As filed with the Securities and Exchange Commission on April 5, 2001
Registration No. 333-45458
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 2 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 IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION
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. |_|
CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES TO AMOUNT TO BE AGGREGATE AGGREGATE AMOUNT OF
BE REGISTERED(1) REGISTERED(2) PRICE PER UNIT (2) OFFERING PRICE (2) REGISTRATION FEE (3)
Notes and Certificates $1,200,000,000 100% $1,200,000,000 $300,014
(1) The securities are also being registered for the purpose of market making.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) A fee in the amount of $264 has previously been paid.
Pursuant to Rule 429 under the Securities Act of 1933, the Prospectuses included
in this Amendment are combined prospectuses and relate to registration statement
No. 333-88101 as previously filed by the Registrant on Form S-3. Securities that
were previously registered by registration statement No. 333-88101, are being
carried forward in connection with this Registration Statement.
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 six 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 and Boat Prospectus") contemplates
the securitization of assets which may include (1) (a) certain new and used
boat, boat motor, jet ski and wave runner receivables or (b) asset backed
certificates or notes, each representing an interest in a trust fund consisting
of a pool of such receivables and (2) (a) certain new and used automobile,
recreational vehicle, including motor homes, campers, motorcycles, all terrain
vehicles, and snow mobiles, van, truck, bus and trailer receivables or (b) asset
backed certificates or notes, each representing an interest in a trust fund
consisting of a pool of such receivables.
The second Prospectus (the "Automobile Prospectus") contemplates the
securitization of assets which may include (1) certain new and used automobile,
recreational vehicle, including motor homes, campers, motorcycles, 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 third Prospectus (the "Boat Prospectus") contemplates the
securitization of assets which may include (1) certain new and used boat, boat
motor, jet ski and wave runner receivables or (2) asset backed certificates or
notes, each representing an interest in a trust fund consisting of a pool of
such receivables.
The fourth 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 fifth 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 sixth Prospectus (the "Equipment 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 equipment receivables.
This Registration Statement also contains three forms of prospectus
supplement with respect to the Automobile and Boat Prospectus, three forms of
prospectus supplement with respect to the Automobile Prospectus, three forms of
prospectus supplement with respect to the Boat Prospectus, two forms of
prospectus supplement with respect to the Mortgage Prospectus #1, two forms of
prospectus supplement with respect to Mortgage Prospectus #2, and one form of
prospectus supplement with respect to the Equipment Prospectus.
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
[ ] AUTO AND BOAT RECEIVABLES OWNER TRUST [ ]-[ ]
$[ ] [ ]% ASSET BACKED NOTES, CLASS A-1
$[ ] [ ]% ASSET BACKED NOTES, CLASS A-2
[ ]
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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.
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The notes will represent interests in the trust fund only and will not
represent interests in or obligations of any other entity.
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This prospectus supplement may be used to offer and sell the notes
only if accompanied by the prospectus.
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SELLER AND SERVICER
The notes will be issued by a trust. The sources for payment of the
notes are a pool of non-prime auto and boat 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 Inc. 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 Inc. 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.
----------------------------
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...........................34
Risk Factors...............................34
The Seller and the Servicer................34
The Trust..................................34
Trust Property.............................34
The Seller's Automobile and Boat Financing
Program...................................
The Backup Servicer........................34
The Receivables............................34
Yield Considerations.......................34
Use of Proceeds............................34
The Insurer................................34
Incorporation of Certain Documents by
Reference...............................34
The Notes..................................34
Description of the Transaction Documents...34
The Policy.................................34
Material Federal Income Tax Consequences...34
Certain State Tax Consequences.............34
ERISA Considerations.......................69
Ratings....................................70
Underwriting...............................70
Experts....................................71
Legal Matters..............................71
Glossary...................................72
Index of Terms.............................76
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 and Boat 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 and boat loans.
SELLER AND SERVICER
[ ] is a [ ] corporation. It will sell the auto and boat loans to ACE Securities
Corp. [ ] will also service the auto and boat loans held by the issuing trust.
COMPANY
ACE Securities Corp. is a special purpose Delaware corporation. Neither Deutsche
Banc Alex. Brown Inc. 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 and boat 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.
INITIAL FINAL
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 and boat 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 and boat loan pool
allocable to principal during the prior calendar month plus any losses
recognized on the auto and boat loan pool during the prior calendar month
and (2) a specified amount of excess interest received on the auto and boat
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 and boat loan pool
allocable to principal during the prior calendar month plus any losses
recognized on the auto and boat 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 and boat retail installment sale contracts secured
by: 1) new and used automobiles and light-duty trucks; and 2) new and used
boats, boat motors, jet skis and/or waverunners;
o monies due on, or received under the receivables, after [ ];
o an assignment of the security interests in the vehicles securing the auto
and boat 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 and boat 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 and boat loans consist of non-prime motor vehicle and boat retail
installment sale contracts originated by dealers and then acquired by [ ]
pursuant to its contract acquisition program. [The motor vehicle and boat 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
and boat loans in the pool as of [ ]. It is expected that the composition and
characteristics of the pool of auto and boat loans on the closing date will be
similar to the information set forth in this prospectus supplement. However,
some auto and boat 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 and boat 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 and boat 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
and boat loans with the prior written consent of [ ] in each case. The issuing
trust will purchase from ACE Securities Corp. additional non-prime auto and boat
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 and boat
loans to the trust is conditioned on these loans having been sold to ACE
Securities Corp. from [ ].
The auto and boat 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 and boat loans are not
expected to differ to any great extent from the auto and boat 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 and boat 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..........................
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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 THE AUTO AND There can be no assurance
BOAT LOANS MAY NOT REFLECT ACTUAL EXPERIENCE. that the net loss 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 and boat 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 and
boat loans will be better or
worse than that set forth in
this prospectus supplement
with respect to [ ]'s
servicing portfolio.
THE [ ] FINANCE PROGRAM AND THE NATURE [ ]generally originated by
OF OBLIGORS MAY INCREASE THE RISK OF automobile and boat dealers
DELINQUENCIES AND LOSSES. for sale and assignment to
[ ]. [ ] purchases retail
automobile and boat
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 and boat 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 and boat 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 and boat
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
and boat 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 and boat loans. You are
urged to consider the credit
quality of the auto and boat
loans when analyzing an
investment in the notes.
A CHANGE IN SERVICER MAY [ ] believes that its
ADVERSELY AFFECT COLLECTIONS ON credit loss and delinquency
THE AUTO AND BOAT LOANS. experience reflect 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 and boat loans will
not be adversely affected by
any change in servicer.
THE ISSUING TRUST HAS ONLY LIMITED ASSETS. The sole sources for
repayment of the notes are
payments on the auto and boat
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 and boat 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 and boat loans
or, in limited circumstances,
redeem a portion of the Class
A Notes and is not available
to cover losses on the auto
and boat 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 and boat loans and is not
designed to provide protection
against losses on the auto and
boat 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 and
boat 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 and boat
loans may be affected and the
proceeds to be distributed to
the noteholders on a current
basis may be reduced.
GEOGRAPHIC CONCENTRATION OF AUTO AND
BOAT LOANS MAY INCREASE CONCENTRATION RISKS. Obligors with respect to
approximately [ ]% of the auto
and boat 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 and boat loans.
LIMITED ABILITY TO RESELL CLASS A NOTES. The underwriter may assist
in 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 A NOTES WILL Interest on the auto and
AMORTIZE CANNOT BE PREDICTED. boat loans will be payable to
the holders of the Class 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 and boat loans have
different APRs.
All of the auto and boat loans
are prepayable at any time.
The rate of prepayments on the
auto and boat 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 and boat 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 and
boat 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 and
boat 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 and
boat 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 and boat
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 and boat retail
installment contracts similar
to the auto and boat loans.
None of the issuing trust, ACE
Securities Corp. or [ ] make
any representation as to the
actual prepayment rates on the
auto and boat 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 and boat loans. The
noteholders will bear all
reinvestment risk resulting
from the timing of payments on
the notes.
EFFECT OF LITIGATION ON [ ]'S FINANCIAL Due to the consumer-oriented
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 NOTES ARE NOT A rating is not a
GUARANTEED TO REMAIN IN PLACE. recommendation to purchase,
hold or 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 UNDER THE INDENTURE Upon the occurrence of an
MAY RESULT IN AN ACCELERATION. event of default under the
indenture, so 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 ALL OF THE If the issuing trust has not
MONEY IN THE PRE-FUNDING ACCOUNT A used all of the money
MANDATORY REDEMPTION OF A PORTION OF deposited in the pre-funding
THE CLASS A NOTES COULD RESULT. account to purchase additional
auto and boat loans by [ ],
[ ], 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 SUFFICIENT The ability of [ ] to
AUTO AND BOAT LOANS TO USE ALL MONEYS IN THE acquire or originate
PRE-FUNDING ACCOUNT. sufficient additional auto and
boat 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 and
boat 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 and Boat 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 and boat 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 and boat retail installment sale
contracts (the "Initial Receivables") secured by: 1) new and used
automobiles and light-duty trucks (the "Initial Financed
Automobiles"); and 2) new and used boats, boat motors, jet skis
and waverunners (the "Initial Financed Boats", and together with
the Initial Financed Automobiles, 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: 1) new and used automobiles and
light-duty trucks (the "Subsequent Financed Automobiles); and 2) new and used
boats, boat motors, jet skis and waverunners (the "Subsequent Financed Boats",
and together with the Subsequent Financed Automobiles, 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 AND BOAT 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, sports utility vehicle,
boat, boat motor, jet ski and waverunner 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, sports utility vehicles, boats, boat
motors, jet skis and waverunners. 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 AND BOAT LOANS FOR WHICH THE SERVICER IS
THE PRIMARY SERVICER. See "Risk Factors--The information relating to the auto
and boat loans may not reflect actual experience."
HISTORICAL DELINQUENCY EXPERIENCE
AS OF __________________________ AS OF ___________________________ AS OF __________________
% OF % OF % OF
NO. OF PRINCIPAL PRINCIPAL NO. OF PRINCIPAL PRINCIPAL NO. OF PRINCIPAL PRINCIPAL
RECEIVABLES BALANCE BALANCE 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 __________________________ 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 and boat 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 and boat loans by other lenders. See "The
Seller's Automobile and Boat 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 BY LOAN TYPE AS OF THE CUTOFF DATE
PERCENTAGE
NUMBER OF AGGREGATE OF INITIAL
LOAN TYPE RECEIVABLES PRINCIPAL BALANCE POOL BALANCE
Motor Vehicle Loan [ ] $ [ ] [ ]%
Boat Loan [ ] [ ] [ ]
--------- ----------------- ---------------
Total.......... [ ] $[ ] 100.00%
DISTRIBUTION OF RECEIVABLES BY CURRENT PRINCIPAL BALANCE
(AS OF THE INITIAL CUTOFF DATE)
PERCENTAGE OF
CURRENT PRINCIPAL PERCENTAGE OF TOTAL CURRENT PRINCIPAL AGGREGATE PRINCIPAL
BALANCE NUMBER OF NUMBER OF BALANCE BALANCE(1)
RECEIVABLES RECEIVABLES(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........
------------
TOTAL............................ 100.00% $ 100.00%
=========== ============= =========== ========
DISTRIBUTION OF RECEIVABLES BY AMOUNT FINANCED
(AS OF THE INITIAL CUTOFF DATE)
PERCENTAGE OF
PERCENTAGE OF TOTAL CURRENT AGGREGATE
AMOUNT NUMBER OF NUMBER 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 CURRENT AGGREGATE
RANGE OF NUMBER OF NUMBER OF PRINCIPAL PRINCIPAL
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 CURRENT AGGREGATE
MODEL NUMBER OF NUMBER OF PRINCIPAL PRINCIPAL
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 CURRENT AGGREGATE
RANGE OF REMAINING NUMBER OF NUMBER OF PRINCIPAL PRINCIPAL
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 CURRENT AGGREGATE
RANGE OF ORIGINAL NUMBER OF NUMBER OF PRINCIPAL PRINCIPAL
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 CURRENT AGGREGATE
NUMBER OF NUMBER OF PRINCIPAL PRINCIPAL
STATE RECEIVABLES RECEIVABLES(1) BALANCE BALANCE(1)
- --------.........................
