OF THE NOTES AND INDENTURE -- LIQUIDATION AND INSURANCE PROCEEDS."
The servicer is, unless otherwise set forth in your prospectus
supplement, responsible for:
o reviewing and certifying that the contract files are
complete;
o monitoring and tracking any property and sales taxes to be
paid by obligors;
o billing, collecting, and recording payments from obligors;
o communicating with and providing billing records to
obligors;
o depositing funds into the collection account;
o receiving payments as the owner trust's agent on the
insurance policies maintained by the obligors and
communicating with insurers;
o issuing reports to the indenture trustee specified in the
indenture and in the pooling and servicing agreement;
o repossessing and remarketing of equipment following obligor
defaults; and
o paying the fees and ordinary expenses of the indenture
trustee and the owner trustee.
The servicer shall be entitled to recover all reasonable out-of-pocket
expenses incurred by it in liquidating a contract and disposing of the related
equipment. The servicer is entitled to retain, from liquidation proceeds, a
reserve for out-of-pocket liquidation expenses in an amount equal to the
expenses, in addition to those previously incurred, as it reasonably estimates
will be incurred. The servicer is permitted to grant payment extensions on a
contract in accordance with its credit and collection policies and procedures if
the servicer believes in good faith that an extension is necessary to avoid a
termination and liquidation of the contract and will maximize the amount to be
received by the owner trust under the contract. The servicer is permitted to
agree to modifications or amendments to a contract in accordance with its credit
and collection policies and procedures.
PREPAYMENTS
The servicer may allow a prepayment of any lease contract, but only if
the amount paid or, in the case of a partial prepayment, the sum of its
prepayment and the remaining contract principal balance, is at least equal to
the required payoff amount of the contract.
EVIDENCE AS TO COMPLIANCE
Annually, the servicer must deliver to the indenture trustee a report
from a nationally recognized accounting firm stating that the accounting firm
has audited the financial statements of the servicer or its parent and issued an
opinion on those financial statements and that the accounting firm has examined
and provided a report as to statements of the servicer concerning the servicer's
controls over the servicing of:
o equipment contracts,
o installment sales contracts,
o promissory notes,
o loan and security agreements and
o other similar types of receivables under servicing
agreements substantially similar one to another.
MATTERS REGARDING THE SERVICER
The servicer may not resign from its obligations under a pooling and
servicing agreement except if its duties are no longer permissible under
applicable law. No resignation will become effective until a successor servicer
has assumed the servicer's obligations and duties under the pooling and
servicing agreement. Removal of the servicer is permissible only upon the
occurrence of an event of termination as discussed below.
The servicer typically must maintain an insurance policy or financial
guarantee bond in customary form covering errors and omissions by the servicer.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
Compensation to the servicer will include a monthly fee equal:
o to the product of one-twelfth of a percentage per annum
specified in your prospectus supplement multiplied by the
contract pool principal balance as of the last day of the
second preceding collection period, or
o in the case of the servicing fee with respect to the
collection period commencing on the date of transfer of the
contracts, the contract pool principal balance as of the
cut-off date,
plus any
o late fees,
o late payment interest,
o documentation fees,
o insurance administration charges, other
administrative fees and any extension fees
collected with respect to the contracts during the
prior collection period and investment earnings on
collections prior to deposit of these amounts in
the collection account.
The servicer will pay all expenses incurred by it in connection with its
activities under the pooling and servicing agreement and, unless otherwise set
forth in your prospectus supplement, the annual fees and expenses of the owner
trustee as indenture trustee in connection with the notes. The servicer is
authorized to waive any administrative fees or extension fees that may be
collected in the ordinary course of servicing any contract.
EVENTS OF TERMINATION
An event of termination under a pooling and servicing agreement will
occur if:
o the servicer fails to make any required payment or deposit
and the failure continues for five business days after
notice from the indenture trustee or discovery by the
servicer;
o the servicer fails to observe in any material respect any
agreements of the servicer set forth in the pooling and
servicing agreement and the failure (1) materially and
adversely affects the rights of the owner trust, the equity
certificate holder or you, and (2) continues unremedied for
30 days after written notice to the servicer;
o events of bankruptcy or insolvency occur with respect to the
servicer; or
o any representation, warranty or statement of the servicer
made under the pooling and servicing agreement is incorrect
in any material respect, and (1) has a material adverse
effect on the owner trust or holders of the notes, and (2)
continues uncured for 30 days after the acquiring of written
notice.
RIGHTS UPON EVENT OF TERMINATION
If an event of termination remains unremedied, the indenture trustee
may, and at the written direction of the required majority of the noteholders,
which shall be the same as that required for amendment of the pooling and
servicing agreement, See "AMENDMENT" below, shall, terminate all of the rights
and obligations of the servicer under the pooling and servicing agreement. A
successor servicer will succeed to all the responsibilities, duties and
liabilities of the servicer under the pooling and servicing agreement. The
successor servicer will be entitled to similar compensation arrangements, except
that any successor servicer will not be liable for any acts or omissions of the
prior servicer occurring prior to a transfer of the servicer's servicing and
related functions or for any breach by the prior servicer of any of its
obligations. A majority of the noteholders may waive any default by the servicer
under the pooling and servicing agreement and its consequences.
AMENDMENT
The parties may amend any pooling and servicing agreement:
o to cure any ambiguity,
o to correct or supplement any provision in the pooling and
servicing agreement that may be inconsistent with any other
provision, or
o to make any other provisions with respect to matters or
questions arising under the pooling and servicing agreement
but only if the amendment will not adversely affect in any
material respect the interests of the noteholders.
Any pooling and servicing agreement may also be amended in any respect
by the parties with the consent of the required majority of the noteholders
determined as described in the prospectus supplement for your notes, except that
no amendment
o that reduces the amount or changes the timing of any
contract collections on any contracts or payments required
to be distributed on any note,
o that changes the interest rate on any note, that adversely
affects the priority of payment of principal or interest to
noteholders or
o that reduces the noteholder percentage required to consent
to these amendments or any waiver under the pooling and
servicing agreement,
may be effective without the consent of the holder of each note. Also, an
amendment under the foregoing sentence will not be effective unless each rating
agency confirms that the amendment will not result in a reduction, qualification
or withdrawal of the ratings on the notes.
CERTAIN LEGAL MATTERS AFFECTING THE CONTRACTS
To the extent provided in your prospectus supplement, certain of the
contracts are "chattel paper", "general intangibles" and "accounts" as defined
in the Uniform Commercial Code, or the UCC, in effect in the applicable state.
Pursuant to the UCC for most purposes, a sale of chattel paper is treated in a
manner similar to a transaction creating a security interest in chattel paper.
To the extent provided in your prospectus supplement, the depositor will cause
the filing of appropriate UCC-1 financing statements to be made with the
appropriate governmental authorities. The servicer will be obligated from time
to time to take such actions as are necessary to protect and perfect the trust's
interests in such contracts and their proceeds.
THE SECURITY INTEREST IN THE EQUIPMENT
The seller will convey the seller's interest in the equipment to the
depositor. The depositor will convey such security interest in the equipment to
the trust. UCC financing statements will not be filed to perfect any security
interest in the equipment unless otherwise specified in your prospectus
supplement. Moreover, in the event of the repossession and resale of equipment,
it may be subject to a superior lien. In such case, the senior lienholder may be
entitled to be paid the full amount of the indebtedness owed to it out of the
sale proceeds before such proceeds could be applied to the payment of claims of
the servicer on behalf of the trust.
In the event of a default by the lessee, the servicer on behalf of the
trust may take action to enforce such defaulted contract by repossession and
resale of the leased equipment. Under the UCC in most states, a creditor can,
without prior notice to the debtor, repossess assets securing a defaulted
contract by the lessee's voluntary surrender of such assets or by "self-help"
repossession that does not involve a breach of the peace and by judicial
process.
In the event of a default by the lessee, some jurisdictions require
that the lessee be notified of the default and be given a time period within
which it may cure the default prior to repossession. Generally, this right of
reinstatement may be exercised on a limited number of occasions in any one-year
period.
The UCC and other state laws place restrictions on repossession sales,
including requirements that the secured party provide the lessee 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 may be held and that any such sale be
conducted in a commercially reasonable manner. Each pooling and servicing
agreement may require the servicer to sell promptly any repossessed item of
equipment, reacquire such equipment, re-lease such equipment for the benefit of
the noteholders or take such other action as specified in your prospectus
supplement.
Under most state laws, a lessee has the right to redeem collateral for
its obligations prior to actual sale by paying the secured party the unpaid
balance of the obligation plus reasonable expenses for repossession, holding and
preparing the collateral for disposition and arranging for its sale, plus, to
the extent provided for in the written agreement of the parties, reasonable
attorneys' fees.
In addition, because the market value of the equipment of the type
financed pursuant to the contracts generally declines with age and because of
obsolescence, the net disposition proceeds of leased equipment at any time
during the term of the lease may be less than the outstanding balance on the
contract principal balance which it secures. Because of this, and because other
creditors may have rights in the related leased equipment superior to those of
the trust, the servicer may not be able to recover the entire amount due on a
defaulted contract in the event that the servicer elects to repossess and sell
such leased equipment at any time.
