PROSPECTUS SUPPLEMENT FILE PURSUANT TO RULE 424(B)(5)
(To Prospectus dated June 6, 2001) REGISTRATION NO. 333-93255
$480,000,000
(APPROXIMATE)
CENTEX HOME EQUITY LOAN TRUST 2001-B
Centex Home Equity Loan Asset-Backed Certificates, Series
[LOGO] 2001-B
Centex Credit Corporation
d/b/a Centex Home Equity Corporation
Originator and Servicer
CHEC Funding, LLC
Depositor
Consider carefully
the risk factors
beginning on page
S-9 in this
Prospectus
Supplement.
The offered
certificates will
represent interests
in the trust only
and will not be
guaranteed by or
represent interests
in or obligations of
Centex Home Equity
Corporation or any
of its affiliates.
This Prospectus
Supplement may be
used to offer and
sell the
certificates only if
accompanied by the
Prospectus.
The Trust will issue pursuant to this Prospectus Supplement and the accompanying
Prospectus:
- ---------------------------------------------------------------------------------------------------------
OFFERED PRINCIPAL FINAL SCHEDULED
CERTIFICATES BALANCE* CERTIFICATE RATE DISTRIBUTION DATE
- ---------------------------------------------------------------------------------------------------------
Class A-1 $134,074,000 4.93% November 25, 2016
- ---------------------------------------------------------------------------------------------------------
Class A-2 $57,096,000 5.35% October 25, 2022
- ---------------------------------------------------------------------------------------------------------
Class A-3 $59,251,000 5.77% November 25, 2027
- ---------------------------------------------------------------------------------------------------------
Class A-4 $39,093,000 6.41% February 25, 2030
- ---------------------------------------------------------------------------------------------------------
Class A-5 $28,871,000 6.83% (or 7.33% for each interest period after July 25, 2032
an affiliate of the servicer first fails to
exercise its clean-up call option), subject to
an interest rate cap.
- ---------------------------------------------------------------------------------------------------------
Class A-6 $35,376,000 6.36% July 25, 2032
- ---------------------------------------------------------------------------------------------------------
Class A-7 $56,639,000 One-Month LIBOR plus 0.23% (or One-Month LIBOR July 25, 2032
plus 0.46% for each interest period after an
affiliate of the servicer first fails to
exercise its clean-up call option), subject to
an available funds cap.
- ---------------------------------------------------------------------------------------------------------
Class M-1 $28,800,000 6.92% (or 7.42% for each interest period after July 25, 2032
an affiliate of the servicer first fails to
exercise its clean-up call option), subject to
an interest rate cap.
- ---------------------------------------------------------------------------------------------------------
Class M-2 $21,600,000 7.36% (or 7.86% for each interest period after July 25, 2032
an affiliate of the servicer first fails to
exercise its clean-up call option), subject to
an interest rate cap.
- ---------------------------------------------------------------------------------------------------------
Class B $19,200,000 7.81% (or 8.31% for each interest period after July 25, 2032
an affiliate of the servicer first fails to
exercise its clean-up call option), subject to
an interest rate cap.
- ---------------------------------------------------------------------------------------------------------
* Principal balances subject to variance of plus or minus 5%.
THE CERTIFICATES
- - Interest and principal on the certificates are scheduled to be paid monthly on
the 25th day of the month or, if the 25th is not a business day, on the next
business day. The first scheduled distribution date is July 25, 2001.
- - The offered certificates currently have no trading market.
- - The Class A-1, Class A-2, Class A-3, Class A-4, Class A-5, Class A-6 and
Class A-7 certificates will be senior certificates.
- - The Class M-1, Class M-2 and Class B certificates will be subordinate to, and
provide credit enhancement for, the senior certificates. The Class M-2
certificates will also be subordinate to, and provide credit enhancement for,
the Class M-1 certificates. The Class B certificates will be subordinate to,
and provide credit enhancement for, the Class M-1 and Class M-2 certificates.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED 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.
The underwriters listed below will offer the offered certificates from time to
time in negotiated transactions or otherwise at varying prices to be determined
at the time of sale. Proceeds to the depositor with respect to the offered
certificates are expected to be approximately $478,716,905, excluding accrued
interest, and before deducting issuance expenses payable by the depositor,
estimated to be $600,000. We expect that delivery of the offered certificates
will be made in book-entry form through the facilities of The Depository Trust
Company, Clearstream Banking, societe anonyme and the Euroclear System on or
about June 15, 2001.
LEHMAN BROTHERS
BANC OF AMERICA SECURITIES LLC
CREDIT SUISSE FIRST BOSTON
SALOMON SMITH BARNEY
June 6, 2001
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS SUPPLEMENT
AND THE ACCOMPANYING PROSPECTUS
We provide information to you about the offered certificates in two separate
documents that provide progressively more detail:
- the accompanying Prospectus, which provides general information, some of
which may not apply to your certificates; and
- this Prospectus Supplement, which describes the specific terms of your
certificates.
YOU SHOULD RELY PRIMARILY ON THE DESCRIPTION OF YOUR CERTIFICATES 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 offered certificates in any state where the offer is
not permitted.
Dealers will deliver a Prospectus Supplement and Prospectus when acting as
underwriters of the offered certificates. In addition, all dealers selling the
offered certificates will be required to deliver a Prospectus Supplement and
Prospectus until September 4, 2001.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
CAPTION PAGE
- ------- --------
Summary.............................. S-1
Risk Factors......................... S-9
Description of the Home Equity
Loans.............................. S-23
Prepayment and Yield
Considerations..................... S-45
Formation of the Trust and Trust
Property........................... S-61
Description of the Certificates...... S-61
Use of Proceeds...................... S-77
Certain Federal Income Tax
Considerations..................... S-77
Certain State Tax Considerations..... S-80
ERISA Considerations................. S-80
Legal Investment Considerations...... S-81
Underwriting......................... S-82
Legal Matters........................ S-83
Ratings.............................. S-83
Index of Defined Terms............... S-84
Annex I.............................. I-1
PROSPECTUS
CAPTION PAGE
- ------- --------
Prospectus Supplement................ 3
Reports to Holders................... 3
Available Information................ 4
Incorporation of Certain Documents by
Reference.......................... 4
Introduction......................... 5
The Depositor........................ 5
The Seller and the Servicer.......... 5
Description of the Securities........ 13
The Trust Funds...................... 21
Accounts............................. 25
Enhancement.......................... 27
The Agreements....................... 29
Certain Legal Aspects of the Home
Equity Loans....................... 44
Use of Proceeds...................... 52
Federal Income Tax Consequences...... 52
State Tax Consequences............... 76
ERISA Considerations................. 77
Legal Investment..................... 83
Plan of Distribution................. 83
Legal Matters........................ 84
ii
SUMMARY
- This summary highlights selected information from this prospectus
supplement and does not contain all of the information that you need to
consider in making your investment decision. To understand all of the
terms of the offering of the offered certificates, you should read
carefully this entire prospectus supplement and accompanying prospectus.
- This summary provides an overview to aid your understanding and is
qualified by the full description of this information in this prospectus
supplement and the accompanying prospectus.
- You can find a listing of the pages where capitalized terms used in this
prospectus supplement are defined under the caption "Index of Defined
Terms" beginning on page S-84 in this prospectus supplement.
ISSUER
- Centex Home Equity Loan Trust 2001-B.
DEPOSITOR
- CHEC Funding, LLC, a Delaware limited liability company and wholly owned
subsidiary of Centex Credit Corporation d/b/a Centex Home Equity
Corporation.
ORIGINATOR
- Centex Credit Corporation d/b/a Centex Home Equity Corporation.
- All of the home equity loans have been originated by the originator, by an
affiliate of the originator or by a broker for simultaneous assignment to
the originator or were acquired by the originator from correspondent
lenders and reunderwritten to comply with the originator's underwriting
standards.
- The originator will sometimes be referred to in this prospectus supplement
as "CHEC".
SELLERS
- Centex Credit Corporation d/b/a Centex Home Equity Corporation.
- Harwood Street Funding II, LLC, which is a limited purpose entity and an
affiliate of Centex Credit Corporation d/b/a Centex Home Equity
Corporation.
SERVICER
- Centex Credit Corporation d/b/a Centex Home Equity Corporation.
TRUSTEE
- Bank One, National Association.
STATISTICAL CALCULATION DATE
- The opening of business on May 15, 2001.
- All statistical information relating to the home equity loans presented in
this prospectus supplement is given as of the statistical calculation
date.
CUT-OFF DATE
- The opening of business on June 1, 2001.
- The cut-off date is the date on and after which the issuer will be
entitled to receive all collections and proceeds on the home equity loans.
CLOSING DATE
June 15, 2001.
DISTRIBUTION DATE
The 25th day of each month, or if the 25th day is not a business day, then
the next succeeding business day. The first distribution date will be July 25,
2001.
RECORD DATE
- With respect to any distribution date and each class of fixed rate
certificates, the last business day of the month immediately preceding the
calendar month in which the distribution date occurs.
- With respect to any distribution date and the variable rate certificates,
the last
S-1
business day immediately preceding the distribution date or, if definitive
certificates are issued, the last business day of the month immediately
preceding the calendar month in which the distribution date occurs.
THE CERTIFICATES
On the closing date, the trust will issue the offered certificates, the
Class X-IO certificates and the Class R certificates.
OFFERED CERTIFICATES
The Class A-1, Class A-2, Class A-3, Class A-4, Class A-5, Class A-6,
Class A-7, Class M-1, Class M-2 and Class B certificates.
SENIOR CERTIFICATES
The Class A-1, Class A-2, Class A-3, Class A-4, Class A-5, Class A-6 and
Class A-7 certificates.
SUBORDINATE CERTIFICATES
The Class M-1, Class M-2 and Class B certificates.
NON-OFFERED CERTIFICATES
The Class X-IO certificates and Class R certificates are not being offered
to the public. We have included information with respect to the Class X-IO and
Class R certificates in this prospectus supplement solely to provide you a
better understanding of the offered certificates.
GROUP I CERTIFICATES
The Group I certificates will be the Class A-1, Class A-2, Class A-3,
Class A-4, Class A-5 and Class A-6 certificates.
GROUP II CERTIFICATES
The Group II certificates will be the Class A-7 certificates.
FIXED RATE CERTIFICATES
The Class A-1, Class A-2, Class A-3, Class A-4, Class A-5, Class A-6,
Class M-1, Class M-2 and Class B certificates.
VARIABLE RATE CERTIFICATES
The Class A-7 certificates.
DENOMINATIONS
The offered certificates will be offered for purchase in denominations of
$25,000 and multiples of $1,000 above $25,000.
BOOK-ENTRY REGISTRATION
We will issue the offered certificates in book-entry form. You will hold
your interests either through a depository in the United States or through one
of two depositories in Europe. While the offered certificates are in book-entry
form they will be registered in the name of the nominee of the depository in the
United States.
FINAL SCHEDULED DISTRIBUTION DATE
The final scheduled distribution date for each class of offered certificates
is as set forth on the cover page of this prospectus supplement.
DISTRIBUTIONS TO OFFERED CERTIFICATEHOLDERS
INTEREST
You will be entitled to receive payments of interest on each distribution
date to the extent set forth in this prospectus supplement. We may reduce the
amount of interest that you are entitled to receive on any distribution date as
a result of the application of the Soldiers' and Sailors' Civil Relief Act of
1940, as amended.
FIXED RATE CERTIFICATE INTEREST
The interest rate on any distribution date for a fixed rate certificate will
be the applicable interest rate set forth on the cover page of this prospectus
supplement.
The interest period with respect to each distribution date and a fixed rate
certificate is the calendar month preceding the month of the distribution date.
For example, if the distribution date occurs on August 25, 2001, the interest
period would be the month of July 2001. Each calendar month will be deemed to
have 30 days and each year will be deemed to have 360 days. Therefore, if you
are a holder of a fixed rate certificate, you would use the following formula
S-2
to calculate your interest payment on any distribution date:
30 X IR X PB = your interest payment
- ---
360
IR = the applicable per annum
fixed interest rate,
subject to (1) in the case
of the Class A-5,
Class M-1, Class M-2 and
Class B certificates, the
fixed rate interest rate
cap and (2) in the case of
the Class A-5, Class M-1,
Class M-2 and Class B
certificates, an increase
of 0.50% per annum after an
affiliate of the servicer
first fails to exercise its
clean-up call option.
PB = the principal balance of
your fixed rate certificate
immediately prior to any
distributions on the
distribution date.
If you are a holder of a fixed rate certificate, we will increase the
interest payment we owe to you for a distribution date by any unpaid interest we
owe to you from prior distribution dates, plus accrued interest at the
applicable certificate rate.
The fixed rate interest rate cap for the Class A-5, Class M-1, Class M-2 and
Class B certificates is the lesser of (a) the weighted average of the net coupon
rates of the Group I home equity loans related to the applicable distribution
date, and (b) the weighted average of the net coupon rates of the home equity
loans in the aggregate related to such distribution date.
If you are a holder of a Class A-5, Class M-1, Class M-2 or Class B
certificate, we will pay to you, on future distribution dates, the amount by
which we reduce the interest payment we owe you because of the effect of the
fixed rate interest rate cap. Payment of these amounts will be made on a
subordinated basis, to the extent that money is available to make these
payments. However, if the clean-up call option is exercised or the home equity
loans are sold in the auction, each as described in this prospectus supplement,
you will generally not be entitled to receive these amounts upon termination of
the trust, except if and to the extent that amounts would otherwise be available
to make distributions in respect of the non-offered certificates.
VARIABLE RATE CERTIFICATE INTEREST
The interest rate on any distribution date with respect to the variable rate
certificates will be the applicable interest rate set forth on the cover page of
this prospectus supplement.
The interest period with respect to each distribution date and the variable
rate certificates is the period from and including the previous distribution
date (or the closing date in the case of the first distribution date) to and
including the day preceding the related distribution date. Interest on the
variable rate certificates will accrue during the related interest period on the
basis of the actual number of days elapsed in the related interest period and a
year consisting of 360 days. Therefore, if you are a holder of a variable rate
certificate, you would use the following formula to calculate your interest
payment on any distribution date:
N X IR X PB = your interest payment
- ---
360
N = number of days in the
interest period.
IR = the per annum floating
interest rate for the
interest period, subject to
both (1) an available
funds cap and (2) a
doubling of the applicable
margin after an affiliate
of the servicer first fails
to exercise its clean-up
call option.
PB = the principal balance of
your variable rate
certificate immediately
prior to any distributions
on the distribution date.
If you are a holder of a variable rate certificate, we will increase the
interest payment we owe to you for a distribution date by any unpaid interest we
owe to you from prior
S-3
distribution dates, plus accrued interest at the applicable certificate rate.
The available funds cap for the variable rate certificates is equal to the
product of the weighted average of the net coupon rates of the Group II home
equity loans and a fraction, the numerator of which is 30 and the denominator of
which is the number of days in the related interest period.
If you are a holder of a variable rate certificate, we will pay to you, on
future distribution dates, the amount by which we reduce the interest payment we
owe to you because of the effect of the available funds cap. Payment of these
amounts will be made on a subordinated basis, to the extent that money is
available to make these payments. However, if the clean-up call option is
exercised or the home equity loans are sold in the auction, each as described in
this prospectus supplement, you will generally not be entitled to receive these
amounts upon termination of the trust, except if and to the extent that amounts
would otherwise be available to make distributions in respect of the non-offered
certificates.
PRINCIPAL
On each distribution date, the amount available for distributions of
principal to the offered certificates will include principal collections on the
home equity loans, plus any excess interest collections on the home equity loans
required to be distributed to satisfy the required level of
overcollateralization, less any decrease in the required level of
overcollateralization.
GROUP I CERTIFICATES
On each distribution date we will distribute principal in a specified amount
to the Group I certificates in the following order of priority:
- first, to the Class A-6 certificates, for each distribution date on or
after the distribution date in July 2004 in an amount up to a specified
amount; and
- second, to the Class A-1, Class A-2, Class A-3, Class A-4, Class A-5 and
Class A-6 certificates, in that order, so that each class does not receive
any principal payments until the principal balance of the prior class has
been reduced to zero.
The Class A-6 certificate is a "lock-out" certificate. If you are a holder
of a Class A-6 certificate generally you will not be entitled to receive
payments of principal until the distribution date in July 2004. From that point
on, you will be entitled to receive an increasing percentage of your class's
proportionate share of principal payable to the Group I certificates, based on a
schedule.
GROUP II CERTIFICATES
On each distribution date we will distribute principal in a specified amount
to the Group II certificates as follows:
- to the Class A-7 certificates, until the principal balance of the
Class A-7 certificates has been reduced to zero.
SUBORDINATE CERTIFICATES
On each distribution date we will distribute principal to the subordinate
certificates on a subordinate basis and following the distributions of principal
to the senior certificates in the amounts and the order of priority described
under "DESCRIPTION OF THE CERTIFICATES--Distributions" in this prospectus
supplement.
TRUST PROPERTY
The trust property is held by the trustee for the benefit of the
certificateholders. The trust property includes:
- a pool of closed-end fixed rate home equity loans secured by first and
second deeds of trust, security deeds or mortgages on primarily one-to
four-family residential properties transferred to the trust on the closing
date;
- a pool of closed-end adjustable rate home equity loans secured by first
deeds of trust, security deeds or mortgages on primarily one-to
four-family residential properties transferred to the trust on the closing
date;
S-4
- payments on the home equity loans received on and after the cut-off date;
- property that secured a home equity loan which has been acquired by
foreclosure or deed in lieu of foreclosure;
- amounts on deposit in the accounts specified in this prospectus
supplement;
- rights under any hazard insurance policies, if any, covering the mortgaged
properties; and
- proceeds of the foregoing.
THE HOME EQUITY LOANS
We will divide the home equity loans into two groups. The Group I home
equity loan group will contain home equity loans that bear interest at fixed
rates. The Group II home equity loan group will contain home equity loans that
bear interest at rates that adjust semi-annually based on six-month LIBOR and
the applicable gross margin (subject to the limitations described in this
prospectus supplement). The initial rate adjustment date for those home equity
loans that bear interest at an adjustable rate is either six months or two years
after the date of origination of the related home equity loan.
All of the home equity loans in the trust have been originated by CHEC, an
affiliate of CHEC or a broker for simultaneous assignment to CHEC or were
acquired by CHEC from correspondent lenders and reunderwritten to comply with
CHEC's underwriting standards.
The home equity loans are not and will not be guaranteed by the depositor,
the sellers, the servicer, the trustee or any of their affiliates. None of the
home equity loans is insured by a primary mortgage insurance policy.
The statistical information presented in this prospectus supplement is, with
respect to 5,043 home equity loans, of which 4,689 are fixed-rate home equity
loans and 354 are adjustable-rate home equity loans, in each case as of the
statistical calculation date. Prior to the closing date, additional home equity
loans will be added to each home equity loan group and some home equity loans
may be removed from each home equity loan group.
As a result, the characteristics of the home equity loans in each home
equity loan group as of the cut-off date will differ from the characteristics
presented in this prospectus supplement as of the statistical calculation date.
The depositor does not expect a material change in the weighted average
characteristics of either home equity loan group.
DELINQUENCY ADVANCES AND COMPENSATING INTEREST
Each month the servicer will determine the amount of any unpaid interest due
on the home equity loans. If the servicer believes that unpaid interest can be
recovered, then the servicer will either:
- advance the unpaid interest to the trust out of its own funds; or
- advance the unpaid interest to the trust out of collections on the home
equity loans that are not required to be distributed on the related
distribution date.
The servicer will reimburse the trust for amounts advanced from trust
collections prior to the date on which these amounts are required to be a part
of any amounts distributable to you.
The servicer will provide to the trust the amount of any shortfall in the
anticipated collection of interest on a home equity loan that is caused by a
full prepayment of a home equity loan up to the amount of the aggregate
servicing fee for the related period.
The servicer is entitled to be reimbursed by the trust for any delinquency
advances from the related home equity loan and, if the delinquency advance is a
non-recoverable advance, from collections on all the home equity loans prior to
any distributions to you. The servicer is also entitled to be reimbursed by the
trust for any delinquency advances, as well as unreimbursed payments of
compensating interest, from all the home equity loans to the extent funds are
available after making other required distributions on the related distribution
date.
S-5
SERVICING ADVANCES
Unless the servicer determines that any proposed advance is not recoverable
from the related home equity loan, the servicer will pay all "out of pocket"
costs and expenses incurred in the performance of its servicing obligations,
including, but not limited to:
- expenditures in connection with a foreclosed home equity loan prior to the
liquidation of that home equity loan;
- the cost of any enforcement or judicial proceedings, including
foreclosures; and
- the cost of the management and liquidation of property acquired in
satisfaction of the related home equity loan.
The servicer is entitled to be reimbursed by the trust for any servicing
advances from the liquidation proceeds realized upon the liquidation of the
related home equity loan prior to any distributions to you. The servicer is also
entitled to be reimbursed by the trust for any servicing advances from all the
home equity loans to the extent funds are available after making other required
distributions on the related distribution date.
CREDIT ENHANCEMENT
SUBORDINATION
The issuance of senior certificates and subordinate certificates by the
trust is designed to increase the likelihood that senior certificateholders will
receive regular payments of interest and principal.
The certificates that are designated as senior certificates will have a
payment priority over the certificates that are designated as subordinate
certificates. Among the classes of subordinate certificates:
- the Class M-1 certificates will have payment priority over the Class M-2
certificates and Class B certificates, and
- the Class M-2 certificates will have payment priority over the Class B
certificates.
ALLOCATION OF LOSSES
If, on any distribution date, there is insufficient excess interest or
overcollateralization to absorb realized losses on the home equity loans, then
realized losses on the home equity loans will be allocated to the subordinate
certificates as follows: FIRST, to the Class B certificates, SECOND, to the
Class M-2 certificates and THIRD, to the Class M-1 certificates, through a
reduction in the principal balance of the applicable class equal to the realized
losses in excess of the amount of excess interest and overcollateralization on
such distribution date. The pooling and servicing agreement does not permit the
allocation of realized losses on the home equity loans to the senior
certificates; however, investors in the senior certificates should realize that
under certain loss scenarios there will not be enough principal and interest
collections on the home equity loans to pay the Class A certificates all the
interest and principal amounts to which such certificates are then entitled.
Once realized losses are allocated to the subordinate certificates, the
principal balance reduced as a result of such realized losses will not be
reinstated thereafter. However, the amount of any realized losses allocated to
the subordinate certificates may be paid to the holders of these certificates
according to the priorities set forth under "Description of the
Certificates--Distributions" in this prospectus supplement.
OVERCOLLATERALIZATION
Overcollateralization is calculated as the amount by which the aggregate
principal balance of the home equity loans exceeds the principal balance of the
offered certificates. The offered certificates will not have the benefit of any
overcollateralization on the closing date. Following the fourth remittance
period, excess interest collections, if any, will be applied as accelerated
payments of principal to the class or classes of offered certificates then
entitled to receive distributions of principal until the overcollateralization
level equals a specified required overcollateralization level.
S-6
If there are not sufficient excess interest collections, the required
overcollateralization level will not be reached or maintained. In addition,
realized losses on the home equity loans will reduce the amount of
overcollateralization. If realized losses on the home equity loans result in the
overcollateralization amount becoming negative, the principal balance of the
class of subordinate certificates then outstanding with the lowest relative
payment priority will be reduced by such negative amount.
CROSSCOLLATERALIZATION
Each home equity loan group provides for limited crosscollateralization of
the offered certificates.
OPTIONAL TERMINATION OF THE TRUST BY AN AFFILIATE OF THE SERVICER; AUCTION SALE;
ADDITIONAL PRINCIPAL DISTRIBUTIONS
An affiliate of the servicer may, at its option, terminate the trust by
purchasing all of the home equity loans on any distribution date on or after the
date on which the aggregate outstanding principal balance of the home equity
loans in both groups is less than 20% of the aggregate outstanding principal
balance of the home equity loans in both groups on the cut-off date.
If the affiliate of the servicer does not exercise this clean-up call option
when it first could have been exercised, then on the next distribution date
after such date, the trustee will begin an auction process to sell the home
equity loans and the other trust assets. It is a condition to the sale of the
trust assets that the proceeds of the auction are at least sufficient to pay the
aggregate unpaid principal balance of the offered certificates (other than any
class principal carryover shortfalls, as described in this prospectus
supplement), all accrued and unpaid interest thereon (other than any interest
accrued in excess of the applicable interest rate cap), any unreimbursed
servicing advances, delinquency advances and compensating interest, and any
delinquency advances the servicer has failed to remit. If the first auction of
the trust property is not successful because the highest bid received does not
satisfy the minimum purchase price condition, then the trustee will conduct an
auction of the home equity loans every third month thereafter, unless and until
a bid satisfying the minimum purchase price condition is received for the trust
property. Certain affiliates of the servicer may bid in the auction.
If the clean-up call option is not exercised on the date upon which it first
could have been exercised, then on the third distribution date following such
date and on each distribution date thereafter, the amounts that otherwise would
have been payable to the non-offered certificates will be paid to the offered
certificates as an additional principal distribution amount. The additional
principal distribution amount will be applied in the same order of priority as
the principal distributions for such distribution date.
OPTIONAL PURCHASE OF DELINQUENT HOME EQUITY LOANS
The servicer has the option, but is not obligated, to purchase from the
trust any home equity loan that becomes delinquent for two consecutive monthly
installments, subject to the limitations described in the pooling and servicing
agreement.
LIMITED OPTIONAL PURCHASE OF HOME EQUITY LOANS
Each of the home equity loans will be allocated to one of 50 lower-tier
REMICs. The home equity loans of each lower-tier REMIC will consist of
approximately 2% of the aggregate principal balance of the home equity loans as
of the cut-off date. It is expected that the assets of each lower-tier REMIC
will be allocated on the closing date between loan groups on a pro rata basis.
The servicer will have a one-time option at any time to purchase all (but not
less than all) of the assets of any one, but only one, of the 50 lower-tier
REMICs at a purchase price equal to the unpaid principal balance of the home
equity loans in the related lower-tier REMIC together with accrued and unpaid
interest on such loans, plus a premium of 4% of the unpaid principal balance of
the home equity loans in the related lower-tier REMIC. If the servicer exercises
its limited purchase option, the purchase price, other than the premium amount,
with respect to each home equity loan in the related lower-tier
S-7
REMIC will be allocated to a home equity loan group based upon the home equity
loan group of such home equity loan and you will receive a prepayment of
principal in the amount and order of priority described under "Description of
the Certificates--Distributions" in this prospectus supplement. The premium
amount will be allocated among all offered certificates (regardless of
priority), pro rata, based on their respective certificate principal balances.
CERTAIN FEDERAL TAX CONSIDERATIONS
In the opinion of Stroock & Stroock & Lavan LLP, counsel to the sellers and
the trust, for federal income tax purposes, the trust will include multiple real
estate mortgage investment conduits or "REMICs", creating a tiered REMIC
structure, subject to the considerations discussed under "CERTAIN FEDERAL INCOME
TAX CONSIDERATIONS" in this prospectus supplement. The offered certificates will
constitute "regular interests" in a REMIC and will be treated as debt
instruments of the REMIC for federal income tax purposes with payment terms
equivalent to the terms of the certificates.
ERISA CONSIDERATIONS
Subject to the considerations and conditions described under "ERISA
CONSIDERATIONS" in this prospectus supplement, we expect that the offered
certificates may be purchased by a pension or other employee benefit plan
subject to the Employee Retirement Income Security Act of 1974, as amended.
LEGAL INVESTMENT CONSIDERATIONS
The offered certificates will not constitute "mortgage related securities"
for purposes of the Secondary Mortgage Market Enhancement Act of 1984.
Accordingly, many institutions with legal authority to invest in comparably
rated securities may not be legally authorized to invest in such certificates.
You should consult your own counsel as to whether and to what extent the offered
certificates constitute legal investments for you.
CERTIFICATE RATING
It is a condition to the issuance of the offered certificates that they
receive the respective ratings set forth below from Moody's Investors
Service, Inc. and Fitch, Inc.
CLASS MOODY'S FITCH
- ----- -------- --------
A-1 Aaa AAA
A-2 Aaa AAA
A-3 Aaa AAA
A-4 Aaa AAA
A-5 Aaa AAA
A-6 Aaa AAA
A-7 Aaa AAA
M-1 Aa2 AA
M-2 A2 A
B Baa2 BBB
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RISK FACTORS
You should consider the following risk factors together with all the
information contained in this Prospectus Supplement and the related Prospectus
in deciding whether to purchase any of the certificates.
YOU MAY HAVE DIFFICULTY SELLING YOUR The offered certificates will not be listed on any
CERTIFICATES securities exchange. As a result, if you wish to
sell your certificates, you will have to find a
purchaser that is willing to purchase your
certificates. The underwriters intend to make a
secondary market for the offered certificates. The
underwriters may do so by offering to buy the
offered certificates from investors that wish to
sell. However, the underwriters will not be
obligated to make offers to buy the offered
certificates and may stop making offers at any
time. In addition, the prices offered, if any, may
not reflect prices that other potential
purchasers, were they to be given the opportunity,
would be willing to pay. There have been times in
the past where there have been very few buyers of
similar asset backed securities, and there may be
similar times in the future. As a result, you may
not be able to sell your certificates when you
wish to do so or you may not be able to obtain the
price you wish to receive.
THE BORROWERS HAVE LESS THAN PERFECT CREDIT CHEC underwriting standards generally are less
stringent than those of Fannie Mae or Freddie Mac
with respect to a borrower's credit history,
collateral and in other respects. The home equity
loans originated or acquired by CHEC or its
affiliates have been made to borrowers that
typically have limited access to traditional
mortgage financing for a variety of reasons,
including impaired past credit experience, limited
credit history, insufficient home equity value, or
high debt-to-income ratios. As a result of this
approach to underwriting, the home equity loans
may experience higher rates of delinquencies,
defaults and foreclosures than home equity loans
underwritten in accordance with Fannie Mae or
Freddie Mac guidelines.