- ---------........................
- ---------........................
- ------------.....................
- ----------.......................
- -----------......................
- ------------.....................
- ---------........................
- -----------......................
- -----------......................
- ---------........................
- ----------.......................
- ----------.......................
- ---------........................
- ----------.......................
- ---------........................
- -----------......................
- -----------......................
- ---------........................
- -----------......................
- ----------.......................
- ----------.......................
- --------.........................
- ----------.......................
- -----------......................
- -----------......................
- ---------........................
- -------..........................
- ----------.......................
------------
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 and boat 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 TERM
AGGREGATE ORIGINAL TERM TO SCHEDULED
PRINCIPAL GROSS ASSUMED TO MATURITY MATURITY (IN
POOL BALANCE APR(%) CUTOFF DATE (IN 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)
PAYMENT CLASS A-1 NOTES CLASS A-2 NOTES
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 and boat
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 Inc. (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 and boat 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 and Boat 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
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 sale is not
permitted.
$[ ]
[ ] AUTO AND BOAT 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 and boat 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..........................................3
Risk Factors..............................................6
Formation of the Trust...................................11
The Trust Property.......................................12
The Receivables Pool.....................................13
The Servicer.............................................19
Weighted Average Life of the Securities..................21
Use of Proceeds..........................................25
Description of the Notes.................................25
Description of the Certificates..........................26
Description of the Transfer and Servicing Agreements.....28
Federal Income Tax Consequences..........................39
State and Local Tax Consequences.........................40
Erisa Considerations.....................................40
Underwriting.............................................42
Legal Matters............................................43
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 and Boat 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: 1) new or used automobiles,
recreational vehicles, including motor homes, campers, motorcycles,
all-terrain-vehicles and snowmobiles, vans trucks, buses and trailers; and 2)
new or used boats, boat motors, jet skis and waverunners.
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 or boat 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 YOUR
SECURITIES The securities will not be listed on any
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
POOL MAY RESULT IN LOSSES. There are a number of features of the
receivables in the pool that create
additional risk of loss, including the
following:
CERTAIN OBLIGORS HAVE LITTLE EQUITY
IN THEIR FINANCED VEHICLES OR BOATS
WHICH MAY RESULT IN MORE SEVERE
LOSSES. For approximately [ ]% of the principal
amount of the receivables, the original
principal amount of the loan exceeded
the cost of the related vehicle or boat.
Although each such obligor was required
to make a downpayment from the obligor's
own funds, those obligors have no equity
in their vehicles or boats. While those
borrowers had excellent credit histories
at the time, the lack of any equity in
the vehicle or boat 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 or boat is
repossessed, the trust is likely to
suffer a loss.
THE CONCENTRATION OF THE RECEIVABLES
IN SPECIFIC GEOGRAPHIC AREAS MAY
INCREASE THE RISK OF LOSS. Economic conditions in the states where
obligors reside may affect the
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
LIKELY TO DEFAULT WHICH MAY CAUSE
LOSSES. Defaults on automobile and boat loans
tend to occur at higher rates during the
early years of the automobile and boat
loans. Substantially all of the
automobile and boat 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 and boat
loans had been outstanding for a longer
period of time.
BALLOON LOANS MAY HAVE A HIGHER
RATES OF DEFAULT WHICH MAY CAUSE
LOSSES. A balloon loan has monthly payments that
will not fully pay off the loan balance
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 boat, 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
SHORTFALLS AND LOSSES BEFORE
THE NOTES. The certificateholders will not receive
any distribution of interest until the
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
REDUCED BY PREPAYMENTS The pre-tax yield to maturity 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 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
DISTRIBUTIONS IN COMPARABLE
INVESTMENTS. Asset backed securities, like the
securities, 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 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
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 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 RATINGS WILL REDUCE
THE PRICES FOR SECURITIES 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. 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
INVESTMENTS FOR ALL INVESTORS The securities are not a suitable
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 and Boat 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: 1) new and used automobiles (the "Financed Automobiles"); and
2) new and used boats (the "Financed Boats", and together with the Financed
Automobiles, the "Financed Vehicles") securing the Receivables.
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 VEHICLES USED FINANCED
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 LOAN TYPE AS OF THE CUTOFF DATE
PERCENTAGE
NUMBER OF AGGREGATE OF INITIAL
LOAN TYPE RECEIVABLES PRINCIPAL BALANCE POOL BALANCE
Motor Vehicle Loan [ ] $ [ ] [ ]%
Boat Loan [ ] [ ] [ ]
------------------------- ------------------------ ------------------------
Total..................... [ ] $[ ] 100.00%
= ======
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 and boat 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
of of of
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
At December 31,
----------------------------- --------------------------------
[ ] [ ]
Number Number
of of
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 and boat 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.
WEIGHTED AVERAGE
ORIGINAL TERM WEIGHTED AVERAGE
REMAINING TERM WEIGHTED TO MATURITY REMAINING TERM TO
TO MATURITY RANGE AGGREGATE AVERAGE (IN MATURITY
POOL (IN MONTHS) PRINCIPAL BALANCE CONTRACT RATE 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 [ ]% [ ]% [ ]% [ ]%
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Closing Date......................................... 100 100 100 100
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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 Alex. Brown 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 [ ], [ ].
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 AND BOAT 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 and boat 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.
----------------------
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
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 and Boat 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: 1) new
or used automobiles, including passenger cars, minivans, sport utility vehicles
and light trucks; and 2) new or used boats, boat motors, jet skis and
waverunners; 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 RECEIVABLES
POOL MAY RESULT IN LOSSES OR CASH
FLOW SHORTFALLS There are a number of features of the
receivables in the pool that create
additional risk of loss, including the
following:
[THE CONCENTRATION OF
RECEIVABLES IN SPECIFIC GEOGRAPHIC
AREAS MAY INCREASE THE RISK OF LOSS Economic conditions in the states where
obligors reside may affect the
delinquency, loan loss and repossession
experience of the 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 or boats 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 or boat financing and the rights
of lenders are more burdensome than
those in other states.]
NEWLY ORIGINATED LOANS MAY BE
MORE LIKELY TO DEFAULT WHICH MAY
CAUSE LOSSES. Defaults on automobile and boat loans
tend to occur at higher rates during the
early years of the loans. A substantial
majority of the automobile and boat
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 and boat 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 and Boat 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 and boat retail installment sales contracts and other motor vehicle and
boat installment chattel paper (the "Receivables") secured by: 1) new and used
automobiles, recreational vehicles, including motor homes, campers, motorcycles,
all-terrain vehicles and snowmobiles, vans trucks, buses and trailers (the
"Financed Automobiles"); and 2) new and used boats, boat motors, jet skis and
waverunners (the "Financed Boats," and together with the Financed Automobiles,
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 Inc., (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 "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 and boat 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 and boat retail installment sales contracts and
other installment chattel paper secured by Financed Vehicles ("Motor Vehicle and
Boat 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 LOAN TYPE AS OF THE CUTOFF DATE
PERCENTAGE
NUMBER OF AGGREGATE OF INITIAL
LOAN TYPE RECEIVABLES PRINCIPAL BALANCE POOL BALANCE
Motor Vehicle Loan [ ] $ [ ] [ ]%
Boat Loan [ ] [ ] [ ]
------------------------- ------------------------ ------------------------
Total..................... [ ] $[ ] 100.00%
= ======
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 and boats, 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 or boat 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
OF LOANS DOLLARS OF LOANS DOLLARS OF LOANS DOLLARS
Principal Amount Outstanding (1)......... [ ] $[ ] [ ] $[ ] [........] $[ ]
Delinquencies (2)
30-59 Days............................... [ ] [ ] [ ] [ ] [........] [ ]
60-89 Days............................... [ ] [ ] [ ] [ ] [........] [ ]
90-119 Days.............................. [ ] [ ] [ ] [ ] [........] [ ]
over 120 days............................ [ ] [ ] [ ] [ ] [........] [ ]
Total Delinquencies...................... [ ] $[ ] [ ] $[ ] [........] $[ ]
AT DECEMBER 31,
[ ] [ ]
NUMBER NUMBER
OF LOANS 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 and boat 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 (IN
RATE MONTHS) MONTHS)
---- ------------ -------
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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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 and
boat installment obligations such as the Receivables. The Depositor believes
that the Exemption will apply to the acquisition, holding and resale of the
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 Alex. Brown 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 Alex. Brown 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 Alex. Brown Inc. is an affiliate of the Depositor and the
Seller.
This Prospectus Supplement may be used by Deutsche Banc Alex. Brown Inc.,
an affiliate of the Depositor, in connection with offers and sales relating to
market-making transactions in the Certificates in which Deutsche Banc Alex.
Brown Inc. acts as principal. Deutsche Banc Alex. Brown 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
ACE SECURITIES CORP.
COMPANY
ASSET BACKED CERTIFICATES
ASSET BACKED NOTES
(ISSUABLE IN SERIES)
AUTO AND BOAT 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:
1. One or more pools of
A .
o boat installment loan agreements or boat retail installment sale
contracts secured by new and used boats, boat motors, jet skis
and waverunners, and security interests in the boat products
financed by the boat installment loan agreements or retail
installment sale contracts, or
o private securities evidencing ownership interests in or secured
by loans similar to the types of loans described above; and
B. 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,
motorcycles, 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, or
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................................................................3
The Trusts..................................................................9
The Trustee................................................................10
The Receivables Pools......................................................10
The Collateral Certificates................................................13
The Government Securities..................................................14
Weighted Average Life of the Securities....................................23
Pool Factors and Trading Information.......................................24
The Seller and The Servicer................................................24
Use of Proceeds............................................................25
Description of the Notes...................................................25
Description of the Certificates............................................31
Certain Information Regarding the Securities...............................32
Description of the Transfer and Servicing Agreements.......................37
Certain Matters Regarding the Servicer.....................................46
Certain Legal Aspects of the Receivables...................................49
Material Federal Income Tax Consequences...................................55
State and Local Tax Considerations.........................................75
ERISA Considerations.......................................................76
Plan of Distribution.......................................................82
Legal Matters..............................................................83
Prospectus Supplement......................................................83
Reports to Securityholders.................................................84
Available Information......................................................84
Incorporation of Certain Documents by Reference............................84
Index of Terms.............................................................86
Annex I - Global Clearance, Settlement and Tax Documentation Procedures.....1
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 Inc.
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. 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 or other products 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: (1) new and used automobiles,
recreational vehicles, including motor homes, campers, motorcycles,
all-terrain-vehicles and snowmobiles, vans, trucks, buses and/or trailers (the
"Automobile Receivables") and (2) new and used boats, boat motors, jet skis
and/or waverunners (the "Boat Receivables", and together with the Automobile
Receivables, 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 Inc., 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 the 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--Potential
Lack of Security".
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 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 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 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.
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" 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 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.
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 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
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 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 a Primary 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 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 --Tax 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 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 stated 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, 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.
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
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 Inc.
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 Inc. 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., 6525 Morrison
Boulevard, Suite 318, Charlotte, North Carolina 28211, telephone, (704)365-0569.