Under the UCC and laws applicable in most states, a creditor is
entitled to obtain a deficiency judgment from a lessee for any deficiency on
repossession and resale of the asset securing the unpaid balance of such
lessee's contract. However, some states impose prohibitions or limitations on
deficiency judgments. In most jurisdictions the courts, in interpreting the UCC,
would impose upon a creditor an obligation to repossess the equipment in a
commercially reasonable manner and to "mitigate damages" in the event of a
lessee's failure to cure a default. The creditor would be required to exercise
reasonable judgment and follow acceptable commercial practice in seizing and
disposing of the equipment and to offset the net proceeds of such disposition
against its claim. In addition, a lessee may successfully invoke an election of
remedies defense to a deficiency claim in the event that the servicer's
repossession and sale of the leased equipment is found to be a retention
discharging the lessee from all further obligations under UCC Section 9-505(2).
If a deficiency judgment were granted, the judgment would be a personal judgment
against the lessee for the shortfall, but a defaulting lessee may have very
little capital or sources of income available following repossession. Therefore,
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.
Certain statutory provisions, including federal and state bankruptcy
and insolvency laws, may also limit the ability of the servicer to repossess and
resell collateral or obtain a deficiency judgment. In the event of the
bankruptcy or reorganization of a lessee, various provisions of the Bankruptcy
Code of 1978 and related laws may interfere with or eliminate the ability of the
servicer or the trustee to enforce its rights under the contracts. If bankruptcy
proceedings were instituted in respect of a lessee, the trustee could be
prevented from continuing to collect payments due from or on behalf of such
lessee or exercising any remedies assigned to such trustee without the approval
of the bankruptcy court, and the bankruptcy court could permit the lessee to use
or dispose of the leased equipment and provide the trustee with a lien on
substitute collateral, so long as such substitute collateral constituted
"adequate protection" as defined under the Bankruptcy Code.
In addition, certain of the contracts may be leased by the seller to
governmental entities. Payment by governmental authorities of amounts due under
such contracts may be contingent upon legislative approval. Accordingly, payment
delays and collection difficulties as described in your prospectus supplement
may limit collections with respect to certain governmental contracts.
These UCC and bankruptcy provisions, in addition to the possible
decrease in value of a repossessed item of equipment, may limit the amount
realized on the sale of the collateral to less than the amount due on the
related contract.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the anticipated material
United States federal income tax consequences of the purchase, ownership and
disposition of the notes. The summary does not purport to deal with federal
income tax consequences applicable to all categories of holders, some of which
may be subject to special rules. For example, it does not discuss the tax
treatment of beneficial owners of notes ("Note Owners") that are insurance
companies, regulated investment companies or dealers in securities. Moreover,
there are no cases or Internal Revenue Service ("IRS") rulings on similar
transactions involving debt interests issued by a trust with terms similar to
those of the notes. As a result, the IRS might disagree with all or part of the
discussion below. Prospective investors are urged to consult their own tax
advisors in determining the federal, state, local, foreign and any other tax
consequences to them of the purchase, ownership and disposition of the notes.
The following summary is based upon current provisions of the Internal
Revenue Code of 1986, as amended (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. Each owner trust will be
provided with an opinion of tax counsel specified in the related prospectus
supplement ("Federal Tax Counsel") regarding some related federal income tax
matters discussed below. An opinion of Federal 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. The opinion of Federal Tax Counsel specifically
addresses only those issues specifically identified below as being covered by
that opinion; however, the opinion also states that the additional discussion
set forth below accurately sets forth the advice of Federal Tax Counsel with
respect to material federal income tax issues. For purposes of the following
summary, references to the owner trust, the notes, and related terms, parties
and documents shall be deemed to refer, unless otherwise specified in this
prospectus, to each owner trust and the notes, and related terms, parties and
documents applicable to the owner trust.
TAX CHARACTERIZATION OF THE OWNER TRUSTS
Upon the issuance of notes, Federal Tax Counsel will deliver its
opinion that the relevant owner trust will not be an association, or publicly
traded partnership, taxable as a corporation for federal income tax purposes.
The opinion of Federal Tax Counsel will be based on the assumption that the
terms of the related trust agreement and documents will be complied with, and on
counsel's conclusions that the nature of the income of the owner trust, or
restrictions, if any, on transfers of the equity interests in the owner trust,
will exempt the owner trust from the rule that some publicly traded partnerships
are taxable as corporations.
If a owner trust were taxable as a corporation for federal income tax
purposes, the owner trust would be subject to corporate income tax on its
taxable income. The owner trust's taxable income would include all of its income
with respect to the contracts and other assets held by the owner trust, which
might be reduced by its interest expense on the notes. Any corporate income tax
could materially reduce cash available to make payments of principal and
interest on the notes.
TAX CONSEQUENCES TO NOTE OWNERS
TREATMENT OF THE NOTES AS INDEBTEDNESS
The owner trust will agree, and the Note Owners will agree by their
purchase of notes, to treat the notes as debt for federal tax purposes. Federal
Tax Counsel will, subject to exceptions which, if applicable, will be specified
in the related prospectus supplement, advise the owner trust that the notes will
be classified as debt for federal income tax purposes, or classified in any
other manner as shall be provided in the related prospectus supplement. If,
contrary to the opinion of Federal Tax Counsel, the IRS successfully asserted
that one or more of the notes did not represent debt for federal income tax
purposes, the notes might be treated as equity interests in the owner trust. If
so treated, the owner trust might be treated as a publicly traded partnership
that would be taxable as a corporation unless it met particular qualifying
income tests, and the resulting taxable corporation would not be able to reduce
its taxable income by deductions for interest expense on notes recharacterized
as equity. Treatment of the notes as equity interests in a partnership could
have adverse tax consequences to some holders, even if the owner trust were not
treated as a publicly traded partnership taxable as a corporation. For example,
income allocable to foreign holders might be subject to United States tax and
United States tax return filing and withholding requirements, income allocable
to tax-exempt holders might constitute "unrelated business taxable income" (if
some, but not all, of the notes were recharacterized as equity in a
partnership), individual holders might be subject to limitations on their
ability to deduct their share of owner trust expenses, and income from the owner
trust's assets would be taxable to Note Owners without regard to whether cash
distributions are made to such Note Owners and without regard to the Note
Owners' method of tax accounting. The discussion below assumes that the notes
will be characterized as debt for federal income tax purposes.
INTEREST INCOME ON THE NOTES
GENERAL. Expect as discussed below, interest on a note generally is
includable in a Note Owner's income as ordinary interest income when actually or
constructively received, if the Note Owner uses the cash method of accounting
for federal income tax purposes, or when accrued, if the Note Owner uses an
accrual method of accounting for federal income tax purposes.
ORIGINAL ISSUE DISCOUNT. Notes of certain series may be issued with
"original issue discount" within the meaning of Section 1273(a) of the Code.
Holders of notes issued with original issue discount generally must include
original issue discount in gross income for federal income tax purposes as it
accrues, in advance of receipt of the cash attributable to such income, under a
method that takes account of the compounding of interest. The Code requires that
information with respect to the original issue discount accruing on any note be
reported periodically to the IRS and to certain categories of Note Owners.
Each owner trust will report original issue discount, if any, to the
Note Owners based on the Treasury regulations relating to original issue
discount (the "OID Regulations"). The OID Regulations concerning contingent
payment debt instruments do not apply to the prepayable debt instruments, such
as the notes.
The OID Regulations provide that, in the case of debt instruments such
as the notes, (i) the amount and rate of accrual of original issue discount will
be calculated based on a reasonable assumed prepayment rate (the "Prepayment
Assumption"), and (ii) adjustments will be made in the amount and rate of
accrual of such discount to reflect differences between the actual prepayment
rate and the Prepayment Assumption. The method for determining the appropriate
assumed prepayment rate will eventually be set forth in Treasury regulations,
but those regulations have not yet been issued. The applicable legislative
history indicates, however, that such regulations will provide that the assumed
prepayment rate for securities such as the notes will be the rate used in
pricing the initial offering of those securities. If the notes of a series are
issued with original issue discount, the Prospectus Supplement for that series
of notes will specify the Prepayment Assumption. However, no representation is
made that the notes of that series will, in fact, prepay at a rate based on the
Prepayment Assumption or at any other rate.
In general, a note will be considered to be issued with original issue
discount if its stated redemption price at maturity exceeds its issue price.
Except as discussed below under "--Payment Lag Notes; Initial Period
Considerations," and "--Qualified Stated Interest," and in the case of certain
Variable Rate Notes (as defined below) and accrual notes, the stated redemption
price at maturity of a note is its principal amount. The issue price of a note
is the initial offering price to the public (excluding bond houses and brokers)
at which a substantial amount of the class of notes is sold. Notwithstanding the
general definition of original issue discount, such discount will be considered
to be zero for any note on which such discount is less than 0.25% of its stated
redemption price at maturity multiplied by its weighted average life. The
weighted average life of a note apparently is computed for purposes of this DE
MINIMIS rule as the sum, for all distributions included in the stated redemption
price at maturity of the note, of the amounts determined by multiplying (i) the
number of complete years (rounding down for partial years) from the applicable
closing date to the date on which each such distribution is expected to be made,
determined under the Prepayment Assumption, by (ii) a fraction, the numerator of
which is the amount of such distribution and the denominator of which is the
note's stated redemption price at maturity. The OID Regulations provide that
holders will include any DE MINIMIS original issue discount ratably as payments
of stated principal are made on the notes.