NEWLY ORIGINATED HOME EQUITY LOANS MAY DEFAULT Approximately 99.75% of the home equity loans as
of the statistical calculation date were
originated within twelve months prior to this
date. The weighted average remaining term to
stated maturity of the Group I and Group II home
equity loans as of the statistical calculation
date is approximately 301 months and 357 months,
respectively. Although little data is available,
defaults on home equity loans, including home
equity loans similar to the home equity loans
expected to be included in the trust, are
generally expected to
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occur with greater frequency in the early years of
the terms of home equity loans.
THE RATE OF RETURN OF PRINCIPAL IS UNCERTAIN DUE OVERVIEW. Generally, if prevailing interest rates
TO PREPAYMENTS fall significantly below the coupon rates on the
home equity loans, the home equity loans are
likely to be subject to higher prepayment rates
than if prevailing rates remain at or above the
coupon rates on the home equity loans. Conversely,
if prevailing interest rates rise significantly
above the coupon rates on the home equity loans,
the rate of prepayments is likely to decrease. The
average life of your certificates and, if
purchased at other than par, the yields realized
by you will be sensitive to levels of payment
(including prepayments) on the home equity loans.
In general, if you purchase an offered certificate
at a premium to the outstanding principal amount
of the certificate the yield on your certificate
may be adversely affected by a higher than
anticipated level of prepayments of the home
equity loans. Conversely, if you purchase an
offered certificate at a discount to the
outstanding principal amount of the certificate,
the yield on your certificate may be adversely
affected by a lower than anticipated level of
prepayments.
MANY OF THE HOME EQUITY LOANS HAVE NO PREPAYMENT
PENALTIES. Approximately 30.41% of the Group I
home equity loans and approximately 18.48% of the
Group II home equity loans, in each case as of the
statistical calculation date, may be prepaid in
whole or in part at any time without penalty. Home
equity loans may not be viewed by borrowers as
permanent financing. Accordingly, the home equity
loans in the trust may experience a higher rate of
prepayment than traditional mortgage loans. The
trust's prepayment experience may be affected by a
wide variety of factors, including general
economic conditions, interest rates, the
availability of alternative financing and
homeowner mobility.
DUE-ON-SALE CLAUSES. All of the home equity loans
contain due-on-sale provisions and the servicer is
required by the pooling and servicing agreement to
enforce these provisions unless the enforcement is
not permitted by applicable law or the servicer,
in a manner consistent with reasonable commercial
practice, permits the purchaser of the related
mortgaged property to assume the home equity loan.
To the extent permitted by applicable law, any
assumption will not release the original borrower
from its obligation under any home equity loan.
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2/28 ADJUSTABLE RATE LOANS. Approximately 73.64%
of the Group II home equity loans, as of the
statistical calculation date, have a two year
fixed rate term followed by a 28 year adjustable
rate term. We refer to these loans in this
prospectus supplement as the 2/28 adjustable rate
loans. As with home equity loans generally, the
rate of prepayments on these 2/28 adjustable rate
loans which are in the initial fixed rate period
is sensitive to prevailing interest rates. The
prepayment behavior of the 2/28 adjustable rate
loans may differ from that of the other Group II
home equity loans, although the other Group II
home equity loans also have adjustable interest
rates. As a 2/28 adjustable rate loan approaches
its initial adjustment date, the borrower may
become more likely to refinance the loan to avoid
an increase in the coupon rate, even if fixed rate
loans are only available at rates that are
slightly lower or higher than the coupon rate
before adjustment. The existence of the applicable
periodic rate cap, lifetime cap and lifetime floor
also may affect the likelihood of prepayments
resulting from refinancings.
LIMITED OPTIONAL PURCHASE. If the servicer
exercises its limited purchase option, you will
receive a prepayment of principal. The maximum
amount of any resulting prepayment is
approximately 2% of the aggregate principal
balance of the home equity loans of each related
home equity loan group as of the cut-off date.
YOU MAY BE UNABLE TO REINVEST DISTRIBUTIONS IN Asset backed securities, like the offered
COMPARABLE INVESTMENTS certificates, usually produce more returns of
principal to investors when market interest rates
fall below the interest rates on the mortgage
loans and produce less returns of principal when
market interest rates rise above the interest
rates on the mortgage loans. If borrowers
refinance their mortgage loans as a result of
lower interest rates, you will receive an
unanticipated payment of principal. 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 offered
certificates, and are likely to receive less money
to reinvest when other investments generally are
producing a higher yield than that on the offered
certificates. You will bear the risk that the
timing and amount of distributions on your offered
certificates will prevent you from attaining your
desired yield.
EFFECT OF HOME EQUITY LOAN YIELD ON CERTIFICATE Approximately 26.36% of the Group II home equity
RATE OF CLASS A-7 CERTIFICATES; BASIS RISK loans, as of the statistical calculation date,
adjust semi-annually based upon the London
interbank offered rate for six-month United States
dollar deposits. We refer to these loans in this
prospectus supplement as the
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six-month adjustable rate loans. Approximately
73.64% of the Group II home equity loans, as of
the statistical calculation date, are 2/28
adjustable rate loans. These home equity loans
provide for a fixed interest rate for a period of
approximately two years following origination and
thereafter provide for interest rate and payment
adjustments in a manner similar to the six-month
adjustable rate loans.
The interest rate for the Class A-7 certificates
is determined in accordance with and adjusts
monthly based upon one-month LIBOR, and is subject
to the Class A-7 available funds cap. One-month
LIBOR and six-month LIBOR may respond to different
economic and market factors, and there is not
necessarily a correlation between them. Thus, it
is possible, for example, that one-month LIBOR may
rise during periods in which six-month LIBOR is
stable or is falling or that, even if both
one-month LIBOR and six-month LIBOR rise during
the same period, one-month LIBOR may rise more
rapidly than six-month LIBOR. Furthermore, even if
one-month LIBOR and six-month LIBOR were at the
same level, the Class A-7 available funds cap may
still limit the amount of interest that would
otherwise be distributable on the Class A-7
certificates. The operation of the Class A-7
available funds cap may cause the certificate rate
of the Class A-7 certificates to be reduced for
extended periods in a rising interest rate
environment. Although we intend to pay you on
future distribution dates on a subordinated basis
the amount by which we reduce your interest
payment because of the Class A-7 available funds
cap, we cannot assure you that excess funds will
be available to make these payments. Moreover, if
the clean-up call option is exercised or the home
equity loans are sold in the auction, you will
generally not be entitled to receive those amounts
upon termination of the trust, except if and to
the extent that amounts would otherwise be
available to make distributions in respect of the
non-offered certificates.
In addition, the Group II home equity loans are
subject to periodic adjustment caps and maximum
rate caps, and the weighted average margin is
subject to change based upon prepayment
experience, which also may result in the
Class A-7 available funds cap limiting increases
in the certificate rate for the class. Finally,
the Group II home equity loans accrue interest on
the basis of a 360-day year assumed to consist of
twelve 30-day months, while calculations of
interest on the Class A-7 certificates will be
made on the basis of the actual number of days
elapsed in the related interest period
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and a year of 360 days. This may result in the
Class A-7 available funds cap limiting the
certificate rate for the Class A-7 certificates to
less than LIBOR plus the applicable margin in
interest periods that have more than 30 days.
If you are a holder of a Class A-7 certificate and
the certificate rate is limited in any period by
the Class A-7 available funds cap you may suffer
a temporary or permanent decline in the market
value of your certificates.
EFFECT OF PREPAYMENTS OF HOME EQUITY LOANS ON The Class A-5, Class M-1, Class M-2 and Class B
CERTIFICATE RATES OF CLASS A-5, CLASS M-1, certificates are subject to the fixed rate
CLASS M-2 AND CLASS B CERTIFICATES; INTEREST interest rate cap. The fixed rate interest rate
RATE RISK cap is the lesser of (a) the weighted average net
coupon rate of the Group I home equity loans and
(b) the weighted average net coupon rate of the
home equity loans in the aggregate. If there is a
sufficiently high prepayment rate with respect to
home equity loans bearing a higher coupon than the
weighted average coupon of the Group I home equity
loans or the pool of home equity loans as a whole,
the interest rate payable on the Class A-5,
Class M-1, Class M-2 and Class B certificates may
become subject to the fixed rate interest rate
cap. Although we intend to pay you on future
distribution dates on a subordinated basis the
amount by which we reduce your interest payment
because of the fixed rate interest rate cap, we
cannot assure you that excess funds will be
available to make these payments. Moreover, if the
clean-up call option is exercised or the home
equity loans are sold in the auction, you will
generally not be entitled to receive those amounts
upon termination of the trust, except if and to
the extent that amounts would otherwise be
available to make distributions in respect of the
non-offered certificates.
If you are a Class A-5, Class M-1, Class M-2 and
Class B certificateholder and the stated fixed
rate payable on your certificates is reduced as a
result of the fixed rate interest rate cap, you
may suffer a temporary or permanent decline in the
market value of your certificates.
THE SUBORDINATE CERTIFICATES WILL ABSORB CASH The subordinate certificates will not receive any
SHORTFALLS BEFORE THE SENIOR CERTIFICATES distributions of interest until the senior
certificates receive their interest distributions
and will not receive any distributions of
principal until the senior certificates receive
their principal distributions. If the available
funds are insufficient to make all of the required
distributions on the offered certificates, one or
more classes of subordinate certificates will not
receive all of their distributions. In addition,
losses due to defaults by
S-13
borrowers, to the extent not covered by the amount
of overcollateralization and excess interest at
that time, will be allocated to the subordinate
certificates in the reverse order of payment
priority. Any allocation of a loss to a class of
subordinate certificates will reduce its principal
balance, which will not be recovered unless
reimbursed from future excess interest on a
subordinated basis. Distributions to the
subordinate certificates are made in the following
order: to the class M-1 certificates, then to the
class M-2 certificates and then to the class B
certificates, and losses are allocated to the
subordinate certificates in the reverse order,
commencing with the class B certificates. The
class M-1 certificates will receive distributions
before, and are allocated losses after, the other
classes of subordinate certificates. Conversely,
the class B certificates will receive
distributions after, and are allocated losses
before, the other classes of subordinate
certificates. As a result, the class B
certificates will be affected to a larger degree
by any losses on the home equity loans.
ADDITIONAL RISKS ASSOCIATED WITH THE SUBORDINATE The weighted average lives of, and the yields to
CERTIFICATES maturity on, the Class M-1 certificates, the
Class M-2 certificates and the Class B
certificates will be progressively more sensitive,
in that order, to the rate and timing of borrower
defaults and the severity of ensuing losses on the
home equity loans. If the actual rate and severity
of losses on the home equity loans is higher than
those assumed by an investor in such certificates,
the actual yield to maturity of such certificates
may be lower than the yield anticipated by that
holder based on that assumption. The timing of
losses on the home equity loans will also affect
an investor's actual yield to maturity, even if
the rate of defaults and severity of losses over
the life of the home equity loans are consistent
with an investor's expectations. In general, the
earlier a loss occurs, the greater the effect on
an investor's yield to maturity. Realized losses
on the home equity loans, to the extent they
exceed the amount of overcollateralization
following distributions of principal on the
related distribution date, will reduce the
certificate principal balance of the Class B
certificates, the Class M-2 certificates and the
Class M-1 certificates, in that order. As a result
of such reductions, less interest will accrue on
such class of subordinate certificates than would
otherwise be the case. Once a realized loss is
allocated to a subordinate certificate, no
interest will be distributable with respect to
such written down amount. However, the amount of
any realized losses allocated to the subordinate
certificates may be
S-14
reimbursed to the holders of the subordinate
certificates according to the priorities set forth
under "DESCRIPTION OF THE
CERTIFICATES--DISTRIBUTIONS" in this prospectus
supplement.
THE YIELD ON THE SUBORDINATE CERTIFICATES WILL The multiple class structure of the offered
BE PARTICULARLY SENSITIVE TO PREPAYMENTS certificates causes the yield of certain classes
of the offered certificates to be particularly
sensitive to changes in the rates of prepayments
of home equity loans. Because distributions of
principal will be made to the classes of offered
certificates according to the priorities described
in this prospectus supplement, the yield to
maturity on such classes of offered certificates
will be sensitive to the rates of prepayment on
the home equity loans experienced both before and
after the commencement of principal distributions
on such classes. In particular, the subordinate
certificates do not receive (unless the
certificate principal balances of the senior
certificates have been reduced to zero) any
portion of the amount of principal payable to the
offered certificates prior to the distribution
date in July 2004. Thereafter, subject to the
delinquency performance of the home equity loan
pool, the subordinate certificates may continue
(unless the certificate principal balances of the
senior certificates have been reduced to zero) to
receive no portion of the amount of principal then
payable to the offered certificates. The weighted
average lives of the subordinate certificates will
therefore be longer than would otherwise be the
case. The effect on the market value of the
subordinate certificates of changes in market
interest rates or market yields for similar
securities may be greater than for the senior
certificates.
YIELD CONSIDERATIONS RELATING TO EXCESS CASH If the offered certificates are overcollateralized
below the required amount, excess interest, if
any, will be distributable on the offered
certificates then entitled to receive principal
distributions as a payment of principal. If
purchased at a premium or a discount, the yield to
maturity on your certificate will be affected by
the rate at which excess interest is distributed
as a payment of principal. If the actual rate of
excess interest distributions is slower than the
rate anticipated by an investor who purchases an
offered certificate at a discount, the actual
yield to the investor will be lower than the
investor's anticipated yield. If the actual rate
of excess interest distributions is faster than
the rate anticipated by an investor who purchases
an offered certificate at a premium, the actual
yield to the investor will be lower than the
investor's anticipated yield. The
S-15
amount of excess interest available for
distribution on any distribution date will be
affected by:
- the actual amount of interest received,
advanced, collected or recovered in respect of
the home equity loans during the calendar
month prior to the related distribution
date;
- changes in the weighted average of the
coupon rates of the home equity loans
resulting from prepayments and liquidations
of home equity loans;
- adjustments in the interest rates on the
Group II home equity loans;
- adjustments in the certificate rate on the
Class A-7 certificates;
- an increase in the certificate rate of the
Class A-5, Class A-7, Class M-1, Class M-2
and Class B certificates if an affiliate of
the servicer first fails to exercise the
clean-up call option; and
- the failure of an affiliate of the servicer
to exercise the clean-up call option on the
first date upon which such clean-up call
option could have been exercised.
The amount of excess interest distributed as
principal on the offered certificates will also be
based on the required amount of
overcollateralization and the amount of realized
losses on the home equity loans during the related
remittance period. We cannot assure you that
enough excess interest will be generated to absorb
losses or to maintain the required level of
overcollateralization.
LIQUIDATION OF HOME EQUITY LOANS COULD CAUSE OVERVIEW. Even assuming that the mortgaged
PAYMENT DELAYS AND/OR LOSSES properties provide adequate security for the
related home equity loans, substantial delays in
receiving proceeds could be encountered by the
trust in connection with the liquidation of
defaulted home equity loans. As a result,
shortfalls in distributions on offered
certificates could occur. Further, liquidation
expenses (including legal fees, real estate taxes,
and maintenance and preservation expenses) will
reduce the proceeds payable on the offered
certificates and thereby reduce the security for
the home equity loans. In the event any of the
mortgaged properties fail to provide adequate
security for the related home equity loans,
holders of
S-16
offered certificates, and the subordinate
certificates in particular, could experience a
loss.
WE REFER YOU TO "RISK FACTORS--THE SUBORDINATED
CERTIFICATES WILL ABSORB CASH SHORTFALLS BEFORE
THE SENIOR CERTIFICATES" IN THIS PROSPECTUS
SUPPLEMENT FOR MORE DETAIL.
SECOND LIENS. As of the statistical calculation
date, approximately 93.34% of the aggregate
principal balance of the Group I home equity loans
are secured by first liens on the related
properties, and approximately 6.66% of the
aggregate principal balance of the Group I home
equity loans are secured by second liens on the
related properties. With respect to home equity
loans that are junior in priority to liens having
a first priority with respect to the related
mortgaged property, the servicer has the power, in
some cases, to consent to a new mortgage lien on
the mortgaged property having priority over the
home equity loan in connection with the
refinancing of the first lien. Home equity loans
secured by second mortgages are entitled to
proceeds that remain from the sale of the related
mortgaged property after any related senior
mortgage loan and prior statutory liens have been
satisfied. In the event that the proceeds are
insufficient to satisfy the loans and prior liens
in the aggregate, the trust and, accordingly, you
(1) bear the risk of delay in distributions while
a deficiency judgment, if any, against the
borrower is sought and (2) may suffer a loss if
the deficiency judgment cannot be obtained or is
not realized upon.
In addition, borrowers often have financing needs
in excess of the amount CHEC may finance under its
first lien mortgage underwriting guidelines
described under "The Seller and the Servicer" in
the accompanying prospectus. In such
circumstances, CHEC may offer a "piggyback" second
lien mortgage in addition to CHEC's first lien
mortgage to finance such excess amount up to a
maximum combined loan-to-value-ratio of 100%.
Approximately 3.24% of the Group I home equity
loans that are secured by first lien mortgages and
8.72% of the Group II home equity loans are
subject to piggyback second lien mortgages
included in the trust. The loan-to-value ratios
for first lien home equity loans listed under the
tables entitled "Original Combined Loan-to-Value
Ratios of Group I Home Equity Loans" and "Original
Loan-to-Value Ratios of Group II Home Equity
Loans" in this prospectus supplement (and for
purposes of the calculation of the weighted
average loan-to-value ratios of the Group I and
Group II home equity loans) do not reflect the
principal balances of the related piggyback second
lien mortgages. Borrowers with
S-17
piggyback second lien mortgages may have little or
no equity in their homes. These borrowers may have
a higher incidence of default than borrowers of
home equity loans with substantial equity in their
homes. In the event of a default on any of these
home equity loans, holders of the offered
certificates, and the subordinated certificates in
particular, may suffer a loss.
HOME EQUITY LOANS TRANSFERRED TO THE TRUST MAY Following the transfer of the home equity loans to
HAVE CHARACTERISTICS THAT DIFFER FROM THOSE OF the trust on the closing date, the characteristics
THE HOME EQUITY LOANS PRESENTED IN THIS of the home equity loans in either loan group, or
PROSPECTUS SUPPLEMENT, WHICH MAY REDUCE YOUR in both loan groups, may differ from the
YIELD TO MATURITY information presented in this prospectus
supplement. The characteristics that may differ
include, among others, the composition of the home
equity loans and of the borrowers, the credit
quality of the home equity loans, the distribution
by interest rate, the distribution by principal
balance, the distribution by loan-to-value ratio
and the distribution by remaining term to stated
maturity. You should consider potential variances
when making your investment decision. In addition,
as a result of the changes in the home equity
loans included in the trust, the principal balance
of each class of certificates is subject to a
variance of plus or minus 5%.
THERE COULD BE DELAYS IN DISTRIBUTIONS ON YOUR The sale of the home equity loans from the sellers
CERTIFICATES IF THE TRANSFER OF HOME EQUITY to the depositor and from the depositor to the
LOANS TO THE TRUST IS NOT CONSIDERED A SALE IN trust will be treated by the sellers, the
THE EVENT OF BANKRUPTCY depositor and the trust as a sale of the home
equity loans. In the event of an insolvency of a
seller or depositor, it is possible that a
receiver or conservator for, or a creditor of, the
seller or depositor may argue that the transaction
between the seller, the depositor and the trust
was a pledge of the home equity loans in
connection with a borrowing rather than a true
sale. This attempt, even if unsuccessful, could
result in delays in distributions on the offered
certificates.
PREPAYMENT INTEREST SHORTFALLS MAY RESULT IN When a full principal prepayment is made on a home
LOSS OF INTEREST equity loan, the mortgagor is charged interest
only up to the date of the prepayment instead of
for a full month, which may result in a prepayment
interest shortfall. The servicer is obligated to
pay those shortfalls in interest collections
payable on the offered certificates that are
attributable to prepayment interest shortfalls,
but only to the extent of the aggregate servicing
fee for the related remittance period. The
servicer will not cover any shortfalls in interest
collections on the home equity loans that are
attributable to the Soldiers' and Sailors' Civil
Relief Act of 1940, as amended.
S-18
GEOGRAPHIC CONCENTRATION MAY AFFECT PERFORMANCE As of the statistical calculation date,
approximately 13.69%, 5.81%, 5.64% and 5.33% of
the Group I home equity loans are located in
Texas, Michigan, Florida and Tennessee,
respectively, and approximately 39.17%, 7.07% and
7.02%, of the Group II home equity loans are
located in California, Washington and Wisconsin,
respectively. To the extent that those regions
have experienced or may experience in the future
weaker economic conditions or greater rates of
decline in real estate values than the United
States generally, a concentration of the home
equity loans in those regions may be expected to
increase the foregoing risks to you. The sellers
and the depositor can neither quantify the impact
of any recent property value declines on the home
equity loans nor predict whether, to what extent
or for how long declines may continue.
In addition, properties in California may be more
susceptible than homes located in other parts of
the country to certain types of uninsured hazards,
such as earthquakes, as well as floods, wildfires,
mudslides and other natural disasters.
BALLOON LOANS MAY HAVE HIGHER RATES OF DEFAULT Based on the principal balances of the home equity
WHICH MAY CAUSE LOSSES loans on the statistical calculation date,
approximately 12.11% of the Group I home equity
loans and none of the Group II home equity loans
are balloon loans. 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 mortgage rates, the value of
the property or the borrower's payment or credit
history. The trust will not have any funds to
refinance a balloon loan, and the sellers are not
obligated to do so. If the borrower is unable to
refinance the balloon loan, holders of the offered
certificates, and the subordinate certificates in
particular; may suffer a loss.
VIOLATIONS OF CONSUMER PROTECTION LAWS MAY Applicable state laws generally regulate interest
RESULT IN LOSSES rates and other charges and require specific
disclosures. In addition, other state laws, public
policy and general principles of equity relating
to the protection of consumers, unfair and
deceptive practices and debt collection practices
may apply to the origination, servicing and
collection of the loans. Depending on the
provisions of the applicable law and the specific
facts and circumstances involved, violations of
these laws, policies and principles may limit the
ability of the servicer to collect all or part of
the principal of or
S-19
interest on the loans, may entitle the borrower to
a refund of amounts previously paid and, in
addition, could subject the owner of the home
equity loan to damages and administrative
enforcement. In this event, holders of the offered
certificates, and the subordinate certificates in
particular, may suffer a loss.
The home equity loans are also subject to federal
laws, including:
(1) the federal Truth in Lending Act and
regulation Z promulgated under the Truth in
Lending Act, which require particular disclosures
to the borrowers regarding the terms of the loans;
(2) the Equal Credit Opportunity Act and
regulation B promulgated under the Equal Credit
Opportunity Act, which prohibit discrimination on
the basis of age, race, color, sex, religion,
marital status, national origin, receipt of public
assistance or the exercise of any right under the
Consumer Credit Protection Act, in the extension
of credit;
(3) the Americans with Disabilities Act, which,
among other things, prohibits discrimination on
the basis of disability in the full and equal
enjoyment of the goods, services, facilities,
privileges, advantages or accommodations of any
place of public accommodation; and
(4) the Fair Credit Reporting Act, which
regulates the use and reporting of information
related to the borrower's credit experience.
Violations of particular provisions of these
federal laws may limit the ability of the servicer
to collect all or part of the principal of or
interest on the loans and in addition could
subject the trust fund to damages and
administrative enforcement. In this event, holders
of the offered certificates, and the subordinate
certificates in particular, may suffer a loss.
Approximately 0.20% of the aggregate principal
balance of the home equity loans on the
statistical calculation date are subject to the
Home Ownership and Equity Protection Act of 1994,
which amended the Truth in Lending Act as it
applies to mortgages subject to the Home Ownership
and Equity Protection Act. The Home Ownership and
Equity Protection Act requires additional
disclosures, specifies the timing of these
disclosures and limits or prohibits inclusion of
some provisions in mortgages subject to the Home
Ownership and Equity Protection Act. The Home
Ownership and Equity Protection Act also provides
that any purchaser
S-20
or assignee of a mortgage covered by the Home
Ownership and Equity Protection Act is subject to
all of the claims and defenses which the borrower
could assert against the original lender.
The maximum damages that may be recovered under
the Home Ownership and Equity Protection Act from
an assignee are the remaining amount of
indebtedness plus the total amount paid by the
borrower in connection with the loans. If the
trust fund includes loans subject to the Home
Ownership and Equity Protection Act, the trust
will be subject to all of the claims and defenses
which the borrower could assert against the
original lender. Any violation of the Home
Ownership and Equity Protection Act which would
result in liability would be a breach of the
relevant seller's representations and warranties,
and CHEC would be obligated to cure the breach or
repurchase or, if permitted by the pooling and
servicing agreement, substitute for the home
equity loan in question.
Some of the home equity loans included in the
trust were underwritten with, and finance the cost
of, credit insurance. From time to time,
originators of home equity loans that finance the
cost of credit insurance have been named in legal
actions brought by federal and state regulatory
authorities alleging that certain practices
employed relating to the sale of credit insurance
constitute violations of law. Although CHEC has
procedures in place to ensure compliance with
applicable law, if such an action was brought
against CHEC with respect to home equity loans
included in the trust and was successful, it is
possible that the borrower could be entitled to
refunds of amounts previously paid or that the
trust could be subject to damages and
administrative enforcement.
In addition, numerous other federal and state
statutory provisions, including the federal
bankruptcy laws, the Soldiers' and Sailors' Civil
Relief Act of 1940, as amended and state debtor
relief laws, may also adversely affect the
servicer's ability to collect the principal of or
interest on the loans and holders of the offered
certificates, and the subordinate certificates in
particular, may suffer a loss if the applicable
laws result in these loans being uncollectible.
REDUCTION IN CERTIFICATE RATING COULD HAVE AN The rating by the rating agencies of the offered
ADVERSE EFFECT ON THE VALUE OF YOUR certificates is not a recommendation for you to
CERTIFICATES purchase, hold or sell the offered certificates,
inasmuch as the rating does not comment as to the
market price or suitability for a particular
investor. We cannot assure you that the ratings
will remain in place for any given
S-21
period of time or that the ratings will not be
lowered or withdrawn by the rating agencies. In
general, the ratings address credit risk and do
not address the likelihood of prepayments on home
equity loans, the likelihood of the payment of any
interest payable to Class A-5, Class A-7 and
subordinate certificateholders, on a subordinated
basis, due to the application of any interest rate
cap described under the section "DESCRIPTION OF
THE CERTIFICATES--Certificate Rate" or the
possibility that offered certificateholders might
realize a lower than anticipated yield. The
ratings of the offered certificates also do not
address the possibility of the imposition of
United States withholding tax with respect to
non-U.S. persons.
None of the sellers, the servicer or depositor is
required to maintain the ratings of the offered
certificates. Any downgrade in the ratings
assigned to your certificates will result in a
decline in the market value of your certificates.
POTENTIAL LIABILITY FOR ENVIRONMENTAL CONDITIONS Real property pledged as security to a lender may
be subject to environmental risks. Under the laws
of some states, contamination of a property may
give rise to a lien on the property to assure the
payment of costs of clean-up. In several states,
this type of lien has priority over the lien of an
existing mortgage or owner's interest against real
property. In addition, under the laws of some
states and under the federal Comprehensive
Environmental Response, Compensation, and
Liability Act of 1980, a lender may be liable, as
an owner or operator, for costs of addressing
releases or threatened releases of hazardous
substances that require remedy at a property, if
agents or employees of the lender have become
sufficiently involved in the operations of the
borrower, regardless of whether or not the
environmental damage or threat was caused by a
prior owner. A lender also risks liability on
foreclosure of the mortgaged property.
S-22
DESCRIPTION OF THE HOME EQUITY LOANS
OVERVIEW
The statistical information presented in this Prospectus Supplement
concerning the pool of home equity loans (the "Home Equity Loans") is based on
the pool of Home Equity Loans CHEC Funding, LLC (the "Depositor") expects to
transfer to Centex Home Equity Loan Trust 2001-B (the "Trust") on the date of
issuance of the Offered Certificates (the "Closing Date"). The statistical
information concerning the Home Equity Loans is as of the opening of business on
May 15, 2001 (the "Statistical Calculation Date").
This subsection describes characteristics of the Home Equity Loans. Unless
otherwise noted, all statistical percentages in this Prospectus Supplement are
measured by the aggregate principal balance of the related Home Equity Loans as
of the Statistical Calculation Date (the "Statistical Calculation Date Loan
Balance"). Prior to the Closing Date, additional Home Equity Loans will be added
to each Home Equity Loan Group (defined below) and other Home Equity Loans may
be removed from a Home Equity Loan Group. As a result, the characteristics of
the Home Equity Loans in each Home Equity Loan Group as of the Cut-Off Date
(defined below) will differ from the characteristics presented in this
Prospectus Supplement as of the Statistical Calculation Date. The Depositor does
not expect any material change in the weighted average characteristics of any
Home Equity Loan Group.
Each Home Equity Loan in the Trust will be assigned to one of two home
equity loan groups ("Group I" and "Group II," respectively, and each a "Home
Equity Loan Group"). Each Home Equity Loan Group will constitute a separate
sub-trust. The Home Equity Loans in Group I (the "Group I Home Equity Loans")
will bear interest at fixed interest rates. The Home Equity Loans in Group II
(the "Group II Home Equity Loans") will bear interest at adjustable interest
rates.