INDEX OF TERMS
PAGE
1997 Act....................................................................71
Actuarial Receivables........................................................8
Advances....................................................................40
Cede.........................................................................1
Certificate Distribution Account............................................36
Certificate Owners..........................................................52
Certificate Pool Factor.....................................................21
Code........................................................................52
Collection Account..........................................................35
Collection Period...........................................................39
Definitive certificates.....................................................32
Definitive notes............................................................32
Definitive Securities.......................................................32
Depository..................................................................22
Distribution Date...........................................................29
DTC..........................................................................1
Eligible Deposit Account....................................................36
Eligible Institution........................................................37
Eligible Investment.........................................................37
Eligible Investments........................................................36
Events of Default...........................................................23
Exchange Act................................................................81
Fannie Mae..................................................................13
Farm Credit Act.............................................................17
FCA.........................................................................17
FCBs........................................................................17
Federal Tax Counsel.........................................................52
FFCB........................................................................13
FFEL........................................................................15
FHLB........................................................................13
FHLMC Act...................................................................15
Final Scheduled Maturity Date...............................................38
Financed Vehicles............................................................6
FIRREA......................................................................16
Fiscal Agent................................................................14
Freddie Mac.................................................................13
FTC Rule....................................................................51
Funding Corporation.........................................................17
Government Securities.......................................................11
grantor trust certificateholders............................................66
grantor trust certificates..................................................66
GSE Issuer..................................................................14
GSEs........................................................................11
GSEs Bonds..................................................................11
Indenture...................................................................22
Indirect Participants.......................................................30
Interest Component..........................................................20
Investment Earnings.........................................................36
IRS.........................................................................52
MBS.........................................................................14
Multiple Variable Rate Note.................................................57
Non-United States Owner.....................................................65
Note Distribution Account...................................................36
Note Owners.................................................................52
Note Pool Factor............................................................21
Participants................................................................30
Payahead Account............................................................36
Payaheads...................................................................39
Pooling and Servicing Agreement..............................................6
Precomputed Advance.........................................................39
Precomputed Receivables......................................................8
Pre-Funded Amount...........................................................37
Pre-Funding Account.........................................................37
Pre-Funding Period..........................................................37
Prepayment Assumption.......................................................54
Presumed Single Qualified Floating Rate.....................................56
Presumed Single Variable Rate...............................................57
Primary Assets..............................................................10
Principal Component.........................................................20
Private Label Custody Receipt Securities....................................18
Private Label Custody Strips................................................18
Receivables..................................................................7
REFCO.......................................................................18
REFCO Strip.................................................................20
Registration Statement......................................................81
Related Documents...........................................................26
Repurchase Amount...........................................................35
Reserve Account.............................................................42
RTC.........................................................................16
Rule of 78S Receivables......................................................8
Rules.......................................................................30
Sale and Servicing Agreement.................................................6
Sallie Mae..................................................................13
Schedule of Receivables.....................................................34
Securities Act..............................................................81
Security Owners.............................................................30
Senior Certificates.........................................................69
Senior Class Percentage.....................................................69
Servicer Default............................................................43
Servicing Fee...............................................................40
Servicing Fee Rate..........................................................40
Shortfall Amount............................................................70
Short-Term Note.............................................................59
Simple Interest Advance.....................................................40
Simple Interest Receivables..................................................8
Single Variable Rate Note...................................................57
Stripped Certificates.......................................................68
Subordinate Certificates....................................................69
Subordinate Class Percentage................................................69
System......................................................................17
Systemwide Debt Securities..................................................17
TEFRA.......................................................................19
Transfer and Servicing Agreements...........................................34
Treasury Bonds..............................................................11
Treasury Strips.............................................................11
Trust........................................................................6
Trust Accounts..............................................................36
Trust Agreement..............................................................6
Trust Stripped Bond.........................................................69
Trust Stripped Coupon.......................................................69
TVA.........................................................................13
TVA Act.....................................................................17
UCC.........................................................................30
Underlying Issuer...........................................................10
Underlying Servicer.........................................................10
Underlying Trust Agreement..................................................10
Underlying Trustee..........................................................10
Underwriting Agreements.....................................................79
United States person........................................................60
Variable Rate Note..........................................................56
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
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 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
[ ]
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.
SELLER AND SERVICER
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.
-------------------
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...........................34
Risk Factors...............................34
The Seller and the Servicer................34
The Trust..................................34
Trust Property.............................34
The Seller's Automobile Financing Program....
The Backup Servicer........................34
The Receivables............................34
Yield Considerations.......................34
Use of Proceeds............................34
The Insurer................................34
Incorporation of Certain Documents by
Reference...............................34
The Notes..................................34
Description of the Transaction Documents...34
The Policy.................................34
Material Federal Income Tax Consequences...34
Certain State Tax Consequences.............34
ERISA Considerations.......................68
Ratings....................................70
Underwriting...............................70
Experts....................................71
Legal Matters..............................71
Glossary...................................72
Index of Terms.............................76
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 Inc. 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.
INITIAL
NOTE
PRINCIPAL INTEREST SCHEDULE
CLASS BALANCE RATE PAYMENT 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 THE AUTO
LOANS MAY NOT REFLECT ACTUAL
EXPERIENCE. There can be no assurance that the net
loss 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 THE
NATURE OF OBLIGORS MAY INCREASE
THE RISK OF DELINQUENCIES AND
LOSSES. [ ]generally originated by automobile
dealers for sale and assignment to [ ].
[ ] purchases retail automobile
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 ADVERSELY
AFFECT COLLECTIONS ON THE AUTO
LOANS.
[ ] believes that its credit loss and
delinquency experience reflect 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 LIMITED
ASSETS. The sole sources for repayment of 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 LOANS MAY INCREASE
CONCENTRATION RISKS. Obligors with respect to 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 RESELL CLASS
A NOTES. The underwriter may assist in 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 A NOTES
WILL AMORTIZE CANNOT BE PREDICTED. Interest on the auto loans will be
payable to the holders of the Class 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 [ ]'S
FINANCIAL CONDITION. Due to the consumer-oriented 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 NOTES
ARE NOT GUARANTEED TO REMAIN A rating is not a recommendation to
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 UNDER THE
INDENTURE MAY RESULT IN AN
ACCELERATION. Upon the occurrence of an event of
default under the indenture, so 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
ALL OF THE MONEY IN THE PRE-FUNDING
ACCOUNT A MANDATORY REDEMPTION OF A
PORTION OF THE CLASS A NOTES COULD
RESULT. If the issuing trust has not used all of
the money deposited in the pre-funding
account to purchase additional auto
loans by [ ], [ ], 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
SUFFICIENT AUTO LOANS TO USE ALL
MONEYS IN THE PRE-FUNDING ACCOUNT. The ability of [ ] to acquire or
originate sufficient additional 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, motorcycles,
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 TOTAL PERCENTAGE OF
CURRENT PRINCIPAL NUMBER OF NUMBER OF CURRENT PRINCIPAL AGGREGATE 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........
20,000.00 to 24,999.99........
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 TOTAL PERCENTAGE OF
AMOUNT NUMBER OF NUMBER OF CURRENT PRINCIPAL AGGREGATE 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 TOTAL PERCENTAGE OF
NUMBER OF NUMBER OF CURRENT PRINCIPAL AGGREGATE 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 TOTAL PERCENTAGE OF
NUMBER OF NUMBER OF CURRENT PRINCIPAL AGGREGATE 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 TOTAL PERCENTAGE OF
RANGE OF REMAINING NUMBER OF NUMBER OF CURRENT PRINCIPAL AGGREGATE PRINCIPAL
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 TOTAL PERCENTAGE OF
RANGE OR ORIGINAL NUMBER OF NUMBER OF CURRENT PRINCIPAL AGGREGATE PRINCIPAL
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 TOTAL PERCENTAGE OF
NUMBER OF NUMBER OF CURRENT PRINCIPAL AGGREGATE 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 TERM
AGGREGATE ORIGINAL TERM TO SCHEDULED
PRINCIPAL GROSS ASSUMED TO MATURITY MATURITY (IN
POOL BALANCE APR(%) CUTOFF DATE (IN 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)
PAYMENT CLASS A-1 NOTES CLASS A-2 NOTES
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 Inc. (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 [ ])
$[ ]
[ ] 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, motorcycles, 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 YOUR
SECURITIES The securities will not be listed on any
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
POOL MAY RESULT IN LOSSES. There are a number of features of the
receivables in the pool that create
additional risk of loss, including the
following:
CERTAIN OBLIGORS HAVE LITTLE
EQUITY IN THEIR FINANCED VEHICLES
WHICH MAY RESULT IN MORE SEVERE
LOSSES. For approximately [ ]% of the principal
amount of the receivables, the original
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 IN SPECIFIC
GEOGRAPHIC AREAS MAY INCREASE
THE RISK OF LOSS. Economic conditions in the states where
obligors reside may affect the
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
LIKELY TO DEFAULT WHICH MAY CAUSE
LOSSES. Defaults on automobile loans tend to
occur at higher rates during the early
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
RATES OF DEFAULT WHICH MAY
CAUSE LOSSES. A balloon loan has monthly payments that
will not fully pay off the loan balance
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
SHORTFALLS AND LOSSES BEFORE
THE NOTES. The certificateholders will not receive
any distribution of interest until the
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
REDUCED BY PREPAYMENTS The pre-tax yield to maturity 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 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
DISTRIBUTIONS IN COMPARABLE
INVESTMENTS. Asset backed securities, like the
securities, 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 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
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 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 RATINGS WILL REDUCE
THE PRICES FOR SECURITIES 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. 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
INVESTMENTS FOR ALL INVESTORS The securities are not a suitable
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 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
of of of
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
At December 31,
------------------------------------------------------------- -
[ ] [ ]
Number Number
of of
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.
WEIGHTED AVERAGE WEIGHTED AVERAGE
REMAINING TERM WEIGHTED ORIGINAL TERM REMAINING TERM TO
TO MATURITY 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.........................................
- ---------------......................................
- ---------------......................................
- ---------------......................................
- ---------------------
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 particular 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 Alex. Brown 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 [ ], [ ].
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.
____________________
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
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 The certificates will not be listed on
YOUR CERTIFICATES 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 RECEIVABLES There are a number of features of the
POOL MAY RESULT IN LOSSES OR CASH receivables in the pool that create
FLOW SHORTFALLS additional risk of loss, including the
following:
[THE CONCENTRATION OF Economic conditions in the states where
RECEIVABLES IN SPECIFIC GEOGRAPHIC obligors reside may affect the
AREAS MAY INCREASE THE RISK OF LOSS. delinquency, loan loss and repossession
experience of the 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 MAY BE Defaults on automobile loans tend to
MORE LIKELY TO DEFAULT WHICH MAY CAUSE occur at higher rates during the early
LOSSES. years 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 The Class B certificateholders will not
SHORTFALLS BEFORE THE CLASS A receive any distribution of interest
CERTIFICATES 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 The pre-tax yield to maturity on your
BY PREPAYMENTS, DELINQUENCIES AND investment is uncertain and will depend
DEFAULTS on a number of factors including the
following:
THE RATE OF RETURN OF PRINCIPAL The amount of distributions of principal
IS UNCERTAIN. 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 Asset backed securities, like the
DISTRIBUTIONS IN COMPARABLE certificates, usually. produce more
INVESTMENTS 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 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, 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 A security rating is not a
RATINGS WILL REDUCE THE PRICES FOR recommendation to buy, sell or hold
CERTIFICATES 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 For federal income tax purposes, amounts
TO PAY TAXES ON AMOUNTS NOT ACTUALLY otherwise payable to the owners of the
RECEIVED 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 The certificates 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 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, motorcycles, 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 Inc., (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
NUMBER OF AGGREGATE OF INITIAL
REMAINING 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 NUMBER
OF LOANS DOLLARS OF LOANS DOLLARS OF LOANS DOLLARS OF LOANS 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 (IN
RATE MONTHS) MONTHS)
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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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 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 Alex. Brown 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 Alex. Brown 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 Alex. Brown Inc. is an affiliate of the Depositor and the
Seller.
This Prospectus Supplement may be used by Deutsche Banc Alex. Brown Inc.,
an affiliate of the Depositor, in connection with offers and sales relating to
market-making transactions in the Certificates in which Deutsche Banc Alex.