The Note Owner of a note issued with original issue discount must
include in gross income the sum of the "daily portions" of such original issue
discount for each day during its taxable year on which it held such note. In the
case of an original Note Owner, the daily portions of original issue discount
are determined first by calculating the portion of the original issue discount
that accrued during each period (an "accrual period") that begins on the day
following a payment date (or in the case of the first such period, begins on the
applicable closing date) and ends on the next succeeding payment date. The
original issue discount accruing during each accrual period is then allocated
ratably to each day during such period to determine the daily portion of
original issue discount for that day.
The portion of the original issue discount that accrues in any accrual
period will equal the excess, if any, of (i) the sum of (A) the present value,
as of the end of the accrual period, of all of the distributions to be made on
the note, if any, in future periods and (B) the distributions made on the note
during the accrual period that are included in such note's stated redemption
price at maturity, over (ii) the adjusted issue price of such note at the
beginning of the accrual period. The present value of the remaining
distributions referred to in the preceding sentence will be calculated (i)
assuming that the notes will be prepaid in future periods at a rate computed in
accordance with the Prepayment Assumption and (ii) using a discount rate equal
to the original yield to maturity of the notes. For these purposes, the original
yield to maturity of the notes will be calculated based on their issue price and
assuming that the notes will be prepaid in accordance with the Prepayment
Assumption. The adjusted issue price of a note at the beginning of any accrual
period will equal the issue price of such note, increased by the portion of the
original issue discount that has accrued during prior accrual periods, and
reduced by the amount of any distributions made on such note in prior accrual
periods that were included in such note's stated redemption price at maturity.
The daily portions of original issue discount may increase or decrease
depending on the extent to which the actual rate of prepayments diverges from
the Prepayment Assumption. If original issue discount accruing during any
accrual period computed as described above is negative, a Note Owner may only be
entitled to offset such amount against positive original issue discount accruing
on such note in future accrual periods. Such a Note Owner may be entitled to
deduct a loss to the extent that its remaining basis would exceed the maximum
amount of future payments to which such Note Owner is entitled. However,
Treasury regulations do not address this issue.
A subsequent Note Owner that purchases a note issued with original
issue discount at a cost that is less than its remaining stated redemption price
at maturity will also generally be required to include in gross income, for each
day on which it holds such note, the daily portions of original issue discount
with respect to the note, calculated as described above. However, if (i) the
excess of the remaining stated redemption price at maturity over such cost is
less than (ii) the aggregate amount of such daily portions for all days after
the date of purchase until final retirement of such note, then such daily
portions will be reduced proportionately in determining the income of such Note
Owner.
QUALIFIED STATED INTEREST. Interest payable on a note which qualifies
as "qualified stated interest" for purposes of the OID Regulations will not be
includable in the stated redemption price at maturity of the note. Conversely,
if the interest on a note does not constitute "qualified stated interest," such
interest will be includable in the stated redemption price at maturity of the
note and the note, consequently, will have original issue discount. Interest
payments will not qualify as qualified stated interest unless the interest
payments are "unconditionally payable." The OID Regulations state that interest
is unconditionally payable if reasonable legal remedies exist to compel timely
payment, or the debt instrument otherwise provides terms and conditions that
make the likelihood of late payment (other than a late payment that occurs
within a reasonable grace period) or nonpayment of interest a remote
contingency, as defined in the OID Regulations. Any terms or conditions that do
not reflect arm's length dealing or that the Note Owner does not intend to
enforce are not considered.
PREMIUM. A purchaser of a note that purchases such note at a cost
greater than its remaining stated redemption price at maturity will be
considered to have purchased such note at a premium, and may, under Section 171
of the Code, elect to amortize such premium under a constant yield method over
the life of the note. The Prepayment Assumption is probably taken into account
in determining the life of the note for this purpose. Except as provided in
regulations, amortizable premium will be treated as an offset to interest income
on the note.
PAYMENT LAG NOTES; INITIAL PERIOD CONSIDERATIONS. Certain notes may
provide for distributions of interest based on a period that is the same length
as the interval between payment dates but ends prior to each payment date. Any
interest that accrues prior to the applicable closing date may be treated under
the OID Regulations either (i) as part of the issue price and the stated
redemption price at maturity of the notes or (ii) as not included in the issue
price or the stated redemption price. The OID Regulations provide a special
application of the DE MINIMIS rule for debt instruments with long first accrual
periods where the interest payable for the first period is at a rate which is
effectively less than that which applies in all other periods. In such cases,
for the sole purpose of determining whether original issue discount is DE
MINIMIS, the OID Regulations provide that the stated redemption price is equal
to the instrument's issue price plus the greater of the amount of foregone
interest or the excess (if any) of the instrument's stated principal amount over
its issue price.
VARIABLE RATE NOTES. Under the OID Regulations, notes paying interest
at a variable rate (each, a "Variable Rate Note") are subject to special rules.
A Variable Rate Note will qualify as a "variable rate debt instrument" if (i)
its issue price does not exceed the total noncontingent principal payments due
under the Variable Rate Note by more than a specified DE MINIMIS amount; (ii) it
provides for stated interest, paid or compounded at least annually, at a current
value of (a) one or more qualified floating rates, (b) a single fixed rate and
one or more qualified floating rates, (c) a single objective rate or (d) a
single fixed rate and a single objective rate that is a qualified inverse
floating rate; and (iii) it does not provide for any principal payments that are
contingent, as defined in the OID Regulations, except as provided in (i), above.
Because the OID Regulations relating to contingent payment debt instruments do
not apply to prepayable debt instruments, such as the notes, principal payments
on the notes should not be considered contingent for this purpose.
A "qualified floating rate" is any variable rate where variations in
the value of such rate can reasonably be expected to measure contemporaneous
variations in the cost of newly borrowed funds in the currency in which the
Variable Rate Note is denominated. A multiple of a qualified floating rate will
generally not itself constitute a qualified floating rate for purposes of the
OID Regulations. However, a variable rate equal to (i) the product of a
qualified floating rate and a fixed multiple that is greater than 0.65 but not
more than 1.35 or (ii) the product of a qualified floating rate and a fixed
multiple that is greater than 0.65 but not more than 1.35, increased or
decreased by a fixed rate will constitute a qualified floating rate for purposes
of the OID Regulations. In addition, under the OID Regulations, two or more
qualified floating rates that can reasonably be expected to have approximately
the same values throughout the term of the Variable Rate Note will be treated as
a single qualified floating rate (a "Presumed Single Qualified Floating Rate").
Two or more qualified floating rates with values within 25 basis points of each
other as determined on the Variable Rate Note's issue date will be conclusively
presumed to be a Presumed Single Qualified Floating Rate. Notwithstanding the
foregoing, a variable rate that would otherwise constitute a qualified floating
rate, but which is subject to one or more restrictions such as a cap or floor,
will not be a qualified floating rate for purposes of the OID Regulations unless
the restriction is fixed throughout the term of the Variable Rate Note or the
restriction is not reasonably expected as of the issue date to significantly
affect the yield of the Variable Rate Note.
An "objective rate" is a rate that is not itself a qualified floating
rate but which is determined using a single fixed formula and which is based
upon objective financial or economic information. The OID Regulations also
provide that other variable rates may be treated as objective rates if so
designated by the IRS in the future. Despite the foregoing, a variable rate of
interest on a Variable Rate Note will not constitute an objective rate if it is
reasonably expected that the average value of such rate during the first half of
the Variable Rate Note's term will be either significantly less than or
significantly greater than the average value of the rate during the final half
of the Variable Rate Note's term. Further, an objective rate does not include a
rate that is based on information that is within the control of the issuer (or a
party related to the issuer) or that is unique to the circumstances of the
issuer (or a party related to the issuer). An objective rate will qualify as a
"qualified inverse floating rate" if such rate is equal to a fixed rate minus a
qualified floating rate and variations in the rate can reasonably be expected to
inversely reflect contemporaneous variations in the qualified floating rate. The
OID Regulations also provide that if a Variable Rate Note provides for stated
interest at a fixed rate for an initial period of less than one year followed by
a variable rate that is either a qualified floating rate or an objective rate
and if the variable rate on the Variable Rate Note's issue date is intended to
approximate the fixed rate, then the fixed rate and the variable rate together
will constitute either a single qualified floating rate or objective rate, as
the case may be (a "Presumed Single Variable Rate"). If the value of the
variable rate and the initial fixed rate are within 25 basis points of each
other as determined on the Variable Rate Note's issue date, the variable rate
will be conclusively presumed to approximate the fixed rate.
For Variable Rate Notes that qualify as "variable rate debt
instruments" under the OID Regulations and provide for interest at either a
single qualified floating rate, a single objective rate, a Presumed Single
Qualified Floating Rate or a Presumed Single Variable Rate throughout the term
(a "Single Variable Rate Note"), original issue discount is computed as
described above in "--Interest Income on the Notes--Original Issue Discount"
based on the following: (i) stated interest on the Single Variable Rate Note
which is unconditionally payable in cash or property (other than debt
instruments of the issuer) at least annually will constitute qualified stated
interest; (ii) by assuming that the variable rate on the Single Variable Rate
Note is a fixed rate equal to: (a) in the case of a Single Variable Rate Note
with a qualified floating rate or a qualified inverse floating rate, the value,
as of the issue date, of the qualified floating rate or the qualified inverse
floating rate or (b) in the case of a Single Variable Rate Note with an
objective rate (other than a qualified inverse floating rate), a fixed rate
which reflects the reasonably expected yield for such Single Variable Rate Note;
and (iii) the qualified stated interest allocable to an accrual period is
increased (or decreased) if the interest actually paid during an accrual period
exceeds (or is less than) the interest assumed to be paid under the assumed
fixed rate described in (ii), above.