The Home Equity Loans to be transferred by Centex Credit Corporation d/b/a
Centex Home Equity Corporation ("CHEC") and Harwood Street Funding II, LLC
(together, the "Sellers") to the Depositor and from the Depositor to the Trust
on the Closing Date are fixed and adjustable rate home equity loans evidenced by
promissory notes secured by first and second lien deeds of trust, security deeds
or mortgages on properties (the "Mortgaged Properties"). The Mortgaged
Properties securing the Home Equity Loans consist primarily of one-to
four-family residential properties and manufactured housing treated as real
property under applicable state law. The Mortgaged Properties may be owner-
occupied and non-owner occupied investment properties (which include second and
vacation homes). None of the Home Equity Loans is insured by pool mortgage
insurance policies or primary mortgage insurance policies. All of the Home
Equity Loans in the Trust have been or will be originated by CHEC, by an
affiliate of CHEC or by a broker for simultaneous assignment to CHEC or were
acquired by CHEC from correspondent lenders and reunderwritten to comply with
CHEC's underwriting standards. All of the Home Equity Loans will be serviced by
CHEC in its capacity as servicer (the "Servicer"). As of the Statistical
Calculation Date, these Home Equity Loans will have the following general
characteristics:
- 5,043 total Home Equity Loans
- 4,689 fixed rate Home Equity Loans
- 354 adjustable rate Home Equity Loans
- all of the Home Equity Loans were originated no earlier than August 23,
1996
- located in 48 states and the District of Columbia
- Group I Home Equity Loans:
- $318,601,182.54 aggregate outstanding loan balance
S-23
- 88.20% of total loan balance of all Home Equity Loans
- Group II Home Equity Loans:
- $42,608,708.29 aggregate outstanding loan balance
- 11.80% of total loan balance of all Home Equity Loans
The Original Loan-to-Value Ratios and Original Combined Loan-to-Value Ratios
with respect to the Home Equity Loans were calculated based upon the lesser of
the appraised values of the Mortgaged Properties at the time of origination or
the purchase price of the related Mortgaged Property if the Home Equity Loan was
made to finance the acquisition of the Mortgaged Property (the "Appraised
Values"). Where more than one appraisal was performed on the subject property,
the lesser of the two values was used to determine the Original Loan-to-Value
Ratio and the Original Combined Loan-to-Value Ratio.
In a limited number of circumstances, and within CHEC underwriting
guidelines, CHEC may discount the Appraised Values of Mortgaged Properties (when
calculating maximum Original Loan-to-Value Ratios and Original Combined
Loan-to-Value Ratios) where the Mortgaged Properties are unique or have a high
value or where the comparables are not within Fannie Mae guidelines. The purpose
for making these reductions is to value the Mortgaged Properties more
conservatively than would otherwise be the case if the appraisals were accepted
as written.
The "Original Combined Loan-to-Value Ratio" of a Home Equity Loan is the
ratio, expressed as a percentage, equal to the sum of any outstanding senior
lien mortgage balance plus the original balance of the Home Equity Loan divided
by the Appraised Value of the related Mortgaged Property and the "Original
Loan-to-Value Ratio" of a Home Equity Loan is the ratio, expressed as a
percentage, equal to the original balance of the Home Equity Loan divided by the
Appraised Value of the related Mortgaged Property.
WE REFER YOU TO "RISK FACTORS--THE BORROWERS HAVE LESS THAN PERFECT CREDIT"
AND "--LIQUIDATION OF HOME EQUITY LOANS COULD CAUSE PAYMENT DELAYS AND/OR
LOSSES" IN THIS PROSPECTUS SUPPLEMENT FOR MORE DETAIL.
No assurance can be given that values of the Mortgaged Properties have
remained or will remain at their levels on the dates of origination of the
related Home Equity Loans. If the residential real estate market has experienced
or should experience an overall decline in property values, causing the
outstanding balances of the Home Equity Loans, together with the outstanding
balances of any first mortgages, to become equal to or greater than the values
of the related Mortgaged Properties, the actual rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced in
the mortgage lending industry.
S-24
GROUP I HOME EQUITY LOANS
The following summary information with respect to the Group I Home Equity
Loans is as of the Statistical Calculation Date:
SUMMARY STATISTICS RANGE (IF APPROPRIATE)
------------------ ------------------------
Avg. Outstanding Principal Balance.................... $67,946.51 $1,841.42 to $500,000.00
Wtd. Avg. Coupon Rate (approximate)................... 10.754% 6.050% to 16.600%
Wtd. Avg. Original Combined Loan-to-Value Ratio
(approximate)....................................... 78.79% 9.14% to 100.00%
Wtd. Avg. Remaining Term to Maturity (approximate).... 301 months 7 to 360 months
Wtd. Avg. Original Term to Maturity (approximate)..... 302 months 60 to 360 months
Maximum Seasoning..................................... 57 months
Ratio of First to Second Liens........................ 93.34% / 6.66%
Outstanding Principal Balance of Loans Secured by
First Liens
TWO-TO FOUR-FAMILY PROPERTIES................. $2,454,133.15
ALL OTHER PROPERTIES.......................... $294,925,854.38
Outstanding Principal Balance of Loans Secured by
Second Liens
TWO-TO FOUR-FAMILY PROPERTIES................. $266,362.05
ALL OTHER PROPERTIES.......................... $20,954,832.96
Balloon Loans (as a percent of the aggregate
outstanding loan balance)........................... 12.11%
Latest Maturity Date.................................. June 1, 2031
30 to 59 day Delinquencies (as a percent of the
aggregate outstanding loan balance)(1).............. 1.49%
- ------------------------
(1) Approximately 73.48% of the outstanding loan balance of the Group I Home
Equity Loans had first monthly payments due on or after April 16, 2001, so
that it was not possible for these loans to be 30 days past due as of the
Statistical Calculation Date.
The tables set forth below contain approximate statistical information as of
the Statistical Calculation Date regarding the Group I Home Equity Loans. The
sum of the percentage columns in the following tables may not equal 100% due to
rounding.
S-25
GEOGRAPHICAL DISTRIBUTION OF MORTGAGED PROPERTIES
OF GROUP I HOME EQUITY LOANS(1)
% OF
STATISTICAL STATISTICAL
NUMBER OF CALCULATION CALCULATION
HOME EQUITY DATE LOAN DATE LOAN
STATE LOANS BALANCE BALANCE
- ----- ----------- --------------- -----------
Arizona............................................... 100 $ 7,958,193.87 2.50%
Arkansas.............................................. 82 4,200,075.25 1.32
California............................................ 92 7,682,414.24 2.41
Colorado.............................................. 106 10,890,847.25 3.42
Connecticut........................................... 36 3,549,886.80 1.11
Delaware.............................................. 11 631,553.48 0.20
District of Columbia.................................. 4 392,639.67 0.12
Florida............................................... 243 17,980,703.18 5.64
Georgia............................................... 179 13,811,145.34 4.33
Idaho................................................. 16 1,327,346.82 0.42
Illinois.............................................. 109 6,860,998.61 2.15
Indiana............................................... 81 4,609,044.26 1.45
Iowa.................................................. 57 3,055,124.91 0.96
Kansas................................................ 106 5,870,698.83 1.84
Kentucky.............................................. 62 3,995,867.56 1.25
Louisiana............................................. 222 12,614,990.24 3.96
Maine................................................. 25 1,828,591.68 0.57
Maryland.............................................. 28 2,465,973.76 0.77
Massachusetts......................................... 36 2,524,538.44 0.79
Michigan.............................................. 269 18,508,031.52 5.81
Minnesota............................................. 66 4,849,144.39 1.52
Mississippi........................................... 107 6,366,279.07 2.00
Missouri.............................................. 225 13,209,594.66 4.15
Montana............................................... 7 300,581.66 0.09
Nebraska.............................................. 51 2,495,790.78 0.78
Nevada................................................ 22 1,901,581.04 0.60
New Hampshire......................................... 20 1,867,605.73 0.59
New Jersey............................................ 88 8,343,420.26 2.62
New Mexico............................................ 44 3,038,099.95 0.95
New York.............................................. 104 8,830,245.28 2.77
North Carolina........................................ 145 10,702,335.00 3.36
North Dakota.......................................... 2 81,505.66 0.03
Ohio.................................................. 184 13,411,899.27 4.21
Oklahoma.............................................. 135 7,008,966.38 2.20
Oregon................................................ 27 2,643,850.00 0.83
Pennsylvania.......................................... 211 12,065,316.51 3.79
Rhode Island.......................................... 6 632,509.77 0.20
South Carolina........................................ 87 6,109,845.73 1.92
Tennessee............................................. 230 16,988,982.61 5.33
Texas................................................. 758 43,612,582.27 13.69
Utah.................................................. 26 2,004,802.58 0.63
Vermont............................................... 1 44,016.38 0.01
Virginia.............................................. 68 5,994,200.50 1.88
Washington............................................ 100 8,746,508.56 2.75
West Virginia......................................... 18 1,061,611.03 0.33
Wisconsin............................................. 82 4,744,208.13 1.49
Wyoming............................................... 11 787,033.63 0.25
TOTAL:................................................ 4,689 $318,601,182.54 100.00%
- ------------------------
(1) Determined by property address designated as such in the related mortgage.
S-26
ORIGINAL COMBINED LOAN-TO-VALUE RATIOS
OF GROUP I HOME EQUITY LOANS(1)
% OF
STATISTICAL STATISTICAL
NUMBER OF CALCULATION CALCULATION
HOME EQUITY DATE LOAN DATE LOAN
RANGE OF ORIGINAL COMBINED LOAN-TO-VALUE RATIOS (%) LOANS BALANCE BALANCE
- --------------------------------------------------- ----------- --------------- -----------
Less than 20.00....................................... 31 $ 671,053.02 0.21%
20.01 - 25.00......................................... 24 748,046.39 0.23
25.01 - 30.00......................................... 40 1,501,675.00 0.47
30.01 - 35.00......................................... 34 1,260,204.52 0.40
35.01 - 40.00......................................... 55 2,064,928.32 0.65
40.01 - 45.00......................................... 56 2,158,094.25 0.68
45.01 - 50.00......................................... 95 3,649,288.59 1.15
50.01 - 55.00......................................... 106 5,327,665.36 1.67
55.01 - 60.00......................................... 153 8,698,611.49 2.73
60.01 - 65.00......................................... 202 12,502,170.27 3.92
65.01 - 70.00......................................... 299 18,148,291.23 5.70
70.01 - 75.00......................................... 443 28,420,716.88 8.92
75.01 - 80.00......................................... 1,244 90,816,366.62 28.50
80.01 - 85.00......................................... 731 52,962,774.63 16.62
85.01 - 90.00......................................... 770 68,718,722.79 21.57
90.01 - 95.00......................................... 186 12,523,988.07 3.93
95.01 - 100.00........................................ 220 8,428,585.11 2.65
TOTAL:................................................ 4,689 $318,601,182.54 100.00%
- ------------------------
(1) As of the Statistical Calculation Date, the weighted average Original
Combined Loan-to-Value Ratio of the Group I Home Equity Loans is
approximately 78.79%.
S-27
COUPON RATES OF GROUP I HOME EQUITY LOANS(1)
% OF
STATISTICAL STATISTICAL
NUMBER OF CALCULATION CALCULATION
HOME EQUITY DATE LOAN DATE LOAN
RANGE OF COUPON RATES (%) LOANS BALANCE BALANCE
- ------------------------- ----------- --------------- -----------
6.001 - 6.500......................................... 17 $ 1,983,744.77 0.62%
6.501 - 7.000......................................... 33 3,281,833.97 1.03
7.001 - 7.500......................................... 45 4,679,044.61 1.47
7.501 - 8.000......................................... 122 12,301,477.04 3.86
8.001 - 8.500......................................... 147 13,742,486.49 4.31
8.501 - 9.000......................................... 294 27,486,456.79 8.63
9.001 - 9.500......................................... 253 22,602,081.76 7.09
9.501 - 10.000........................................ 473 37,496,623.40 11.77
10.001 - 10.500....................................... 310 24,465,483.18 7.68
10.501 - 11.000....................................... 523 39,649,638.48 12.44
11.001 - 11.500....................................... 357 23,435,118.18 7.36
11.501 - 12.000....................................... 521 30,882,609.10 9.69
12.001 - 12.500....................................... 402 21,969,045.69 6.90
12.501 - 13.000....................................... 451 23,820,225.83 7.48
13.001 - 13.500....................................... 262 11,721,337.46 3.68
13.501 - 14.000....................................... 287 11,418,224.13 3.58
14.001 - 14.500....................................... 127 4,746,867.77 1.49
14.501 - 15.000....................................... 45 2,083,120.86 0.65
15.001 - 15.500....................................... 13 657,058.58 0.21
15.501 - 16.000....................................... 2 75,696.73 0.02
16.001 - 16.500....................................... 4 80,987.72 0.03
16.501 - 17.000....................................... 1 22,020.00 0.01
TOTAL:................................................ 4,689 $318,601,182.54 100.00%
- ------------------------
(1) As of the Statistical Calculation Date, the weighted average Coupon Rate of
the Group I Home Equity Loans is approximately 10.754%.
S-28
LOAN BALANCES OF GROUP I HOME EQUITY LOANS(1)
% OF
STATISTICAL STATISTICAL
NUMBER OF CALCULATION CALCULATION
HOME EQUITY DATE LOAN DATE LOAN
RANGE OF LOAN BALANCES ($) LOANS BALANCE BALANCE
- -------------------------- ----------- --------------- -----------
0.01 - 5,000.00....................................... 10 $ 35,760.00 0.01%
5,000.01 - 10,000.00.................................. 23 205,952.22 0.06
10,000.01 - 15,000.00................................. 108 1,385,854.42 0.43
15,000.01 - 20,000.00................................. 174 3,123,304.64 0.98
20,000.01 - 25,000.00................................. 240 5,503,234.22 1.73
25,000.01 - 30,000.00................................. 313 8,668,038.20 2.72
30,000.01 - 35,000.00................................. 278 9,075,399.71 2.85
35,000.01 - 40,000.00................................. 310 11,716,214.11 3.68
40,000.01 - 45,000.00................................. 291 12,439,037.48 3.90
45,000.01 - 50,000.00................................. 279 13,343,293.62 4.19
50,000.01 - 55,000.00................................. 276 14,530,916.73 4.56
55,000.01 - 60,000.00................................. 249 14,402,308.18 4.52
60,000.01 - 65,000.00................................. 258 16,184,946.96 5.08
65,000.01 - 70,000.00................................. 191 12,934,044.45 4.06
70,000.01 - 75,000.00................................. 181 13,133,797.50 4.12
75,000.01 - 80,000.00................................. 170 13,218,949.91 4.15
80,000.01 - 85,000.00................................. 135 11,158,272.84 3.50
85,000.01 - 90,000.00................................. 136 11,940,668.76 3.75
90,000.01 - 95,000.00................................. 109 10,088,195.14 3.17
95,000.01 - 100,000.00................................ 114 11,143,810.43 3.50
100,000.01 - 105,000.00............................... 78 8,018,268.93 2.52
105,000.01 - 110,000.00............................... 91 9,794,430.30 3.07
110,000.01 - 115,000.00............................... 73 8,219,636.78 2.58
115,000.01 - 120,000.00............................... 65 7,636,178.63 2.40
120,000.01 - 125,000.00............................... 64 7,842,532.22 2.46
125,000.01 - 130,000.00............................... 60 7,657,490.90 2.40
130,000.01 - 135,000.00............................... 38 5,027,734.44 1.58
135,000.01 - 140,000.00............................... 45 6,185,995.15 1.94
140,000.01 - 145,000.00............................... 33 4,711,598.44 1.48
145,000.01 - 150,000.00............................... 32 4,743,418.48 1.49
150,000.01 - 200,000.00............................... 160 27,437,199.92 8.61
200,000.01 - 250,000.00............................... 66 14,676,311.17 4.61
250,000.01 - 300,000.00............................... 21 5,717,690.88 1.79
300,000.01 - 350,000.00............................... 8 2,577,463.53 0.81
350,000.01 - 400,000.00............................... 5 1,871,904.44 0.59
400,000.01 - 450,000.00............................... 3 1,251,930.55 0.39
450,000.01 - 500,000.00............................... 2 999,398.26 0.31
TOTAL:................................................ 4,689 $318,601,182.54 100.00%
- ------------------------
(1) As of the Statistical Calculation Date, the average outstanding Loan Balance
of the Group I Home Equity Loans is approximately $67,946.51.
S-29
TYPES OF MORTGAGED PROPERTIES OF GROUP I HOME EQUITY LOANS
% OF
STATISTICAL STATISTICAL
NUMBER OF CALCULATION CALCULATION
HOME EQUITY DATE LOAN DATE LOAN
PROPERTY TYPE LOANS BALANCE BALANCE
- ------------- ----------- --------------- -----------
Single Family......................................... 4,270 $284,116,413.17 89.18%
PUD................................................... 208 21,367,664.86 6.71
Condominium........................................... 66 4,270,270.85 1.34
Manufactured Housing.................................. 54 3,478,251.43 1.09
Two- to Four-Family................................... 49 2,720,495.20 0.85
Townhouse............................................. 42 2,648,087.03 0.83
TOTAL:................................................ 4,689 $318,601,182.54 100.00%
ORIGINAL TERMS TO MATURITY OF GROUP I HOME EQUITY LOANS(1)
% OF
STATISTICAL STATISTICAL
NUMBER OF CALCULATION CALCULATION
HOME EQUITY DATE LOAN DATE LOAN
ORIGINAL TERM TO MATURITY (MONTHS) LOANS BALANCE BALANCE
- ---------------------------------- ----------- --------------- -----------
0 - 60................................................ 37 $ 726,673.10 0.23%
61 - 120.............................................. 249 8,422,941.02 2.64
121 - 180............................................. 1,287 71,440,055.66 22.42
181 - 240............................................. 446 25,337,004.39 7.95
241 - 300............................................. 46 3,118,058.51 0.98
301 - 360............................................. 2,624 209,556,449.86 65.77
TOTAL:................................................ 4,689 $318,601,182.54 100.00%
- ------------------------
(1) As of the Statistical Calculation Date, the weighted average Original Term
to Maturity of the Group I Home Equity Loans is approximately 302 months.
REMAINING TERMS TO MATURITY OF GROUP I HOME EQUITY LOANS(1)
% OF
STATISTICAL STATISTICAL
NUMBER OF CALCULATION CALCULATION
HOME EQUITY DATE LOAN DATE LOAN
REMAINING TERM TO MATURITY (MONTHS) LOANS BALANCE BALANCE
- ----------------------------------- ----------- --------------- -----------
0 - 60................................................ 37 $ 726,673.10 0.23%
61 - 120.............................................. 249 8,422,941.02 2.64
121 - 180............................................. 1,287 71,440,055.66 22.42
181 - 240............................................. 446 25,337,004.39 7.95
241 - 300............................................. 46 3,118,058.51 0.98
301 - 360............................................. 2,624 209,556,449.86 65.77
TOTAL:................................................ 4,689 $318,601,182.54 100.00%
- ------------------------
(1) As of the Statistical Calculation Date, the weighted average Remaining Term
to Maturity of the Group I Home Equity Loans is approximately 301 months.
S-30
SEASONING OF GROUP I HOME EQUITY LOANS(1)
% OF
STATISTICAL STATISTICAL
NUMBER OF CALCULATION CALCULATION
HOME EQUITY DATE LOAN DATE LOAN
SEASONING (MONTHS) LOANS BALANCE BALANCE
- ------------------ ----------- --------------- -----------
0..................................................... 1,569 $107,133,793.61 33.63%
1 - 6................................................. 3,068 209,579,872.60 65.78
7 - 12................................................ 25 1,107,758.06 0.35
13 - 18............................................... 11 316,532.10 0.10
19 - 24............................................... 7 184,505.49 0.06
25 - 30............................................... 1 6,338.40 0.00
49 - 54............................................... 4 160,321.89 0.05
55 - 60............................................... 4 112,060.39 0.04
TOTAL:................................................ 4,689 $318,601,182.54 100.00%
- ------------------------
(1) As of the Statistical Calculation Date, the weighted average Seasoning of
the Group I Home Equity Loans is approximately one month.
OCCUPANCY STATUS OF GROUP I HOME EQUITY LOANS
% OF
STATISTICAL STATISTICAL
NUMBER OF CALCULATION CALCULATION
HOME EQUITY DATE LOAN DATE LOAN
OCCUPANCY STATUS LOANS BALANCE BALANCE
- ---------------- ----------- --------------- -----------
Primary Home.......................................... 4,509 $310,085,347.36 97.33%
Investment Property................................... 155 7,152,723.78 2.25
Second Home........................................... 25 1,363,111.40 0.43
TOTAL:................................................ 4,689 $318,601,182.54 100.00%
LIEN POSITIONS OF GROUP I HOME EQUITY LOANS
% OF
STATISTICAL STATISTICAL
NUMBER OF CALCULATION CALCULATION
HOME EQUITY DATE LOAN DATE LOAN
LIEN POSITION LOANS BALANCE BALANCE
- ------------- ----------- --------------- -----------
First lien............................................ 4,032 $297,379,987.53 93.34%
Second lien........................................... 657 21,221,195.01 6.66
TOTAL:................................................ 4,689 $318,601,182.54 100.00%
S-31
DOCUMENTATION TYPES OF GROUP I HOME EQUITY LOANS
% OF
STATISTICAL STATISTICAL
NUMBER OF CALCULATION CALCULATION
HOME EQUITY DATE LOAN DATE LOAN
DOCUMENTATION TYPE(1) LOANS BALANCE BALANCE
- --------------------- ----------- --------------- -----------
Full Documentation.................................... 4,229 $281,044,086.01 88.21%
Stated Income......................................... 295 22,440,716.73 7.04
Limited Documentation................................. 165 15,116,379.80 4.74
TOTAL:................................................ 4,689 $318,601,182.54 100.00%
- ------------------------
(1) We refer you to "THE SELLER AND THE SERVICER--Underwriting Guidelines
Applicable to the Home Equity Loans" in the Prospectus for a description of
CHEC's documentation programs.
CREDIT GRADES OF GROUP I HOME EQUITY LOANS
% OF
STATISTICAL STATISTICAL
NUMBER OF CALCULATION CALCULATION
HOME EQUITY DATE LOAN DATE LOAN
CREDIT GRADE(1) LOANS BALANCE BALANCE
- --------------- ----------- --------------- -----------
A+.................................................... 347 $ 27,927,388.02 8.77%
A-1................................................... 1,334 104,754,293.32 32.88
A-2................................................... 1,357 90,779,706.91 28.49
B..................................................... 737 46,666,963.19 14.65
C-1................................................... 622 32,682,813.71 10.26
C-2................................................... 200 10,820,237.01 3.40
D..................................................... 92 4,969,780.38 1.56
TOTAL:................................................ 4,689 $318,601,182.54 100.00%
- ------------------------
(1) We refer you to "THE SELLER AND THE SERVICER--Underwriting Criteria of the
Seller" in the Prospectus for a description of CHEC's credit grades and
underwriting criteria.
S-32
SECOND MORTGAGE RATIOS OF GROUP I HOME EQUITY LOANS(1)
% OF
STATISTICAL STATISTICAL
NUMBER OF CALCULATION CALCULATION
HOME EQUITY DATE LOAN DATE LOAN
RANGE OF SECOND MORTGAGE RATIOS (%) LOANS BALANCE BALANCE
- ----------------------------------- ----------- -------------- -----------
5.01 - 10.00........................................... 38 $ 504,476.52 2.38%
10.01 - 15.00.......................................... 68 1,396,055.41 6.58
15.01 - 20.00.......................................... 214 5,402,529.59 25.46
20.01 - 25.00.......................................... 104 3,256,120.33 15.34
25.01 - 30.00.......................................... 62 2,262,862.42 10.66
30.01 - 35.00.......................................... 48 1,812,066.26 8.54
35.01 - 40.00.......................................... 40 2,380,448.28 11.22
40.01 - 45.00.......................................... 22 1,250,105.83 5.89
45.01 - 50.00.......................................... 12 693,804.59 3.27
50.01 - 55.00.......................................... 15 612,584.53 2.89
55.01 - 60.00.......................................... 7 294,930.76 1.39
60.01 - 65.00.......................................... 10 627,959.01 2.96
65.01 - 70.00.......................................... 8 389,228.64 1.83
70.01 - 75.00.......................................... 2 47,582.42 0.22
75.01 - 80.00.......................................... 4 225,384.62 1.06
85.01 - 90.00.......................................... 3 65,055.80 0.31
TOTAL:................................................. 657 $21,221,195.01 100.00%
- ------------------------
(1) Applies only to Home Equity Loans in the second lien position. The Second
Mortgage Ratios shown above are equal to, with respect to each Home Equity
Loan in the second lien position, the original principal balance of the Home
Equity Loan at the date of origination divided by the sum of (a) the
original principal balance of the Home Equity Loan at the date of
origination and (b) the remaining principal balance of the senior lien on
the related Mortgaged Property at the date of origination of the Home Equity
Loan.
S-33
GROUP II HOME EQUITY LOANS
The following summary information with respect to the Group II Home Equity
Loans is as of the Statistical Calculation Date:
SUMMARY STATISTICS RANGE (IF APPROPRIATE)
------------------ ----------------------
Avg. Outstanding Principal Balance.................... $120,363.58 $18,468.58 to
$600,800.00
Wtd. Avg. Coupon Rate (approximate)................... 10.093% 7.200% to 13.600%
Wtd. Avg. Gross Margin (approximate).................. 6.621% 3.890% to 10.800%
Wtd. Avg. Maximum Rate (approximate)(1)............... 17.084% 14.200% to 20.600%
Wtd. Avg. Minimum Rate (approximate)(1)............... 10.093% 7.200% to 13.600%
Wtd. Avg. Original Loan-to-Value Ratio
(approximate)....................................... 82.64% 23.15% to 97.94%
Wtd. Avg. Remaining Term to Maturity (approximate).... 357 months 179 to 360 months
Wtd. Avg. Original Term to Maturity (approximate)..... 358 months 180 to 360 months
Maximum Seasoning..................................... 7 months
Ratio of First to Second Liens........................ 100.00% / 0.00%
Outstanding Principal Balance of Loans Secured by
First Liens
TWO-TO FOUR-FAMILY PROPERTIES..................... $441,750.00
ALL OTHER PROPERTIES.............................. $42,166,958.29
Balloon Payments (as a percent of the aggregate
outstanding loan balance)........................... 0.00%
Latest Maturity Date.................................. May 15, 2031
30 to 59 day Delinquencies (as a percent of the
aggregate outstanding loan balance)(2).............. 0.16%
Six-Month Adjustable Rate Loans(3)
PERCENTAGE OF AGGREGATE OUTSTANDING GROUP II
PRINCIPAL LOAN BALANCE.......................... 26.36%
WTD. AVG. REMAINING PERIOD TO COUPON RATE
ADJUSTMENT (APPROXIMATE)........................ 5 months
WTD. AVG. INITIAL INTEREST RATE ADJUSTMENT CAP
(APPROXIMATE)(4)................................ 1.00%
WTD. AVG. SEMI-ANNUAL INTEREST RATE ADJUSTMENT CAP
(APPROXIMATE)................................... 1.00%
2/28 Adjustable Rate Loans(5)
PERCENTAGE OF AGGREGATE OUTSTANDING GROUP II
PRINCIPAL LOAN BALANCE.......................... 73.64%
WTD. AVG. REMAINING PERIOD TO COUPON RATE
ADJUSTMENT (APPROXIMATE)........................ 23 months
WTD. AVG. INITIAL INTEREST RATE ADJUSTMENT CAP
(APPROXIMATE)(4)................................ 2.01%
WTD. AVG. SEMI-ANNUAL INTEREST RATE ADJUSTMENT CAP
(APPROXIMATE)(4)................................ 1.00%
- ------------------------
(1) The "Maximum Rates" or "Minimum Rates" are the highest and lowest rates,
respectively, at which interest may accrue on the Group II Home Equity
Loans.
(2) Approximately 82.26% of the outstanding loan balance of the Group II Home
Equity Loans had first monthly payments due on or after April 16, 2001, so
that it was not possible for these loans to be 30 days past due as of the
Statistical Calculation Date.
S-34
(3) "Six-Month Adjustable Rate Loans" have their first adjustment date six
months following their date of origination, and adjust semiannually
thereafter, based on six-month LIBOR plus a margin, subject to certain
limitations.
(4) Above the then current coupon rate.
(5) "2/28 Adjustable Rate Loans" have their first adjustment date two years
after the date of origination, and adjust semiannually thereafter, based on
six-month LIBOR plus a margin, subject to certain limitations.
The tables set forth below contain approximate statistical information as of
the Statistical Calculation Date regarding the Group II Home Equity Loans. The
sum of the percentage columns in the following tables may not equal 100% due to
rounding.
S-35
GEOGRAPHICAL DISTRIBUTION OF MORTGAGED PROPERTIES
OF GROUP II HOME EQUITY LOANS(1)
% OF
STATISTICAL STATISTICAL
CALCULATION CALCULATION
MORTGAGE DATE PRINCIPAL DATE PRINCIPAL
STATE LOANS BALANCE BALANCE
- ----- -------- -------------- --------------
Arizona................................................ 21 $ 1,641,452.41 3.85%
Arkansas............................................... 3 515,425.00 1.21
California............................................. 94 16,689,228.93 39.17
Colorado............................................... 9 1,421,518.09 3.34
Connecticut............................................ 2 324,836.65 0.76
Florida................................................ 10 898,383.09 2.11
Georgia................................................ 14 1,757,594.05 4.12
Illinois............................................... 11 1,041,562.18 2.44
Iowa................................................... 2 58,468.58 0.14
Kentucky............................................... 3 253,390.71 0.59
Louisiana.............................................. 1 136,833.00 0.32
Maine.................................................. 1 68,710.00 0.16
Maryland............................................... 2 150,058.71 0.35
Massachusetts.......................................... 1 135,397.00 0.32
Michigan............................................... 17 1,568,772.51 3.68
Minnesota.............................................. 2 385,535.86 0.90
Mississippi............................................ 2 126,550.00 0.30
Missouri............................................... 8 545,833.40 1.28
Nevada................................................. 1 159,059.83 0.37
New Hampshire.......................................... 1 130,500.00 0.31
New Jersey............................................. 5 707,083.70 1.66
New Mexico............................................. 3 263,679.14 0.62
New York............................................... 7 825,145.62 1.94
North Carolina......................................... 11 849,869.22 1.99
Ohio................................................... 11 879,581.42 2.06
Oklahoma............................................... 3 283,400.00 0.67
Oregon................................................. 2 304,250.55 0.71
Pennsylvania........................................... 11 476,548.36 1.12
Rhode Island........................................... 1 27,920.00 0.07
South Carolina......................................... 2 155,422.41 0.36
South Dakota........................................... 1 71,000.00 0.17
Tennessee.............................................. 13 945,345.14 2.22
Texas.................................................. 15 1,982,276.56 4.65
Utah................................................... 1 107,914.62 0.25
Virginia............................................... 1 342,000.00 0.80
Washington............................................. 21 3,014,042.98 7.07
West Virginia.......................................... 6 373,122.12 0.88
Wisconsin.............................................. 35 2,990,996.45 7.02
TOTAL:................................................. 354 $42,608,708.29 100.00%
- ------------------------
(1) Determined by property address designated in the related mortgage.