Brown Inc. acts as principal. Deutsche Banc Alex. Brown 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
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,
motorcycles, 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................................................................3
The Trusts..................................................................7
The Trustee.................................................................8
The Receivables Pools.......................................................8
The Collateral Certificates................................................11
The Government Securities..................................................12
Weighted Average Life of the Securities....................................21
Pool Factors and Trading Information.......................................22
The Seller and The Servicer................................................22
Use of Proceeds............................................................23
Description of the Notes...................................................23
Description of the Certificates............................................29
Certain Information Regarding the Securities...............................30
Description of the Transfer and Servicing Agreements.......................35
Certain Matters Regarding the Servicer.....................................44
Certain Legal Aspects of the Receivables...................................47
Material Federal Income Tax Consequences...................................52
State and Local Tax Considerations.........................................72
ERISA Considerations.......................................................72
Plan of Distribution.......................................................79
Legal Matters..............................................................80
Prospectus Supplement......................................................80
Reports to Securityholders.................................................80
Available Information......................................................81
Incorporation of Certain Documents by Reference............................81
Index of Terms.............................................................83
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 Inc.
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.
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. 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, motorcycles, 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 Inc., 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.
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--Potential
Lack of Security".
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 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 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 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.
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" 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 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.
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 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
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 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 a Primary 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 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 --Tax 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 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 stated 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, 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.
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
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 Inc.
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 Inc. 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., 6525 Morrison
Boulevard, Suite 318, Charlotte, North Carolina 28211, telephone (704)365-0569.
INDEX OF TERMS
PAGE
1997 Act...................................................................69
Actuarial Receivables.......................................................7
Advances...................................................................39
Cede........................................................................1
Certificate Distribution Account...........................................35
Certificate Owners.........................................................50
Certificate Pool Factor....................................................20
Code.......................................................................50
Collection Account.........................................................35
Collection Period..........................................................38
Definitive certificates....................................................31
Definitive notes...........................................................31
Definitive Securities......................................................31
Depository.................................................................21
Distribution Date..........................................................28
DTC.........................................................................1
Eligible Deposit Account...................................................36
Eligible Institution.......................................................36
Eligible Investment........................................................36
Eligible Investments.......................................................35
Events of Default..........................................................23
Exchange Act...............................................................79
Fannie Mae.................................................................12
Farm Credit Act............................................................16
FCA........................................................................16
FCBs.......................................................................16
Federal Tax Counsel........................................................50
FFCB.......................................................................13
FFEL.......................................................................14
FHLB.......................................................................13
FHLMC Act..................................................................14
Final Scheduled Maturity Date..............................................38
Financed Vehicles...........................................................5
FIRREA.....................................................................15
Fiscal Agent...............................................................13
Freddie Mac................................................................12
FTC Rule...................................................................49
Funding Corporation........................................................17
Government Securities......................................................10
grantor trust certificateholders...........................................64
grantor trust certificates.................................................64
GSE Issuer.................................................................13
GSEs.......................................................................10
GSEs Bonds.................................................................10
Indenture..................................................................21
Indirect Participants......................................................29
Interest Component.........................................................19
Investment Earnings........................................................36
IRS........................................................................50
MBS........................................................................13
Multiple Variable Rate Note................................................55
Non-United States Owner....................................................63
Note Distribution Account..................................................35
Note Owners................................................................50
Note Pool Factor...........................................................20
Participants...............................................................29
Payahead Account...........................................................35
Payaheads..................................................................39
Pooling and Servicing Agreement.............................................5
Precomputed Advance........................................................39
Precomputed Receivables.....................................................7
Pre-Funded Amount..........................................................36
Pre-Funding Account........................................................36
Pre-Funding Period.........................................................36
Prepayment Assumption......................................................52
Presumed Single Qualified Floating Rate....................................54
Presumed Single Variable Rate..............................................55
Primary Assets..............................................................9
Principal Component........................................................19
Private Label Custody Receipt Securities...................................17
Private Label Custody Strips...............................................17
Receivables.................................................................6
REFCO......................................................................17
REFCO Strip................................................................19
Registration Statement.....................................................79
Related Documents..........................................................25
Repurchase Amount..........................................................34
Reserve Account............................................................41
RTC........................................................................15
Rule of 78S Receivables.....................................................7
Rules......................................................................29
Sale and Servicing Agreement................................................5
Sallie Mae.................................................................12
Schedule of Receivables....................................................34
Securities Act.............................................................79
Security Owners............................................................29
Senior Certificates........................................................67
Senior Class Percentage....................................................67
Servicer Default...........................................................43
Servicing Fee..............................................................40
Servicing Fee Rate.........................................................40
Shortfall Amount...........................................................68
Short-Term Note............................................................57
Simple Interest Advance....................................................39
Simple Interest Receivables.................................................7
Single Variable Rate Note..................................................55
Stripped Certificates......................................................66
Subordinate Certificates...................................................67
Subordinate Class Percentage...............................................67
System.....................................................................16
Systemwide Debt Securities.................................................16
TEFRA......................................................................18
Transfer and Servicing Agreements..........................................33
Treasury Bonds.............................................................10
Treasury Strips............................................................10
Trust.......................................................................5
Trust Accounts.............................................................35
Trust Agreement.............................................................5
Trust Stripped Bond........................................................67
Trust Stripped Coupon......................................................67
TVA........................................................................13
TVA Act....................................................................16
UCC........................................................................29
Underlying Issuer...........................................................9
Underlying Servicer.........................................................9
Underlying Trust Agreement..................................................9
Underlying Trustee..........................................................9
Underwriting Agreements....................................................77
United States person.......................................................58
Variable Rate Note.........................................................54
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
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 TO COMPLETION, [ ]
PROSPECTUS SUPPLEMENT (to prospectus dated [ ])
$[ ] (APPROXIMATE)
ACE SECURITIES CORP.
[ ] TRUST
[ ] BOAT 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 boat 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 Inc. 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 Inc. 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.
- --------------------------------------------------------------------
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...........................33
Risk Factors...............................33
The Seller and the Servicer................33
The Trust..................................33
Trust Property.............................33
The Seller's Boat Financing Program..........
The Backup Servicer........................33
The Receivables............................33
Yield Considerations.......................33
Use of Proceeds............................33
The Insurer................................33
Incorporation of Certain Documents by
Reference...............................33
The Notes..................................33
Description of the Transaction Documents...33
The Policy.................................33
Material Federal Income Tax Consequences...33
Certain State Tax Consequences.............33
ERISA Considerations.......................68
Ratings....................................69
Underwriting...............................69
Experts....................................70
Legal Matters..............................70
Glossary...................................71
Index of Terms.............................75
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
[ ] Boat 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 boat loans.
SELLER AND SERVICER
[ ] is a [ ] corporation. It will sell the boat loans to ACE Securities Corp. [
] will also service the boat loans held by the issuing trust.
COMPANY
ACE Securities Corp. is a special purpose Delaware corporation. Neither Deutsche
Banc Alex. Brown Inc. 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 boat 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.
INITIAL
NOTE FINAL
PRINCIPAL INTEREST SCHEDULE
CLASS BALANCE RATE PAYMENT 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 boat 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 boat loan pool allocable to
principal during the prior calendar month plus any losses recognized on the
boat loan pool during the prior calendar month and (2) a specified amount
of excess interest received on the boat 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 boat loan pool allocable
to principal during the prior calendar month plus any losses recognized on
the boat 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 retail installment sale contracts secured by new and used boats,
boat motors, jet skis and waverunners;
o monies due on, or received under the receivables, after [ ];
o an assignment of the security interests in the boats, boat motors, jet skis
and waverunners securing the boat loan pool;
o the related files;
o all rights to proceeds from claims on physical damage, credit life and
disability insurance policies covering the boats or the obligors;
o all rights to liquidation proceeds with respect to the boat 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 BOAT LOAN POOL
The boat loans consist of non-prime retail installment sale contracts originated
by dealers and then acquired by [ ] pursuant to its contract acquisition
program. [The 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 boat
loans in the pool as of [ ]. It is expected that the composition and
characteristics of the pool of boat loans on the closing date will be similar to
the information set forth in this prospectus supplement. However, some boat
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 boat 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 boat 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 boat
loans with the prior written consent of [ ] in each case. The issuing trust will
purchase from ACE Securities Corp. additional non-prime boat loans from time to
time on or before [ ], [ ], from funds on deposit in this account. The
obligation of ACE Securities Corp. to sell additional boat loans to the trust is
conditioned on these loans having been sold to ACE Securities Corp. from [ ].
The boat 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 boat loans are not expected to
differ to any great extent from the boat 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 boat 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 THE BOAT
LOANS MAY NOT REFLECT ACTUAL
EXPERIENCE. There can be no assurance that the net
loss 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 boat
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 boat loans will be better or
worse than that set forth in this
prospectus supplement with respect to [
]'s servicing portfolio.
THE [ ] FINANCE PROGRAM AND THE
NATURE OF OBLIGORS MAY INCREASE THE
RISK OF DELINQUENCIES AND LOSSES. [ ]generally originated by boat dealers
for sale and assignment to [ ]. [ ]
purchases retail boat 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 boat 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 boat loans is expected
to be higher than would be the case with
lower risk borrowers. Due to the credit
quality of these borrowers, the boat
loans have been originated with higher
annual percentage interest rates than
more traditional lenders charge lower
risk borrowers. Any increase in losses
on the boat 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 boat loans. You are urged to
consider the credit quality of the boat
loans when analyzing an investment in
the notes.
A CHANGE IN SERVICER MAY
ADVERSELY AFFECT COLLECTIONS ON
THE BOAT LOANS. [ ] believes that its credit loss and
delinquency experience reflect 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 boat
loans will not be adversely affected by
any change in servicer.
THE ISSUING TRUST HAS ONLY LIMITED
ASSETS. The sole sources for repayment of the
notes are payments on the boat loans,
amounts on deposit in the pre-funding
account, other cash accounts held by [
], proceeds from the repossession and
sale of related financed boats that
secure defaulted boat 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 boat loans or, in limited
circumstances, redeem a portion of the
Class A Notes and is not available to
cover losses on the boat 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 boat loans and is
not designed to provide protection
against losses on the boat 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 boat 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 boats, its ability
to realize on the collateral securing
the boat loans may be affected and the
proceeds to be distributed to the
noteholders on a current basis may be
reduced.
GEOGRAPHIC CONCENTRATION OF BOAT
LOANS MAY INCREASE CONCENTRATION
RISKS. Obligors with respect to approximately [
]% of the boat 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 boat loans.
LIMITED ABILITY TO RESELL CLASS
A NOTES. The underwriter may assist in 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 A NOTES
WILL AMORTIZE CANNOT BE PREDICTED. Interest on the boat loans will be
payable to the holders of the Class 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 boat loans have different
APRs.
All of the boat loans are prepayable at
any time. The rate of prepayments on the
boat 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 boat securing an boat 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 boat loans may also
may be influenced by the structure of
the loan, the nature of the consumer
obligors and the related financed boats
and servicing decisions. In addition,
under some circumstances, [ ] is
obligated to purchase boat 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 boat 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 boat
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
retail installment contracts similar to
the boat loans. None of the issuing
trust, ACE Securities Corp. or [ ] make
any representation as to the actual
prepayment rates on the boat 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 boat loans.
The noteholders will bear all
reinvestment risk resulting from the
timing of payments on the notes.
EFFECT OF LITIGATION ON [ ]'S
FINANCIAL CONDITION. Due to the consumer-oriented 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 NOTES ARE NOT
GUARANTEED TO REMAIN IN PLACE. A rating is not a recommendation to
purchase, hold or 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 UNDER THE
INDENTURE MAY RESULT IN AN
ACCELERATION. Upon the occurrence of an event of
default under the indenture, so 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
ALL OF THE MONEY IN THE PRE-FUNDING
ACCOUNT A MANDATORY REDEMPTION OF
A PORTION OF THE CLASS A NOTES
COULD RRESULT. If the issuing trust has not used all of
the money deposited in the pre-funding
account to purchase additional boat
loans by [ ], [ ], 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
SUFFICIENT BOAT LOANS TO USE ALL
MONEYS IN THE PRE-FUNDING ACCOUNT. The ability of [ ] to acquire or
originate sufficient additional boat
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 boat 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, [ ]Boat 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 retail installment sales
contracts secured by new and used boats, boat motors, jet skis
and waverunners and the related trailers financed by these 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 boat retail installment sale contracts (the "Initial
Receivables") secured by new and used boats, boat motors, jet skis and
waverunners (the "Initial Financed Boats");
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 Boats 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 Boats 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 boat retail installment sale contracts (the
"Subsequent Receivables") secured by new and used boats, boat motors, jet skis
and waverunners (the "Subsequent Financed Boats") 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 Boats and
the Subsequent Financed Boats are in this prospectus supplement referred to as
the "Financed Boats."