In general, any Variable Rate Note other than a Single Variable Rate
Note (a "Multiple Variable Rate Note") that qualifies as a "variable rate debt
instrument" will be converted into an "equivalent" fixed rate debt instrument
for purposes of determining the amount and accrual of original issue discount
and qualified stated interest on the Multiple Variable Rate Note. The OID
Regulations generally require that such a Multiple Variable Rate Note be
converted into an "equivalent" fixed rate debt instrument by substituting any
qualified floating rate or qualified inverse floating rate provided for under
the terms of the Multiple Variable Rate Note with a fixed rate equal to the
value of the qualified floating rate or qualified inverse floating rate, as the
case may be, as of the Multiple Variable Rate Note's issue date. Any objective
rate (other than a qualified inverse floating rate) provided for under the terms
of the Multiple Variable Rate Note is converted into a fixed rate that reflects
the yield that is reasonably expected for the Multiple Variable Rate Note. (A
Multiple Variable Rate Note may not bear more than one objective rate.) In the
case of a Multiple Variable Rate Note that qualifies as a "variable rate debt
instrument" and provides for stated interest at a fixed rate in addition to
either one or more qualified floating rates or a qualified inverse floating
rate, the fixed rate is initially converted into a qualified floating rate (or a
qualified inverse floating rate, if the Multiple Variable Rate Note provides for
a qualified inverse floating rate). Under such circumstances, the qualified
floating rate or qualified inverse floating rate that replaces the fixed rate
must be such that the fair market value of the Multiple Variable Rate Note as of
the Multiple Variable Rate Note's issue date is approximately the same as the
fair market value of an otherwise identical debt instrument that provides for
either the qualified floating rate or qualified inverse floating rate rather
than the fixed rate. Subsequent to converting the fixed rate into either a
qualified floating rate or a qualified inverse floating rate, the Multiple
Variable Rate Note is then converted into an "equivalent" fixed rate debt
instrument in the manner described above.
Once the Multiple Variable Rate Note is converted into an "equivalent"
fixed rate debt instrument pursuant to the foregoing rules, the amounts of
original issue discount and qualified stated interest, if any, are determined
for the "equivalent" fixed rate debt instrument by applying the original issue
discount rules to the "equivalent" fixed rate debt instrument in the manner
described above in "--Interest Income on the Notes--Original Issue Discount." A
holder of the Multiple Variable Rate Note will account for such original issue
discount and qualified stated interest as if the holder held the "equivalent"
fixed rate debt instrument. In each accrual period, appropriate adjustments will
be made to the amount of qualified stated interest or original issue discount
assumed to have been accrued or paid with respect to the "equivalent" fixed rate
debt instrument in the event that such amounts differ from the actual amount of
interest accrued or paid on the Multiple Variable Rate Note during the accrual
period.
If a Variable Rate Note does not qualify as a "variable rate debt
instrument" under the OID Regulations, then the Variable Rate Note would be
treated as a contingent payment debt obligation. The manner in which a Variable
Rate Note would be taxed if such note were treated as a contingent payment debt
obligation is not governed by the OID Regulations relating to contingent payment
debt obligations which do not apply to prepayable debt instruments, such as the
notes, and Treasury regulations do not otherwise address this point.
MARKET DISCOUNT. A Note Owner that acquires a note at a market
discount (that is, a discount that exceeds any unaccrued original issue
discount) will recognize gain upon receipt of a principal distribution,
regardless of whether the distribution is scheduled or is a prepayment. In
particular, the Note Owner will be required to allocate that principal
distribution first to the portion of the market discount on such note that has
accrued but has not previously been includable in income, and will recognize
ordinary income to that extent. In general terms, unless Treasury regulations
when issued provide otherwise, market discount on a note may be treated, at the
election of the holder of the note, as accruing either (i) under a constant
yield method, taking into account the Prepayment Assumption, or (ii) in
proportion to accruals of original issue discount (or, if there is no original
issue discount, in proportion to stated interest on the note).
In addition, a Note Owner may be required to defer deductions for a
portion of the Note Owner's interest expense on any debt incurred or continued
to purchase or carry a note purchased with market discount. The deferred portion
of any interest deduction would not exceed the portion of the market discount on
the note that accrues during the taxable year in which such interest would
otherwise be deductible and, in general, would be deductible when such market
discount is included in income upon receipt of a principal distribution on, or
upon the sale of, the note. The Code requires that information necessary to
compute accruals of market discount be reported periodically to the IRS and to
certain categories of Note Owners.
Notwithstanding the above rules, market discount on a note will be
considered to be zero if such discount is less than 0.25% of the remaining
stated redemption price at maturity of such note multiplied by its weighted
average remaining life. Weighted average remaining life presumably is calculated
in a manner similar to weighted average life (described above under "--Interest
Income on the Notes--Original Issue Discount"), taking into account
distributions (including prepayments) prior to the date of acquisition of such
note by the subsequent purchaser. If market discount on a note is treated as
zero under this rule, the actual amount of such discount must be allocated to
the remaining principal distributions on such note in proportion to the amounts
of such principal distributions, and when each such distribution is made, gain
equal to the discount, if any, allocated to the distribution will be recognized.
ELECTION TO TREAT ALL INTEREST UNDER THE CONSTANT YIELD RULES. The OID
Regulations provide that the holder of a debt instrument issued after April 4,
1994 may elect to include in gross income all interest that accrues on such debt
instrument using the constant yield method. For purposes of this election,
interest includes stated interest, original issue discount, and market discount,
as adjusted to account for any premium. Note Owners should consult their own tax
advisors regarding the availability or advisability of such an election.
SALES OF NOTES
If a note is sold, the seller will recognize gain or loss equal to the
difference between the amount realized on the sale and its adjusted basis in the
note. A holder's adjusted basis in a note generally equals the cost of the note
to the holder, increased by income reported by the holder with respect to the
note and reduced (but not below zero) by distributions on the note (other than
qualified stated interest) received by the holder and by amortized premium.
While any such gain or loss generally will be capital gain or loss provided the
Note is held as a capital asset, gain recognized on the sale of a note by a
seller who purchased the note at a market discount would be taxable as ordinary
income in an amount not exceeding the portion of such discount that accrued
during the period the note was held by such seller, reduced by any market
discount includable in income under the rules described above under "--Interest
Income on the Notes--Market Discount." Further, the notes will be "evidences of
indebtedness" within the meaning of Section 582(c)(1) of the Code, so that gain
or loss recognized from a sale of a note by a bank or other financial
institution to which such section applies would be ordinary income or loss.
SHORT-TERM NOTES
In the case of a note with a maturity of one year or less from its
issue date (a "Short-Term Note"), no interest is treated as qualified stated
interest, and therefore all interest is included in original issue discount.
Note Owners that report income for federal income tax purposes on an accrual
method and some other Note Owners, including banks and certain dealers in
securities, are required to include original issue discount in income on
Short-Term Notes on a straight-line basis, unless an election is made to accrue
the original issue discount according to a constant yield method based on daily
compounding.
Any other Note Owner of a Short-Term Note is not required to accrue
original issue discount for federal income tax purposes, unless it elects to do
so. In the case of a Note Owner that is not required, and does not elect, to
include original issue discount in income currently, any gain realized on the
sale, exchange or retirement of a Short-Term Note is ordinary income to the
extent of the original issue discount accrued on a straight-line basis, or, if
elected, according to a constant yield method based on daily compounding,
through the date of sale, exchange or retirement. In addition, Note Owners that
are not required, and do not elect, to include original issue discount in income
currently are required to defer deductions for any interest paid on indebtedness
incurred or continued to purchase or carry a Short-Term Note in an amount not
exceeding the deferred interest income with respect to the Short-Term Note,
which includes both the accrued original issue discount and accrued interest
that are payable but that have not been included in gross income, until the
deferred interest income is realized. A Note Owner may elect to apply the
foregoing rules, except for the rule characterizing gain on sale, exchange or
retirement as ordinary, with respect to "acquisition discount" rather than
original issue discount. Acquisition discount is the excess of the stated
redemption price at maturity of the Short-Term Note over the Note Owner's basis
in the Short-Term Note. This election applies to all obligations acquired by the
taxpayer on or after the first day of the first taxable year to which the
election applies, unless revoked with the consent of the IRS. A Note Owner's tax
basis in a Short-Term Note is increased by the amount included in the Note
Owner's income with respect to the Note.