S-36
ORIGINAL LOAN-TO-VALUE RATIOS
OF GROUP II HOME EQUITY LOANS(1)
% OF
STATISTICAL STATISTICAL
NUMBER OF CALCULATION CALCULATION
HOME EQUITY DATE LOAN DATE LOAN
RANGE OF ORIGINAL LOAN-TO-VALUE RATIOS (%) LOANS BALANCE BALANCE
- ------------------------------------------ ----------- -------------- -----------
20.01 - 25.00.......................................... 1 $ 41,654.07 0.10%
35.01 - 40.00.......................................... 1 96,500.00 0.23
40.01 - 45.00.......................................... 1 21,378.04 0.05
45.01 - 50.00.......................................... 3 186,433.47 0.44
50.01 - 55.00.......................................... 3 169,168.58 0.40
55.01 - 60.00.......................................... 4 418,315.78 0.98
60.01 - 65.00.......................................... 5 283,962.46 0.67
65.01 - 70.00.......................................... 9 863,469.42 2.03
70.01 - 75.00.......................................... 21 1,960,335.29 4.60
75.01 - 80.00.......................................... 120 15,712,084.99 36.88
80.01 - 85.00.......................................... 69 8,382,673.19 19.67
85.01 - 90.00.......................................... 86 11,763,747.98 27.61
90.01 - 95.00.......................................... 24 2,100,609.06 4.93
95.01 - 100.00......................................... 7 608,375.96 1.43
TOTAL:................................................. 354 $42,608,708.29 100.00%
- ------------------------
(1) As of the Statistical Calculation Date, the weighted average Original
Loan-to-Value Ratio of the Group II Home Equity Loans is approximately
82.64%.
CURRENT COUPON RATES OF GROUP II HOME EQUITY LOANS(1)
% OF
STATISTICAL STATISTICAL
NUMBER OF CALCULATION CALCULATION
HOME EQUITY DATE LOAN DATE LOAN
RANGE OF CURRENT COUPON RATES (%) LOANS BALANCE BALANCE
- --------------------------------- ----------- -------------- -----------
7.001 - 7.500.......................................... 3 $ 637,795.73 1.50%
7.501 - 8.000.......................................... 14 1,954,885.32 4.59
8.001 - 8.500.......................................... 21 3,231,645.35 7.58
8.501 - 9.000.......................................... 40 6,181,293.22 14.51
9.001 - 9.500.......................................... 36 4,340,545.96 10.19
9.501 - 10.000......................................... 64 8,735,998.39 20.50
10.001 - 10.500........................................ 25 3,366,274.40 7.90
10.501 - 11.000........................................ 45 4,646,389.18 10.90
11.001 - 11.500........................................ 24 2,102,187.52 4.93
11.501 - 12.000........................................ 34 3,568,430.02 8.37
12.001 - 12.500........................................ 16 1,526,784.12 3.58
12.501 - 13.000........................................ 21 1,604,665.99 3.77
13.001 - 13.500........................................ 8 532,671.82 1.25
13.501 - 14.000........................................ 3 179,141.27 0.42
TOTAL:................................................. 354 $42,608,708.29 100.00%
- ------------------------
(1) As of the Statistical Calculation Date, the weighted average Coupon Rate of
the Group II Home Equity Loans is approximately 10.093%.
S-37
GROSS MARGINS OF GROUP II HOME EQUITY LOANS(1)
% OF
STATISTICAL STATISTICAL
NUMBER OF CALCULATION CALCULATION
HOME EQUITY DATE LOAN DATE LOAN
RANGE OF GROSS MARGINS (%) LOANS BALANCE BALANCE
- -------------------------- ----------- -------------- -----------
3.501 - 4.000.......................................... 5 $ 677,565.05 1.59%
4.001 - 4.500.......................................... 15 2,561,204.89 6.01
4.501 - 5.000.......................................... 23 3,189,008.04 7.48
5.001 - 5.500.......................................... 25 3,362,978.37 7.89
5.501 - 6.000.......................................... 49 7,150,995.87 16.78
6.001 - 6.500.......................................... 46 5,921,421.83 13.90
6.501 - 7.000.......................................... 36 4,598,614.14 10.79
7.001 - 7.500.......................................... 25 2,780,746.38 6.53
7.501 - 8.000.......................................... 37 4,374,115.83 10.27
8.001 - 8.500.......................................... 30 2,511,981.93 5.90
8.501 - 9.000.......................................... 28 2,602,798.71 6.11
9.001 - 9.500.......................................... 12 903,291.22 2.12
9.501 - 10.000......................................... 12 829,184.03 1.95
10.001 - 10.500........................................ 4 389,472.26 0.91
10.501 - 11.000........................................ 7 755,329.74 1.77
TOTAL:................................................. 354 $42,608,708.29 100.00%
- ------------------------
(1) As of the Statistical Calculation Date, the weighted average Gross Margin of
the Group II Home Equity Loans is approximately 6.621%.
MAXIMUM RATES OF GROUP II HOME EQUITY LOANS(1)
% OF
STATISTICAL STATISTICAL
NUMBER OF CALCULATION CALCULATION
HOME EQUITY DATE LOAN DATE LOAN
RANGE OF MAXIMUM RATES (%) LOANS BALANCE BALANCE
- -------------------------- ----------- -------------- -----------
14.001 - 14.500........................................ 3 $ 637,795.73 1.50%
14.501 - 15.000........................................ 14 1,954,885.32 4.59
15.001 - 15.500........................................ 21 3,231,645.35 7.58
15.501 - 16.000........................................ 42 6,625,498.57 15.55
16.001 - 16.500........................................ 37 4,372,545.96 10.26
16.501 - 17.000........................................ 62 8,291,793.04 19.46
17.001 - 17.500........................................ 24 3,334,274.40 7.83
17.501 - 18.000........................................ 45 4,646,389.18 10.90
18.001 - 18.500........................................ 23 2,018,987.52 4.74
18.501 - 19.000........................................ 34 3,568,430.02 8.37
19.001 - 19.500........................................ 17 1,609,984.12 3.78
19.501 - 20.000........................................ 21 1,604,665.99 3.77
20.001 - 20.500........................................ 8 532,671.82 1.25
20.501 - 21.000........................................ 3 179,141.27 0.42
TOTAL:................................................. 354 $42,608,708.29 100.00%
- ------------------------
(1) As of the Statistical Calculation Date, the weighted average Maximum Rate of
the Group II Home Equity Loans is approximately 17.084%.
S-38
NEXT INTEREST ADJUSTMENT DATES OF GROUP II HOME EQUITY LOANS
% OF
STATISTICAL STATISTICAL
NUMBER OF CALCULATION CALCULATION
HOME EQUITY DATE LOAN DATE LOAN
NEXT INTEREST ADJUSTMENT DATE LOANS BALANCE BALANCE
- ----------------------------- ----------- -------------- -----------
June 2001.............................................. 1 $ 229,057.01 0.54%
August 2001............................................ 2 179,575.47 0.42
September 2001......................................... 17 2,156,436.50 5.06
October 2001........................................... 33 3,551,112.11 8.33
November 2001.......................................... 56 5,113,802.00 12.00
October 2002........................................... 1 122,145.60 0.29
March 2003............................................. 47 5,314,719.73 12.47
April 2003............................................. 84 10,963,940.19 25.73
May 2003............................................... 113 14,977,919.68 35.15
TOTAL:................................................. 354 $42,608,708.29 100.00%
S-39
LOAN BALANCES OF GROUP II HOME EQUITY LOANS(1)
% OF
STATISTICAL STATISTICAL
NUMBER OF CALCULATION CALCULATION
HOME EQUITY DATE LOAN DATE LOAN
RANGE OF LOAN BALANCES ($) LOANS BALANCE BALANCE
- -------------------------- ----------- -------------- -----------
15,000.01 - 20,000.00.................................. 1 $ 18,468.58 0.04%
20,000.01 - 25,000.00.................................. 3 65,040.75 0.15
25,000.01 - 30,000.00.................................. 3 82,463.72 0.19
30,000.01 - 35,000.00.................................. 9 294,823.95 0.69
35,000.01 - 40,000.00.................................. 8 303,419.18 0.71
40,000.01 - 45,000.00.................................. 8 349,345.73 0.82
45,000.01 - 50,000.00.................................. 9 431,546.15 1.01
50,000.01 - 55,000.00.................................. 17 885,765.50 2.08
55,000.01 - 60,000.00.................................. 13 748,550.83 1.76
60,000.01 - 65,000.00.................................. 18 1,119,334.75 2.63
65,000.01 - 70,000.00.................................. 11 740,868.08 1.74
70,000.01 - 75,000.00.................................. 14 1,014,874.60 2.38
75,000.01 - 80,000.00.................................. 19 1,480,035.35 3.47
80,000.01 - 85,000.00.................................. 11 900,836.84 2.11
85,000.01 - 90,000.00.................................. 8 703,175.66 1.65
90,000.01 - 95,000.00.................................. 8 734,940.67 1.72
95,000.01 - 100,000.00................................. 10 971,838.24 2.28
100,000.01 - 105,000.00................................ 8 818,667.49 1.92
105,000.01 - 110,000.00................................ 13 1,399,398.54 3.28
110,000.01 - 115,000.00................................ 11 1,234,248.81 2.90
115,000.01 - 120,000.00................................ 12 1,419,620.26 3.33
120,000.01 - 125,000.00................................ 9 1,104,617.22 2.59
125,000.01 - 130,000.00................................ 5 636,965.52 1.49
130,000.01 - 135,000.00................................ 4 529,415.75 1.24
135,000.01 - 140,000.00................................ 9 1,236,609.94 2.90
140,000.01 - 145,000.00................................ 2 288,500.00 0.68
145,000.01 - 150,000.00................................ 10 1,471,172.57 3.45
150,000.01 - 200,000.00................................ 50 8,785,373.99 20.62
200,000.01 - 250,000.00................................ 36 7,969,976.21 18.71
250,000.01 - 300,000.00................................ 7 1,914,828.91 4.49
300,000.01 - 350,000.00................................ 5 1,579,184.50 3.71
350,000.01 - 400,000.00................................ 2 774,000.00 1.82
600,000.01 - 650,000.00................................ 1 600,800.00 1.41
TOTAL:................................................. 354 $42,608,708.29 100.00%
- ------------------------
(1) As of the Statistical Calculation Date, the average outstanding Loan Balance
of the Group II Home Equity Loans is approximately $120,363.58.
S-40
TYPES OF MORTGAGED PROPERTIES OF GROUP II HOME EQUITY LOANS
% OF
STATISTICAL STATISTICAL
NUMBER OF CALCULATION CALCULATION
HOME EQUITY DATE LOAN DATE LOAN
PROPERTY TYPE LOANS BALANCE BALANCE
- ------------- ----------- -------------- -----------
Single Family.......................................... 317 $35,875,316.59 84.20%
PUD.................................................... 21 4,474,901.70 10.50
Condominium............................................ 9 1,407,392.51 3.30
Two-to Four- Family.................................... 2 441,750.00 1.04
Manufactured Housing................................... 3 226,306.77 0.53
Townhouse.............................................. 2 183,040.72 0.43
TOTAL:................................................. 354 $42,608,708.29 100.00%
ORIGINAL TERMS TO MATURITY OF GROUP II HOME EQUITY LOANS(1)
% OF
STATISTICAL STATISTICAL
NUMBER OF CALCULATION CALCULATION
HOME EQUITY DATE LOAN DATE LOAN
ORIGINAL TERM TO MATURITY (MONTHS) LOANS BALANCE BALANCE
- ---------------------------------- ----------- -------------- -----------
121 - 180.............................................. 2 $ 119,661.02 0.28%
181 - 240.............................................. 5 489,460.19 1.15
301 - 360.............................................. 347 41,999,587.08 98.57
TOTAL:................................................. 354 $42,608,708.29 100.00%
- ------------------------
(1) As of the Statistical Calculation Date, the weighted average Original Term
to Maturity of the Group II Home Equity Loans is approximately 358 months.
REMAINING TERMS TO MATURITY OF GROUP II HOME EQUITY LOANS(1)
% OF
STATISTICAL STATISTICAL
NUMBER OF CALCULATION CALCULATION
HOME EQUITY DATE LOAN DATE LOAN
REMAINING TERM TO MATURITY (MONTHS) LOANS BALANCE BALANCE
- ----------------------------------- ----------- -------------- -----------
121 - 180.............................................. 2 $ 119,661.02 0.28%
181 - 240.............................................. 5 489,460.19 1.15
301 - 360.............................................. 347 41,999,587.08 98.57
TOTAL:................................................. 354 $42,608,708.29 100.00%
- ------------------------
(1) As of the Statistical Calculation Date, the weighted average Remaining Term
to Maturity of the Group II Home Equity Loans is approximately 357 months.
S-41
SEASONING OF GROUP II HOME EQUITY LOANS(1)
% OF
STATISTICAL STATISTICAL
NUMBER OF CALCULATION CALCULATION
HOME EQUITY DATE LOAN DATE LOAN
SEASONING (MONTHS) LOANS BALANCE BALANCE
- ------------------ ----------- -------------- -----------
0...................................................... 172 $20,353,695.68 47.77%
1 - 6.................................................. 181 22,132,867.01 51.94
7 - 12................................................. 1 122,145.60 0.29
TOTAL:................................................. 354 $42,608,708.29 100.00%
- ------------------------
(1) As of the Statistical Calculation Date, the weighted average Seasoning of
the Group II Home Equity Loans is approximately one month.
OCCUPANCY STATUS OF GROUP II HOME EQUITY LOANS
% OF
STATISTICAL STATISTICAL
NUMBER OF CALCULATION CALCULATION
HOME EQUITY DATE LOAN DATE LOAN
OCCUPANCY STATUS LOANS BALANCE BALANCE
- ---------------- ----------- -------------- -----------
Primary Home........................................... 343 $41,472,097.13 97.33%
Investment Property.................................... 5 637,826.15 1.50
Second Home............................................ 6 498,785.01 1.17
TOTAL:................................................. 354 $42,608,708.29 100.00%
DOCUMENTATION TYPES OF GROUP II HOME EQUITY LOANS
% OF
STATISTICAL STATISTICAL
NUMBER OF CALCULATION CALCULATION
HOME EQUITY DATE LOAN DATE LOAN
DOCUMENTATION TYPE(1) LOANS BALANCE BALANCE
- --------------------- ----------- -------------- -----------
Full Documentation..................................... 322 $38,278,999.86 89.84%
Stated Income.......................................... 20 2,542,627.27 5.97
Limited Documentation.................................. 12 1,787,081.16 4.19
TOTAL:................................................. 354 $42,608,708.29 100.00%
- ------------------------
(1) We refer you to "THE SELLER AND THE SERVICER--Underwriting Guidelines
Applicable to the Home Equity Loans" in the Prospectus for a description of
CHEC's documentation programs.
S-42
CREDIT GRADES OF GROUP II HOME EQUITY LOANS
% OF
STATISTICAL STATISTICAL
NUMBER OF CALCULATION CALCULATION
HOME EQUITY DATE LOAN DATE LOAN
CREDIT GRADE(1) LOANS BALANCE BALANCE
- --------------- ----------- -------------- -----------
A+..................................................... 10 $ 1,209,582.32 2.84%
A-1.................................................... 86 12,006,472.71 28.18
A-2.................................................... 129 16,825,405.88 39.49
B...................................................... 54 5,147,763.08 12.08
C-1.................................................... 62 6,134,119.44 14.40
C-2.................................................... 13 1,285,364.86 3.02
TOTAL:................................................. 354 $42,608,708.29 100.00%
- ------------------------
(1) We refer you to "THE SELLER AND THE SERVICER--Underwriting Criteria of the
Seller" in the Prospectus for a description of CHEC's credit grades and
underwriting criteria.
DELINQUENCY AND LOSS EXPERIENCE
CHEC commenced its servicing activities of home equity loans similar to the
Home Equity Loans in October 1997. The following table sets forth CHEC's
delinquency experience as of the last day of each of the months indicated with
respect to securitized home equity loans originated or acquired, and serviced,
by CHEC. These loans are similar in type to the Home Equity Loans. No home
equity loan is considered delinquent for purposes of the table until a payment
is one calendar month past due on a contractual basis. The delinquency and loss
percentages may be affected by the size and relative lack of seasoning of this
servicing portfolio which increased from approximately $966,480,950 at
March 31, 1999 to approximately $3,051,578,912 at March 31, 2001. CHEC believes
that as the existing loan portfolio becomes more seasoned, the rate of
delinquencies, loan losses, foreclosures and REO properties will increase.
Accordingly, the information in the table below is for illustrative purposes
only and is not intended to indicate or predict the expected delinquency
experience on past, current or future pools of home equity loans for which CHEC
is the servicer.
DELINQUENCY EXPERIENCE
AS OF MARCH 31, 2001 AS OF MARCH 31, 2000 AS OF MARCH 31, 1999
-------------------------- -------------------------- ------------------------
BY NUMBER BY DOLLAR BY NUMBER BY DOLLAR BY NUMBER BY DOLLAR
OF LOANS AMOUNT OF LOANS AMOUNT OF LOANS AMOUNT
--------- -------------- --------- -------------- --------- ------------
Portfolio(1)............. 46,174 $3,051,578,912 29,235 $1,950,284,484 14,304 $966,480,950
Delinquency Percentage
30-59 days............. 2.53% 2.33% 1.48% 1.41% 1.60% 1.34%
60-89 days............. 0.92% 0.87% 0.55% 0.52% 0.55% 0.52%
90 days and over....... 3.06% 3.05% 2.31% 2.25% 1.17% 1.08%
------ -------------- ------ -------------- ------ ------------
Total Delinquency
Percentage(2)(3)....... 6.51% 6.25% 4.34% 4.18% 3.31% 2.94%
====== ============== ====== ============== ====== ============
Percentage of REO
Properties............. 1.07% 1.04% 0.63% 0.60% 0.20% 0.21%
- ------------------------
(1) Portfolio includes all securitized loans originated or acquired, and
serviced, by CHEC.
(2) Excludes REO properties.
(3) Totals may not sum due to rounding.
S-43
The following table sets forth CHEC's loss experience with respect to home
equity loans similar in type to the Home Equity Loans for the periods indicated.
LOSS EXPERIENCE
FISCAL YEAR FISCAL YEAR FISCAL YEAR
ENDED ENDED ENDED
MARCH 31,2001 MARCH 31, 2000 MARCH 31, 1999
------------- -------------- --------------
DOLLAR DOLLAR DOLLAR
AMOUNT ($) AMOUNT ($) AMOUNT ($)
------------- -------------- --------------
Average Portfolio(1)............................... 2,384,624,362 1,462,106,026 566,006,851
Net Losses(2)...................................... 18,673,245 6,129,076 135,035
Net Losses as a Percentage of Average Portfolio.... 0.78% 0.42% 0.02%
- ------------------------
(1) "Average Portfolio" during the period is the arithmetic average of the
principal balances of the loans outstanding on the last day of each month
during the period. Portfolio includes all securitized loans originated or
acquired, and serviced, by CHEC.
(2) "Net Losses" means gross losses minus recoveries.
S-44
PREPAYMENT AND YIELD CONSIDERATIONS
The rate of principal payments on each class of Offered Certificates, the
aggregate amount of distributions on each class of Offered Certificates and the
yield to maturity of each class of Offered Certificates will be related to the
rate and timing of payments of principal on the Home Equity Loans. The rate of
principal payments on the Home Equity Loans will in turn be affected by the
amortization schedules of the Home Equity Loans, by the rate of principal
prepayments on the Home Equity Loans (including for this purpose prepayments
resulting from refinancings of the loans or liquidations of the loans due to
defaults, casualties, condemnations and repurchases by CHEC or purchases by the
Servicer of delinquent home equity loans or pursuant to the limited purchase
option) and by realized losses on the Home Equity Loans. Certain of the Home
Equity Loans may be prepaid by the mortgagors at any time without penalty.
Certain of the Home Equity Loans are subject to penalties for prepayments.
PREPAYMENTS
Prepayments, liquidations and purchases of the Home Equity Loans (including
any optional purchase by the Servicer of a delinquent Home Equity Loan, any
optional purchase by the Servicer pursuant to the limited purchase option, the
purchase of all the Home Equity Loans by an affiliate of the Servicer in
connection with the termination of the Trust and the sale of the Trust assets
pursuant to the auction) will result in distributions on the Offered
Certificates of principal amounts which would otherwise be distributed over the
remaining terms of the Home Equity Loans. Since the rate of payment of principal
of the Home Equity Loans will depend on future events and a variety of factors,
no assurance can be given as to the rate or timing of principal prepayments. The
extent to which the yield to maturity of an Offered Certificate may vary from
the anticipated yield will depend upon the degree to which an Offered
Certificate is purchased at a discount or premium, and the degree to which the
timing of payments on the Offered Certificate is sensitive to prepayments,
liquidations and purchases of the Home Equity Loans.
The rate of prepayment on the Home Equity Loans cannot be predicted. As of
the Statistical Calculation Date, approximately 30.41% of the Group I Home
Equity Loans and approximately 18.48% of the Group II Home Equity Loans may be
prepaid in whole or in part at any time without penalty. Generally, home equity
loans are not viewed by borrowers as permanent financing. Accordingly, the Home
Equity Loans may experience a higher rate of prepayment than traditional
mortgage loans. The prepayment experience of the Trust with respect to the Home
Equity Loans may be affected by a wide variety of factors, including economic
conditions, prevailing interest rate levels, the availability of alternative
financing and homeowner mobility and changes affecting the deductibility for
Federal income tax purposes of interest payments on home equity loans. All of
the Home Equity Loans will contain "due-on-sale" provisions, and the Servicer is
required by the Agreement to enforce the provisions, unless the enforcement is
not permitted by applicable law or the Servicer, in a manner consistent with
reasonable commercial practice, permits the purchaser of the related Mortgaged
Property to assume the Home Equity Loan. The enforcement of a "due-on-sale"
provision will have the same effect as a prepayment of the related Home Equity
Loan. The rate of prepayment of the Home Equity Loans may also be affected by
the extent to which the Home Equity Loans provide for the payment of a penalty
in connection with a prepayment and the amount of the penalty.
WE REFER YOU TO "CERTAIN LEGAL ASPECTS OF THE HOME EQUITY LOANS--DUE-ON-SALE
CLAUSES IN HOME EQUITY LOANS" IN THE PROSPECTUS FOR MORE DETAIL.
As with fixed rate obligations generally, the rate of prepayment on a pool
of home equity loans with fixed rates, including the Group I Home Equity Loans,
is affected by prevailing market rates for home equity loans of a comparable
term and risk level. When the market interest rate is below the mortgage coupon,
mortgagors may have an increased incentive to refinance their home equity loans.
S-45
Depending on prevailing market rates, the future outlook for market rates and
economic conditions generally, some mortgagors may sell or refinance mortgaged
properties in order to realize their equity in the mortgaged properties, to meet
cash flow needs or to make other investments. The prepayment behavior of the
2/28 Adjustable Rate Loans may differ from that of the other Home Equity Loans.
As a 2/28 Adjustable Rate Loan approaches its initial adjustment date, the
borrower may become more likely to refinance the loan to avoid an increase in
the coupon rate, even if fixed-rate loans are only available at rates that are
slightly lower or higher than the coupon rate before adjustment. The existence
of the applicable periodic rate cap, lifetime cap and lifetime floor also may
affect the likelihood of prepayments resulting from refinancings. As is the case
with conventional fixed-rate home equity loans, adjustable-rate home equity
loans may be subject to a greater rate of principal prepayments in a declining
interest rate environment. For example, if prevailing interest rates fall
significantly, adjustable-rate home equity loans could be subject to higher
prepayment rates than if prevailing interest rates remain constant because the
availability of fixed-rate home equity loans at competitive rates may encourage
mortgagors to refinance their adjustable-rate home equity loans to "lock in" a
lower fixed interest rate. However, no assurance can be given as to the level of
prepayments that the Home Equity Loans will experience.
PROJECTED YIELDS
On each Distribution Date, the Principal Distribution Amount will reflect
the total amount in respect of principal received with respect to both Home
Equity Loan Groups in the related Remittance Period, as adjusted by the
overcollateralization provisions described in this Prospectus Supplement. The
Principal Distribution Amount will be allocated between the Senior Certificates
in each Certificate Group generally on a pro rata basis, regardless of the
amount of principal actually received with respect to the Home Equity Loan Group
related to a particular Certificate Group. Depending on the rate of payments of
principal and/or the rate of Realized Losses on the Home Equity Loans in a Home
Equity Loan Group relative to the rates experienced with respect to the Home
Equity Loans in the other Home Equity Loan Group, the Senior Certificates in a
Certificate Group may receive principal distributions faster or slower than
would have been the case were distributions based solely on the principal
collections for the related Home Equity Loan Group. The relative rates of
principal payments may change over time and may be affected by different
factors. For example, the Home Equity Loans with fixed interest rates may prepay
at faster rates than the Home Equity Loans with adjustable interest rates in
response to a given decline in market interest rates because adjustable interest
rates would readjust based on current rates. As a result of this method of
allocating the Principal Distribution Amount, it may be more difficult to
analyze the potential weighted average lives of the Senior Certificates and the
related yields to maturity.
Excess Interest (as defined in "DESCRIPTION OF CERTIFICATES--Glossary"
below) for the Home Equity Loans will be distributed in reduction of the
Certificate Principal Balance of the Offered Certificates then entitled to
distributions of principal on each Distribution Date to the extent that the then
required overcollateralization amount exceeds the actual overcollateralization
amount. If purchased at a premium or a discount, the yield to maturity on an
Offered Certificate will be affected by the rate at which the Excess Interest
for the Home Equity Loans is distributed in reduction of the applicable
Certificate Principal Balance of the Offered Certificates. If the actual rate of
the Excess Interest distribution is slower than the rate anticipated by an
investor who purchases an Offered Certificate, and particularly a Subordinate
Certificate, at a discount, the actual yield to the investor will be lower than
the investor's anticipated yield. If the actual rate of the Excess Interest
distribution is faster than the rate anticipated by an investor who purchases an
Offered Certificate at a premium, the actual yield to the investor will be lower
than the investor's anticipated yield. The amount of Excess Interest available
for distribution on any Distribution Date will be affected by the actual amount
of interest received, advanced, collected or recovered in respect of the Home
Equity Loans during the related Remittance Period and the amount will be
influenced by changes in the weighted average of the
S-46
coupon rates of the Home Equity Loans resulting from prepayments and
liquidations. The amount of Excess Interest distributions applied in reduction
of the Certificate Principal Balance of the Offered Certificates on each
Distribution Date will be based on the then required overcollateralization
amount. Once the required level of overcollateralization is reached, the
application of Excess Interest to accelerate overcollateralization will cease,
unless necessary to maintain the required overcollateralization amount.
In addition, if the clean-up call option is not exercised on the date upon
which it first could have been exercised, then on the third Distribution Date
following such date, and on each Distribution Date thereafter, the amounts that
otherwise would have been payable to the Non-Offered Certificates will be paid
to the Offered Certificates as an additional principal distribution amount. Such
additional principal distributions may result in an accelerated rate of
amortization of the related Offered Certificates and affect the weighted average
life and yield on your investment.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES--CREDIT ENHANCEMENT--
OVERCOLLATERALIZATION RESULTING FROM CASH FLOW STRUCTURE" IN THIS PROSPECTUS
SUPPLEMENT FOR MORE DETAIL.
SUBORDINATE CERTIFICATES
The Subordinate Certificates provide credit enhancement for the Senior
Certificates in both Home Equity Loan Groups and may absorb losses on the Home
Equity Loans in either Home Equity Loan Group. The weighted average lives of,
and the yields to maturity on, the Subordinate Certificates, in reverse order of
their relative payment priorities, will be progressively more sensitive to the
rate and timing of borrower defaults and the severity of ensuing losses on the
Home Equity Loans. If the actual rate and severity of losses on the Home Equity
Loans is higher than those assumed by a holder of a Subordinate Certificate, the
actual yield to maturity on the holder's certificate may be lower than the yield
expected by the holder based on that assumption. Realized Losses on the Home
Equity Loans will reduce the Certificate Principal Balance of the class of
Subordinate Certificates then outstanding with lowest relative payment priority
if and to the extent that the aggregate of the Certificate Principal Balances of
all classes of Certificates, following all distributions on a Distribution Date,
exceeds the aggregate principal balance of the Home Equity Loans. As a result of
these reductions, less interest will accrue on that class of Subordinate
Certificates than otherwise would be the case.
In addition, the Subordinate Certificates will not be entitled to any
principal distributions prior to the Stepdown Date or during the continuation of
a Trigger Event, unless all of the Certificates with a higher relative payment
priority have been paid in full. Because of the disproportionate distribution of
principal on the Senior Certificates, depending on the timing of Realized
Losses, defaults and delinquencies on the Home Equity Loans, the weighted
average lives of the Subordinate Certificates may be longer than would otherwise
be the case.