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
Boats, 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 BOAT 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 boat, boat motor, jet ski and waverunner 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 boats, boat motors, jet skis and waverunners. 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 BOAT LOANS
FOR WHICH THE SERVICER IS THE PRIMARY SERVICER. See "Risk Factors--The
information relating to the boat 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 ______________ 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......................
__________________
(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 boat.
(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 boat
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
boat loans by other lenders. See "The Seller's Boat 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 Boat 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 Boat 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 Boat, 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........
20,000.00 to 24,999.99........
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 BOAT
(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
RANGE OF REMAINING NUMBER OF OF PRINCIPAL PRINCIPAL
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
RANGE OR ORIGINAL NUMBER OF OF PRINCIPAL PRINCIPAL
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)
- --------.........................
- ---------........................
- ---------........................
- ------------.....................
- ----------.......................
- -----------......................
- ------------.....................
- ---------........................
- -----------......................
- -----------......................
- ---------........................
- ----------.......................
- ----------.......................
- ---------........................
- ----------.......................
- ---------........................
- -----------......................
- -----------......................
- ---------........................
- -----------......................
- ----------.......................
- ----------.......................
- --------.........................
- ----------.......................
- -----------......................
- -----------......................
- ---------........................
- -------..........................
- ----------.......................
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 Boat 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 Boats 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 boat 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)
PAYMENT CLASS A-1 NOTES CLASS A-2 NOTES
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 Boat 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 Boat;
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
Boats,
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 Boat.
"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 Boats, 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 Boats. 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
Boats;
(d) the APR is not less than [ ]% nor more than [ ]%; and
(e) no boat 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 Boat 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 Boat 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 Boats"
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 boat 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 Boat
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 Boats (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 Inc. (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
Boat 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 boat 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 Boats 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 Boat, 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, [ ] Boat 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 Boat.
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.
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
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
Financed Boats.............................................................S-17
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 Boats.....................................................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
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
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 Boats..................................................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
United States person.......................................................S-65
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 [ ])
$[ ]
[ ] BOAT 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 boat 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 AgreementsS-
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............................ [ ] Boat 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 boats, boat motors, jet skis
and waverunners.
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 boat 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
YOUR SECURITIES The securities will not be listed on any
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
POOL MAY RESULT IN LOSSES. There are a number of features of the
receivables in the pool that create
additional risk of loss, including the
following:
CERTAIN OBLIGORS HAVE LITTLE
EQUITY IN THEIR FINANCED BOAT
WHICH MAY RESULT IN MORE SEVERE
LOSSES. For approximately [ ]% of the principal
amount of the receivables, the original
principal amount of the loan exceeded
the cost of the related boat. Although
each such obligor was required to make a
downpayment from the obligor's own
funds, those obligors have no equity in
their boats. While those borrowers had
excellent credit histories at the time,
the lack of any equity in the boat 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 boat is
repossessed, the trust is likely to
suffer a loss.
THE CONCENTRATION OF THE
RECEIVABLES IN SPECIFIC
GEOGRAPHIC AREAS MAY INCREASE
THE RISK OF LOSS. Economic conditions in the states where
obligors reside may affect the
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
LIKELY TO DEFAULT WHICH MAY CAUSE
LOSSES. Defaults on boat loans tend to occur at
higher rates during the early years of
the boat loans. Substantially all of the
boat 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 boat loans had been outstanding
for a longer period of time.
BALLOON LOANS MAY HAVE A HIGHER
RATES OF DEFAULT WHICH MAY CAUSE
LOSSES. A balloon loan has monthly payments that
will not fully pay off the loan balance
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 boat, 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
SHORTFALLS AND LOSSES BEFORE
THE NOTES. The certificateholders will not receive
any distribution of interest until the
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
REDUCED BY PREPAYMENTS The pre-tax yield to maturity 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 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
DISTRIBUTIONS IN COMPARABLE
INVESTMENTS. Asset backed securities, like the
securities, 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 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
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 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 RATINGS WILL REDUCE
THE PRICES FOR SECURITIES 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. 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
INVESTMENTS FOR ALL INVESTORS The securities are not a suitable
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
[ ] Boat 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 $[ ], excluding
amounts deposited in the Reserve Account, representing the initial principal
balance of the Certificates. The Notes and Certificates will be transferred by
the Trust to the Depositor in exchange for the Receivables. The Certificates and
the Notes will be sold to the Underwriter for cash. The Servicer will initially
service the Receivables pursuant to a sale and servicing agreement, to be dated
as of [ ] (the "Sale and Servicing Agreement"), among the Seller, the Depositor,
the Trust and the Servicer, and will be compensated for acting as the Servicer.
See "Description of the Transfer and Servicing Agreements--Servicing
Compensation" in this prospectus supplement and "--Servicing Compensation and
Payment of Expenses" in the Prospectus. To facilitate servicing and to minimize
administrative burden and expense, the Servicer will be appointed custodian for
the Receivables by the Trust, but will not stamp the Receivables to reflect the
sale and assignment of the Receivables to the Trust, nor amend the certificates
of title of the Financed Boats.
If the protection provided to the investment of the Securityholders in the
Trust by the Reserve Account is insufficient, the Trust will look to the
Obligors on the Receivables, and the proceeds from the repossession and sale of
Financed Boats which secure defaulted Receivables. In such event, there may not
be sufficient funds to make distributions with respect to the Securities.
The Trust's principal offices are in [ ], in care of [ ], as Owner Trustee,
at the address listed below under "--The Owner Trustee."
CAPITALIZATION OF THE TRUST
The following table illustrates the capitalization of the Trust as of the
Cut-off Date, as if the issuance and sale of the Notes and the Certificates had
taken place on such date:
Notes .............................$[ ]
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 Boats;
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 Boats or the retail purchasers of, or other persons owing
payments on, the Financed Boats (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 Boats; 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 Boats, and approximately [ ]% of the Initial Pool Balance was
secured by used Financed Boats;
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 BOATS USED FINANCED BOATS 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 boat 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
of of of
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
DELINQUENCY EXPERIENCE
(DOLLARS IN THOUSANDS)
At December 31,
-------------------------------------------------------------
[ ] [ ]
Number Number
of of
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 boat 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.
WEIGHTED AVERAGE
REMAINING TERM ORIGINAL TERM WEIGHTED AVERAGE
TO MATURITY WEIGHTED TO MATURITY REMAINING TERM TO
RANGE AGGREGATE AVERAGE (IN MATURITY
POOL (IN MONTHS) PRINCIPAL BALANCE CONTRACT RATE 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 Boat, (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 Alex. Brown 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 [ ], [ ].
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)
[ ] BOAT 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 boat 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.
--------------------------
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
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.................................... [ ] Boat 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 boats, boat motors, jets skis and waverunners, substantially all of which
were purchased from boat 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 The certificates will not be listed
CERTIFICATES 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 RECEIVABLES There are a number of features of
POOL MAY RESULT IN SHORTFALL the receivables in LOSSES OR CASH
FLOW S the pool that create
additional risk of loss, including
the following:
[THE CONCENTRATION OF RECEIVABLES Economic conditions in the states
IN SPECIFIC GEOGRAPHIC AREAS MAY where obligors reside may affect
INCREASE THE RISK OF LOSS. the delinquency, loan loss and
repossession experience of the
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 boats
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 MAY BE Defaults on boat loans tend to
MORE LIKELY TO DEFAULT WHICH MAY occur at higher rates during the
CAUSE LOSSES. early years of the boat loans.
A substantial majority of the boat
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 boat loans
had been outstanding for a longer
period of time.
CLASS B CERTIFICATES WILL ABSORB CASH The Class B certificateholders will
SHORTFALLS BEFORE THE CLASS A not receive any distribution of
CERTIFICATES 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 The pre-tax yield to maturity on
BY PREPAYMENTS, DELINQUENCIES your investment is uncertain
AND DEFAULTS and will depend on a number of
factors including the following:
THE RATE OF RETURN OF The amount of distributions of
PRINCIPAL IS UNCERTAIN. 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 Asset backed securities,
DISTRIBUTIONS IN COMPARABLE INVESTMENTS. 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 If the receivables are sold
LIFE OF YOUR INVESTMENT WHICH upon exercise of the servicer's
MAY REDUCE YOUR YIELD TO MATURITY. 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 A security rating is not a
INITIAL RATINGS WILL REDUCE recommendation to buy, sell
THE PRICES FOR CERTIFICATES 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 For federal income tax purposes,
HAVE TO PAY TAXES ON AMOUNTS amounts otherwise payable to
NOT ACTUALLY RECEIVED 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 The certificates are not a suitable
INVESTMENTS FOR ALL investment for any investor that
INVESTORS 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 [ ] Boat 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 boat retail
installment sales contracts and other boat installment chattel paper (the
"Receivables") secured by new and used boats, boat motors, jet skis and
waverunners (the "Financed Boats") 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 Inc., (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 Boats 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 Boats 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 Boats may be defeated. See "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 boat 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 Boats;
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 Boats or the retail purchasers of, or other persons owing
payments on, the Financed Boats (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 Boats; 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 boat retail installment sales contracts and other installment
chattel paper secured by Financed Boats ("Boat 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 boats,
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 boat 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
OF LOANS DOLLARS OF LOANS 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.
DELINQUENCY EXPERIENCE
(DOLLARS IN THOUSANDS)
[ ] [ ]
NUMBER NUMBER
OF LOANS 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 boat, 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 boat 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 Boat 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 [ ] [ ] [ ] [ ]
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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 Boat, (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 granted to Deutsche Banc Alex. Brown Inc. 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 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 boat installment
obligations such as the Receivables. The Depositor believes that the Exemption
will apply to the acquisition, holding and resale of the 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 Alex. Brown 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 PRINCIPAL AMOUNT OF
UNDERWRITER CLASS A CERTIFICATES CLASS B CERTIFICATES
- -----------
[ ]................... $[ ] $ [ ]
Deutsche Banc Alex.
Brown 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 Alex. Brown Inc. is an affiliate of the Depositor and the
Seller.
This Prospectus Supplement may be used by Deutsche Banc Alex. Brown Inc.,
an affiliate of the Depositor, in connection with offers and sales relating to
market-making transactions in the Certificates in which Deutsche Banc Alex.
Brown Inc. acts as principal. Deutsche Banc Alex. Brown 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
ACE SECURITIES CORP.
COMPANY
ASSET BACKED CERTIFICATES
ASSET BACKED NOTES
(ISSUABLE IN SERIES)
BOAT 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 installment loan agreements or retail installment sale contracts
secured by new and used boats, boat motors, jet skis and/or
waverunners, and security interests therein,
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...............................................................3
The Trusts.................................................................8
The Trustee................................................................9
The Receivables Pools......................................................9
The Collateral Certificates...............................................12
The Government Securities.................................................13
Weighted Average Life of the Securities...................................22
Pool Factors and Trading Information......................................23
The Seller and The Servicer...............................................23
Use of Proceeds...........................................................24
Description of the Notes..................................................24
Description of the Certificates...........................................30
Certain Information Regarding the Securities..............................31
Description of the Transfer and Servicing Agreements......................36
Certain Matters Regarding the Servicer....................................45
Certain Legal Aspects of the Receivables..................................48
Material Federal Income Tax Consequences..................................54
State and Local Tax Considerations........................................74
ERISA Considerations......................................................74
Plan of Distribution......................................................81
Legal Matters.............................................................82
Prospectus Supplement.....................................................82
Reports to Securityholders................................................83
Available Information.....................................................83
Incorporation of Certain Documents by Reference...........................83
Index of Terms............................................................85
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 Inc.
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 boats securing
the receivables to the related trust.