FOREIGN INVESTORS IN NOTES
Except as discussed below, a Note Owner that is not a "United States
person" (as defined below) generally will not be subject to United States income
or withholding tax in respect of a distribution on a note provided that (i) the
holder complies to the extent necessary with certain certification requirements,
which generally relate to the identity of the beneficial owner and the status of
the beneficial owner as a person that is not a United States person (as defined
below), (ii) the holder is not a "10-percent shareholder" within the meaning of
Section 871(h)(3)(B) of the Code, which could be interpreted to include a person
that directly or indirectly owns 10% or more of the equity interests in the
owner trust, (iii) the holder is not a "controlled foreign corporation" (as
defined in the Code) related to the owner trust or related to a 10 percent
holder of equity interests in the owner trust, and (iv) the holder is not
engaged in a United States trade or business, or otherwise subject to federal
income tax as a result of any direct or indirect connection to the United States
other than through its ownership of a note. For these purposes, the term "United
States person" means (i) a citizen or resident of the United States, (ii) a
corporation or partnership (or other entity properly treated as a corporation or
partnership for federal income tax purposes) created or organized in or under
the laws of the United States or any political subdivision thereof, (iii) an
estate whose income is includable in gross income for United States federal
income taxation regardless of its source, and (iv) a trust for which one or more
United States fiduciaries have the authority to control all substantial
decisions and for which a court of the United States can exercise primary
supervision over the trust's administration. A "Foreign Person" is any person
that is not a United States person. Each Note Owner should consult its tax
advisors regarding the tax documentation and certifications that must be
provided to secure the exemption from United States withholding taxes.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a note by a Foreign Person generally will be exempt from
United States federal income and withholding tax, provided that (i) such gain is
not effectively connected with the conduct of a trade or business in the United
States by the Foreign Person and (ii) in the case of an individual Foreign
Person, the Foreign Person is not present in the United States for 183 days or
more in the taxable year.
If the interest, gain or income on a note held by a Foreign Person is
effectively connected with the conduct of a trade or business in the United
States by the Foreign Person (although exempt from the withholding tax
previously discussed if the holder provides an appropriate statement
establishing that such income is so effectively connected), the holder generally
will be subject to United States federal income tax on the interest, gain or
income at regular federal income tax rates. In addition, if the Foreign Person
is a foreign corporation, it may be subject to a branch profits tax equal to 30%
of its "effectively connected earnings and profits," within the meaning of the
Code, for the taxable year, as adjusted for certain items, unless it qualifies
for a lower rate under an applicable tax treaty (as modified by the branch
profits tax rules).
BACKUP WITHHOLDING ON NOTES
Distributions made on the notes and proceeds from the sale of notes to
or through certain brokers may be subject to a "backup" withholding tax of 31
percent of "reportable payments" (including interest accruals, original issue
discount, and, under certain circumstances, distributions in reduction of
principal amount) if the holder of the notes fails to comply with certain
identification procedures, unless the Note Owner is an exempt recipient under
applicable provisions of the Code and, if necessary, demonstrates such status.
Any amounts so withheld from distributions on the notes would be refunded by the
IRS or allowable as a credit against the Note Owner's federal income tax.
STATE AND LOCAL TAX CONSIDERATIONS
The discussion above does not address the tax consequences of
purchase, ownership or disposition of notes under any state or local tax laws.
We recommend that investors consult their own tax advisors regarding state and
local tax consequences.
* * *
THE TAX DISCUSSIONS SET FORTH ABOVE ARE INCLUDED FOR GENERAL INFORMATION ONLY
AND MAY NOT BE APPLICABLE DEPENDING UPON A NOTE OWNER'S PARTICULAR TAX
SITUATION. PROSPECTIVE PURCHASERS OF NOTES SHOULD CONSULT THEIR TAX ADVISORS
WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND
DISPOSITION OF NOTES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL AND
FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL OR
OTHER TAX LAWS.
ERISA CONSIDERATIONS
GENERAL
A fiduciary of a pension, profit-sharing, retirement or other employee
benefit plan subject to Title I of ERISA should consider the fiduciary standards
under the Employee Retirement Income Security Act of 1974, as amended ("ERISA")
in the context of the plan's particular circumstances before authorizing an
investment of a portion of such plan's assets in the Notes. Accordingly,
pursuant to Section 404 of ERISA, such fiduciary should consider among other
factors (i) whether the investment is for the exclusive benefit of plan
participants and their beneficiaries; (ii) whether the investment satisfies the
applicable diversification requirements; (iii) whether the investment is in
accordance with the documents and instruments governing the plan; and (iv)
whether the investment is prudent, considering the nature of the investment.
Fiduciaries of plans also should consider ERISA's prohibition on improper
delegation of control over, or responsibility for, plan assets.
In addition, employee benefit plans or other retirement arrangements
subject to ERISA, as well as individual retirement accounts, certain types of
Keogh plans not subject to ERISA but subject to Section 4975 of the Code, or any
entity (including insurance company separate or general accounts) whose
underlying assets include plan assets by reason of such plans, arrangements or
accounts investing in the entity (each, a "Plan") are prohibited from engaging
in a broad range of transactions involving Plan assets and persons having
certain specified relationships to a Plan ("parties in interest" and
"disqualified persons"). Such transactions are treated as "prohibited
transactions" under Sections 406 of ERISA and excise taxes and/or other
penalties are imposed upon such persons under ERISA and/or Section 4975 of the
Code unless an exemption applies. The depositor, underwriter of the Notes, the
servicer, the owner trustee, the indenture trustee and certain of their
affiliates might be considered "parties in interest" or "disqualified persons"
with respect to a Plan. If so, the acquisition, holding or disposition of Notes
by or on behalf of such Plan could be considered to give rise to a "prohibited
transaction" within the meaning of ERISA and the Code unless a statutory,
regulatory or administrative exception or exemption is available.
ERISA CONSIDERATIONS RELATING TO PLAN ASSETS
PLAN ASSETS. In 29 C.R.F ss.2510.3-101 (the "Plan Asset Regulations"),
the U.S. Department of Labor ("DOL") has defined what constitutes "plan assets"
for purposes of ERISA and Section 4975 of the Code. The Plan Asset Regulations
provide that if a Plan makes an investment in an "equity interest" in an entity,
an undivided portion of the assets of the entity will be considered the assets
of such Plan unless certain exceptions set forth in such Regulations apply. As a
result, (i) if a Plan is deemed to have acquired an interest in the assets of
the owner trust and not merely an interest in the Notes, (ii) the fiduciary
investment standards of ERISA could apply to such assets and (iii) transactions
occurring in the course of managing, operating and servicing the owner trust and
its assets might constitute prohibited transactions, unless a statutory,
regulatory or administrative exemption applies.
Under the Plan Asset Regulations, the assets of the owner trust would
be treated as "plan assets" of a Plan for the purposes of ERISA and the Code
only if the Plan acquires an "equity interest" in the owner trust and none of
the exceptions contained in the Plan Asset Regulations is applicable. An equity
interest is defined under the Plan Asset Regulations as an interest other than
an instrument which is treated as indebtedness under applicable local law and
which has no substantial equity features. Assuming that the Notes are treated as
indebtedness without substantial equity features for purposes of the Plan Asset
Regulations, then such Notes will be eligible for purchase by Plans. However,
without regard to whether the Notes are treated as an "equity interest" for such
purposes, the acquisition or holding of Notes by or on behalf of a Plan could be
considered to give rise to a prohibited transaction if the owner trust or any of
its affiliates is or becomes a party in interest or disqualified person with
respect to such Plan, or in the event that a Note is purchased in the secondary
market and such purchase constitutes a sale or exchange between a Plan and a
party in interest or disqualified person with respect to such Plan. There can be
no assurance that the owner trust or any of its affiliates will not be or become
a party in interest or a disqualified person with respect to a Plan that
acquires Notes.
UNDERWRITER EXEMPTION
GENERAL DISCUSSION. The DOL has granted to Deutsche Bank Alex. Brown
an individual exemption, Prohibited Transaction Exemption 94-84, and to Deutsche
Morgan Grenfell/C.J. Lawrence Inc., similar approval (FAN 97-03E), which were
both amended by Prohibited Transaction Exemption 97-34 ("PTE 97-34") and further
recently amended pursuant to Prohibited Transaction Exemption 2000-58 ("PTE
2000-58") (collectively, the "Exemption") which is applicable to asset-backed
securities which meet its requirements whenever the Deutsche Banc Alex. Brown or
its affiliate is the sole underwriter, manager or co-manager of an underwriting
syndicate or is the selling or placement agent. The Exemption generally exempts
certain transactions from the application of certain of the prohibited
transaction provisions of ERISA and the Code provided that the conditions set
forth in the Exemption are satisfied. These transactions include the servicing,
managing and operation of investment trusts holding fixed (generally
non-revolving pools) of enumerated categories of assets which include those
Contracts which are installment obligations and the purchase, sale and holding
of securities which represent beneficial ownership interests in the assets of,
or obligations of, such trusts. The Exemption does not apply to investment
trusts whose assets include Contracts which are leases, as opposed to
installment obligations, although the rights to receive the lease payments may
serve as collateral in addition to the equipment.
GENERAL CONDITIONS OF EXEMPTION. The Exemption sets forth general
conditions which must be satisfied for a transaction relating to assets such as
the Contracts involving the purchase, sale and holding of asset-backed
securities to be eligible for exemptive relief thereunder. First, the
acquisition of such securities by Plans must be on terms that are at least as
favorable to the Plan as they would be in an arm's-length transaction with an
unrelated party. Second, the assets held by the investment trust must be
secured. Third, the securities may not be subordinated. Fourth, the securities
at the time of acquisition by the Plan must be rated in one of the three highest
generic rating categories by Standard & Poor's Ratings Services, a division of
The McGraw-Hill Companies, Inc., Moody's Investors Services, Inc. or Fitch, Inc.