PAYMENT DELAY FEATURE OF THE FIXED RATE CERTIFICATES
The effective yield to the Certificateholders of each class of Fixed Rate
Certificates will be lower than the yield otherwise produced by the applicable
Certificate Rate and the purchase price of the Certificates because
distributions will not be payable to the Certificateholders until the
Distribution Date following the month of accrual (without any additional
distribution of interest or earnings on the Certificates in respect of the
delay).
PRINCIPAL PAYMENT FEATURES OF THE CLASS A-6 CERTIFICATES
Investors in the Class A-6 Certificates should be aware that the Class A-6
Certificates do not receive any portion of principal payments prior to the
Distribution Date occurring in July 2004, thereafter, they will receive an
increasing percentage of their pro rata share of principal payable to the Group
I Certificates based on a schedule. This percentage will, after the Distribution
Date in
S-47
June 2008, exceed their pro rata share of principal. As a result, the weighted
average life of the Class A-6 Certificates may be longer or shorter than would
otherwise be the case, and the effect on the market value of the Class A-6
Certificates of changes in market interest rates or market yields for similar
securities may be greater or lesser than for other classes of Offered
Certificates.
WEIGHTED AVERAGE LIVES
Generally, greater than anticipated prepayments of principal will increase
the yield on Offered Certificates purchased at a price less than par and will
decrease the yield on Offered Certificates purchased at a price greater than
par. In general, the earlier prepayments of principal occur on the Home Equity
Loans, the greater the effect on the yields of the Offered Certificates. The
effect on an investor's yield due to principal prepayments on the Home Equity
Loans occurring at a rate that is faster (or slower) than the rate anticipated
by the investor in the period immediately following the issuance of the Offered
Certificates will not be entirely offset by a subsequent like reduction (or
increase) in the rate of principal payments. The weighted average lives of the
Offered Certificates will also be affected by the amount and timing of
delinquencies and defaults on the Home Equity Loans and the recoveries, if any,
on defaulted Home Equity Loans and foreclosed properties.
The "weighted average life" of a Certificate refers to the average amount of
time that will elapse from the date of issuance to the date each dollar in
respect of principal of the Certificate is repaid. The weighted average life of
any class of the Offered Certificates will be influenced by, among other
factors, the rate at which principal payments are made on the Home Equity Loans,
including final payments made upon the maturity of Home Equity Loans for which
the related monthly payments are insufficient to fully amortize the Home Equity
Loans ("Balloon Loans").
Prepayments of home equity loans are commonly measured relative to a
prepayment standard or model. The model used with respect to the Group I Home
Equity Loans is the prepayment assumption (the "Prepayment Assumption"). A 100%
Prepayment Assumption assumes constant prepayment rates ("CPR") of 4% per annum
of the then outstanding principal balance of the Group I Home Equity Loans in
the first month of the life of the Home Equity Loans and an additional 1.455%
(precisely 16/11%) per annum in each month thereafter until the twelfth month.
Beginning in the twelfth month and in each month thereafter during the life of
the Home Equity Loans, a 100% Prepayment Assumption assumes a CPR of 20% per
annum of the outstanding principal balance of the Group I Home Equity Loans each
month. The model used with respect to the Group II Home Equity Loans is CPR,
which is a prepayment assumption that represents a constant assumed rate of
prepayment each month relative to the then outstanding principal balance of a
pool of home equity loans for the life of the home equity loans. Neither model
purports to be a historical description of prepayment experience or a prediction
of the anticipated rate of prepayment of any pool of home equity loans,
including the Home Equity Loans to be included in the Trust.
Since the following tables were prepared on the basis of the assumptions in
the following paragraph, there are discrepancies between characteristics of the
actual Home Equity Loans and the characteristics of the Home Equity Loans
assumed in preparing the tables set forth below. Any discrepancy may have an
effect upon the percentages of the Certificate Principal Balances outstanding
and the weighted average lives of the Offered Certificates set forth in the
tables. In addition, since the actual Home Equity Loans in the Trust will have
characteristics which differ from those assumed in preparing the tables set
forth below, the distributions of principal on the Offered Certificates may be
made earlier or later than as indicated in the tables.
S-48
The information in the decrement tables has been prepared on the basis of
the following assumed characteristics of the Home Equity Loans and the following
additional assumptions (collectively, the "Structuring Assumptions"):
- the Home Equity Loans consist of pools of loans with the amortization
characteristics set forth below,
- the Closing Date for the Offered Certificates is June 15, 2001,
- distributions on the Offered Certificates are made on the 25th day of each
month regardless of the day on which the Distribution Date actually
occurs, commencing in July, 2001 and are made in accordance with the
priorities described in this Prospectus Supplement,
- the scheduled monthly payments of principal and interest on the Home
Equity Loans will be timely delivered on the first day of each month
commencing on June 1, 2001 (with no defaults, delinquencies,
modifications, waivers or amendments),
- the Home Equity Loans prepay at the specified percentages of the
Prepayment Assumption, in the case of the Group I Home Equity Loans, or at
the specified percentages of CPR, in the case of the Group II Home Equity
Loans,
- all prepayments are prepayments in full received on the last day of each
month and include 30 days' interest thereon,
- neither the limited purchase option nor the clean-up call option is
exercised (except as noted in footnote 2 in the following tables) and
there is no resulting auction of the trust assets,
- the Offered Certificates of each class have the respective Certificate
Rates and initial Certificate Principal Balances as set forth in this
Prospectus Supplement,
- the overcollateralization level is set as specified in the Agreement,
- the coupon rate for each Group II Home Equity Loan is adjusted on its next
adjustment date and on subsequent adjustment dates which occur at six
month intervals following the initial adjustment date to equal the sum of
the applicable gross margin and six-month LIBOR (the sum being subject to
the applicable periodic rate adjustment caps and floors and lifetime rate
caps and floors), and
- six-month LIBOR remains constant at 3.99% per annum and one-month LIBOR
remains constant at 4.06% per annum.
GROUP I
REMAINING ORIGINAL AMORTIZED
TERM TO TERM TO ORIGINAL
LOAN COUPON MATURITY MATURITY TERM
POOL NUMBER BALANCE ($) RATE (%) (MONTHS) (MONTHS) (MONTHS)
- --------------------- --------------- -------- --------- -------- ---------
1.................... $ 952,915.25 10.639 56 60 60
2.................... $ 11,146,463.93 10.877 116 118 118
3.................... $ 43,602,564.50 10.933 177 179 179
4.................... $ 33,654,438.78 10.905 237 240 240
5.................... $ 4,143,548.44 10.224 297 299 299
6.................... $278,575,155.08 10.673 358 360 360
7.................... $ 51,285,869.48 10.963 178 180 360
S-49
GROUP II
NUMBER
OF
MONTHS INITIAL
TO NEXT INTEREST INTEREST REMAINING
LOAN COUPON COUPON GROSS RATE RATE TERM TO
POOL BALANCE RATE CHANGE MARGIN ADJUSTMENT ADJUSTMENT MAXIMUM MATURITY
NUMBER ($) (%) DATE (%) CAP (%) CAP (%) RATE (%) (MONTHS)
- --------------------- -------------- -------- -------- -------- ---------- ---------- --------- ---------
1........... $ 3,409,430.33 9.773 3 6.617 1.000 1.000 16.713 348
2........... $ 4,720,123.41 10.019 4 6.909 1.000 1.000 17.019 350
3........... $ 6,797,759.32 10.522 5 7.740 1.000 1.000 17.516 354
4........... $ 7,227,382.19 10.494 21 6.392 2.014 1.000 17.494 357
5........... $14,574,401.64 10.046 22 6.086 2.010 1.000 17.020 358
6........... $19,909,947.65 9.908 23 6.647 2.006 1.000 16.914 359
INTEREST
ORIGINAL RATE
TERM TO CHANGE
POOL MATURITY FREQUENCY
NUMBER (MONTHS) (MONTHS)
- --------------------- -------- ---------
1........... 351 6
2........... 352 6
3........... 355 6
4........... 360 6
5........... 360 6
6........... 360 6
DECREMENT TABLES
The following tables indicate, based on the Structuring Assumptions, the
percentages of the initial Certificate Principal Balances of the Offered
Certificates that would be outstanding after each of the dates shown, based on
the indicated percentages of the Prepayment Assumption, in the case of the Group
I Home Equity Loans, and at the indicated percentages of CPR, in the case of the
Group II Home Equity Loans, and the weighted average lives of the Offered
Certificates. It is not likely that:
- the Home Equity Loans will have the characteristics assumed,
- the Home Equity Loans will prepay at the specified percentages of the
Prepayment Assumption or CPR or at any other constant percentage, or
- the level of one-month LIBOR or six-month LIBOR will remain constant at
the level assumed or at any other level.
Moreover, the diverse remaining terms to maturity of the Home Equity Loans
could produce slower or faster principal distributions than indicated in the
tables at the specified percentages of the Prepayment Assumption or CPR even if
the weighted average remaining term to maturity of the Home Equity Loans is
consistent with the remaining terms to maturity of the Home Equity Loans
specified in the Structuring Assumptions.
PREPAYMENT SCENARIOS I II III IV V VI VII
- -------------------- -------- -------- -------- -------- -------- -------- --------
Group I Home Equity Loans--
Prepayment Assumption.............................. 50% 75% 100% 115% 150% 200% 250%
Group II Home Equity Loans--CPR...................... 12% 18% 24% 28% 36% 50% 60%
S-50
PERCENT OF INITIAL CLASS PRINCIPAL OUTSTANDING (TO MATURITY)
CLASS A-1
--------------------------------------------------------------------------
PREPAYMENT SCENARIO I II III IV V VI VII
- ------------------- -------- -------- -------- -------- -------- -------- --------
Initial Percentage............................. 100% 100% 100% 100% 100% 100% 100%
June 25, 2002.................................. 67 55 44 37 20 0 0
June 25, 2003.................................. 35 11 0 0 0 0 0
June 25, 2004.................................. 6 0 0 0 0 0 0
June 25, 2005.................................. 0 0 0 0 0 0 0
June 25, 2006.................................. 0 0 0 0 0 0 0
June 25, 2007.................................. 0 0 0 0 0 0 0
June 25, 2008.................................. 0 0 0 0 0 0 0
June 25, 2009.................................. 0 0 0 0 0 0 0
June 25, 2010.................................. 0 0 0 0 0 0 0
June 25, 2011.................................. 0 0 0 0 0 0 0
June 25, 2012.................................. 0 0 0 0 0 0 0
June 25, 2013.................................. 0 0 0 0 0 0 0
June 25, 2014.................................. 0 0 0 0 0 0 0
June 25, 2015.................................. 0 0 0 0 0 0 0
June 25, 2016.................................. 0 0 0 0 0 0 0
June 25, 2017.................................. 0 0 0 0 0 0 0
June 25, 2018.................................. 0 0 0 0 0 0 0
June 25, 2019.................................. 0 0 0 0 0 0 0
June 25, 2020.................................. 0 0 0 0 0 0 0
June 25, 2021.................................. 0 0 0 0 0 0 0
June 25, 2022.................................. 0 0 0 0 0 0 0
June 25, 2023.................................. 0 0 0 0 0 0 0
June 25, 2024.................................. 0 0 0 0 0 0 0
June 25, 2025.................................. 0 0 0 0 0 0 0
June 25, 2026.................................. 0 0 0 0 0 0 0
June 25, 2027.................................. 0 0 0 0 0 0 0
June 25, 2028.................................. 0 0 0 0 0 0 0
June 25, 2029.................................. 0 0 0 0 0 0 0
June 25, 2030.................................. 0 0 0 0 0 0 0
June 25, 2031.................................. 0 0 0 0 0 0 0
Weighted Average Life*(1)...................... 1.64 1.22 0.99 0.90 0.75 0.63 0.55
Weighted Average Life*(2)...................... 1.64 1.22 0.99 0.90 0.75 0.63 0.55
- ------------------------
* The weighted average life of an Offered Certificate is determined by
(1) multiplying the amount of each distribution in reduction of the related
Certificate Principal Balance 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 original Certificate
Principal Balance of the Offered Certificate.
(1) To maturity.
(2) To optional termination. The optional termination of the Trust is dependent
on the aggregate outstanding principal balance of the Group I and Group II
Home Equity Loans being reduced to less than 20% of the aggregate
outstanding principal balance of the Group I and Group II Home Equity Loans
on the Cut-Off Date.
S-51
PERCENT OF INITIAL CLASS PRINCIPAL OUTSTANDING (TO MATURITY)
CLASS A-2
--------------------------------------------------------------------------
PREPAYMENT SCENARIO I II III IV V VI VII
- ------------------- -------- -------- -------- -------- -------- -------- --------
Initial Percentage............................. 100% 100% 100% 100% 100% 100% 100%
June 25, 2002.................................. 100 100 100 100 100 92 35
June 25, 2003.................................. 100 100 71 40 0 0 0
June 25, 2004.................................. 100 37 0 0 0 0 0
June 25, 2005.................................. 58 0 0 0 0 0 0
June 25, 2006.................................. 8 0 0 0 0 0 0
June 25, 2007.................................. 0 0 0 0 0 0 0
June 25, 2008.................................. 0 0 0 0 0 0 0
June 25, 2009.................................. 0 0 0 0 0 0 0
June 25, 2010.................................. 0 0 0 0 0 0 0
June 25, 2011.................................. 0 0 0 0 0 0 0
June 25, 2012.................................. 0 0 0 0 0 0 0
June 25, 2013.................................. 0 0 0 0 0 0 0
June 25, 2014.................................. 0 0 0 0 0 0 0
June 25, 2015.................................. 0 0 0 0 0 0 0
June 25, 2016.................................. 0 0 0 0 0 0 0
June 25, 2017.................................. 0 0 0 0 0 0 0
June 25, 2018.................................. 0 0 0 0 0 0 0
June 25, 2019.................................. 0 0 0 0 0 0 0
June 25, 2020.................................. 0 0 0 0 0 0 0
June 25, 2021.................................. 0 0 0 0 0 0 0
June 25, 2022.................................. 0 0 0 0 0 0 0
June 25, 2023.................................. 0 0 0 0 0 0 0
June 25, 2024.................................. 0 0 0 0 0 0 0
June 25, 2025.................................. 0 0 0 0 0 0 0
June 25, 2026.................................. 0 0 0 0 0 0 0
June 25, 2027.................................. 0 0 0 0 0 0 0
June 25, 2028.................................. 0 0 0 0 0 0 0
June 25, 2029.................................. 0 0 0 0 0 0 0
June 25, 2030.................................. 0 0 0 0 0 0 0
June 25, 2031.................................. 0 0 0 0 0 0 0
Weighted Average Life*(1)...................... 4.24 2.93 2.26 2.00 1.58 1.23 1.03
Weighted Average Life*(2)...................... 4.24 2.93 2.26 2.00 1.58 1.23 1.03
- ------------------------
* The weighted average life of an Offered Certificate is determined by
(1) multiplying the amount of each distribution in reduction of the related
Certificate Principal Balance 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 original Certificate
Principal Balance of the Offered Certificate.
(1) To maturity.
(2) To optional termination. The optional termination of the Trust is dependent
on the aggregate outstanding principal balance of the Group I and Group II
Home Equity Loans being reduced to less than 20% of the aggregate
outstanding principal balance of the Group I and Group II Home Equity Loans
on the Cut-Off Date.
S-52
PERCENT OF INITIAL CLASS PRINCIPAL OUTSTANDING (TO MATURITY)
CLASS A-3
--------------------------------------------------------------------------
PREPAYMENT SCENARIO I II III IV V VI VII
- ------------------- -------- -------- -------- -------- -------- -------- --------
Initial Percentage............................. 100% 100% 100% 100% 100% 100% 100%
June 25, 2002.................................. 100 100 100 100 100 100 100
June 25, 2003.................................. 100 100 100 100 73 0 0
June 25, 2004.................................. 100 100 69 32 0 0 0
June 25, 2005.................................. 100 70 21 0 0 0 0
June 25, 2006.................................. 100 34 0 0 0 0 0
June 25, 2007.................................. 68 8 0 0 0 0 0
June 25, 2008.................................. 47 0 0 0 0 0 0
June 25, 2009.................................. 35 0 0 0 0 0 0
June 25, 2010.................................. 22 0 0 0 0 0 0
June 25, 2011.................................. 9 0 0 0 0 0 0
June 25, 2012.................................. 0 0 0 0 0 0 0
June 25, 2013.................................. 0 0 0 0 0 0 0
June 25, 2014.................................. 0 0 0 0 0 0 0
June 25, 2015.................................. 0 0 0 0 0 0 0
June 25, 2016.................................. 0 0 0 0 0 0 0
June 25, 2017.................................. 0 0 0 0 0 0 0
June 25, 2018.................................. 0 0 0 0 0 0 0
June 25, 2019.................................. 0 0 0 0 0 0 0
June 25, 2020.................................. 0 0 0 0 0 0 0
June 25, 2021.................................. 0 0 0 0 0 0 0
June 25, 2022.................................. 0 0 0 0 0 0 0
June 25, 2023.................................. 0 0 0 0 0 0 0
June 25, 2024.................................. 0 0 0 0 0 0 0
June 25, 2025.................................. 0 0 0 0 0 0 0
June 25, 2026.................................. 0 0 0 0 0 0 0
June 25, 2027.................................. 0 0 0 0 0 0 0
June 25, 2028.................................. 0 0 0 0 0 0 0
June 25, 2029.................................. 0 0 0 0 0 0 0
June 25, 2030.................................. 0 0 0 0 0 0 0
June 25, 2031.................................. 0 0 0 0 0 0 0
Weighted Average Life*(1)...................... 7.39 4.72 3.49 3.00 2.24 1.70 1.37
Weighted Average Life*(2)...................... 7.39 4.72 3.49 3.00 2.24 1.70 1.37
- ------------------------
* The weighted average life of an Offered Certificate is determined by
(1) multiplying the amount of each distribution in reduction of the related
Certificate Principal Balance 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 original Certificate
Principal Balance of the Offered Certificate.
(1) To maturity.
(2) To optional termination. The optional termination of the Trust is dependent
on the aggregate outstanding principal balance of the Group I and Group II
Home Equity Loans being reduced to less than 20% of the aggregate
outstanding principal balance of the Group I and Group II Home Equity Loans
on the Cut-Off Date.
S-53
PERCENT OF INITIAL CLASS PRINCIPAL OUTSTANDING (TO MATURITY)
CLASS A-4
--------------------------------------------------------------------------
PREPAYMENT SCENARIO I II III IV V VI VII
- ------------------- -------- -------- -------- -------- -------- -------- --------
Intial Percentage............................ 100% 100% 100% 100% 100% 100% 100%
June 25, 2002................................ 100 100 100 100 100 100 100
June 25, 2003................................ 100 100 100 100 100 79 0
June 25, 2004................................ 100 100 100 100 32 0 0
June 25, 2005................................ 100 100 100 94 16 0 0
June 25, 2006................................ 100 100 79 43 0 0 0
June 25, 2007................................ 100 100 44 12 0 0 0
June 25, 2008................................ 100 81 19 0 0 0 0
June 25, 2009................................ 100 69 7 0 0 0 0
June 25, 2010................................ 100 52 0 0 0 0 0
June 25, 2011................................ 100 27 0 0 0 0 0
June 25, 2012................................ 94 0 0 0 0 0 0
June 25, 2013................................ 75 0 0 0 0 0 0
June 25, 2014................................ 56 0 0 0 0 0 0
June 25, 2015................................ 27 0 0 0 0 0 0
June 25, 2016................................ 0 0 0 0 0 0 0
June 25, 2017................................ 0 0 0 0 0 0 0
June 25, 2018................................ 0 0 0 0 0 0 0
June 25, 2019................................ 0 0 0 0 0 0 0
June 25, 2020................................ 0 0 0 0 0 0 0
June 25, 2021................................ 0 0 0 0 0 0 0
June 25, 2022................................ 0 0 0 0 0 0 0
June 25, 2023................................ 0 0 0 0 0 0 0
June 25, 2024................................ 0 0 0 0 0 0 0
June 25, 2025................................ 0 0 0 0 0 0 0
June 25, 2026................................ 0 0 0 0 0 0 0
June 25, 2027................................ 0 0 0 0 0 0 0
June 25, 2028................................ 0 0 0 0 0 0 0
June 25, 2029................................ 0 0 0 0 0 0 0
June 25, 2030................................ 0 0 0 0 0 0 0
June 25, 2031................................ 0 0 0 0 0 0 0
Weighted Average Life *(1)................... 13.09 8.90 6.09 5.03 3.24 2.21 1.75
Weighted Average Life *(2)................... 12.43 8.39 5.91 5.00 3.24 2.21 1.75
- ------------------------
* The weighted average life of an Offered Certificate is determined by
(1) multiplying the amount of each distribution in reduction of the related
Certificate Principal Balance 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 original Certificate
Principal Balance of the Offered Certificate.
(1) To maturity.
(2) To optional termination. The optional termination of the Trust is dependent
on the aggregate outstanding principal balance of the Group I and Group II
Home Equity Loans being reduced to less than 20% of the aggregate
outstanding principal balance of the Group I and Group II Home Equity Loans
on the Cut-Off Date.
S-54
PERCENT OF INITIAL CLASS PRINCIPAL OUTSTANDING (TO MATURITY)
CLASS A-5
--------------------------------------------------------------------------
PREPAYMENT SCENARIO I II III IV V VI VII
- ------------------- -------- -------- -------- -------- -------- -------- --------
Intial Percentage.......................... 100% 100% 100% 100% 100% 100% 100%
June 25, 2002.............................. 100 100 100 100 100 100 100
June 25, 2003.............................. 100 100 100 100 100 100 51
June 25, 2004.............................. 100 100 100 100 100 0 0
June 25, 2005.............................. 100 100 100 100 100 0 0
June 25, 2006.............................. 100 100 100 100 64 0 0
June 25, 2007.............................. 100 100 100 100 25 0 0
June 25, 2008.............................. 100 100 100 77 7 0 0
June 25, 2009.............................. 100 100 100 60 0 0 0
June 25, 2010.............................. 100 100 68 19 0 0 0
June 25, 2011.............................. 100 100 26 0 0 0 0
June 25, 2012.............................. 100 93 0 0 0 0 0
June 25, 2013.............................. 100 53 0 0 0 0 0
June 25, 2014.............................. 100 17 0 0 0 0 0
June 25, 2015.............................. 100 0 0 0 0 0 0
June 25, 2016.............................. 81 0 0 0 0 0 0
June 25, 2017.............................. 50 0 0 0 0 0 0
June 25, 2018.............................. 22 0 0 0 0 0 0
June 25, 2019.............................. 0 0 0 0 0 0 0
June 25, 2020.............................. 0 0 0 0 0 0 0
June 25, 2021.............................. 0 0 0 0 0 0 0
June 25, 2022.............................. 0 0 0 0 0 0 0
June 25, 2023.............................. 0 0 0 0 0 0 0
June 25, 2024.............................. 0 0 0 0 0 0 0
June 25, 2025.............................. 0 0 0 0 0 0 0
June 25, 2026.............................. 0 0 0 0 0 0 0
June 25, 2027.............................. 0 0 0 0 0 0 0
June 25, 2028.............................. 0 0 0 0 0 0 0
June 25, 2029.............................. 0 0 0 0 0 0 0
June 25, 2030.............................. 0 0 0 0 0 0 0
June 25, 2031.............................. 0 0 0 0 0 0 0
Weighted Average Life *(1)................. 16.14 12.17 9.51 8.17 5.57 2.65 2.07
Weighted Average Life *(2)................. 12.86 9.11 6.94 6.03 4.60 2.65 2.07
- ------------------------
* The weighted average life of an Offered Certificate is determined by
(1) multiplying the amount of each distribution in reduction of the related
Certificate Principal Balance 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 original Certificate
Principal Balance of the Offered Certificate.
(1) To maturity.
(2) To optional termination. The optional termination of the Trust is dependent
on the aggregate outstanding principal balance of the Group I and Group II
Home Equity Loans being reduced to less than 20% of the aggregate
outstanding principal balance of the Group I and Group II Home Equity Loans
on the Cut-Off Date.
S-55
PERCENT OF INITIAL CLASS PRINCIPAL OUTSTANDING (TO MATURITY)
CLASS A-6
--------------------------------------------------------------------------
PREPAYMENT SCENARIO I II III IV V VI VII
- ------------------- -------- -------- -------- -------- -------- -------- --------
Intial Percentage.............................. 100% 100% 100% 100% 100% 100% 100%
June 25, 2002.................................. 100 100 100 100 100 100 100
June 25, 2003.................................. 100 100 100 100 100 100 100
June 25, 2004.................................. 100 100 100 100 100 68 0
June 25, 2005.................................. 93 89 89 90 95 51 0
June 25, 2006.................................. 86 82 80 80 80 0 0
June 25, 2007.................................. 74 71 66 64 47 0 0
June 25, 2008.................................. 65 59 52 42 13 0 0
June 25, 2009.................................. 44 34 16 5 0 0 0
June 25, 2010.................................. 30 19 2 ** 0 0 0
June 25, 2011.................................. 20 8 ** 0 0 0 0
June 25, 2012.................................. 13 2 0 0 0 0 0
June 25, 2013.................................. 9 ** 0 0 0 0 0
June 25, 2014.................................. 6 ** 0 0 0 0 0
June 25, 2015.................................. 2 0 0 0 0 0 0
June 25, 2016.................................. ** 0 0 0 0 0 0
June 25, 2017.................................. ** 0 0 0 0 0 0
June 25, 2018.................................. ** 0 0 0 0 0 0
June 25, 2019.................................. 0 0 0 0 0 0 0
June 25, 2020.................................. 0 0 0 0 0 0 0
June 25, 2021.................................. 0 0 0 0 0 0 0
June 25, 2022.................................. 0 0 0 0 0 0 0
June 25, 2023.................................. 0 0 0 0 0 0 0
June 25, 2024.................................. 0 0 0 0 0 0 0
June 25, 2025.................................. 0 0 0 0 0 0 0
June 25, 2026.................................. 0 0 0 0 0 0 0
June 25, 2027.................................. 0 0 0 0 0 0 0
June 25, 2028.................................. 0 0 0 0 0 0 0
June 25, 2029.................................. 0 0 0 0 0 0 0
June 25, 2030.................................. 0 0 0 0 0 0 0
June 25, 2031.................................. 0 0 0 0 0 0 0
Weighted Average Life *(1)..................... 7.97 7.17 6.59 6.35 5.88 3.88 2.49
Weighted Average Life *(2)..................... 7.90 6.99 6.11 5.57 4.56 3.24 2.47
- ------------------------
* The weighted average life of an Offered Certificate is determined by
(1) multiplying the amount of each distribution in reduction of the related
Certificate Principal Balance 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 original Certificate
Principal Balance of the Offered Certificate.
** Means less than 1% but greater than 0%.
(1) To maturity.
(2) To optional termination. The optional termination of the Trust is dependent
on the aggregate outstanding principal balance of the Group I and Group II
Home Equity Loans being reduced to less than 20% of the aggregate
outstanding principal balance of the Group I and Group II Home Equity Loans
on the Cut-Off Date.
S-56
PERCENT OF INITIAL CLASS PRINCIPAL OUTSTANDING (TO MATURITY)
CLASS A-7
--------------------------------------------------------------------------
PREPAYMENT SCENARIO I II III IV V VI VII
- ------------------- -------- -------- -------- -------- -------- -------- --------
Intial Percentage.............................. 100% 100% 100% 100% 100% 100% 100%
June 25, 2002.................................. 87 82 76 72 64 50 40
June 25, 2003.................................. 77 66 57 51 40 25 16
June 25, 2004.................................. 67 54 43 37 26 12 0
June 25, 2005.................................. 58 44 33 26 16 9 0
June 25, 2006.................................. 51 36 25 19 10 0 0
June 25, 2007.................................. 45 29 18 13 5 0 0
June 25, 2008.................................. 39 24 14 9 1 0 0
June 25, 2009.................................. 34 19 9 4 0 0 0
June 25, 2010.................................. 29 16 5 1 0 0 0
June 25, 2011.................................. 25 12 2 0 0 0 0
June 25, 2012.................................. 22 8 0 0 0 0 0
June 25, 2013.................................. 19 4 0 0 0 0 0
June 25, 2014.................................. 16 1 0 0 0 0 0
June 25, 2015.................................. 12 0 0 0 0 0 0
June 25, 2016.................................. 7 0 0 0 0 0 0
June 25, 2017.................................. 5 0 0 0 0 0 0
June 25, 2018.................................. 2 0 0 0 0 0 0
June 25, 2019.................................. 0 0 0 0 0 0 0
June 25, 2020.................................. 0 0 0 0 0 0 0
June 25, 2021.................................. 0 0 0 0 0 0 0
June 25, 2022.................................. 0 0 0 0 0 0 0
June 25, 2023.................................. 0 0 0 0 0 0 0
June 25, 2024.................................. 0 0 0 0 0 0 0
June 25, 2025.................................. 0 0 0 0 0 0 0
June 25, 2026.................................. 0 0 0 0 0 0 0
June 25, 2027.................................. 0 0 0 0 0 0 0
June 25, 2028.................................. 0 0 0 0 0 0 0
June 25, 2029.................................. 0 0 0 0 0 0 0
June 25, 2030.................................. 0 0 0 0 0 0 0
June 25, 2031.................................. 0 0 0 0 0 0 0
Weighted Average Life *(1)..................... 6.52 4.50 3.36 2.86 2.18 1.48 1.07
Weighted Average Life *(2)..................... 6.14 4.18 3.12 2.65 2.02 1.36 1.05
- ------------------------
* The weighted average life of an Offered Certificate is determined by
(1) multiplying the amount of each distribution in reduction of the related
Certificate Principal Balance 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 original Certificate
Principal Balance of the Offered Certificate.
(1) To maturity.
(2) To optional termination. The optional termination of the Trust is dependent
on the aggregate outstanding principal balance of the Group I and Group II
Home Equity Loans being reduced to less than 20% of the aggregate
outstanding principal balance of the Group I and Group II Home Equity Loans
on the Cut-Off Date.