Due to administrative burden and
expense, however, we will not cause any
certificates of title to the financed
boats 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 boats securing the
receivables in some states. If a trust
does not have a perfected security
interest in a financed boat, its ability
to realize in the event of a default on
that financed boat 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 Boats." 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. 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 boats, boat motors, jet skis and/or waverunners
and trailers related thereto financed by the Receivables (the
"Financed Boats ") and any other interest of a seller in the Financed
Boats;
o the rights to proceed from claims on physical damage, credit life and
disability insurance policies covering Financed Boats 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 relating to any
of the Financed Boats will not be amended to reflect the sale and assignment of
the security interest in the Financed Boats to a Trust. In the absence of an
amendment, a Trust may not have a perfected security interest in some of the
Financed Boats 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 Boats 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 Boats, 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 Boats. 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 installment loan agreements or retail installment sale contracts
secured by new and used boats, boat motors, jet skis and waverunners and
trailers related thereto (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 boat, boat motor, jet ski or wavenrunner,
o was originated or acquired, either from a boat, boat motor, jet ski or
waverunner 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 boats and by used boats.
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 BOATS
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 Boat. An assessment generally does not
distinguish between new or used boats. Rather, the amount advanced under a boat
loan generally will not exceed 100% of the value of the collateral unless
otherwise specified in the related prospectus supplement. For new boats, the
value equals the dealer invoice for the boat 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 boats, the value equals the wholesale price reported in
the most recent edition of any 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 boat
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 Boats 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
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 installment loan
agreements and retail installment sale contracts secured by boats,
boat motors, jet skis and/or waverunners and the related trailers,
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 boat 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 Boat 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 Borse 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 Inc., 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 Boats. 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 Boat 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
Boat 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 Boat 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 boat 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 willful 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 boat 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 BOATS
Security interests in boats may be perfected in one of three ways: in
certificate of title states, a security interest is perfected by obtaining the
certificate of title to the financed boat or notation of the secured party's
lien on the boat's certificate of title; 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 will represent marine retail installment sale contracts
purchased from Dealers or direct loans to Obligors secured by the Financed
Boats. When originated, each contract will have granted a security interest in
the Financed Boat financed thereby. Each such security interest will 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 Boat is located to perfect the seller's
security interest in the Financed Boat, including, where applicable, having a
notation of its lien recorded on the boat'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 Boat, 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 Boat 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 Boat 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 Boats 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 Boats. Unless otherwise specified
in the related prospectus supplement, the servicer will hold certificates of
title relating to the Financed Boats 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 Boat without amendment of any lien
noted on the boat 's certificate of title, and the assignee succeeds by
assignment to the assignor's rights as secured party. Although re-registration
of the boat is not necessary in these states to convey a perfected security
interest in the Financed Boats to a Trust, because the related Trust will not be
listed as legal owner on the certificates of title to the Financed Boats, a
Trust's security interest could be defeated through fraud or negligence.
However, in the absence of fraud or forgery by the boat 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 Boat or subsequent creditors who
take a security interest in a Financed Boat. If there are any Financed Boats 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 Boats and holders of perfected security
interests in Financed Boats. 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--Potential Lack of Security".
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
boat continues for four months after the boat is moved to a new state from the
one in which it is initially registered and after until the owner re-registers
the boat in the new state. A majority of these states require surrender of a
certificate of title to re-register a boat. Accordingly, a secured party must
surrender possession if it holds the certificate of title of the boat or, in the
case of boats 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 boat 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 boat, 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
Boat and the purchaser of that Financed Boat attempts to re-register the boat,
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 Boat 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 boat and
liens for unpaid taxes take priority over even a perfected, first-priority
security interest in the boat. 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 boats 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 boat. 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 Boat 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 Boat. However, liens for repairs or taxes could arise,
or the confiscation of a Financed Boat 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 boat. 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
boat 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 Boat 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 boat 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 boat or, if no subordinate lienholder exists, to the
former owner of the boat.
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 Boats may assert against the sellers
of those Financed Boats. 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 boat and, as part of the rehabilitation plan, may
reduce the amount of the secured indebtedness to the market value of the boat 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 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 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 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.
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" 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 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.
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 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
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 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 a Primary 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 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 --Tax 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 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 stated 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, 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.
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
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 Banc Alex. Brown Inc.
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 Inc. 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., 6525 Morrison
Boulevard, Suite 318, Charlotte, North Carolina 28211, telephone, (704)365-0569.
INDEX OF TERMS
PAGE
1997 Act.....................................................................72
Actuarial Receivables.........................................................9
Advances.....................................................................41
Cede..........................................................................1
Certificate Distribution Account.............................................37
Certificate Owners...........................................................53
Certificate Pool Factor......................................................22
Code.........................................................................53
Collection Account...........................................................37
Collection Period............................................................40
Definitive certificates......................................................33
Definitive notes.............................................................33
Definitive Securities........................................................33
Depository...................................................................23
Distribution Date............................................................30
DTC...........................................................................1
Eligible Deposit Account.....................................................38
Eligible Institution.........................................................38
Eligible Investment..........................................................38
Eligible Investments.........................................................37
Events of Default............................................................24
Exchange Act.................................................................82
Fannie Mae...................................................................14
Farm Credit Act..............................................................18
FCA..........................................................................18
FCBs.........................................................................18
Federal Tax Counsel..........................................................53
FFCB.........................................................................14
FFEL.........................................................................16
FHLB.........................................................................14
FHLMC Act....................................................................16
Final Scheduled Maturity Date................................................40
Financed Boats................................................................7
FIRREA.......................................................................17
Fiscal Agent.................................................................15
Freddie Mac..................................................................14
FTC Rule.....................................................................52
Funding Corporation..........................................................18
Government Securities........................................................12
grantor trust certificateholders.............................................67
grantor trust certificates...................................................67
GSE Issuer...................................................................15
GSEs.........................................................................12
GSEs Bonds...................................................................12
Indenture....................................................................23
Indirect Participants........................................................31
Interest Component...........................................................21
Investment Earnings..........................................................37
IRS..........................................................................53
MBS..........................................................................15
Multiple Variable Rate Note..................................................58
Non-United States Owner......................................................66
Note Distribution Account....................................................37
Note Owners..................................................................53
Note Pool Factor.............................................................22
Participants.................................................................31
Payahead Account.............................................................37
Payaheads....................................................................40
Pooling and Servicing Agreement...............................................7
Precomputed Advance..........................................................40
Precomputed Receivables.......................................................9
Pre-Funded Amount............................................................38
Pre-Funding Account..........................................................38
Pre-Funding Period...........................................................38
Prepayment Assumption........................................................55
Presumed Single Qualified Floating Rate......................................57
Presumed Single Variable Rate................................................58
Primary Assets...............................................................11
Principal Component..........................................................21
Private Label Custody Receipt Securities.....................................19
Private Label Custody Strips.................................................19
Receivables...................................................................8
REFCO........................................................................19
REFCO Strip..................................................................21
Registration Statement.......................................................82
Related Documents............................................................27
Repurchase Amount............................................................36
Reserve Account..............................................................43
RTC..........................................................................17
Rule of 78S Receivables.......................................................9
Rules........................................................................31
Sale and Servicing Agreement..................................................7
Sallie Mae...................................................................14
Schedule of Receivables......................................................35
Securities Act...............................................................82
Security Owners..............................................................31
Senior Certificates..........................................................70
Senior Class Percentage......................................................70
Servicer Default.............................................................45
Servicing Fee................................................................41
Servicing Fee Rate...........................................................41
Shortfall Amount.............................................................71
Short-Term Note..............................................................60
Simple Interest Advance......................................................41
Simple Interest Receivables...................................................9
Single Variable Rate Note....................................................58
Stripped Certificates........................................................69
Subordinate Certificates.....................................................70
Subordinate Class Percentage.................................................70
System.......................................................................18
Systemwide Debt Securities...................................................18
TEFRA........................................................................20
Transfer and Servicing Agreements............................................35
Treasury Bonds...............................................................12
Treasury Strips..............................................................12
Trust.........................................................................7
Trust Accounts...............................................................37
Trust Agreement...............................................................7
Trust Stripped Bond..........................................................70
Trust Stripped Coupon........................................................70
TVA..........................................................................14
TVA Act......................................................................18
UCC..........................................................................31
Underlying Issuer............................................................11
Underlying Servicer..........................................................11
Underlying Trust Agreement...................................................11
Underlying Trustee...........................................................11
Underwriting Agreements......................................................80
United States person.........................................................61
Variable Rate Note...........................................................57
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
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 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 and the prospectus, see supplement.
This prospectus supplement 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 this 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............................................................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............................................39
Use of Proceeds............................................................40
Underwriting...............................................................40
Experts....................................................................41
Legal Matters..............................................................41
Ratings....................................................................41
Glossary of Defined Terms..................................................42
Annex I.....................................................................1
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 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 AND EFFECT Borrowers may prepay their
OF PREPAYMENTS 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 We describe in this prospectus
OVERCOLLATERALIZATION supplement the underwriting
ON PAYMENTS OF guidelines used in originating
PRINCIPAL ON THE NOTES 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 Approximately [ ]% of the mortgage loans
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 payment schedules for most of the
THE MORTGAGE POOL ARE mortgage loans in the pool require the
MORE LIKELY TO DEFAULT borrower to pay off the principal
THAN OTHERS, AND balance of the loan gradually over
HIGHER THAN EXPECTED the life of the loan. Some of the
DEFAULTS ON THESE LOANS mortgage loans in the pool, however,
COULD REDUCE THE YIELD have payment schedules under which the
ON YOUR NOTES 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 Approximately [ ]% of the mortgage loans
MORTGAGE INSURANCE ON THE NOTES 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 A decline in the real estate values or
AFFECT PERFORMANCE OF in economic conditions generally could
MORTGAGE LOANS 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 If the cash in the pre-funding
FROM CASH REMAINING account on the closing date is not used
IN PRE-FUNDING ACCOUNT 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 Your ownership of the notes
NOTES, WHICH CAN CAUSE DELAYS will be registered electronically with
IN DISTRIBUTIONS AND HAMPER DTC. The lack of physical notes could:
YOUR ABILITY TO PLEDGE OR RESELL
YOUR NOTES 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
$[ ].
The weighted average Combined Loan-to-Value Ratio at origination of the
Mortgage Loans is approximately [ ]%.
No more than approximately [ ]% of the Mortgage Loans are secured by
Mortgaged Properties located in any one zip code area.
The following tables set forth as of the Cut-off Date the number, total
Principal Balance and percentage of the Mortgage Loans having the stated
characteristics shown in the tables in each range. (The sum of the amounts of
the total Principal Balances and the percentages in the following tables may not
equal the totals due to rounding.)
CUT-OFF DATE PRINCIPAL BALANCES
PERCENTAGE OF
MORTGAGE LOANS
RANGE OF NUMBER OF TOTAL BY TOTAL
PRINCIPAL BALANCES ($) 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 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
NUMBER OF TOTAL BY TOTAL
PREPAYPMENT 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 HOME LOAN NET HOME REMAINING TERM
LOAN PRINCIPAL INTEREST LOAN INTEREST TO 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 "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 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
filled 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.......................................................................47
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 the
MORTGAGE POOL ARE MORE LIKELY mortgage loans in the pool require the
TO DEFAULT THAN OTHERS, AND borrower to pay off the principal
HIGHER THAN EXPECTED DEFAULTS balance of the loan gradually over the
ON THESE LOANS COULD REDUCE THE life of the loan. Some of the mortgage
YIELD ON YOUR 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 [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
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 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 Borrowers may prepay their mortgage
OF 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
POOL" 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 If the cash in the pre-funding account
CASH REMAINING IN PRE-FUNDING on the closing date is not used to
ACCOUNT 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 residual certificates, your ownership of
DELAYS IN DISTRIBUTIONS AND the certificates will be registered
HAMPER YOUR ABILITY TO PLEDGE OR electronically with DTC. The lack of
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
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 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 $[ ].
The weighted average Loan-to-Value Ratio at origination of the Mortgage
Loans is approximately [ ]%.