(each, a "Rating Agency"). Fifth, the owner trustee and the indenture trustee
generally cannot be affiliates of any member of the "Restricted Group" which
consists of any (i) underwriter as defined in the Exemption, (ii) the depositor,
(iii) the servicer, (iv) the counterparty of any "interest swap" (as described
below) held as an asset of the investment trust and (v) any obligor with respect
to Contracts constituting more than 5% of the aggregate unamortized principal
balance of the Contracts held in the investment trust as of the date of initial
issuance of the securities. Sixth, the sum of all payments made to, and retained
by, such underwriters must represent not more than reasonable compensation for
underwriting the securities; the sum of all payments made to, and retained by,
the depositor pursuant to the assignment of the Contracts to the related
investment trust must represent not more than the fair market value of such
Contracts; and the sum of all payments made to, and retained by, the servicer
must represent not more than reasonable compensation for such person's services
under the Agreement and reimbursement of such person's reasonable expenses in
connection therewith. Seventh, (i) the investment pool must consist only of
assets of the type enumerated in the Exemption and which have been included in
other investment pools; (ii) securities evidencing interests in such other
investment pools must have been rated in one of the three highest generic rating
categories by one of the Rating Agencies for at least one year prior to a Plan's
acquisition of securities; and (iii) securities evidencing interests in such
other investment pools must have been purchased by investors other than Plans
for at least one year prior to a Plan's acquisition of securities. Finally, the
investing Plan must be an accredited investor as defined in Rule 501(a)(1) of
Regulation D of the Commission under the Securities Act of 1933, as amended. The
depositor assumes that only Plans which are accredited investors under the
federal securities laws will be permitted to purchase the securities.
RECENT AMENDMENTS TO EXEMPTION. As relevant to the Notes, PTE 2000-58
(the "Amendment") recently amended the Exemption to make the acquisition of
asset-backed securities by Plans in an initial offering or in a secondary market
transaction and the holding or transfer of securities on or after November 13,
2000 eligible for exemptive relief to a broader range of such securities. Prior
to such amendment, such securities had to be pass-through certificates issued by
a investment trust which was a grantor trust, REMIC or a FASIT whose corpus
could not include certain types of assets such as interest-rate swaps.
The Amendment to the Exemption permits investment trusts to issue
asset-backed securities which are Notes, as well as pass-through certificates,
provided a legal opinion is received to the effect that the noteholders have a
perfected security interest in the investment trust's assets. The exemptive
relief provided under the Exemption for any prohibited transactions which could
be caused as a result of the operation, management or servicing of the
investment trust and its assets would not be necessary with respect to Notes
with no substantial equity features issued as obligations of the trust. However,
effective for the acquisition, holding or transfer of Notes between a Plan and a
party in interest which occurs on or after November 13, 2000, the Exemption
would provide prohibited transaction exemptive relief.
The Amendment has expanded the types of permitted investment trusts to
include owner trusts, as well as grantor trusts, REMICs and FASITs. Owner trusts
are subject to certain restrictions in their governing documents to ensure that
their assets may not be reached by the creditors of the depositor in the event
of bankruptcy or other insolvency and must provide certain legal opinions.
PERMITTED ASSETS. The Amendment permits an interest-rate swap to be an
asset of an investment trust which issues securities acquired by Plans in an
initial offering or in the secondary market on or after November 13, 2000 and
clarifies the requirements regarding yield supplement agreements. An
interest-rate swap (or if purchased by or on behalf of the investment trust) an
interest-rate cap contract (collectively, a "Swap" or "Swap Agreement") is a
permitted trust asset if it: (a) is an "eligible Swap;" (b) is with an "eligible
counterparty;" (c) is purchased by a "qualified plan investor;" (d) meets
certain additional specific conditions which depend on whether the Swap is a
"ratings dependent Swap" or a "non-ratings dependent Swap" and (e) permits the
investment trust to make termination payments to the Swap (other than currently
scheduled payments) solely from excess spread or amounts otherwise payable to
the servicer or depositor.
An "eligible Swap" is one which: (a) is denominated in U.S. dollars;
(b) pursuant to which the investment trust pays or receives, on or immediately
prior to the respective payment or distribution date for the class of securities
to which the Swap relates, a fixed rate of interest or a floating rate of
interest based on a publicly available index (E.G., LIBOR or the U.S. Federal
Reserve's Cost of Funds Index (COFI)), with the investment trust receiving such
payments on at least a quarterly basis and obligated to make separate payments
no more frequently than the counterparty, with all simultaneous payments being
netted ("Allowable Interest Rate"); (c) has a notional amount that does not
exceed either: (i) the principal balance of the class of securities to which the
Swap relates, or (ii) the portion of the principal balance of such class
represented by obligations ("Allowable Notional Amount"); (d) is not leveraged
(I.E., payments are based on the applicable notional amount, the day count
fractions, the fixed or floating rates permitted above, and the difference
between the products thereof, calculated on a one-to-one ratio and not on a
multiplier of such difference) ("Leveraged"); (e) has a final termination date
that is either the earlier of the date on which the issuer terminates or the
related class of securities are fully repaid and (f) does not incorporate any
provision which could cause a unilateral alteration in the interest rate
requirements described above or the prohibition against leveraging.
An "eligible counterparty" means a bank or other financial institution
which has a rating at the date of issuance of the securities, which is in one of
the three highest long-term credit rating categories or one of the two highest
short-term credit rating categories, utilized by at least one of the Rating
Agencies rating the securities; provided that, if a counterparty is relying on
its short-term rating to establish eligibility hereunder, such counterparty must
either have a long-term rating in one of the three highest long-term rating
categories or not have a long-term rating from the applicable Rating Agency.
A "qualified plan investor" is a Plan or Plans where the decision to
buy such class of securities is made on behalf of the Plan by an independent
fiduciary qualified to understand the Swap transaction and the effect the Swap
would have on the rating of the securities and such fiduciary is either (a) a
"qualified professional asset manager" ("QPAM") under Prohibited Transaction
Class Exemption 84-14 ("PTCE 84-14") (see below), (b) an "in-house asset
manager" under Prohibited Transaction Class Exemption 96-23 ("PTCE 96-23") (see
below) or (c) has total assets (both Plan and non-Plan) under management of at
least $100 million at the time the securities are acquired by the Plan.
In "ratings dependent Swaps" (where the rating of a class of
securities is dependent on the terms and conditions of the Swap), the Swap
Agreement must provide that if the credit rating of the counterparty is
withdrawn or reduced by any Rating Agency below a level specified by the Rating
Agency, the servicer must, within the period specified under the Swap Agreement:
(a) obtain a replacement Swap Agreement with an eligible counterparty which is
acceptable to the Rating Agency and the terms of which are substantially the
same as the current Swap Agreement (at which time the earlier Swap Agreement
must terminate); or (b) cause the Swap counterparty to establish any
collateralization or other arrangement satisfactory to the Rating Agency such
that the then current rating by the Rating Agency of the particular class of
securities will not be withdrawn or reduced (and the terms of the Swap Agreement
must specifically obligate the counterparty to perform these duties for any
class of securities with a term of more than one year). In the event that the
servicer fails to meet these obligations, Plan certificateholders must be
notified in the immediately following periodic report which is provided to
certificateholders but in no event later than the end of the second month
beginning after the date of such failure. Sixty days after the receipt of such
report, the exemptive relief provided under the Exemption will prospectively
cease to be applicable to any class of securities held by a Plan which involves
such ratings dependent Swap.
"Non-ratings dependent Swaps" (those where the rating of the
securities does not depend on the terms and conditions of the Swap) are subject
to the following conditions. If the credit rating of the counterparty is
withdrawn or reduced below the lowest level permitted above, the servicer will,
within a specified period after such rating withdrawal or reduction: (a) obtain
a replacement Swap Agreement with an eligible counterparty, the terms of which
are substantially the same as the current Swap Agreement (at which time the
earlier Swap Agreement must terminate); (b) cause the counterparty to post
collateral with the investment trust in an amount equal to all payments owed by
the counterparty if the Swap transaction were terminated; or (c) terminate the
Swap Agreement in accordance with its terms.
An "eligible yield supplement agreement" is any yield supplement
agreement or similar arrangement (or if purchased by or on behalf of the
investment trust) an interest rate cap contract to supplement the interest rates
otherwise payable on obligations held by the investment trust ("EYS Agreement").
If the EYS Agreement has a notional principal amount and/or is written on an
International Swaps and Derivatives Association, Inc. (ISDA) form, the EYS
Agreement may only be held as an asset of the investment trust with respect to
securities purchased by Plans on or after April 7, 1998 if it meets the
following conditions: (a) it is denominated in U.S. dollars; (b) it pays an
Allowable Interest Rate; (c) it is not Leveraged; (d) it does not allow any of
these three preceding requirements to be unilaterally altered without the
consent of the owner and indenture trustee; (e) it is entered into between the
investment trust and an eligible counterparty and (f) it has an Allowable
Notional Amount.