S-57
PERCENT OF INITIAL CLASS PRINCIPAL OUTSTANDING (TO MATURITY)
CLASS M-1
--------------------------------------------------------------------------
PREPAYMENT SCENARIO I II III IV V VI VII
- ------------------- -------- -------- -------- -------- -------- -------- --------
Intial Percentage............................ 100% 100% 100% 100% 100% 100% 100%
June 25, 2002................................ 100 100 100 100 100 100 100
June 25, 2003................................ 100 100 100 100 100 100 100
June 25, 2004................................ 100 100 100 100 100 100 57
June 25, 2005................................ 100 100 81 70 49 89 0
June 25, 2006................................ 100 85 64 53 33 72 0
June 25, 2007................................ 99 71 50 40 31 13 0
June 25, 2008................................ 87 59 39 34 31 0 0
June 25, 2009................................ 77 49 35 34 9 0 0
June 25, 2010................................ 67 40 35 34 0 0 0
June 25, 2011................................ 59 36 35 14 0 0 0
June 25, 2012................................ 51 36 24 0 0 0 0
June 25, 2013................................ 45 36 0 0 0 0 0
June 25, 2014................................ 39 36 0 0 0 0 0
June 25, 2015................................ 37 19 0 0 0 0 0
June 25, 2016................................ 37 0 0 0 0 0 0
June 25, 2017................................ 37 0 0 0 0 0 0
June 25, 2018................................ 37 0 0 0 0 0 0
June 25, 2019................................ 33 0 0 0 0 0 0
June 25, 2020................................ 5 0 0 0 0 0 0
June 25, 2021................................ 0 0 0 0 0 0 0
June 25, 2022................................ 0 0 0 0 0 0 0
June 25, 2023................................ 0 0 0 0 0 0 0
June 25, 2024................................ 0 0 0 0 0 0 0
June 25, 2025................................ 0 0 0 0 0 0 0
June 25, 2026................................ 0 0 0 0 0 0 0
June 25, 2027................................ 0 0 0 0 0 0 0
June 25, 2028................................ 0 0 0 0 0 0 0
June 25, 2029................................ 0 0 0 0 0 0 0
June 25, 2030................................ 0 0 0 0 0 0 0
June 25, 2031................................ 0 0 0 0 0 0 0
Weighted Average Life *(1)................... 12.68 9.25 7.18 6.30 5.10 5.34 3.12
Weighted Average Life *(2)................... 10.54 7.43 5.66 4.94 4.05 3.36 2.61
- ------------------------
* The weighted average life of an Offered Certificate is determined by
(1) multiplying the amount of each distribution in reduction of the related
Certificate Principal Balance 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 original Certificate
Principal Balance of the Offered Certificate.
(1) To maturity.
(2) To optional termination. The optional termination of the Trust is dependent
on the aggregate outstanding principal balance of the Group I and Group II
Home Equity Loans being reduced to less than 20% of the aggregate
outstanding principal balance of the Group I and Group II Home Equity Loans
on the Cut-Off Date.
S-58
PERCENT OF INITIAL CLASS PRINCIPAL OUTSTANDING (TO MATURITY)
CLASS M-2
--------------------------------------------------------------------------
PREPAYMENT SCENARIO I II III IV V VI VII
- ------------------- -------- -------- -------- -------- -------- -------- --------
Intial Percentage............................ 100% 100% 100% 100% 100% 100% 100%
June 25, 2002................................ 100 100 100 100 100 100 100
June 25, 2003................................ 100 100 100 100 100 100 100
June 25, 2004................................ 100 100 100 100 100 100 100
June 25, 2005................................ 100 100 81 70 49 27 7
June 25, 2006................................ 100 85 64 53 33 26 0
June 25, 2007................................ 99 71 50 40 30 26 0
June 25, 2008................................ 87 59 39 34 30 0 0
June 25, 2009................................ 77 49 34 34 30 0 0
June 25, 2010................................ 67 40 34 34 0 0 0
June 25, 2011................................ 59 36 34 34 0 0 0
June 25, 2012................................ 51 36 34 9 0 0 0
June 25, 2013................................ 45 36 23 0 0 0 0
June 25, 2014................................ 39 36 0 0 0 0 0
June 25, 2015................................ 37 36 0 0 0 0 0
June 25, 2016................................ 31 3 0 0 0 0 0
June 25, 2017................................ 31 0 0 0 0 0 0
June 25, 2018................................ 31 0 0 0 0 0 0
June 25, 2019................................ 31 0 0 0 0 0 0
June 25, 2020................................ 31 0 0 0 0 0 0
June 25, 2021................................ 4 0 0 0 0 0 0
June 25, 2022................................ 0 0 0 0 0 0 0
June 25, 2023................................ 0 0 0 0 0 0 0
June 25, 2024................................ 0 0 0 0 0 0 0
June 25, 2025................................ 0 0 0 0 0 0 0
June 25, 2026................................ 0 0 0 0 0 0 0
June 25, 2027................................ 0 0 0 0 0 0 0
June 25, 2028................................ 0 0 0 0 0 0 0
June 25, 2029................................ 0 0 0 0 0 0 0
June 25, 2030................................ 0 0 0 0 0 0 0
June 25, 2031................................ 0 0 0 0 0 0 0
Weighted Average Life *(1)................... 12.80 9.52 7.48 6.58 5.23 4.39 3.75
Weighted Average Life *(2)................... 10.54 7.43 5.66 4.93 3.97 3.36 2.61
- ------------------------
* The weighted average life of an Offered Certificate is determined by
(1) multiplying the amount of each distribution in reduction of the related
Certificate Principal Balance 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 original Certificate
Principal Balance of the Offered Certificate.
(1) To maturity.
(2) To optional termination. The optional termination of the Trust is dependent
on the aggregate outstanding principal balance of the Group I and Group II
Home Equity Loans being reduced to less than 20% of the aggregate
outstanding principal balance of the Group I and Group II Home Equity Loans
on the Cut-Off Date.
S-59
PERCENT OF INITIAL CLASS PRINCIPAL OUTSTANDING (TO MATURITY)
CLASS B
--------------------------------------------------------------------------
PREPAYMENT SCENARIO I II III IV V VI VII
- ------------------- -------- -------- -------- -------- -------- -------- --------
Intial Percentage............................. 100% 100% 100% 100% 100% 100% 100%
June 25, 2002................................. 100 100 100 100 100 100 100
June 25, 2003................................. 100 100 100 100 100 100 100
June 25, 2004................................. 100 100 100 100 100 100 100
June 25, 2005................................. 100 100 81 70 49 27 100
June 25, 2006................................. 100 85 64 53 33 25 12
June 25, 2007................................. 99 71 50 40 30 25 0
June 25, 2008................................. 87 59 39 33 30 20 0
June 25, 2009................................. 77 49 34 33 30 0 0
June 25, 2010................................. 67 40 34 33 28 0 0
June 25, 2011................................. 59 36 34 33 0 0 0
June 25, 2012................................. 51 36 34 33 0 0 0
June 25, 2013................................. 45 36 34 5 0 0 0
June 25, 2014................................. 39 36 19 0 0 0 0
June 25, 2015................................. 37 36 0 0 0 0 0
June 25, 2016................................. 25 36 0 0 0 0 0
June 25, 2017................................. 25 5 0 0 0 0 0
June 25, 2018................................. 25 0 0 0 0 0 0
June 25, 2019................................. 25 0 0 0 0 0 0
June 25, 2020................................. 25 0 0 0 0 0 0
June 25, 2021................................. 25 0 0 0 0 0 0
June 25, 2022................................. 0 0 0 0 0 0 0
June 25, 2023................................. 0 0 0 0 0 0 0
June 25, 2024................................. 0 0 0 0 0 0 0
June 25, 2025................................. 0 0 0 0 0 0 0
June 25, 2026................................. 0 0 0 0 0 0 0
June 25, 2027................................. 0 0 0 0 0 0 0
June 25, 2028................................. 0 0 0 0 0 0 0
June 25, 2029................................. 0 0 0 0 0 0 0
June 25, 2030................................. 0 0 0 0 0 0 0
June 25, 2031................................. 0 0 0 0 0 0 0
Weighted Average Life *(1).................... 12.74 9.79 7.80 6.84 5.40 4.34 4.62
Weighted Average Life *(2).................... 10.54 7.43 5.66 4.93 3.93 3.31 2.61
- ------------------------
* The weighted average life of an Offered Certificate is determined by
(1) multiplying the amount of each distribution in reduction of the related
Certificate Principal Balance 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 original Certificate
Principal Balance of the Offered Certificate.
(1) To maturity.
(2) To optional termination. The optional termination of the Trust is dependent
on the aggregate outstanding principal balance of the Group I and Group II
Home Equity Loans being reduced to less than 20% of the aggregate
outstanding principal balance of the Group I and Group II Home Equity Loans
on the Cut-Off Date.
The above tables have been prepared based on the assumptions described above
(including the assumptions regarding the characteristics and performance of the
Home Equity Loans, which differ from the actual characteristics and performance
of the Home Equity Loans) and should be read in conjunction with those
assumptions.
S-60
FORMATION OF THE TRUST AND TRUST PROPERTY
The Trust will be created and established pursuant to the Pooling and
Servicing Agreement (the "Agreement") dated as of June 1, 2001 among the
Depositor, CHEC and Harwood Street Funding II, LLC as sellers, CHEC as servicer
(in this capacity, the "Servicer") and Bank One, National Association as trustee
(the "Trustee"). On the Closing Date, the Sellers will transfer without recourse
the Home Equity Loans to the Depositor, the Depositor will convey without
recourse the Home Equity Loans to the Trust and the Trust will issue the Offered
Certificates, the Class X-IO Certificates and the Class R Certificates at the
direction of the Depositor.
The property of the Trust will include all
(a) the Home Equity Loans together with the related Home Equity Loan
documents, each Seller's interest in any Mortgaged Property which secures
a Home Equity Loan, all payments on each Home Equity Loan on or after the
opening of business on June 1, 2001 (the "Cut-Off Date") and proceeds of
the conversion, voluntary or involuntary, of the foregoing,
(b) the amounts as may be held by the Trustee in the Certificate Account and
any other accounts held by the Trustee for the Trust together with
investment earnings on those amounts, and the amounts as may be held by
the Servicer in the Principal and Interest Account, if any, inclusive of
investment earnings on those amounts whether in the form of cash,
instruments, securities or other properties, and
(c) proceeds of all the foregoing (including, but not by way of limitation,
all proceeds of any mortgage insurance, hazard insurance and title
insurance policy relating to the Home Equity Loans, cash proceeds,
accounts, accounts receivable, notes, drafts, acceptances, chattel paper,
checks, deposit accounts, rights to payment of any and every kind, and
other forms of obligations and receivables which at any time constitute
all or part of or are included in the proceeds of any of the foregoing)
to pay the Certificates as specified in the Agreement.
As described in the Agreement, the Trustee and the Servicer shall each receive
specified investment earnings on amounts on deposit in the Certificate Account
as additional compensation and the Servicer shall receive any investment
earnings on amounts on deposit in the Principal and Interest Account.
The Offered Certificates will not represent an interest in or an obligation
of, nor will the Home Equity Loans be guaranteed by, the Depositor, the Sellers,
the Servicer, the Trustee or any of their affiliates.
Prior to the Closing Date, the Trust will have had no assets or obligations.
Upon formation, the Trust will not engage in any business activity other than
acquiring, holding and collecting payments on the Home Equity Loans, issuing the
Certificates and distributing payments on the Certificates. The Trust will not
acquire any receivables or assets other than the Home Equity Loans and their
proceeds and rights appurtenant to them. To the extent that borrowers make
scheduled payments under the Home Equity Loans, the Trust will have sufficient
liquidity to make distributions on the Certificates. As the Trust does not have
any operating history and will not engage in any business activity other than
issuing the Certificates and making distributions on the Certificates, there has
not been included any historical or pro forma ratio of earnings to fixed charges
with respect to the Trust.
DESCRIPTION OF THE CERTIFICATES
Pursuant to the Agreement the Trust will issue on the Closing Date the
Centex Home Equity Loan Asset-Backed Certificates, Series 2001-B, Class A-1
Certificates, Class A-2 Certificates, Class A-3 Certificates, Class A-4
Certificates, Class A-5 Certificates, Class A-6 Certificates, Class A-7
Certificates, Class M-1 Certificates, Class M-2 Certificates and Class B
Certificates (collectively referred to as the "Offered Certificates"). The Trust
will also issue on the Closing Date the Class X-IO Certificates (the
S-61
"Class X-IO Certificates") and two residual classes of certificates (together,
the "Class R Certificates," and together with the Class X-IO Certificates, the
"Non-Offered Certificates" and together with the Offered Certificates, the
"Certificates"). Only the Offered Certificates are being offered pursuant to
this Prospectus Supplement. The Class A-1 Certificates, Class A-2 Certificates,
Class A-3 Certificates, Class A-4 Certificates, Class A-5 Certificates,
Class A-6 Certificates and Class A-7 Certificates are sometimes referred to as
the "Senior Certificates" and the Class M-1 Certificates, Class M-2 Certificates
and Class B Certificates are sometimes referred to as the "Subordinate
Certificates." The Class A-1 Certificates, Class A-2 Certificates, Class A-3
Certificates, Class A-4 Certificates, Class A-5 Certificates, Class A-6
Certificates, Class M-1 Certificates, Class M-2 Certificates and Class B
Certificates are sometimes referred to as the "Fixed Rate Certificates". The
Class A-7 Certificates are sometimes referred to as the "Variable Rate
Certificates" or the "Group II Certificates". The Senior Certificates, other
than the Class A-7 Certificates, are sometimes referred to as the "Group I
Certificates." Each of the Group I Certificates and the Group II Certificates is
sometimes referred to as a "Certificate Group." The form of the Agreement has
been filed as an exhibit to the Registration Statement of which this Prospectus
Supplement and the Prospectus are a part. The following summaries describe
important provisions of the Agreement. The summaries do not purport to be
complete and are subject to, and are qualified in their entirety by reference
to, all of the provisions of the Agreement. Wherever particular sections or
defined terms of the Agreement are referred to, the sections or defined terms
are incorporated in this Prospectus Supplement by reference.
The Offered Certificates will be issued in denominations of $25,000 and
multiples of $1,000 in excess of $25,000 and will evidence specified undivided
interests in the Trust. Definitive Certificates (as defined below) will be
transferable and exchangeable at the corporate trust office of the Trustee,
which will initially act as Certificate Registrar.
WE REFER YOU TO "--BOOK-ENTRY CERTIFICATES" BELOW FOR MORE DETAIL.
No service charge will be made for any registration of exchange or transfer
of Certificates, but the Trustee may require payment of a sum sufficient to
cover any tax or other governmental charge.
The principal amount of a class of Offered Certificates (each, a
"Certificate Principal Balance") on any Distribution Date is equal to the
aggregate outstanding principal balance of the class of Offered Certificates on
the Closing Date minus the aggregate of amounts actually distributed as
principal to the holders of the class of Offered Certificates and, in the case
of the Subordinate Certificates, minus any reductions in the Certificate
Principal Balance of such Subordinate Certificates due to Realized Losses as
described in this Prospectus Supplement. On any date, the "Aggregate Certificate
Principal Balance" is the aggregate of the Certificate Principal Balances of all
Offered Certificates on that date.
Each class of Offered Certificates represents the right to receive payments
of interest at the Certificate Rate for that class and payments of principal as
described below.
The person in whose name a Certificate is registered in the Certificate
Register is referred to in this Prospectus Supplement as a "Certificateholder."
BOOK-ENTRY CERTIFICATES
The Offered Certificates initially will be book-entry certificates (the
"Book-Entry Certificates"). Persons acquiring beneficial ownership interests in
the Offered Certificates ("Certificateowners") will
S-62
hold the certificates through The Depository Trust Company ("DTC"), in the
United States, or Clearstream Banking, societe anonyme ("Clearstream,
Luxembourg") or the Euroclear System ("Euroclear"), in Europe, if the
Certificateowners are participants of the systems, or indirectly through
organizations that are participants in the systems. The Book-Entry Certificates
will be issued in one or more certificates per class, representing the aggregate
principal balance of each class of Offered Certificates, and will initially be
registered in the name of Cede & Co. ("Cede"), the nominee of DTC. Euroclear and
Clearstream, Luxembourg will hold omnibus positions on behalf of their
participants through customers' securities accounts in Euroclear's and
Clearstream, Luxembourg'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 N.A. will act as depositary
for Clearstream, Luxembourg and Morgan Guaranty Trust Company of New York will
act as depositary for Euroclear. Investors may hold beneficial interests in the
Book-Entry Certificates in minimum denominations representing principal balances
of $25,000 and in integral multiples of $1,000 in excess of $25,000. Except as
described in the Prospectus, no person acquiring a Book-Entry Certificate will
be entitled to receive a physical certificate representing the Certificate (a
"Definitive Certificate"). Unless and until Definitive Certificates are issued,
it is anticipated that the only "Certificateholder" of the Offered Certificates
will be Cede, as nominee of DTC. Certificateowners will not be
Certificateholders as that term is used in the Agreement. Certificateowners are
permitted to exercise their rights only indirectly through DTC and its
participants (including Euroclear and Clearstream, Luxembourg).
WE REFER YOU TO "DESCRIPTION OF THE SECURITIES--BOOK ENTRY SECURITIES" IN
THE PROSPECTUS FOR MORE DETAIL.
DISTRIBUTION DATES
On the 25th day of each month, or if the 25th day is not a Business Day,
then the next succeeding Business Day (each, a "Distribution Date"), the Trustee
will distribute amounts then on deposit in the certificate account established
and maintained by the Trustee in accordance with the Agreement (the "Certificate
Account"). Distributions will be made in immediately available funds to
Certificateholders of Offered Certificates by wire transfer or otherwise, to the
account of the Certificateholder at a domestic bank or other entity having
appropriate facilities therefor, if the Certificateholder has so notified the
Trustee at least five Business Days prior to the Record Date, or by check mailed
to the address of the person entitled to the distributions as it appears on the
register (the "Certificate Register") maintained by the Trustee as registrar
(the "Certificate Registrar"). Certificateholders may experience some delay in
the receipt of their payments due to the operations of DTC.
WE REFER YOU TO "--BOOK-ENTRY CERTIFICATES" ABOVE FOR MORE DETAIL.
The Agreement will provide that a Certificateholder, upon receiving the
final distribution on a Certificate, will be required to send the Certificate to
the Trustee. The Agreement additionally will provide that, in any event, any
Certificate as to which the final distribution on that Certificate has been made
shall be deemed canceled for all purposes of the Agreement.
GLOSSARY
"AGGREGATE PRINCIPAL AMOUNT" means as to any Distribution Date, the sum of
the Basic Principal Amount for each Home Equity Loan Group.
The "BASIC PRINCIPAL AMOUNT" with respect to the related Home Equity Loan
Group and each Distribution Date shall be the sum of (without duplication):
(A) the principal portion of all scheduled monthly payments on the Home
Equity Loans related to the Home Equity Loan Group actually received by
the Servicer during the related Remittance Period and any prepayments on
the Home Equity Loans made by the mortgagors of Home
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Equity Loans in the related Home Equity Loan Group and actually received
by the Servicer during the related Remittance Period, in each case to the
extent the amounts are received by the Trustee on or prior to the Monthly
Remittance Date;
(B) the outstanding principal balance of each Home Equity Loan in the
related Home Equity Loan Group that was purchased or repurchased by CHEC
or purchased by the Servicer, other than in the case of any purchase by
the Servicer pursuant to the limited purchase option, the amount of any
premium related thereto, on or prior to the related Monthly Remittance
Date, in each case to the extent the amounts are received by the Trustee
on or prior to the Monthly Remittance Date;
(C) any Substitution Amounts (as defined in the Prospectus) relating to
principal, delivered by CHEC on the related Monthly Remittance Date in
connection with a substitution of a Home Equity Loan in the related Home
Equity Loan Group, in each case to the extent the amounts are received by
the Trustee on or prior to the Monthly Remittance Date;
(D) all Net Liquidation Proceeds (as defined in the Prospectus) actually
collected by or on behalf of the Servicer with respect to the Home Equity
Loans in the related Home Equity Loan Group during the related Remittance
Period (to the extent the Net Liquidation Proceeds relate to principal),
in each case to the extent the amounts are received by the Trustee on or
prior to the Monthly Remittance Date; and
(E) the principal portion of the proceeds received by the Trustee with
respect to the related Home Equity Loan Group upon termination of the
Trust (to the extent the proceeds relate to principal).
"BUSINESS DAY" means any day other than (1) a Saturday or Sunday or (2) a
day on which banking institutions in New York, New York, Dallas, Texas or the
city in which the corporate trust office of the Trustee is located are
authorized or obligated by law or executive order to be closed.
The "CLASS A-6 CALCULATION PERCENTAGE" for any Distribution Date will be the
fraction, expressed as a percentage, the numerator of which is the Certificate
Principal Balance of the Class A-6 Certificates and the denominator of which is
the total of the Certificate Principal Balances of all of the Group I
Certificates, in each case before giving effect to distributions of principal on
that Distribution Date.
The "CLASS A-6 LOCKOUT DISTRIBUTION AMOUNT" for any Distribution Date will
be an amount equal to the product of (1) the applicable Class A-6 Lockout
Percentage for the Distribution Date, (2) the Class A-6 Calculation Percentage
and (3) the Group I Principal Distribution Amount for the Distribution Date. In
no event shall the Class A-6 Lockout Distribution Amount exceed the outstanding
Certificate Principal Balance of the Class A-6 Certificates or the Group I
Principal Distribution Amount for the Distribution Date.
The "CLASS A-6 LOCKOUT PERCENTAGE" for each Distribution Date will be as
follows:
DISTRIBUTION DATE LOCKOUT PERCENTAGE
- ----------------- ------------------
July 2001 through June 2004................................. 0%
July 2004 through June 2006................................. 45%
July 2006 through June 2007................................. 80%
July 2007 through June 2008................................. 100%
July 2008 and thereafter.................................... 300%
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"CLASS B PRINCIPAL DISTRIBUTION AMOUNT" means with respect to any
Distribution Date on or after the Stepdown Date and as long as, a Trigger Event
is not in effect, the excess of:
(1) the sum of
(A) the aggregate Certificate Principal Balances of the Senior
Certificates, after taking into account distribution of the Senior
Principal Distribution Amount for the applicable Distribution Date,
(B) the Certificate Principal Balance of the Class M-1 Certificates,
after taking into account distribution of the Class M-1 Principal
Distribution Amount for the applicable Distribution Date,
(C) the Certificate Principal Balance of the Class M-2 Certificates,
after taking into account distribution of the Class M-2 Principal
Distribution Amount for the applicable Distribution Date, and
(D) the Certificate Principal Balance of the Class B Certificates
immediately prior to the applicable Distribution Date,
over (2) the lesser of
(A) 96% of the aggregate loan balance of the Home Equity Loans as of the
last day of the related Remittance Period, and
(B) the aggregate loan balance of the Home Equity Loans as of the last
day of the related Remittance Period minus the OC Floor,
; provided, however, that after the Certificate Principal Balances of the
Senior, Class M-1 and Class M-2 Certificates are reduced to zero, the Class B
Principal Distribution Amount for the applicable Distribution Date will equal
100% of the Principal Distribution Amount.
"CLASS INTEREST CARRYOVER SHORTFALL" means, with respect to any class of
Offered Certificates and any Distribution Date, an amount equal to the sum of
(1) the excess of the related Class Monthly Interest Amount for the preceding
Distribution Date and any outstanding Class Interest Carryover Shortfall with
respect to that class from any preceding Distribution Date, over the amount in
respect of interest that is actually distributed to the Certificateholders of
that class on the preceding Distribution Date plus (2) one month's interest on
the excess, to the extent permitted by law, at the Certificate Rate.
"CLASS M-1 PRINCIPAL DISTRIBUTION AMOUNT" means, with respect to any
Distribution Date on or after the Stepdown Date, (x) 100% of the Principal
Distribution Amount if the Certificate Principal Balance of each class of Senior
Certificates has been reduced to zero and a Trigger Event exists, or (y) if a
Trigger Event is not in effect, the excess of:
(1) the sum of:
(A) the aggregate Certificate Principal Balances of the Senior
Certificates, after taking into account distribution of the Senior
Principal Distribution Amount for the applicable Distribution Date,
and
(B) the Certificate Principal Balance of the Class M-1 Certificates
immediately prior to the applicable Distribution Date,
over (2) the lesser of:
(A) 79% of the aggregate loan balance of the Home Equity Loans as of the
last day of the related Remittance Period, and
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(B) the aggregate loan balance of the Home Equity Loans as of the last
day of the related Remittance Period minus the OC Floor.
"CLASS M-2 PRINCIPAL DISTRIBUTION AMOUNT" means, with respect to any
Distribution Date on or after the Stepdown Date, (x) 100% of the Principal
Distribution Amount if the aggregate Certificate Principal Balance of each of
the Senior and Class M-1 Certificates has been reduced to zero and a Trigger
Event exists, or (y) if a Trigger Event is not in effect, the excess of:
(1) the sum of:
(A) the aggregate Certificate Principal Balances of the Senior
Certificates, after taking into account distribution of the Senior
Principal Distribution Amount for the applicable Distribution Date,
(B) the Certificate Principal Balance of the Class M-1 Certificates,
after taking into account distribution of the Class M-1 Principal
Distribution Amount for the applicable Distribution Date, and
(C) the Certificate Principal Balance of the Class M-2 Certificates
immediately prior to the applicable Distribution Date,
over (2) the lesser of:
(A) 88% of the aggregate loan balance of the Home Equity Loans as of the
last day of the related Remittance Period and
(B) the aggregate loan balance of the Home Equity Loans as of the last
day of the related Remittance Period minus the OC Floor.
"CLASS MONTHLY INTEREST AMOUNT" with respect to each class of Offered
Certificates means, with respect to any Distribution Date, the aggregate amount
of interest accrued for the related Interest Period at the related Certificate
Rate on the Certificate Principal Balance of the related Offered Certificates
provided, however, that with respect to each class of Offered Certificates, such
amount will be reduced by the class' pro rata share of any shortfalls resulting
from the application of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended ("Civil Relief Act Interest Shortfalls") during the related Remittance
Period.
The Class A-7 Certificates are subject to the Class A-7 Available Funds Cap
and the Class A-5 and Subordinate Certificates are each subject to the Fixed
Rate Interest Rate Cap. For a description of the respective Certificate Rates,
the Class A-7 Available Funds Cap and the Fixed Rate Interest Rate Cap, see
"--Certificate Rate" below.
"CLASS PRINCIPAL CARRYOVER SHORTFALL" means, with respect to any class of
Subordinate Certificates and any Distribution Date, the excess, if any, of
(1) the sum of (x) the amount of the reduction in the Certificate Principal
Balance of that class of Subordinate Certificates on the applicable Distribution
Date as provided under "--Allocation of Realized Losses" below and (y) the
amount of any such reductions on prior Distribution Dates over (2) the amount
distributed in respect of the related Class Principal Carryover Shortfall to
such class on prior Distribution Dates.
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"DELINQUENCY AMOUNT" means, with respect to any Distribution Date, the sum,
without duplication, of the aggregate principal balance of the Home Equity Loans
that are (1) 60 or more days delinquent, (2) 60 or more days delinquent and in
bankruptcy, (3) in foreclosure and (4) REO properties, each as of the last day
of the related Remittance Period.
"DELINQUENCY EVENT" means, a Delinquency Event shall have occurred and be
continuing, if at any time, (1) the three month rolling average of the
percentage equivalent of a fraction, the numerator of which is the Delinquency
Amount and the denominator of which is the aggregate loan balance of the Home
Equity Loans as of the last day of the related Remittance Period exceeds
(2) 50% of the Senior Enhancement Percentage.
"EXCESS INTEREST" with respect to any Distribution Date, means the amounts
remaining, if any, after the application of payments pursuant to clauses 1
through 6 of clause C. under "--Distributions" below.
"EXCESS OVERCOLLATERALIZATION AMOUNT" means, with respect to any
Distribution Date, the lesser of (1) the Aggregate Principal Amount for the
applicable Distribution Date and (2) the excess, if any, of (x) the
Overcollateralization Amount, assuming 100% of the Aggregate Principal Amount is
distributed on the Offered Certificates, over (y) the Required
Overcollateralization Amount.
"GROUP I PRINCIPAL DISTRIBUTION AMOUNT" means, with respect to any
Distribution Date, the excess of (1) the Senior Principal Distribution Amount
for the applicable Distribution Date over (2) the Group II Principal
Distribution Amount for the applicable Distribution Date.
"GROUP II PRINCIPAL DISTRIBUTION AMOUNT" means, with respect to any
Distribution Date, the lesser of (A) the greater of (1) the product of (x) the
Senior Principal Distribution Amount for the applicable Distribution Date and
(y) a fraction, the numerator of which is the outstanding loan balance of the
Group II Home Equity Loans as of the last day of the related Remittance Period,
and the denominator of which is the aggregate loan balance of the Home Equity
Loans as of the last day of the related Remittance Period, and (2) the excess,
if any, of (x) the Certificate Principal Balance of the Class A-7 Certificates
immediately prior to that Distribution Date over (y) the aggregate loan balance
of the Home Equity Loans in Group II as of the last day of the related
Remittance Period or (B) the Senior Principal Distribution Amount.
"MONTHLY REMITTANCE DATE" means the 18th day of each month, or if the 18th
day is not a Business Day, the preceding Business Day. On each Monthly
Remittance Date, the Servicer will be required to transfer funds on deposit in
the Principal and Interest Account to the Certificate Account.
"OC FLOOR" means an amount equal to 0.50% of the aggregate loan balance of
the Home Equity Loans as of the Cut-Off Date.