No more than approximately [ ]% of the Mortgage Loans are secured by
Mortgaged Properties located in any one zip code area.
The following tables set forth as of the Cut-off Date the number, total
Principal Balance and percentage of the Mortgage Loans having the stated
characteristics shown in the tables in each range. (The sum of the amounts of
the percentages in the following tables may not equal the totals due to
rounding.)
CUT-OFF DATE PRINCIPAL BALANCES
RANGE OF NUMBER OF TOTAL PERCENTAGE OF
PRINCIPAL BALANCES ($) 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 ORIGINAL 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
NUMBER OF TOTAL PERCENTAGE OF
LOAN TYPE MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
- --------- -------------- ----------------- BY TOTAL
PRINCIPAL BALANCE
-----------------
$ %
-------------- ----------------- -----------------
Total............... $ 100.00%
ORIGINAL TERMS TO MATURITY
RANGE OF NUMBER OF TOTAL PERCENTAGE OF
MATURITIES (MONTHS) 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
NUMBER OF TOTAL PERCENTAGE OF
STATE MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
- ----- -------------- ----------------- BY TOTAL
PRINCIPAL BALANCE
-----------------
$ %
-------------- ----------------- -----------------
Total............... $ 100.00%
PROPERTY TYPES
NUMBER OF TOTAL PERCENTAGE OF
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
- ------------- -------------- ----------------- BY TOTAL
PRINCIPAL BALANCE
-----------------
$ %
-------------- ----------------- -----------------
Total............... $ 100.00%
LOAN PURPOSES
NUMBER OF TOTAL PERCENTAGE OF
LOAN PURPOSE MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
- ------------ -------------- ----------------- BY TOTAL
PRINCIPAL BALANCE
-----------------
$ %
-------------- ----------------- -----------------
Total............... $ 100.00%
OCCUPANCY STATUS
NUMBER OF TOTAL PERCENTAGE OF
OCCUPANCY STATUS MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
- ---------------- -------------- ----------------- BY TOTAL
PRINCIPAL BALANCE
-----------------
$ %
-------------- ----------------- -----------------
Total............... $ 100.00%
DOCUMENTATION TYPES
NUMBER OF TOTAL PERCENTAGE OF
DOCUMENTATION TYPE MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
- ------------------ -------------- ----------------- BY TOTAL
PRINCIPAL BALANCE
-----------------
$ %
-------------- ----------------- -----------------
Total............... $ 100.00%
CREDIT GRADES
NUMBER OF TOTAL PERCENTAGE OF
CREDIT GRADE MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
- ------------ -------------- ----------------- BY TOTAL
PRINCIPAL BALANCE
-----------------
$ %
-------------- ----------------- -----------------
Total............... $ 100.00%
PREPAYMENT PENALTIES
NUMBER OF TOTAL PERCENTAGE OF
PREPAYMENT PENALTY MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
- ------------------ -------------- ----------------- BY TOTAL
PRINCIPAL BALANCE
-----------------
$ %
-------------- ----------------- -----------------
Total............... $ 100.00%
MAXIMUM RATES OF THE ADJUSTABLE RATE MORTGAGE LOANS
RANGE OF NUMBER OF TOTAL PERCENTAGE OF
MAXIMUM RATES (%) MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
- ----------------- -------------- ----------------- BY TOTAL
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
RANGE OF NUMBER OF TOTAL PERCENTAGE OF
MINIMUM RATES (%) MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
- ----------------- -------------- ----------------- BY TOTAL
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
RANGE OF NUMBER OF TOTAL PERCENTAGE OF
GROSS MARGINS (%) MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
- ----------------- -------------- ----------------- BY TOTAL
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
NUMBER OF TOTAL PERCENTAGE OF
NEXT ADJUSTMENT DATE MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
- -------------------- -------------- ----------------- BY TOTAL
PRINCIPAL BALANCE
-----------------
$ %
-------------- ----------------- -----------------
Total............... $ 100.00%
INITIAL FIXED TERM/SUBSEQUENT ADJUSTABLE RATE TERM
OF THE ADJUSTABLE RATE MORTGAGE LOANS
INITIAL FIXED
TERM/SUBSEQUENT NUMBER OF TOTAL PERCENTAGE OF
ADJUSTABLE RATE TERM MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
- -------------------- -------------- ----------------- BY TOTAL
PRINCIPAL BALANCE
-----------------
$ %
-------------- ----------------- -----------------
Total............... $ 100.00%
PERIODIC CAPS OF THE ADJUSTABLE RATE MORTGAGE LOANS
NUMBER OF TOTAL PERCENTAGE OF
PERIODIC CAP (%) MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
- -------------------- -------------- ----------------- BY TOTAL
PRINCIPAL BALANCE
-----------------
$ %
-------------- ----------------- -----------------
Total............... $ 100.00%
INITIAL CAPS OF THE ADJUSTABLE RATE MORTGAGE LOANS
NUMBER OF TOTAL PERCENTAGE OF
INITIAL CAP (%) MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE LOANS
- --------------- -------------- ----------------- BY TOTAL
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
LOAN TYPE PRINCIPAL GROSS ORIGINAL REMAINING LOAN AGE GROSS
- --------- BALANCE($) COUPON TERM TO TERM TO (MONTHS) MARGIN(%)
---------- RATE(%) MATURITY MATURITY -------- --------
------- (MONTHS) (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
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 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 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
[ ] PASS-THROUGH CERTIFICATES,
[ ,]
ORIGINATOR AND 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
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 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...............................................43
DESCRIPTION OF CREDIT SUPPORT...............................................70
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS.....................................73
CERTAIN LEGAL ASPECTS OF THE CONTRACTS......................................89
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS..................................93
STATE AND OTHER TAX CONSIDERATIONS.........................................140
LEGAL INVESTMENT...........................................................149
METHODS OF DISTRIBUTION....................................................151
ADDITIONAL INFORMATION.....................................................152
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............................153
LEGAL MATTERS..............................................................153
FINANCIAL INFORMATION......................................................153
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 mortgage loans on residential properties, 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 ("Multi Family
Property" and together with Single Family Property, "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 Apartment buildings 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 principal balance of mortgage loans secured by Mortgaged Property
consisting of Multi Family Property or apartment buildings owned by
Cooperatives shall not exceed 5% of the principal balance of all mortgage
loans conveyed to the trust fund.
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 contracts 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 gainst 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 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 Banc Alex. Brown Inc. 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 Banc Alex. Brown Inc. ("DBAB") 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 DBAB 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 DBAB acts as agent in
the sale of Notes or Certificates, as applicable, DBAB 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 DBAB elects to purchase Notes or
Certificates, as applicable, as principal, DBAB 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 DBAB and any underwriters against particular
civil liabilities, including liabilities under the Securities Act of 1933, or
will contribute to payments DBAB and any underwriters may be required to make in
respect of these civil liabilities.
In the ordinary course of business, DBAB 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. DBAB 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
Agreemen.......................................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 and the prospectus, see supplement.
This prospectus supplement 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 this 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-39
Use of Proceeds..................................S-40
Underwriting.....................................S-40
Experts..........................................S-41
Legal Matters....................................S-41
Ratings..........................................S-41
Glossary of Defined Terms........................S-42
Annex I..........................................S-43
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 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-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
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 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
$[ ].
The weighted average Combined Loan-to-Value Ratio at origination of the
Mortgage Loans is approximately [ ]%.
No more than approximately [ ]% of the Mortgage Loans are secured by
Mortgaged Properties located in any one zip code area.
The following tables set forth as of the Cut-off Date the number, total
Principal Balance and percentage of the Mortgage Loans having the stated
characteristics shown in the tables in each range. (The sum of the amounts of
the total Principal Balances and the percentages in the following tables may not
equal the totals due to rounding.)
CUT-OFF DATE PRINCIPAL BALANCES
PERCENTAGE OF
MORTGAGE LOANS
RANGE OF NUMBER OF TOTAL BY TOTAL
PRINCIPAL BALANCES ($) 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 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
NUMBER OF TOTAL BY TOTAL
PREPAYPMENT 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 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
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
SUBJECT TO COMPLETION, [ ]
PROSPECTUS SUPPLEMENT (to prospectus dated [ ])
$[ ] (APPROXIMATE)
ACE SECURITIES CORP.
[ ] TRUST
[ ] PASS-THROUGH CERTIFICATES
[ ]
ORIGINATOR AND 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 certificates will represent interests in the trust fund only and will
not represent interest 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 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
POOL ARE MORE LIKELY TO DEFAULT
THAN OTHERS, AND HIGHER THAN
EXPECTED DEFAULTS ON THESE LOANS
COULD REDUCE THE YIELD ON
YOUR CERTIFICATES 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 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 LIMIT INTEREST RATES
ON THE CERTIFICATES [LIBOR may increase or
decrease at different times and in
different amounts 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 ENHANCEMENT
FOR THE CLASS [ ]
CERTIFICATES The Class [ ] Certificates are
not insured by any financial guaranty
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 [ ] CERTIFICATES The rights of holders of Class
[ ] 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 INSURANCE
ON THE CLASS [ ] CERTIFICATES Approximately [ ]% of the
mortgage loans have loan-to-value ratios
greater than 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 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 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 POOLS" 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 certificates from these
losses, the yield on your certificates
may be reduced.
[EARLY PRINCIPAL PAYMENT
FROM CASH REMAINING
IN PRE-FUNDING ACCOUNT
If the cash in the 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
CERTIFICATES, WHICH CAN
CAUSE DELAYS IN DISTRIBUTIONS
AND HAMPER YOUR ABILITY
TO PLEDGE OR RESELL
YOUR CERTIFICATES Unless you are the purchaser
of the residual certificates, your
ownership of the certificates will be
registered electronically with DTC. The
lack of 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
CERTIFICATES The underwriter is not
required to 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 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
NUMBER OF TOTAL BY TOTAL
PREPAYPMENT 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 ADJUSTMENT NUMBER OF TOTAL BY TOTAL
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%
START HERE
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%
____ ___________ _______
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.
THREE MONTHS ENDED MARCH 31,
YEAR ENDED DECEMBER 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
LOAN TYPE PRINCIPAL GROSS ORIGINAL REMAINING LOAN GROSS
BALANCE($) COUPON TERM TO TERM TO AGE MARGIN(%)
RATE(%) MATURITY MATURITY (MONTHS)
(MONTHS) (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
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.
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
[ ] PASS-THROUGH CERTIFICATES,
[ ,]
ORIGINATOR AND 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
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..............................................................15
YIELD CONSIDERATIONS.........................................................16
THE DEPOSITOR................................................................22
DESCRIPTION OF THE SECURITIES................................................23
DESCRIPTION OF THE AGREEMENTS................................................39
DESCRIPTION OF CREDIT SUPPORT................................................64
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS......................................67
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS...................................82
STATE AND OTHER TAX CONSIDERATIONS..........................................129
ERISA CONSIDERATIONS........................................................130
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 mortgage loans on residential properties, 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 Apartment buildings owned by cooperative housing corporations
("Cooperatives"), provided that no more than 5% of the principal
balance of Mortgaged Properties in a trust fund may consist of such
apartment buildings; 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; 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 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 Banc Alex. Brown Inc. 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 Alex. Brown Inc. ("DBAB") 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 DBAB 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 DBAB acts as agent in
the sale of Notes or Certificates, as applicable, DBAB 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 DBAB elects to purchase Notes or
Certificates, as applicable, as principal, DBAB 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 DBAB and any underwriters against particular
civil liabilities, including liabilities under the Securities Act of 1933, or
will contribute to payments DBAB and any underwriters may be required to make in
respect of these civil liabilities.
In the ordinary course of business, DBAB 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. DBAB 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
1986 Act.......................................84
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
DBAB..........................................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, [ ]
PROSPECTUS SUPPLEMENT (to prospectus date [ ])
$[ ] (APPROXIMATE)
ACE SECURITIES CORP.
SPONSOR
[ ] EQUIPMENT TRUST SECURITIES [ ]-[ ]
OWNER TRUST
RECEIVABLE-BACKED NOTES
[ ]
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.