LIMITATIONS ON SCOPE OF THE EXEMPTION. If the general conditions of
the Exemption are satisfied, the Exemption may provide an exemption from the
restrictions imposed by ERISA and the Code in connection with the initial
acquisition, transfer or holding, and the acquisition or disposition in the
secondary market, of the Notes by Plans. However, no exemption is provided from
the restrictions of ERISA for the acquisition or holding of a Note on behalf of
an "Excluded Plan" by any person who is a fiduciary with respect to the assets
of such Excluded Plan. For those purposes, an Excluded Plan is a Plan sponsored
by any member of the Restricted Group. Exemptive relief may also be provided for
the acquisition, holding and disposition of Notes by Plans if the fiduciary or
its affiliate is the obligor with respect to 5% or less of the fair market value
of the Contracts in the owner trust provided that: (i) the Plan is not an
Excluded Plan, (ii) each Plan's investment in each class of Notes does not
exceed 25% of the outstanding Notes in the class, (iii) after the Plan's
acquisition of the Notes, no more than 25% of the assets over which the
fiduciary has investment authority are invested in securities of a trust
containing assets which are sold or serviced by the same entity and (iv) in the
case of initial issuance (but not secondary market transactions), at least 50%
of each class of securities issued by the owner trust and at least 50% of the
aggregate interests in the owner trust are acquired by persons independent of
the Restricted Group.
In the event that the Exemption is not applicable to the Notes, one or
more other prohibited transactions exemptions may be available to Plans
purchasing or transferring the Notes depending in part upon the type of Plan
fiduciary making the decision to acquire the Notes and the circumstances under
which such decision is made. These exemptions include, but are not limited to,
Prohibited Transaction Class Exemption 90-1 (regarding investments by insurance
company pooled separate accounts), Prohibited Transaction Class Exemption 91-38
(regarding investments by bank collective investments funds), PTCE 84-14
(regarding transactions effected by "qualified professional asset managers"),
PTCE 95-60 (regarding investments by insurance company general accounts) and
PTCE 96-23 (regarding transactions effected by "in-house asset managers")
(collectively, the "Investor-Based Exemptions"). However, even if the conditions
specified in these Investor-Based Exemptions are met, the scope of the relief
provided under such Exemptions might or might not cover all acts which might be
construed as prohibited transactions.
EACH PROSPECTUS SUPPLEMENT WILL CONTAIN INFORMATION CONCERNING
CONSIDERATIONS RELATING TO ERISA AND THE CODE THAT ARE APPLICABLE TO THE RELATED
NOTES. BEFORE PURCHASING NOTES IN RELIANCE ON THE EXEMPTION, THE INVESTOR-BASED
EMEMPTIONS OR ANY OTHER EXEMPTION, A FIDUCIARY OF A PLAN SHOULD ITSELF CONFIRM
THAT REQUIREMENTS SET FORTH IN SUCH EXEMPTION WOULD BE SATISFIED.
ANY PLAN INVESTOR WHO PROPOSES TO USE "PLAN ASSETS" OF ANY PLAN TO
PURCHASE NOTES OF ANY SERIES OR CLASS SHOULD CONSULT WITH ITS COUNSEL WITH
RESPECT TO THE POTENTIAL CONSEQUENCES UNDER ERISA AND SECTION 4975 OF THE CODE
OF THE ACQUISITION AND OWNERSHIP OF SUCH NOTES.
Governmental plans and church plans as defined in ERISA are not
subject to ERISA or Code Section 4975, although they may elect to be qualified
under Section 401(a) of the Code and exempt from taxation under Section 501(a)
of the Code and would then be subject to the prohibited transaction rules set
forth in Section 503 of the Code. In addition, governmental plans may be subject
to federal, state and local laws which are to a material extent similar to the
provisions of ERISA or a Code Section 4975 ("Similar Law"). A fiduciary of a
governmental plan should make its own determination as to the propriety of an
investment in Notes under applicable fiduciary or other investment standards and
the need for the availability of any exemptive relief under any Similar Law.
RATINGS OF THE NOTES
The owner trust will not sell notes of a series unless one or more
nationally recognized rating agencies rate the notes of that series in a rating
category that signifies investment grade. Any rating that is made may be lowered
or withdrawn by the assigning rating agency at any time if, in its judgment,
circumstances so warrant. If a rating or ratings of notes is qualified, reduced
or withdrawn, no person or entity will be obligated to provide any additional
credit enhancement with respect to the notes so qualified, reduced or withdrawn.
The rating of the notes should be evaluated independently from similar
ratings on other types of securities. A rating is not a recommendation to buy,
sell or hold notes, inasmuch as a rating does not comment as to market price or
suitability for a particular investor. The ratings of the notes do not address
the likelihood of payment of principal on any class of notes prior to the stated
maturity date of the notes, or the possibility of the imposition of United
States withholding tax with respect to non-United States persons.
USE OF PROCEEDS
The proceeds from the sale of the notes of each series, after funding
a portion of the cash collateral account or other form of credit enhancement for
the series and paying the expenses of the sponsor, will be used to pay the
purchase price due to the depositor.
PLAN OF DISTRIBUTION
The sponsor or the owner trust may sell notes to or through
underwriters at the prices set forth in your prospectus supplement or in
negotiated transactions at varying prices, and also may sell notes directly to
other purchasers or through agents. The sponsor intends to offer the notes
through these various methods from time to time and that offerings may be made
concurrently through more than one of these methods or that an offering of a
particular series of notes may be made through a combination of these methods.
The underwriters will be obligated to purchase all of the notes
described in your prospectus supplement if any such notes are purchased. The
place and time of delivery for your notes will be set forth in your prospectus
supplement.
The sponsor, the originators, the depositor and certain of its
affiliates may agree to indemnify the underwriters and agents who participate in
the distribution of the notes against certain liabilities, including liabilities
under the Securities Act of 1933, as amended, or contribute to payments the
underwritten may be required to make.
Funds in cash collateral accounts and the trust accounts may, from
time to time, be invested in certain investments acquired from the underwriters.
If and to the extent required by applicable law or regulation, this
prospectus and your prospectus supplement will also be used by the underwriters
after the completion of the offering for market-making transactions in the
notes. Sales will be made at negotiated prices determined at the time of sales.
If and to the extent required by applicable law or regulation, this
prospectus and the prospectus supplement will also be used by the underwriter
after the completion of the offering in connection with offers and sales related
to market-making transactions in the notes in which the underwriter acts as
principal. The underwriter may also act as agent in these transactions. Sales
will be made at negotiated prices determined at the time of sale.
LEGAL MATTERS
Stroock & Stroock & Lavan LLP or other counsel specified in your
prospectus supplement, will provide a legal opinion relating to the notes in its
capacity as special counsel to the sponsor and the underwriters. Other legal
matters for underwriters will be passed upon by counsel to underwriters.
WHERE YOU CAN FIND MORE INFORMATION
Federal securities law requires the filing of certain information with
the Securities and Exchange Commission, including annual, quarterly and special
reports, proxy statements and other information. You can read and copy these
documents at the public reference facility maintained by the Securities and
Exchange Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549. You can also read and copy the reports, proxy statements
and other information at the following regional offices of the Securities and
Exchange Commission:
New York Regional Office Chicago Regional Office
Seven World Trade Center Citicorp Center
Suite 1300 500 West Madison Street, Suite 1400
New York, NY 10048 Chicago, IL 60661
Please call the Securities and Exchange Commission at 1-800-SEC-0330
for more information about the public reference rooms or visit the Securities
and Exchange Commission's web site at http://www.sec.gov to access available
filings.
The Securities and Exchange Commission allows offerors of securities
to incorporate by reference some of the information they file with it. This
means that offerors can disclose important information to you by referring you
to those documents. The information that the sponsor incorporates by reference
is considered to be part of this prospectus, and later information that the
sponsor files with the Securities and Exchange Commission will automatically
update and supersede this information.
All documents filed by the servicer, on behalf of a respective owner
trust, under Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of
1934, after the date of this prospectus and prior to the termination of the
offering of the notes will be incorporated by reference into this prospectus.
If you are a beneficial owner of the notes to whom a prospectus has
been delivered, the sponsor will, on request, send you a copy of the information
that has been incorporated by reference in this prospectus. The sponsor will
provide this information at no cost to you. Please address requests to: ACE
Securities Corp., 6525 Morrison Boulevard, Suite 318, Charlotte, North Carolina
28211, Telephone No. (704) 365-0569.
INDEX OF TERMS
Collection Account.......................................................35
Distribution Account.....................................................35
DTC......................................................................36
ERISA....................................................................64
excluded residual investment.............................................24
guaranteed residual investment...........................................24
Material modification....................................................32
PTCE.....................................................................65
Qualified institution....................................................35
true lease................................................................9
Trust Account............................................................35
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses expected to be incurred by the Registrant in
connection with the issuance and distribution of the securities being
registered, other than underwriting compensation, are as follows:
SEC Registration Fee $*
Trustee's Fees and Expenses (including counsel fees) *
Printing and Engraving Costs *
Rating Agency Fees *
Legal Fees and Expenses *
Blue Sky Fees and Expenses *
Accounting Fees and Expenses *
Miscellaneous *
Total *
* To be filed by amendment
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law provides that a
Delaware corporation may indemnify any persons, including officers and
directors, who are made, or are threatened to be made, parties to any
threatened, pending or completed legal action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action by or in
the right of such corporation), by reason of the fact that such person is or was
an officer or director of such corporation, or is or was serving at the request
of such corporation as a director, officer, employee or agent of another
corporation or enterprise. The indemnity may include expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding, provided such officer or director acted in good faith and in a
manner he reasonably believed to be in or not opposed to the corporation's best
interests and, for criminal proceedings, had no reasonable cause to believe that
his conduct was illegal. A Delaware corporation may indemnify officers and
directors in an action by or in the right of the corporation under the same
conditions, except that no indemnification is permitted without judicial
approval if the officer or director is adjudged to be liable to the corporation.