"OVERCOLLATERALIZATION AMOUNT" means, with respect to each Distribution
Date, the excess, if any, of (1) the aggregate loan balance of the Home Equity
Loans as of the close of business on the last day of the preceding Remittance
Period over (2) the Aggregate Certificate Principal Balance as of the
Distribution Date (after taking into account the payment of the Principal
Distribution Amount on the Distribution Date).
"PERCENTAGE INTEREST" means as to any Offered Certificate and any date of
determination, the percentage obtained by dividing the Certificate Principal
Balance for the related class of Offered Certificates as of the Closing Date by
the Aggregate Certificate Principal Balance as of the Closing Date.
"PRINCIPAL DISTRIBUTION AMOUNT" means, with respect to any Distribution
Date, the lesser of (1) the Aggregate Certificate Principal Balance immediately
preceding the Distribution Date and (2) the sum of (x) the Aggregate Principal
Amount for the applicable Distribution Date minus the Excess
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Overcollateralization Amount for the applicable Distribution Date and (y) the
Subordination Increase Amount for the applicable Distribution Date.
"RECORD DATE" means (1) with respect to any Distribution Date and each class
of Fixed Rate Certificates, the last Business Day of the month immediately
preceding the calendar month in which the Distribution Date occurs and (2) with
respect to any Distribution Date and the Variable Rate Certificates, the
Business Day immediately preceding the Distribution Date, or if Definitive
Certificates have been issued, the last Business Day of the month immediately
preceding the calendar month in which the Distribution Date occurs.
"REMITTANCE PERIOD" means, with respect to any Distribution Date, the
calendar month preceding the calendar month in which the Distribution Date
occurs.
"REQUIRED OVERCOLLATERALIZATION AMOUNT" means, with respect to the first
four Distribution Dates, zero and as to any subsequent Distribution Date
(1) prior to the Stepdown Date, the product of (x) 2.00% and (y) the aggregate
loan balance of the Home Equity Loans as of the Cut-off Date; and (2) on and
after the Stepdown Date, the greater of (i) the lesser of (x) the product of
2.00% and the aggregate loan balance of the Home Equity Loans as of the Cut-off
Date and (y) the product of 4.00% and the aggregate loan balance of the Home
Equity Loans as of the end of the related Remittance Period and (ii) the OC
Floor.
"SENIOR ENHANCEMENT PERCENTAGE" means, with respect to any Distribution
Date, the percentage equivalent of a fraction, the numerator of which is the sum
of (1) the aggregate Certificate Principal Balances of the Subordinate
Certificates and (2) the Overcollateralization Amount, in each case, after
taking into account the distribution of the Principal Distribution Amount on the
applicable Distribution Date, and the denominator of which is the aggregate loan
balance of the Home Equity Loans as of the last day of the related Remittance
Period.
"SENIOR PRINCIPAL DISTRIBUTION AMOUNT" means, with respect to (a) any
Distribution Date prior to the Stepdown Date or during the continuation of a
Trigger Event, the lesser of (1) 100% of the Principal Distribution Amount and
(2) the aggregate Certificate Principal Balances of the Senior Certificates
immediately prior to the Distribution Date, and (b) any other Distribution Date,
the lesser of (1) the Principal Distribution Amount and (2) the excess, if any,
of (x) the aggregate Certificate Principal Balances of the Senior Certificates
immediately prior to the applicable Distribution Date over (y) the lesser of
(A) 67% of the aggregate loan balance of the Home Equity Loans as of the last
day of the related Remittance Period and (B) the aggregate loan balance of the
Home Equity Loans as of the last day of the related Remittance Period minus the
OC Floor.
"STEPDOWN DATE": means, the later to occur of (1) the earlier to occur of
(A) the Distribution Date in July 2004 and (B) the Distribution Date on which
the aggregate Certificate Principal Balances of the Senior Certificates is
reduced to zero, and (2) the first Distribution Date on which the Senior
Enhancement Percentage, after giving effect to the distribution of the Principal
Distribution Amount on that Distribution Date, is at least equal to 33%.
"SUBORDINATION DEFICIENCY" means, with respect to any Distribution Date, the
excess, if any, of (1) the Required Overcollateralization Amount for the
applicable Distribution Date over (2) the Overcollateralization Amount for that
Distribution Date after giving effect to the distribution of the Principal
Distribution Amount on that Distribution Date.
"SUBORDINATION INCREASE AMOUNT" means, with respect to the first four
Distribution Date(s), zero and as to any subsequent Distribution Date, the
lesser of (1) the Subordination Deficiency and (2) the Excess Interest.
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"TRANSITION EXPENSES" means expenses incurred by the Trustee in connection
with the transfer of servicing upon the termination of the Servicer; provided
that the amount shall not exceed $50,000 in any one calendar year (and no more
than $100,000 in the aggregate).
"TRIGGER EVENT" means the existence of a Delinquency Event.
DISTRIBUTIONS
The Trustee will be required to deposit into the Certificate Account:
- the proceeds of any liquidation of the assets of the Trust,
- all collections on the Home Equity Loans received during the related
Remittance Period and remitted by the Servicer to the Trustee, and
- all other remittances made to the Trustee by or on behalf of the Sellers
or the Servicer.
The Agreement establishes a certificate rate on each class of Offered
Certificates (each, a "Certificate Rate") as set forth in this Prospectus
Supplement under "--Certificate Rate." The Agreement also establishes an
"Expense Fee" for any Distribution Date equal to the Trustee Fee on the
Distribution Date.
On each Distribution Date, the Trustee will make the following disbursements
and transfers from monies then on deposit in the Certificate Account with
respect to the Home Equity Loans and apply the amounts in the following order of
priority, in each case, to the extent of funds remaining:
A. With respect to funds in the Certificate Account received with respect to
Home Equity Loan Group I
1. To the Trustee, the Trustee Fee and any Transition Expenses for
Home Equity Loan Group I.
2. Concurrently, to each class of Group I Certificates, the related
Class Monthly Interest Amount and any related Class Interest
Carryover Shortfall for the Distribution Date, allocated among each
such class of Group I Certificates on a pro rata basis based on
each Group I Certificate's Class Monthly Interest Amount and Class
Interest Carryover Shortfall without priority among such Group I
Certificates.
3. The remaining amount pursuant to clause C. below.
B. With respect to funds in the Certificate Account received with respect
to Home Equity Loan Group II
1. To the Trustee, the Trustee Fee and any Transition Expenses for
Home Equity Loan Group II.
2. To the Class A-7 Certificates, the related Class Monthly Interest
Amount and any related Class Interest Carryover Shortfall for the
Distribution Date.
3. The remaining amount pursuant to clause C. below.
C. With respect to any remaining amounts in the Certificate Account
received with respect to Home Equity Loan Group I and Home Equity Loan
Group II
1. Concurrently, to the Senior Certificates in both Certificate
Groups, the related Class Monthly Interest Amount and any related
Class Interest Carryover Shortfall to the extent not paid pursuant
to clauses A. and B. above on the applicable Distribution Date,
allocated among each such class of Senior Certificates on a pro
rata basis based on the
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amount that would have been distributed to each such class in the
absence of such shortfall.
2. Sequentially, to the Class M-1, Class M-2 and Class B Certificates,
in that order, the related Class Monthly Interest Amount for the
Distribution Date.
3. To the Senior Certificates, an amount up to the Senior Principal
Distribution Amount for the Distribution Date, excluding any
Subordination Increase Amount included in that amount, concurrently
as follows:
(i) To the Group I Certificates, the Group I Principal Distribution
Amount allocated in the following order of priority:
- To the Class A-6 Certificates, an amount equal to the
Class A-6 Lockout Distribution Amount; and
- Sequentially, to the Class A-1, Class A-2, Class A-3,
Class A-4, Class A-5, and Class A-6 Certificates, in that
order, until the respective Certificate Principal Balances of
such Certificates have been reduced to zero.
(ii) To the Group II Certificates, the Group II Principal
Distribution Amount until the Certificate Principal Balance of
such Certificates has been reduced to zero.
4. To the Class M-1 Certificates, the Class M-1 Principal Distribution
Amount for the Distribution Date, excluding any Subordination
Increase Amount included in that amount, until the Certificate
Principal Balance thereof is reduced to zero.
5. To the Class M-2 Certificates, the Class M-2 Principal Distribution
Amount for the Distribution Date, excluding any Subordination
Increase Amount included in that amount, until the Certificate
Principal Balance thereof is reduced to zero.
6. To the Class B Certificates, the Class B Principal Distribution
Amount for the Distribution Date, excluding any Subordination
Increase Amount included in that amount, until the Certificate
Principal Balance thereof is reduced to zero.
7. To the Offered Certificates, the Subordination Increase Amount for
the applicable Distribution Date, allocated in the order of
priority set forth in clauses 3 through 6 of clause C, above.
8. To the Class M-1 Certificates, (a) any related Class Interest
Carryover Shortfall and then (b) any related Class Principal
Carryover Shortfall.
9. To the Class M-2 Certificates, (a) any related Class Interest
Carryover Shortfall and then (b) any related Class Principal
Carryover Shortfall.
10. To the Class B Certificates, (a) any related Class Interest
Carryover Shortfall and then (b) any related Class Principal
Carryover Shortfall.
11. To the Class X-IO Certificates for deposit to the Supplemental
Interest Reserve Fund for distribution in accordance with
priorities 12 and 13.
12. To the Class A-7 Certificates, the amount of any Class A-7 Interest
Index Carryover from the Supplemental Interest Reserve Fund.
13. Sequentially, to the Class A-5, Class M-1, Class M-2 and Class B
Certificates, in that order, the related Net Rate Cap Carryover
from the Supplemental Interest Reserve Fund.
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14. To the Trustee as reimbursement for all reimbursable expenses
incurred in connection with its duties and obligations under the
Agreement to the extent not paid as Transition Expenses pursuant to
clauses A.1 and B.1 above.
15. To the Servicer to the extent of any unreimbursed Delinquency
Advances (as defined in the Prospectus), unreimbursed Servicing
Advances (as defined in the Prospectus) and unreimbursed
Compensating Interest (as defined in the Prospectus).
16. To the Non-Offered Certificates, the remainder.
CERTIFICATE RATE
With respect to any Distribution Date and the Class A-1 Certificates, the
"Certificate Rate" will equal 4.93% per annum.
With respect to any Distribution Date and the Class A-2 Certificates, the
"Certificate Rate" will equal 5.35% per annum.
With respect to any Distribution Date and the Class A-3 Certificates, the
"Certificate Rate" will equal 5.77% per annum.
With respect to any Distribution Date and the Class A-4 Certificates, the
"Certificate Rate" will equal 6.41% per annum.
With respect to any Distribution Date and the Class A-5 Certificates, the
"Certificate Rate" will equal the lesser of (A) 6.83% per annum (or 7.33% per
annum for each Interest Period occurring after the date on which an affiliate of
the Servicer first fails to exercise its clean-up call option) and (B) the Fixed
Rate Interest Rate Cap for the Distribution Date.
With respect to any Distribution Date and the Class A-6 Certificates, the
"Certificate Rate" will equal 6.36% per annum.
With respect to any Distribution Date and the Class A-7 Certificates, the
"Certificate Rate" will equal the lesser of (A) the Class A-7 Formula Rate and
(B) the Class A-7 Available Funds Cap for the Distribution Date.
With respect to any Distribution Date and the Class M-1 Certificates, the
"Certificate Rate" will equal the lesser of (A) 6.92% per annum (or 7.42% per
annum for each Interest Period occurring after the date on which an affiliate of
the Servicer first fails to exercise its clean-up call option) and (B) the Fixed
Rate Interest Rate Cap for the Distribution Date.
With respect to any Distribution Date and the Class M-2 Certificates, the
"Certificate Rate" will equal the lesser of (A) 7.36% per annum (or 7.86% per
annum for each Interest Period occurring after the date on which an affiliate of
the Servicer first fails to exercise its clean-up call option) and (B) the Fixed
Rate Interest Rate Cap for the Distribution Date.
With respect to any Distribution Date and the Class B Certificates, the
"Certificate Rate" will equal the lesser of (A) 7.81%per annum (or 8.31% per
annum for each Interest Period occurring after the date on which an affiliate of
the Servicer first fails to exercise its clean-up call option) and (B) the Fixed
Rate Interest Rate Cap for the Distribution Date.
The "Class A-7 Formula Rate" for any Distribution Date is the sum of
(1) One-Month LIBOR and (2) 0.23% per annum (or 0.46% per annum for each
Interest Period occurring after the date on which an affiliate of the Servicer
first fails to exercise its clean-up call option).
The "Class A-7 Available Funds Cap" with respect to any Interest Period and
the related Distribution Date will be the rate per annum equal to the product of
(a) the weighted average of the Net Coupon Rates on the Group II Home Equity
Loans as of the beginning of the related Remittance Period and (b) the fraction,
the numerator of which is 30 and denominator is the number of days in the
related Interest Period.
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The "Fixed Rate Interest Rate Cap" with respect to any Distribution Date
will be a rate per annum equal to the lesser of (x) the weighted average of the
Net Coupon Rates on the Group I Home Equity Loans as of the beginning of the
related Remittance Period and (y) the weighted average of the Net Coupon Rates
on the Home Equity Loans in the aggregate as of the beginning of the related
Remittance Period.
The "Net Coupon Rate" of any Group I Home Equity Loan or Group II Home
Equity Loan will be the rate per annum equal to the coupon rate of the Home
Equity Loan minus the sum of (1) the rate at which the Servicing Fee accrues and
(2) the rate at which the Trustee Fee accrues (expressed as a per annum
percentage of the aggregate principal balance of the Group I or Group II Home
Equity Loans, as applicable).
If on any Distribution Date the Certificate Rate for the Class A-5
Certificates, Class M-1 Certificates, the Class M-2 Certificates or the Class B
Certificates is based on the Fixed Rate Interest Rate Cap, the related
Certificateholders will be entitled to receive on subsequent Distribution Dates
the related Net Rate Cap Carryover as described under "--Distributions" above.
If on any Distribution Date the Certificate Rate for the Class A-7
Certificates is based on the Class A-7 Available Funds Cap, the Class A-7
Certificateholders will be entitled to receive on subsequent Distribution Dates
the Class A-7 Certificateholders' Interest Index Carryover as described under
"--Distributions" above.
The "Net Rate Cap Carryover" is equal to the sum of (A) the excess of
(1) the amount of interest that the Class A-5, Class M-1, Class M-2 or Class B
Certificates, as applicable, would otherwise be entitled to receive on the
Distribution Date had its interest rate been calculated at the respective
Certificate Rate for such Class and for the Distribution Date without regard to
the Fixed Rate Interest Rate Cap over (2) the amount of interest payable on such
Class at the Fixed Rate Interest Rate Cap for the Distribution Date and (B) the
Net Rate Cap Carryover for all previous Distribution Dates not previously paid
to the related Class of Certificates (including any interest accrued on that
amount at the related Certificate Rate without regard to the Fixed Rate Interest
Rate Cap).
The "Class A-7 Certificateholders' Interest Index Carryover" is equal to the
sum of (A) the excess of (1) the amount of interest the Class A-7 Certificates
would otherwise be entitled to receive on the Distribution Date had the rate
been calculated at the Class A-7 Formula Rate for the related Distribution Date
over (2) the amount of interest payable on the Class A-7 Certificates at the
Class A-7 Available Funds Cap for the related Distribution Date and (B) the
Class A-7 Certificateholders' Interest Index Carryover for all previous
Distribution Dates not previously paid to Class A-7 Certificateholders
(including any interest accrued on that amount at the Class A-7 Formula Rate).
The ratings on the Class A-5, Class A-7 and Subordinate Certificates by
Moody's Investors Service, Inc. ("Moody's"), and Fitch, Inc. ("Fitch" and
together with Moody's, the "Rating Agencies") will not address the likelihood of
receipt by such Certificateholders of any amounts in respect of Net Rate Cap
Carryover or Class A-7 Certificateholders' Interest Index Carryover,
respectively. Payment of the Net Rate Cap Carryover or Class A-7
Certificateholders' Interest Index Carryover will be subject to availability of
funds therefor in accordance with the priority of payments set forth under
"--Distributions" above.
"Interest Period" means, with respect to each Distribution Date and the
Fixed Rate Certificates, the period from the first day of the calendar month
preceding the month of the Distribution Date through the last day of the
calendar month. Interest on the Fixed Rate Certificates in respect of any
Distribution Date will accrue during the related Interest Period on the basis of
a 360-day year consisting of twelve 30-day months.
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"Interest Period" means, with respect to each Distribution Date and the
Variable Rate Certificates, the period from and including the preceding
Distribution Date (or the Closing Date in the case of the first Distribution
Date) to and including the day preceding the related Distribution Date. Interest
will accrue on the Variable Rate Certificates during the related Interest Period
on the basis of the actual number of days elapsed in the related Interest Period
and a year of 360 days.
CALCULATION OF ONE-MONTH LIBOR
On each LIBOR Determination Date (as defined below), the Trustee will
determine One-Month LIBOR for the next Interest Period for the Class A-7
Certificates.
"One-Month LIBOR" means, as of any LIBOR Determination Date, the London
interbank offered rate for one-month United States dollar deposits which appears
on Telerate Page 3750 as of 11:00 a.m., London time, on this date. If the rate
does not appear on Telerate Page 3750, the rate for that day will be determined
on the basis of the rates at which deposits in United States dollars are offered
by the Reference Banks at approximately 11:00 a.m. (London time), on that day to
prime banks in the London interbank market. The Trustee will request the
principal London office of each of the Reference Banks to provide a quotation of
its rate. If at least two quotations are provided, the rate for that day will be
the arithmetic mean of the quotations (rounded upwards if necessary to the
nearest whole multiple of 1/16%). If fewer than two quotations are provided as
requested, the rate for that day will be the arithmetic mean of the rates quoted
by major banks in New York City, selected by the Servicer, at approximately
11:00 a.m. (New York City time) on that day for loans in United States dollars
to leading European banks.
"LIBOR Determination Date" means, with respect to any Interest Period, the
second London Business Day preceding the commencement of the Interest Period.
For purposes of determining One-Month LIBOR, a "London Business Day" is any day
on which dealings in deposits of United States dollars are transacted in the
London interbank market.
"Telerate Page 3750" means the display page currently so designated on the
Bridge Telerate Service (or another page that replaces this page on the service
for the purpose of displaying comparable rates or prices) and "Reference Banks"
means leading banks selected by CHEC and engaged in transactions in Eurodollar
deposits in the international Eurocurrency market.
CREDIT ENHANCEMENT
OVERCOLLATERALIZATION RESULTING FROM CASH FLOW STRUCTURE. The Agreement
requires that, on each Distribution Date, Excess Interest be applied as an
accelerated payment of principal on the Offered Certificates, but only to the
limited extent hereafter described.
The application of Excess Interest for the payment of principal has the
effect of accelerating the amortization of the Offered Certificates relative to
the amortization of the Home Equity Loans. To the extent that any Excess
Interest is not so used, the Agreement provides that it will be used in the
following order of priority:
(1) To pay any related Class Interest Carryover Shortfall and any related
Class Principal Carryover Shortfall on the Subordinate Certificates,
(2) to pay the Certificateholders of the Group II Certificates any related
Class A-7 Certificateholders' Interest Index Carryover and then to pay
the Certificateholders of the Group I Certificates any related Net Rate
Cap Carryover,
(3) to reimburse the Trustee and then the Servicer with respect to any
amounts owing to them, and
(4) to pay the Class X-IO and the Class R Certificateholders, as specified
in the Agreement.
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Pursuant to the Agreement, the Excess Interest will be applied beginning on
the fifth Distribution Date as an accelerated payment of principal on the
Offered Certificates until the Overcollateralization Amount has increased to the
Required Overcollateralization Amount.
If, on any Distribution Date, the Overcollateralization Amount is, or, after
taking into account all other distributions to be made on the Distribution Date,
would be, greater than the Required Overcollateralization Amount, then any
amounts relating to principal which would otherwise be distributed to the
Certificateholders of the Offered Certificates on the Distribution Date shall
instead be distributed to the Certificateholders of the Class X-IO Certificates
or as otherwise provided in the Agreement (to the extent available therefor) in
an amount equal to the Excess Overcollateralization Amount.
ALLOCATION OF REALIZED LOSSES. The Agreement provides generally that on any
Distribution Date all amounts collected on account of principal (other than any
amount applied to the payment of an Excess Overcollateralization Amount) during
the prior Remittance Period will be distributed to the Certificateholders of the
related Offered Certificates on the Distribution Date. If any Home Equity Loan
became a Liquidated Loan during the prior Remittance Period, the Net Liquidation
Proceeds related to that Home Equity Loan and allocated to principal may be less
than the principal balance of the related Home Equity Loan. The amount of any
insufficiency is referred to as a "Realized Loss." In addition, the Agreement
provides that the loan balance of any Home Equity Loan which becomes a
Liquidated Loan shall thereafter equal zero.
A "Liquidated Loan" is a Home Equity Loan with respect to which a
determination has been made by the Servicer that all recoveries have been made
or that the Servicer reasonably believes that the cost of obtaining any
additional recoveries from that loan would exceed the amount of the recoveries.
The Basic Principal Amount includes the Net Liquidation Proceeds in respect
of principal received upon liquidation of a Liquidated Loan. If the Net
Liquidation Proceeds are less than the unpaid principal balance of the related
Liquidated Loan, the aggregate loan balance of the Home Equity Loans will
decline more than the aggregate Certificate Principal Balance of the Offered
Certificates. If the difference is not covered by the Overcollateralization
Amount or the application of Excess Interest, the class of Subordinate
Certificates then outstanding with the lowest relative payment priority will
bear the loss.
If, following the distributions on a Distribution Date, the aggregate
Certificate Principal Balance of the Offered Certificates exceeds the aggregate
loan balance of the Home Equity Loans, that is, the Offered Certificates are
undercollateralized, the Certificate Principal Balance of the class of
Subordinate Certificates then outstanding with the lowest relative payment
priority will be reduced by the amount of the excess. Any reduction will
constitute a Class Principal Carryover Shortfall for the applicable class.
Although a Class Principal Carryover Shortfall will not accrue interest, this
amount may be paid on a future distribution date to the extent funds are
available for distribution as provided above under "--Distributions."
The Agreement does not permit the allocation of Realized Losses to the
Senior Certificates. Investors in the Senior Certificates should note that
although Realized Losses cannot be allocated to the Senior Certificates, under
certain loss scenarios there will not be enough principal and interest paid on
the Home Equity Loans to pay the Senior Certificates all interest and principal
amounts to which they are then entitled.
For all purposes of this Prospectus Supplement, the Class B Certificates
will have the lowest payment priority of any class of Offered Certificates.
CROSSCOLLATERALIZATION PROVISIONS. Certain funds with respect to each Home
Equity Loan Group will be available to cover certain shortfalls with respect to
the Offered Certificates relating to the other
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Home Equity Loan Group and to create overcollateralization as described above
under "Description of the Certificates--Distributions."
FINAL SCHEDULED DISTRIBUTION DATE
The final scheduled Distribution Date (the "Final Scheduled Distribution
Date") for each class of Offered Certificates is specified on the cover page of
this Prospectus Supplement.
The Final Scheduled Distribution Date for each of the Class A-1, Class A-2,
Class A-3 and Class A-4 Certificates is the Distribution Date on which the
Certificate Principal Balance for the related class would be reduced to zero
assuming that no prepayments are received on the related Home Equity Loans, no
Excess Interest is applied to create overcollateralization and scheduled monthly
payments of principal of and interest on each of the Home Equity Loans are
timely received. The Final Scheduled Distribution Date for each of the
Class A-5, Class A-6, Class A-7, Class M-1, Class M-2 and Class B Certificates
is the Distribution Date occurring thirteen months after the maturity date of
the latest possible maturing Home Equity Loan.
It is expected that the actual last Distribution Date for each class of
Offered Certificates will occur significantly earlier than the Final Scheduled
Distribution Date.
OPTIONAL TERMINATION BY AN AFFILIATE OF THE SERVICER; AUCTION SALE; ADDITIONAL
PRINCIPAL DISTRIBUTIONS
An affiliate of the Servicer may, at its option, terminate the Trust by
purchasing all of the Home Equity Loans on any Distribution Date on or after the
date on which the aggregate outstanding principal balance of the Group I and
Group II Home Equity Loans is less than 20% of the aggregate outstanding
principal balance of the Home Equity Loans in both groups on the Cut-Off Date.
If the affiliate of the Servicer does not exercise this clean-up call option
when it first could have been exercised, then on the next Distribution Date
after such date, the Trustee will begin an auction process to sell the Home
Equity Loans and the other trust assets. It is a condition to the sale of the
trust assets that the proceeds of the auction are at least sufficient to pay the
aggregate unpaid principal balance of the Offered Certificates, all accrued and
unpaid interest thereon (other than any Class A-7 Certificateholders' Interest
Index Carryover and any Net Rate Cap Carryover), any unreimbursed Delinquency
Advances, Servicing Advances and Compensating Interest and any Delinquency
Advances the Servicer has failed to remit (the "Minimum Bid"). If the first
auction of the trust property is not successful because the highest bid received
is less than the Minimum Bid, then the Trustee will conduct an auction of the
Home Equity Loans every third month thereafter, unless and until the Minimum Bid
is received for the trust property. Affiliates of the Servicer other than the
Sellers and the Depositor may bid in the auction.
If the clean-up call option is not exercised on the date upon which it first
could have been exercised, then on the third Distribution Date following such
date and on each Distribution Date thereafter, the amounts that otherwise would
have been payable to the Non-Offered Certificates will be paid to the Offered
Certificates as an additional principal distribution amount. The additional
principal distribution amount for the related Offered Certificates will be
applied in the same order of priority as distributions of the Principal
Distribution Amount to the related classes of Certificates.
OPTIONAL LIMITED PURCHASE OF HOME EQUITY LOANS
On the Closing Date, each of the Home Equity Loans will be allocated to one
of 50 lower-tier REMICs. The Home Equity Loans of each lower-tier REMIC will, at
the date of such allocation, have an aggregate outstanding principal balance as
of the Cut-Off Date equal to approximately 2% of the aggregate outstanding
principal balance of the Home Equity Loans as of the Cut-Off Date. It is
expected that the assets of each lower-tier REMIC will be allocated on the
Closing Date between the
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Group I Home Equity Loans and the Group II Home Equity Loans on a pro rata
basis. The Servicer will have a one-time option at any time to purchase all of
the assets of any one of the 50 lower-tier REMICS at a purchase price equal to
the unpaid principal balance of the Home Equity Loans in the related lower-tier
REMIC together with accrued and unpaid interest on such Home Equity Loans plus a
premium of 4% of such unpaid principal balance of the Home Equity Loans in the
related lower-tier REMIC. If the Servicer exercises this limited purchase option
the purchase price, other than the premium amount, with respect to each Home
Equity Loan in the related lower-tier REMIC will be allocated to a Home Equity
Loan Group based upon the Home Equity Loan Group of such Home Equity Loan and
Certificateholders will receive a prepayment of principal in the amount and
priority described in "--Distributions" in this Prospectus Supplement. The
premium amount will be allocated among all Offered Certificates, regardless of
priority, pro rata, based on their respective Certificate Principal Balances.
Once the Servicer exercises its limited option to purchase with respect to the
Home Equity Loans in one of the fifty lower-tier REMICs, its option with respect
to the other 49 lower-tier REMICs will immediately expire.
SERVICING OF DELINQUENT HOME EQUITY LOANS
The Servicer will exercise its discretion consistent with customary
servicing procedures and the terms of the Agreement, with respect to the
enforcement of defaulted Home Equity Loans in such manner as will maximize the
receipt of principal and interest with respect thereto, including but not
limited to the sale of such Home Equity Loan to a third party, the modification
of such Home Equity Loan, or foreclosure upon the related Mortgaged Property and
disposition thereof.
SERVICING FEE
As to each Home Equity Loan, the Servicer will retain a fee (the "Servicing
Fee") equal to 0.50% per annum, payable monthly at one-twelfth of the annual
rate of the then outstanding principal balance of the Home Equity Loan serviced
as of the first day of each Remittance Period. If a successor Servicer is
appointed in accordance with the Agreement, the Servicing Fee shall be an amount
agreed upon by the Trustee and the successor Servicer but in no event in an
amount greater than the amount paid to the predecessor Servicer. The Servicer
will also be able to retain late fees, prepayment charges, assumption fees,
release fees, bad check charges and any other servicing related charges.
THE TRUSTEE
Bank One, National Association has been named Trustee pursuant to the
Agreement.
The Trustee may have normal banking relationships with the Depositor, the
Sellers and the Servicer.
As to each Home Equity Loan the Trustee will receive a fee (the "Trustee
Fee") set forth in the Agreement.
The Trustee may resign at any time, in which event the Depositor will be
obligated to appoint a successor Trustee, as approved by the Servicer. The
Depositor and the Servicer may also remove the Trustee if the Trustee ceases to
be eligible to continue under the Agreement or if the Trustee becomes insolvent.
Upon becoming aware of these circumstances, the Depositor will be obligated to
appoint a successor Trustee, as approved by the Servicer (which approval shall
not be unreasonably withheld). 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.
No holder of a Certificate will have any right under the Agreement to
institute any proceeding with respect to the Agreement unless
(1) Certificateholders holding Certificates evidencing at least 51% of the
Percentage Interests in the Trust have made written requests upon the Trustee to
institute a
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proceeding in its own name as Trustee under the Agreement and have offered to
the Trustee reasonable indemnity and (2) the Trustee for 60 days has neglected
or refused to institute any proceeding. The Trustee will be under no obligation
to exercise any of the trusts 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 to the Trustee reasonable security or
indemnity against the cost, expenses and liabilities which may be incurred by
the Trustee in compliance with such request or direction.