The owner trust will issue the following classes of notes:
- -------- ------------ ---------- --------- --------- ---------- ---------------
Initial Interest
Class of Aggregate Rate First Stated Price to Underwriting
Notes Principal (per Payment Maturity Public Discount
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 Inc. Neither
Deutsche Banc Alex. Brown Inc. 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 THE notes prior to paying interest,
SWAP COUNTERPARTY WILL BE ENTITLED principal or both on other classes of
TO PAYMENT BEFORE SOME NOTE CLASSES notes. The subordination of some 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 COUNTERPARTY The Class A-3 Notes will be dependent
TO PAY AMOUNTS OWED UNDER THE SWAP upon payments to be made by the swap
AGREEMENT WOULD REDUCE THE FUNDS counterparty under the swap agreement
AVAILABLE TO PAY INTEREST ON THE for receipt of the full amount of
CLASS A-3 NOTES interest on the Class A-3 Notes. This
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 conditions
CONCENTRATION STATES MAY CAUSE were particularly severe in a
INCREASED DEFAULTS AND DELINQUENCIES geographic region where there is a
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 IN HIGH If the industries in which there is a
CONCENTRATION INDUSTRIES MAY CAUSE substantial concentration of contracts
INCREASED DEFAULTS AND DELINQUENCIES experience adverse events or economic
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 OR [ ], a [ ]and [ ] a [ ] is the vendor of
ADVERSE ECONOMIC EVENTS FOR TWO equipment for approximately [ ]% of the
VENDORS ACCOUNTING FOR HIGH contract pool principal balance
PROPORTIONS OF THE CONTRACTS MAY calculated as of the initial cut-off
CAUSE INCREASED DEFAULTS AND 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 OF If the types of equipment in which
TYPES OF EQUIPMENT ACCOUNTING FOR contracts are concentrated suffer
HIGH PROPORTIONS OF THE CONTRACTS MAY unexpectedly high rates of defects or
CAUSE INCREASED DEFAULTS OR become obsolete, the obligors on the
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 SECURITY The owner trust will have no security
INTERESTS IN COMPUTER SOFTWARE AND interest in computer software and
SERVICES AND THE OWNER TRUST'S NOT computer services contracts, which
BEING NAMED AS SECURED PARTY IN MOTOR accounted for [ ]% of the initial
VEHICLE TITLE CERTIFICATES WILL contract pool balance, and the owner
LEAVE THE OWNER TRUST WITHOUT trust will not be named as a secured
COLLATERAL FOR THE ASSOCIATED party in the title certificates for
CONTRACTS motor 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 SOURCE All distributions on the notes will be
OF PAYMENTS ON THE NOTES 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
REMAINING TERMS OF NUMBER OF NUMBER OF PRINCIPAL PRINCIPAL
CONTRACTS (MONTHS) CONTRACTS CONTRACTS BALANCE BALANCE
- ------------------ --------- ---------- --------- -------------
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
AS OF BALANCE DAYS DAYS DAYS TOTAL
- ----- -------- -------- -------- ------- -----
(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
-------------------------------------------------
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 Inc.
[ ]
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
Inc., 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 Inc., 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
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
EQUIPMENT RECEIVABLE-BACKED NOTES
(ISSUABLE IN SERIES)
ACE SECURITIES CORP.
SPONSOR
THE OWNER TRUST:
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 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 FOR THE NOTES MAY
LIMIT YOUR ABILITY TO
RESELL THE NOTES There is currently no public market for
the notes and the sponsor cannot assure
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,
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 A higher than anticipated level of
prepayments or liquidation of contracts
that become defaulted may cause an owner
trust to pay principal on the notes
sooner than you expected. Also, an owner
trust may pay principal sooner than you
expected if the depositor or a seller
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 RESELL
YOUR NOTES MAY DECREASE IF THE
RATINGS OF YOUR NOTES CHANGE At any time, the rating agencies may
lower their respective ratings of the
notes or withdraw their ratings
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 CLASSES OF
NOTES IS ONLY A LIMITED FORM
OF CREDIT ENHANCEMENT AND DOES
NOT ENSURE PAYMENT OF
THE MORE SENIOR An owner trust will pay interest and
principal on some classes of notes prior
to paying interest and CLASSES principal
on other classes of notes. The
subordination of some classes of notes
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 FOR
PAYMENT OF THE NOTES; NOTEHOLDERS WILL
HAVE NO RECOURSE TO THE ORIGINATORS,
SPONSOR, DEPOSITOR, SERVICER OR THEIR
AFFILIATES IN THE EVENT DELINQUENCIES
AND LOSSES REDUCE THE TRUST'S ASSETS Each owner trust will be a limited
purpose trust with limited assets.
Moreover, you have no recourse to the
general credit of the servicer, sponsor,
depositor, originator or their
affiliates. Therefore, you must rely
solely upon the contracts and any credit
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
REPOSSESSES AND SELLS THE
EQUIPMENT RELATING TO A
CONTRACT AFTER AN OBLIGOR
DEFAULTS, SHORTFALLS IN AMOUNTS
AVAILABLE TO PAY THE NOTES MAY
OCCUR IF THE MARKET VALUE OF
THE EQUIPMENT HAS DECLINED If a contract held by the trust becomes
a defaulted contract, the only sources
of payment for amounts owed on that
contract will be the income and proceeds
from the sale of any related equipment
and a deficiency judgment, if any,
against the obligor under the defaulted
contract. Since the market 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
FILES MAY HINDER AN OWNER
TRUST'S ABILITY TO REALIZE
THE VALUE OF EQUIPMENT
SECURING THE CONTRACTS To facilitate servicing and reduce
administrative costs, the servicer or a
sub-servicer, unless otherwise specified
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
NECESSARY TO PERFECT SECURITY
INTERESTS IN EQUIPMENT, TO
RECORD ASSIGNMENT OF SECURITY
INTERESTS TO THE OWNER TRUST
OR TO RECORD SECURITY INTERESTS
IN TITLED EQUIPMENT MAY HINDER
THE OWNER TRUST'S ABILITY TO
REALIZE THE VALUE OF
EQUIPMENT SECURING THE CONTRACTS The depositor will receive security
interests in financed equipment securing
contracts from the seller of such
financed equipment, which will obtain
security interests in financed equipment
from other originator or through its own
origination activities. The depositor
will assign the security interests to
the owner trust. However, 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
SELLER PROVIDES YOU ONLY
LIMITED PROTECTION AGAINST PRIOR
LIENS ON THE CONTRACTS OR EQUIPMENT Federal or state law may grant liens on
contracts or equipment that have
priority over the owner 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
THAT THE TRANSFER OF CONTRACTS
FROM A VENDOR TO AN ORIGINATOR
WAS NOT A TRUE SALE THEN
PAYMENTS ON THE CONTRACTS
MAY BE REDUCED OR DELAYED Vendors sell contracts to the
originators, which contracts will be
transferred directly or indirectly to
the depositor and then the owner trust.
If a bankruptcy court decides that the
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 THAT THE
TRANSFER OF CONTRACTS FROM
ORIGINATORS TO THE SELLER,
FROM THE SELLER TO THE
DEPOSITOR OR FROM THE
DEPOSITOR TO THE OWNER
TRUST WAS NOT A TRUE SALE
THEN PAYMENTS ON THE
CONTRACTS COULD BE
REDUCED OR DELAYED If an originator, the seller or the
depositor became a debtor in a
bankruptcy case, creditors of that
party, or that party acting as a
debtor-in-possession, may assert that
the transfer of the contracts was
ineffective to remove the contracts from
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
COULD DELAY OR REDUCE
PAYMENTS TO YOU In the event a vendor under a vendor
loan becomes subject to 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
REDUCE OR DELAY COLLECTIONS
ON THE CONTRACTS, AND
DISPOSITION OF EQUIPMENT
RELATING TO THESE OR OTHER
DEFAULTING END-USERS MAY BE
DELAYED OR MAY NOT RESULT IN
COMPLETE RECOVERY OF AMOUNTS DUE Bankruptcy and insolvency laws could
affect your interests in contracts with
end-user obligors who become subject to
bankruptcy proceedings. Those laws could
result in contracts of a bankrupt
end-user being written off as
uncollectible or result in delay in
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
RESULT IN REDUCED PAYMENTS TO YOU Cash held by the servicer may be
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 OWNER TRUST MAY CAUSE
DELAYS IN OR REDUCE COLLECTIONS
UNDER THE CONTRACTS If an owner trust or the depositor
becomes insolvent under any federal
bankruptcy or similar state laws, the
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
REPURCHASE CONTACTS COULD BE
IMPAIRED BY BANKRUPTCY The seller of contracts to the
depositor, will make representations and
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
OR RELATED SUPPORT AND
CONSULTING SERVICES ARE NOT
SECURED BY THE SOFTWARE OR
RELATED SERVICES Some of the contracts held by the owner
trust may relate to software that is not
owned by an originator or related
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
OF SECURITY INTERESTS IN THE
EQUIPMENT MAY HINDER THE OWNER
TRUST'S ABILITY TO REALIZE
THE VALUE OF EQUIPMENT
SECURING THE CONTRACTS State law limitations on the
enforceability of security interests and
the manner in which a secured party may
dispose of collateral may limit the
owner trust's ability to obtain or
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 "TRUE LEASES" MAY REDUCE
FUNDS AVAILABLE TO PAY NOTES A bankruptcy trustee or
debtor-in-possession under federal
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 Inc.
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
Inc. 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 $ 300,014
Trustee's Fees and Expenses (including counsel fees) 90,000
Printing and Engraving Costs 250,000
Rating Agency Fees 400,000
Legal Fees and Expenses 350,000
Blue Sky Fees and Expenses 60,000
Accounting Fees and Expenses 200,000
Miscellaneous 40,000
-------------------
Total $1,690,014
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, Boat
Receivables and Auto/Boat Receivables)*
4.1.2 Form of Indenture between the Trust and the Indenture Trustee
(Owner Trust, Equipment Securities)*
4.2.1 Form of Pooling and Servicing Agreement (Mortgage)+
4.2.2 Form of Pooling and Servicing Agreement. (Equipment)*
4.3.1 Form of Trust Agreement. (Owner Trust, Auto Receivables, Boat
Receivables and Auto/Boat Receivables)*
4.3.2 Form of Trust Agreement among the Depositor, the Seller and the
Trustee (Owner Trust, Equipment 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, Boat
Receivables and Auto/Boat Receivables)*
10.1.2 Form of Sale and Servicing Agreement. (Owner Trust, Auto
Receivables, Boat Receivables and Auto/Boat 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.
* 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. 2 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 April 2001.
ACE SECURITIES CORP.
By:/S/ JULIANA C. JOHNSON
---------------------------------------
Name: Juliana C. Johnson
Title: Vice 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 April 5, 2001
----------------------------- (Principal Executive Officer)
Douglas K. Johnson
* Director and Secretary April 5, 2001
-----------------------------
Evelyn Echevarria
* Treasurer and Director April 5, 2001
----------------------------- (Principal Financial and
Juliana C. Johnson Accounting Officer)
* By:/S/ JULIANA C. JOHNSON
Name: Juliana C. Johnson
Title: Vice 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, Boat
Receivables and Auto/Boat Receivables)*
4.1.2 Form of Indenture between the Trust and the Indenture Trustee
(Owner Trust, Equipment Securities)*
4.2.1 Form of Pooling and Servicing Agreement (Mortgage)+
4.2.2 Form of Pooling and Servicing Agreement. (Equipment)*
4.3.1 Form of Trust Agreement. (Owner Trust, Auto Receivables, Boat
Receivables and Auto/Boat Receivables)*
4.3.2 Form of Trust Agreement among the Depositor, the Seller and the
Trustee (Owner Trust, Equipment 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, Boat
Receivables and Auto/Boat Receivables)*
10.1.2 Form of Sale and Servicing Agreement. (Owner Trust, Auto
Receivables, Boat Receivables and Auto/Boat 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.
* Previously filed.
** To be filed following the effectiveness of the Registration Statement.