Where an officer or director is successful on the merits or otherwise in the
defense of any action referred to above, the corporation must indemnify him
against the expenses which such officer or director actually and reasonably
incurred.
The By-laws of the Registrant provide for indemnification of officers
and directors to the full extent permitted by the Delaware General Corporation
Law.
The transaction documents for each series of Securities will provide
either that the Registrant and the partners, directors, officers, employees and
agents of the Registrant, or that the Servicer or Master Servicer and the
partners, directors, officers, employees and agents of the Servicer or Master
Servicer, will be entitled to indemnification by the applicable Trust and will
be held harmless against any loss, liability or expense incurred in connection
with any legal action relating to the transaction documents, other than any
loss, liability or expense incurred by reason of willful misfeasance, bad faith
or gross negligence in the performance of his or its duties thereunder or by
reason of reckless disregard of his or its obligations and duties thereunder.
The Underwriting Agreement for each series of Securities will
generally provide that each underwriter will indemnify the Registrant, each of
its directors, each of its officers who signs the Registration Statement, and
each person who controls the Registrant within the meaning of either the
Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as
amended, against claims, damages, or liability, to which the Registrant may
become subject, under the Securities Act or the Exchange Act, or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged untrue
statement of material fact furnished by the underwriter for the preparation of a
prospectus, or included in any computational materials, term sheets or similar
documents delivered to prospective investors by the underwriter (other than any
such untrue statement that is based on materials previously provided to the
underwriter by the Registrant).
ITEM 16. EXHIBITS.
1.1 Form of Underwriting Agreement+
3.1 Restated Certificate of Incorporation of ACE Securities Corp.+
4.1.1 Form of Indenture (Owner Trust, Auto Receivables)**
4.1.2 Form of Indenture (Dealer Floorplan Securities)**
4.1.3 Form of Indenture between the Trust and the Indenture Trustee (Owner
Trust, Equipment Securities)**
4.1.4 Form of Indenture (Credit Card Securities)**
4.2 Form of Pooling and Servicing Agreement (Mortgage)+
4.2.1 Form of Trust Sale and Servicing Agreement (Dealer Floorplan
Securities)**
4.2.2 Form of Pooling and Servicing Agreement. (Equipment)**
4.2.3 Form of Pooling and Servicing Agreement (Dealer Floorplan Securities)**
4.2.4 Form of Master Pooling and Servicing Agreemenet (Credit Card
Securities)**
4.3.1 Form of Administration Agreement (Dealer Floorplan Securities)**
4.3.2 Form of Series Supplement to Pooling and Servicing Agreement (Credit
Card Securities)**
4.4.1 Form of Trust Agreement. (Owner Trust, Auto Receivables)**
4.4.2 Form of Trust Agreement (Dealer Floorplan Securities)**
4.4.3 Form of Trust Agreement among the Depositor, the Seller and the
Trustee (Owner Trust, Equipment Securities)**
4.4.4 Form of Trust Agreement (Owner Trust, Credit Card Securities)**
4.4.5 Form of Trust Agreement (Grantor Trust, Credit Card Securities)**
5.1 Opinion of Stroock & Stroock & Lavan LLP as to securities offered**
8.1 Opinion of Stroock & Stroock & Lavan LLP with respect to tax matters.
(included in Exhibit 5.1)**
10.1.1 Form of Loan Contribution Agreement. (Auto Receivables)**
10.1.2 Form of Receivables Purchase Agreement (Credit Card Securities)**
10.2.1 Form of Sale and Servicing Agreement. (Owner Trust, Auto
Receivables)**
23.1 Consent of Stroock & Stroock & Lavan LLP. (included in Exhibits 5.1
and 8.1)**
24.1 Powers of Attorney of directors and officers of ACE Securities Corp.
(included in the signature pages to this Registration Statement)***
25.1 Statement of Eligibility and Qualification of Indenture Trustee****
+ Incorporated herein by reference to the Registrant's Registration
Statement on Form S-3 (Reg. No. 333-56213), filed with the Commission
on June 5, 1999.
** Filed herewith.
*** Previously filed.
**** To be filed following the effectiveness of the Registration Statement.
Item 17. Undertakings
A. Undertaking in respect of Rule 415 offering.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement: (i) to include
any prospectus required by Section 10(a)(3) of the Securities Act of 1933, as
amended; (ii) to reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the Registration Statement;
and (iii) to include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change of such information in the Registration Statement; provided,
however, that paragraphs (i) and (iii) do not apply if the information required
to be included in the post-effective amendment is contained in periodic reports
filed by the Registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934, as amended, that are incorporated by reference
in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, as amended, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
B. Undertaking in respect of filings incorporating subsequent Exchange Act
documents by reference.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes to provide to the
Underwriter at the closing specified in the Underwriting Agreements Notes and
Certificates in the denominations and registered in the names as required by the
Underwriter to permit prompt delivery to each purchaser.
C. Undertaking in respect of indemnification.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act of 1933, as amended, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act of 1933, as amended, and will be
governed by the final adjudication of such issue.
D. Undertakings for registration statement permitted by Rule 430A.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, as amended, the information omitted from the form of prospectus filed
as part of this Registration Statement in reliance upon Rule 430A and contained
in the form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act of 1933, as amended, shall be deemed to
be part of this Registration Statement as of the time it was declared effective;
and
(2) For the purpose of determining any liability under the Securities
Act of 1933, as amended, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
E. Undertaking in respect of qualification of Indentures under the Trust
Indenture Act of 1939.
The Registrant hereby undertakes to file an application for the
purpose of determining the eligibility of the trustee to act under subsection
(a) of Section 310 of the Trust Indenture Act of 1939 in accordance with the
rules and regulations prescribed by the Commission under Section 305(b)(2) of
the Trust Indenture Act of 1939.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing on Form S-3 and has duly caused this
Amendment No. 1 to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Charlotte, North Carolina on the 5th
day of February, 2001.
ACE SECURITIES CORP.
By: /s/ Douglas K. Johnson
------------------------------
Name: Douglas K. Johnson
Title: President
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
Signature Title Date
* President and Director February 5, 2001
Douglas K. Johnson (Principal Executive Officer)
* Director and Secretary February 5, 2001
Evelyn Echevarria
* Treasurer and Director February 5, 2001
Juliana C. Johnson (Principal Financial and
Accounting Officer)
* By: /s/ Douglas K. Johnson
Name: Douglas K. Johnson
Title: President
EXHIBIT INDEX
1.1 Form of Underwriting Agreement+
3.1 Restated Certificate of Incorporation of ACE Securities Corp.+
4.1.1 Form of Indenture (Owner Trust, Auto Receivables)**
4.1.2 Form of Indenture (Dealer Floorplan Securities)**
4.1.3 Form of Indenture between the Trust and the Indenture Trustee (Owner
Trust, Equipment Securities)**
4.1.4 Form of Indenture (Credit Card Securities)**
4.2 Form of Pooling and Servicing Agreement (Mortgage)+
4.2.1 Form of Trust Sale and Servicing Agreement (Dealer Floorplan
Securities)**
4.2.2 Form of Pooling and Servicing Agreement. (Equipment)**
4.2.3 Form of Pooling and Servicing Agreement (Dealer Floorplan Securities)**
4.2.4 Form of Master Pooling and Servicing Agreemenet (Credit Card
Securities)**
4.3.1 Form of Administration Agreement (Dealer Floorplan Securities)**
4.3.2 Form of Series Supplement to Pooling and Servicing Agreement (Credit
Card Securities)**
4.4.1 Form of Trust Agreement. (Owner Trust, Auto Receivables)**
4.4.2 Form of Trust Agreement (Dealer Floorplan Securities)**
4.4.3 Form of Trust Agreement among the Depositor, the Seller and the
Trustee (Owner Trust, Equipment Securities)**
4.4.4 Form of Trust Agreement (Owner Trust, Credit Card Securities)**
4.4.5 Form of Trust Agreement (Grantor Trust, Credit Card Securities)**
5.1 Opinion of Stroock & Stroock & Lavan LLP as to securities offered**
8.1 Opinion of Stroock & Stroock & Lavan LLP with respect to tax matters.
(included in Exhibit 5.1)**
10.1.1 Form of Loan Contribution Agreement. (Auto Receivables)**
10.1.2 Form of Receivables Purchase Agreement (Credit Card Securities)**
10.2.1 Form of Sale and Servicing Agreement. (Owner Trust, Auto
Receivables)**
23.1 Consent of Stroock & Stroock & Lavan LLP. (included in Exhibits 5.1
and 8.1)**
24.1 Powers of Attorney of directors and officers of ACE Securities Corp.
(included in the signature pages to this Registration Statement)***
25.1 Statement of Eligibility and Qualification of Indenture Trustee****
+ Incorporated herein by reference to the Registrant's Registration
Statement on Form S-3 (Reg. No. 333-56213), filed with the Commission
on June 5, 1999.
** Filed herewith.
*** Previously filed.
**** To be filed following the effectiveness of the Registration Statement.