The Trustee will make the monthly statement to Certificateholders (and, at
its option, any additional files containing the same information in an
alternative format) available each month to Certificateholders and the other
parties to the Agreement via the Trustee's internet website at
www.abs.bankone.com or by calling the Trustee's customer service desk at
1-800-524-9472. Parties are entitled to have a paper copy mailed to them via
first class mail by calling the customer service desk. The Trustee shall have
the right to change the way monthly statements are distributed in order to make
distribution more convenient and/or more accessible to the above parties and the
Trustee shall provide timely and adequate notification to all above parties
regarding any changes.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Certificates will be
applied by the Depositor towards the purchase of the Home Equity Loans from the
Sellers.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following section in conjunction with the section in the Prospectus
captioned "FEDERAL INCOME TAX CONSEQUENCES" discusses the material federal
income tax consequences of the purchase, ownership and disposition of the
Offered Certificates. This section must be considered only in connection with
"FEDERAL INCOME TAX CONSEQUENCES" in the Prospectus. The discussion in this
Prospectus Supplement and in the Prospectus is based upon laws, regulations,
rulings and decisions now in effect, all of which are subject to change. The
discussion below and in the Prospectus does not purport to deal with all federal
tax consequences applicable to all categories of investors, some of which may be
subject to special rules. Investors should consult their own tax advisors in
determining the federal, state, local and any other tax consequences to them of
the purchase, ownership and disposition of the Offered Certificates. No portion
of the "CERTAIN FEDERAL INCOME TAX CONSIDERATIONS" or "FEDERAL INCOME TAX
CONSEQUENCES" sections of the Prospectus Supplement or Prospectus constitutes an
opinion of counsel, other than the opinion set forth in the second paragraph of
"--REMIC Elections" below and in clause (2) of "FEDERAL INCOME TAX
CONSEQUENCES--OPINIONS" in the Prospectus.
REMIC ELECTIONS
52 separate elections will be made to treat the assets of the Trust as real
estate mortgage investment conduits ("REMICs") for federal income tax purposes,
creating a multi-tiered REMIC structure. Each of the home equity loans will be
allocated to one of 50 lower-tier REMICs and the home equity loans of each
lower-tier REMIC will consist of approximately 2% of the aggregate principal
balance of the home equity loans as of the Cut-Off Date. The two other REMICs
will be a middle-tier and an upper-tier REMIC respectively. The Senior,
Subordinate and Class X-IO Certificates will be designated as regular interests
in a REMIC (the "Regular Certificates" or the "REMIC Regular Certificates"), and
the Class R-1, Class R-2 and Class R-3 Certificates each will be designated as
the residual interest in a REMIC (the "Residual Certificates" or the "REMIC
Residual Certificates"). In addition, as described below, the Class A-5,
Class A-7, Class M-1, Class M-2 and Class B Certificates will represent an
undivided beneficial ownership interest in an interest rate cap,
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and each Offered Certificate will represent an undivided beneficial ownership
interest in the Premium Amount described below.
Qualification as a REMIC requires ongoing compliance with relevant
conditions. Stroock & Stroock & Lavan LLP, special tax counsel to the Sellers
and the Depositor, is of the opinion that, for federal income tax purposes,
assuming (1) the appropriate REMIC elections are made, and (2) compliance with
all of the provisions of the Agreement, the REMICs formed pursuant to the
Agreement will each constitute a REMIC, the Senior, Subordinate and Class X-IO
Certificates will represent ownership of "regular interests" in a REMIC, and the
Residual Certificates will be considered the sole class of "residual interests"
in each REMIC.
Because the REMIC Regular Certificates will be considered REMIC regular
interests, they generally will be taxable as debt obligations under the Internal
Revenue Code of 1986, as amended (the "Code"), and interest paid or accrued on
the Regular Certificates, including original issue discount with respect to any
Regular Certificates issued with original issue discount, will be taxable to
Certificateholders in accordance with the accrual method of accounting. Some or
all of the classes of Offered Certificates may be subject to the original issue
discount provisions. WE REFER YOU TO "FEDERAL INCOME TAX CONSEQUENCES" IN THE
PROSPECTUS FOR MORE DETAIL.
In addition, classes of Offered Certificates may be treated as issued with a
premium. WE REFER YOU TO "FEDERAL INCOME TAX CONSEQUENCES" IN THE PROSPECTUS FOR
MORE DETAIL.
The prepayment assumption that will be used in determining the rate of
accrual of original issue discount is 115% Prepayment Assumption with respect to
the Group I Home Equity Loans and 28% CPR with respect to the Group II Home
Equity Loans. See "Prepayment and Yield Considerations" in this Prospectus
Supplement for a description of the prepayment assumption models. However, no
representation is made as to the rate at which prepayments actually will occur.
PREMIUM AMOUNT PAYABLE TO OFFERED CERTIFICATES
The Agreement provides for a reserve fund (the "Repurchase Reserve Fund"),
that is held by the Trustee on behalf of the holders of the Offered
Certificates. The Servicer will have the right to repurchase all of the Home
Equity Loans that comprise a single lower-tier REMIC on any Distribution Date.
Upon the exercise of such repurchase option, the Servicer will pay a price equal
to the unpaid principal balance of the Home Equity Loans that comprise such
lower-tier REMIC, plus any accrued interest on such Home Equity Loans (the
"Repurchase Price"). In addition, the Servicer will deposit in the Repurchase
Reserve Fund a premium amount equal to 4% of the unpaid principal balance of the
Home Equity Loans in the related lower-tier REMIC (the "Premium Amount"). The
Premium Amount will be distributed from the Repurchase Reserve Fund to the
holders of the Offered Certificates, pro rata, based upon the outstanding
principal balances of the Offered Certificates but will be considered neither a
distribution of interest nor principal. Once the Servicer exercises its
repurchase option with respect to a single lower-tier REMIC, the Servicer's
option to exercise the repurchase option with respect to any other lower-tier
REMIC shall expire. The Repurchase Reserve Fund will not be included as an asset
of any REMIC created pursuant to the Agreement.
CARRYOVER CERTIFICATES
The Agreement provides for a reserve fund (the "Supplemental Interest
Reserve Fund"), which is held by the Trustee on behalf of the holders of the
Class A-5, Class A-7, Class M-1, Class M-2 and Class B Certificates (the
"Carryover Certificates"). To the extent amounts on deposit are sufficient,
holders of the Carryover Certificates will be entitled to receive payments from
the fund equal to any WAC Excess due to the application of a cap in the
priorities described in "Description of the Certificates--Distributions" in this
Prospectus Supplement. The "WAC Excess" is the portion of the current or
carryover interest and any accrued interest thereon being distributed on any
particular
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Distribution Date with respect to the Carryover Certificates equal to the amount
of interest accrued on those Certificates at a rate equal to (a) the excess of
the respective Certificate Rate without regard to the cap over (b) the related
Certificate Rate as a result of the application of a cap. The amount required to
be deposited in the fund on any Distribution Date (the "Supplemental Interest
Reserve Fund Deposit") will equal any WAC Excess as a result of the application
of a cap, or, if there is no WAC Excess as a result of the application of a cap
on that Distribution Date, an amount that when added to amounts already on
deposit in the fund, the aggregate amount on deposit in the fund is equal to
$10,000. Any investment earnings on amounts on deposit in the Supplemental
Interest Reserve Fund will be paid to (and will be for the benefit of) the
holders of the Class X-IO Certificates and will not be available to pay any WAC
Excess as a result of the application of a cap. The Supplemental Interest
Reserve Fund will not be included as an asset of any REMIC created pursuant to
the Agreement.
The Regular Certificates, except to the extent of any Premium Amount
allocable to such Certificates, and except to the extent of any WAC Excess as a
result of the application of a cap allocable to the Regular Certificates which
are Carryover Certificates, will be treated as regular interests in a REMIC
under section 860G of the Code (the "Regular Interests"). Accordingly, the
portion of the Regular Certificates representing the Regular Interests will be
treated as (i) assets described in section 7701(a)(19)(C) of the Code, and
(ii) "real estate assets" within the meaning of section 856(c)(4)(A) of the
Code, in each case to the extent described in the Prospectus. Interest on the
portion of the Regular Certificates will be treated as interest on obligations
secured by mortgages on real property within the meaning of
section 856(c)(3)(B) of the Code to the same extent that the portion of the
Regular Certificates is treated as real estate assets. WE REFER YOU TO "CERTAIN
FEDERAL INCOME TAX CONSEQUENCES" IN THE PROSPECTUS.
The right to receive any Premium Amount, any WAC Excess as a result of the
application of a cap will not be (i) a regular interest in a REMIC under
section 860G of the Code, (ii) an asset described in section 7701(a)(19)(C) of
the Code, or (iii) a "real estate asset" within the meaning of
section 856(c)(4)(A) of the Code. Further, neither of the Premium Amount nor WAC
Excess will be considered interest on obligations secured by mortgages on real
property within the meaning of section 856(c)(3)(B) of the Code.
Each holder of a Carryover Certificate is deemed to own an undivided
beneficial ownership interest in three assets: (i) a REMIC Regular Interest,
(ii) an interest rate cap contract (a "Cap Agreement") under which the WAC
Excess as a result of the application of a cap is paid and (iii) its right to
receive a portion of the Premium Amount ("Premium Share"). Neither the Cap
Agreement nor the Premium Share with respect to the Carryover Certificates is
included in any REMIC. The treatment of amounts received by a Carryover
Certificateholder under the Certificateholder's right to receive the WAC Excess
as a result of the application of a cap and the Premium Share will depend upon
the portion of the Certificateholder's purchase price allocable thereto. Under
the REMIC regulations, each Carryover Certificateholder must allocate its
purchase price for the Carryover Certificates between its undivided interest in
the Carryover Regular Interests and its undivided interest in the Cap Agreement
and Premium Share in accordance with the relative fair market values of each
property right. No representation is or will be made as to the relative fair
market values. Generally, payments made to the Carryover Certificates under the
Cap Agreement and Premium Share will be included in income based on, and the
purchase price allocated to the Cap Agreement and Premium share may be amortized
in accordance with, the regulations relating to notional principal contracts.
Similarly, each holder of a Class A-1, Class A-2, Class A-3, Class A-4 and
Class A-6 Certificates is deemed to own an undivided beneficial ownership
interest in two assets, a REMIC Regular Interest and a Premium Share, which
shall be treated for tax purposes as described with respect to the Carryover
Certificates but allocated between those two assets instead of the three assets
applicable to the Carryover Certificates.
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CERTAIN STATE TAX CONSIDERATIONS
Because the income tax laws of the states vary, it is impractical to predict
the income tax consequences to the Certificateholders in all of the state taxing
jurisdictions in which they are subject to tax. Certificateholders are urged to
consult their own tax advisors with respect to state and local income and
franchise taxes.
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 the plan's assets in the Offered Certificates.
Accordingly, pursuant to Section 404 of ERISA, the 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;
(4) whether the investment is prudent, considering the nature of the
investment; and
(5) 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 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 Offered Certificates includes plan assets by reason of a plan or account
investing in the entity (each, a "Plan"), are prohibited from engaging in a
broad range of transactions involving Plan assets and persons having specified
relationships to a Plan. These transactions are treated as "prohibited
transactions" under Sections 406 and 407 of ERISA and excise taxes are imposed
upon these persons by Section 4975 of the Code.
An investment in Offered Certificates by a Plan might result in the assets
of the Trust being deemed to constitute Plan assets, which in turn might mean
that aspects of the 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 regulations (the "Regulation"), a Plan's assets may include
an interest in the underlying assets of an entity (including a trust), if the
Plan acquires an "equity interest" in the entity, unless exceptions apply. The
Depositor believes that the Offered Certificates will give Certificateholders an
equity interest in the Trust for purposes of the Regulation and can give no
assurance that the Offered 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 an Offered Certificate.
The U.S. Department of Labor has granted to a predecessor of Lehman
Brothers Inc. an administrative exemption (Prohibited Transaction Exemption
("PTE") 91-14, as amended by PTE 97-34 and as further recently amended by PTE
2000-58 (the "Exemption") from the prohibited transaction rules of ERISA which
may be applicable to the initial purchase, the holding and the subsequent resale
in the secondary market by Plans of pass-through certificates representing a
beneficial undivided ownership interest in the assets of a trust that consist of
receivables, loans and other obligations such as the Home Equity Loans that meet
the conditions and requirements of the Exemption which may be applicable to the
Offered Certificates if Lehman Brothers Inc. or any of its affiliates is either
the sole underwriter or manager or co-manager of the underwriting syndicate, or
a selling or placement agent.
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The Exemption does not apply to Plans sponsored by the Sellers, the
Depositor, the Underwriters, the Trustee, the Servicer or any mortgagor with
respect to Home Equity Loans included in the Trust constituting more than 5% of
the aggregate unamortized principal balance of the assets in the Trust or any
affiliate of such parties (the "Restricted Group"). No exemption is provided
from the restrictions of ERISA for the acquisition or holding of Offered
Certificates on behalf of an "Excluded Plan" by any person who is a fiduciary
with respect to the assets of the Excluded Plan. For purposes of the Offered
Certificates, an Excluded Plan is a Plan sponsored by any member of the
Restricted Group. In addition, no Plan's investment in any class of Offered
Certificates may exceed 25% of all of the Certificates of the class outstanding
at the time of the Plan's acquisition and after the Plan's acquisition of the
class of Offered Certificates, no more than 25% of the assets over which the
fiduciary has investment authority may be invested in securities of a trust
containing assets which are sold or serviced by the same entity. Finally, in the
case of initial issuance (but not secondary market transactions), at least 50%
of each class of Offered Certificates, and at least 50% of the aggregate
interest in the Trust, must be acquired by persons independent of the Restricted
Group.
The Depositor believes that the Exemption will apply to the acquisition,
holding and resale of the Offered 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.
It is a continuing condition of the Exemption that the rating of the
Certificates be at least BBB at the time of their acquisition by a Plan, whether
in the initial offering or in the secondary market. Therefore, the acquisition
of a Subordinate Certificates on behalf of a Plan will be deemed a
representation that the purchaser understands that the applicability of the
Exemption is conditioned upon such Subordinate Certificate being rated at least
BBB at such time, unless the purchaser is an insurance company general account
purchasing the Subordinate Certificate pursuant to Sections I and III of
PTE 95-60.
WE REFER YOU TO "ERISA CONSIDERATIONS" IN THE PROSPECTUS FOR MORE DETAIL.
Before purchasing an Offered Certificate, a fiduciary of a Plan should
itself confirm (a) that the Offered Certificates constitute "Securities" for
purposes of the Exemption and (b) that the specific conditions set forth in the
Exemption and the other requirements set forth in the Exemption will be
satisfied.
Any Plan fiduciary considering whether to purchase an Offered Certificate on
behalf of a Plan should consult with its counsel regarding the applicability of
the fiduciary responsibility and prohibited transaction provisions of ERISA and
the Code to the investment.
LEGAL INVESTMENT CONSIDERATIONS
The Offered Certificates will not constitute "mortgage related securities"
for purposes of the Secondary Mortgage Market Enhancement Act of 1984.
Accordingly, many institutions with legal authority to invest in comparably
rated securities may not be legally authorized to invest in the Certificates.
You should consult your own counsel as to whether and to what extent the Offered
Certificates constitute legal investments for you.
WE REFER YOU TO "LEGAL INVESTMENT" IN THE PROSPECTUS FOR MORE DETAIL.
S-81
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting agreement,
dated June 6, 2001 (the "Underwriting Agreement"), between the Depositor and
Lehman Brothers Inc. as representative of the Underwriters named below (the
"Underwriters"), the Depositor has agreed to sell to the Underwriters and the
Underwriters have agreed to purchase from the Depositor the principal amount of
the Offered Certificates set forth opposite their respective names. The Offered
Certificates will be offered by the Underwriters when, as and if issued and sold
by the Depositor to the Underwriters, subject to the Underwriters' right to
reject any subscription, in whole or in part.
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT
OF CLASS A-1 OF CLASS A-2 OF CLASS A-3 OF CLASS A-4 OF CLASS A-5
UNDERWRITER CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES
- ----------- ------------ ------------ ------------ ------------ ------------
Lehman Brothers Inc........................... $93,851,800 $39,967,200 $41,475,700 $27,365,100 $20,209,700
Banc of America Securities LLC................ $13,407,400 $ 5,709,600 $ 5,925,100 $ 3,909,300 $ 2,887,100
Credit Suisse First Boston Corporation........ $13,407,400 $ 5,709,600 $ 5,925,100 $ 3,909,300 $ 2,887,100
Salomon Smith Barney Inc...................... $13,407,400 $ 5,709,600 $ 5,925,100 $ 3,909,300 $ 2,887,100
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT
OF CLASS A-6 OF CLASS A-7 OF CLASS M-1 OF CLASS M-2 OF CLASS B
UNDERWRITER CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES
- ----------- ------------ ------------ ------------ ------------ ------------
Lehman Brothers Inc.......................... $24,763,200 $39,647,300 $20,160,000 $15,120,000 $13,440,000
Banc of America Securities LLC............... $ 3,537,600 $ 5,663,900 $ 2,880,000 $ 2,160,000 $ 1,920,000
Credit Suisse First Boston Corporation....... $ 3,537,600 $ 5,663,900 $ 2,880,000 $ 2,160,000 $ 1,920,000
Salomon Smith Barney Inc..................... $ 3,537,600 $ 5,663,900 $ 2,880,000 $ 2,160,000 $ 1,920,000
The Underwriters have informed the Depositor that they propose to offer the
Offered Certificates for sale 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 the related sale. The Underwriters may effect the transactions by
selling the Offered Certificates to or through dealers, and the dealers may
receive compensation in the form of underwriting discounts, concessions or
commissions from the Underwriters. In connection with the sale of the Offered
Certificates, the Underwriters may be deemed to have received compensation from
the Depositor in the form of underwriting compensation. The Underwriters and any
dealers that participate with the Underwriters in the distribution of the
Offered Certificates may be deemed to be underwriters and any commissions
received by them and any profit on the resale of the Offered Certificates by
them may be deemed to be underwriting discounts and commissions under the
Securities Act of 1933, as amended (the "Securities Act").
No Offered Certificate will have an established trading market when issued.
The Underwriters may, from time to time, act as brokers or purchase and sell
Offered Certificates in the secondary market, but the Underwriters are under no
obligation to do so and there can be no assurance that there will be a secondary
market for the Offered Certificates or liquidity in the secondary market if one
does develop.
From time to time the Underwriters or their affiliates may perform
investment banking and advisory services for, and may provide general financing
and banking services to, affiliates of the Depositor.
The Underwriting Agreement provides that the Depositor will indemnify the
Underwriters against described civil liabilities, including liabilities under
the Securities Act.
S-82
LEGAL MATTERS
Certain legal matters with respect to the Offered Certificates will be
passed upon for the Depositor, the Sellers and the Servicer by Stroock &
Stroock & Lavan LLP, New York, New York. Certain legal matters with respect to
the Offered Certificates will be passed upon for the Underwriters by McKee
Nelson LLP.
RATINGS
It is a condition to the issuance of the Offered Certificates that they
receive ratings by Moody's and Fitch as follows:
CLASS MOODY'S FITCH
- ----- -------- --------
A-1......................................................... Aaa AAA
A-2......................................................... Aaa AAA
A-3......................................................... Aaa AAA
A-4......................................................... Aaa AAA
A-5......................................................... Aaa AAA
A-6......................................................... Aaa AAA
A-7......................................................... Aaa AAA
M-1......................................................... Aa2 AA
M-2......................................................... A2 A
B........................................................... Baa2 BBB
A securities rating addresses the likelihood of the receipt by Offered
Certificateholders of distributions on the Home Equity Loans. The rating takes
into consideration the characteristics of the Home Equity Loans and the
structural, legal and tax aspects associated with the Offered Certificates. The
ratings on the Offered Certificates do not, however, constitute statements
regarding the likelihood or frequency of prepayments on the Home Equity Loans,
the likelihood of payment of any Class A-7 Certificateholders' Interest Index
Carryover or Net Rate Cap Carryover or the possibility that Offered
Certificateholders might realize a lower than anticipated yield.
A securities rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each securities rating should be evaluated independently of
similar ratings on different securities.
S-83
INDEX OF DEFINED TERMS
TERMS PAGE
- ----- --------
2/28 Adjustable Rate Loans.................................. S-35
Aggregate Certificate Principal Balance..................... S-62
Aggregate Principal Amount.................................. S-63
Agreement................................................... S-61
Appraised Values............................................ S-24
Balloon Loans............................................... S-48
Basic Principal Amount...................................... S-63
Book-Entry Certificates..................................... S-62
Business Day................................................ S-64
Cap Agreement............................................... S-79
Carryover Certificates...................................... S-78
Cede........................................................ S-63
Certificate Account......................................... S-63
Certificate Group........................................... S-62
Certificate Principal Balance............................... S-62
Certificate Rate............................................ S-69
Certificate Register........................................ S-63
Certificate Registrar....................................... S-63
Certificateholder........................................... S-62
Certificateowners........................................... S-62
CHEC........................................................ S-23
Civil Relief Act Interest Shortfalls........................ S-66
Class A-6 Calculation Percentage............................ S-64
Class A-6 Lockout Distribution Amount....................... S-64
Class A-6 Lockout Percentage................................ S-64
Class A-7 Available Funds Cap............................... S-71
Class A-7 Certificateholders' Interest Index Carryover...... S-72
Class A-7 Formula Rate...................................... S-71
Class A-7 Regular Interests................................. S-78
Class B Principal Distribution Amount....................... S-65
Class Interest Carryover Shortfall.......................... S-65
Class M-1 Principal Distribution Amount..................... S-65
Class M-2 Principal Distribution Amount..................... S-66
Class Monthly Interest Amount............................... S-66
Class Principal Carryover Shortfall......................... S-66
Class R Certificates........................................ S-62
Class X-IO Certificates..................................... S-62
Clearstream, Luxembourg..................................... S-63
Closing Date................................................ S-23
Code........................................................ S-78
Coupon Rate................................................. S-28
CPR......................................................... S-48
Cut-Off Date................................................ S-61
Definitive Certificate...................................... S-63
Delinquency Amount.......................................... S-67
Delinquency Event........................................... S-67
Depositor................................................... S-23
S-84
TERMS PAGE
- ----- --------
Distribution Date........................................... S-63
DTC......................................................... S-63
ERISA....................................................... S-80
Euroclear................................................... S-63
Excess Interest............................................. S-67
Excess Overcollateralization Amount......................... S-67
Excluded Plan............................................... S-80
Exemption................................................... S-80
Expense Fee................................................. S-69
Final Scheduled Distribution Date........................... S-75
Fitch....................................................... S-72
Fixed Rate Certificates..................................... S-62
Fixed Rate Interest Rate Cap................................ S-72
Group I Certificates........................................ S-62
Group I Home Equity Loans................................... S-23
Group I Principal Distribution Amount....................... S-67
Group II Certificates....................................... S-62
Group II Home Equity Loans.................................. S-23
Group II Principal Distribution Amount...................... S-67
Home Equity Loan Group...................................... S-23
Home Equity Loans........................................... S-23
Interest Period............................................. S-72
LIBOR Determination Date.................................... S-73
Liquidated Loan............................................. S-74
London Business Day......................................... S-73
Maximum Rates............................................... S-34
Minimum Bid................................................. S-75
Minimum Rates............................................... S-34
Monthly Remittance Date..................................... S-67
Moody's..................................................... S-72
Mortgaged Properties........................................ S-23
Net Coupon Rate............................................. S-72
Net Rate Cap Carryover...................................... S-72
Non-Offered Certificates.................................... S-62
OC Floor.................................................... S-67
Offered Certificates........................................ S-61
One-Month LIBOR............................................. S-73
Original Combined Loan-to-Value Ratio....................... S-24
Original Loan-to-Value Ratio................................ S-24
Overcollateralization Amount................................ S-67
Percentage Interest......................................... S-67
Plan........................................................ S-80
Premium Share............................................... S-79
Prepayment Assumption....................................... S-48
Principal Distribution Amount............................... S-67
prohibited transactions..................................... S-80
PTE......................................................... S-80
Rating Agencies............................................. S-72
Realized Loss............................................... S-74
Record Date................................................. S-68
S-85
TERMS PAGE
- ----- --------
Reference Banks............................................. S-73
Regular Certificates........................................ S-77
Regulation.................................................. S-80
REMIC Regular Certificates.................................. S-77
REMIC Residual Certificates................................. S-77
REMICs...................................................... S-77
Remittance Period........................................... S-68
Repurchase Price............................................ S-78
Repurchase Reserve Fund..................................... S-78
Required Overcollateralization Amount....................... S-68
Residual Certificates....................................... S-77
Restricted Group............................................ S-81
Securities Act.............................................. S-82
Sellers..................................................... S-23
Senior Certificates......................................... S-62
Senior Enhancement Percentage............................... S-68
Senior Principal Distribution Amount........................ S-68
Servicer.................................................... S-61
Servicing Fee............................................... S-76
Six-Month Adjustable Rate Loans............................. S-35
Statistical Calculation Date................................ S-23
Statistical Calculation Date Loan Balance................... S-23
Stepdown Date............................................... S-68
Structuring Assumptions..................................... S-49
Subordinate Certificates.................................... S-62
Subordination Deficiency.................................... S-68
Subordination Increase Amount............................... S-68
Supplemental Interest Reserve Fund.......................... S-78
Supplemental Interest Reserve Fund Deposit.................. S-78
Telerate Page 3750.......................................... S-73
Transition Expenses......................................... S-69
Trigger Event............................................... S-69
Trust....................................................... S-23
Trustee..................................................... S-61
Trustee Fee................................................. S-76
Underwriters................................................ S-82
Underwriting Agreement...................................... S-82
Variable Rate Certificates.................................. S-62
WAC Excess.................................................. S-78
weighted average life....................................... S-48
S-86
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except under limited circumstances, the globally offered Centex Home Equity
Loan Asset-Backed Certificates, Series 2001-B (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, Euroclear or Clearstream, Luxembourg.
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
Euroclear and Clearstream, Luxembourg 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 home equity loan asset-backed certificates
issues.
Secondary cross-market trading between Euroclear or Clearstream, Luxembourg
and DTC participants holding Offered Certificates will be effected on a
delivery-against-payment basis through the respective depositaries of Euroclear
and Clearstream, Luxembourg and as DTC participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless the holders meet established 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, Euroclear and Clearstream,
Luxembourg 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 home equity 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 Euroclear or
Clearstream, Luxembourg 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 sellers'
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 home
equity loan asset-backed certificates issues in same-day funds.
TRADING BETWEEN EUROCLEAR AND/OR CLEARSTREAM, LUXEMBOURG
PARTICIPANTS. Secondary market trading between Euroclear participants or
Clearstream, Luxembourg participants will be settled using the procedures
applicable to conventional eurobonds in same-day funds.
I-1
TRADING BETWEEN DTC SELLER AND EUROCLEAR OR CLEARSTREAM, LUXEMBOURG
PURCHASER. When Global Securities are to be transferred from the account of a
DTC participant to the account of a Euroclear participant or a Clearstream,
Luxembourg participant, the purchaser will send instructions to Euroclear or
Clearstream, Luxembourg through a Euroclear participant or Clearstream,
Luxembourg participant at least one business day prior to settlement. Euroclear
or Clearstream, Luxembourg 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, 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 12 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 Euroclear participant's or Clearstream, Luxembourg
participant's account. The securities credit will appear the next day (European
time) and the cash debt will be back-valued to, and the interest on the Global
Securities will accrue from, the value date (which would be the preceding day
when settlement occurred in New York). If settlement is not completed on the
intended value date (i.e., the trade fails), the Euroclear or Clearstream,
Luxembourg cash debt will be valued instead as of the actual settlement date.
Euroclear participants and Clearstream, Luxembourg 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 Euroclear or Clearstream,
Luxembourg. Under this approach, they may take on credit exposure to Euroclear
or Clearstream, Luxembourg until the Global Securities are credited to their
accounts one day later.
As an alternative, if Euroclear or Clearstream, Luxembourg has extended a
line of credit to them, Euroclear participants or Clearstream, Luxembourg
participants can elect not to preposition funds and allow that credit line to be
drawn upon the finance settlement. Under this procedure, Euroclear participants
or Clearstream, Luxembourg 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 Euroclear participant's or Clearstream,
Luxembourg 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 Euroclear participants or
Clearstream, Luxembourg 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 EUROCLEAR OR CLEARSTREAM, LUXEMBOURG SELLER AND DTC
PURCHASER. Due to time zone differences in their favor, Euroclear participants
and Clearstream, Luxembourg 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 Euroclear or Clearstream,
Luxembourg through a Euroclear participant or Clearstream, Luxembourg
participant at least one business day prior to settlement. In these cases
Euroclear or Clearstream, Luxembourg will instruct the respective depositary, as
appropriate, to deliver the Global Securities to the DTC participant's account
against payment. Payment will include interest
I-2
accrued on the Global Securities from and including the last coupon 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 12 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 Euroclear participant
or Clearstream, Luxembourg participant the following day, and receipt of the
cash proceeds in the Euroclear participant's or Clearstream, Luxembourg
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 Euroclear
participant or Clearstream, Luxembourg participant have a line of credit with
its respective clearing system and elect to be in debt in anticipation of
receipt of the sale proceeds in its account, the back-valuation will extinguish
any overdraft incurred over that one-day period. If settlement is not completed
on the intended value date (i.e., the trade fails), receipt of the cash proceeds
in the Euroclear participant's or Clearstream, Luxembourg participant's account
would instead be valued as of the actual settlement date.
Finally, day traders that use Euroclear or Clearstream, Luxembourg and that
purchase Global Securities from DTC participants for delivery to Euroclear
participants or Clearstream, Luxembourg 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 Euroclear or Clearstream, Luxembourg for one day
(until the purchase side of the day trade is reflected in their Euroclear
or Clearstream, Luxembourg 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 Euroclear or
Clearstream, Luxembourg 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 Euroclear participant
or Clearstream, Luxembourg participant.
U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through
Clearstream, Luxembourg or Euroclear (or through DTC if the holder has an
address outside the U.S.) will be subject to the 30% (or in some cases 31%) U.S.
withholding tax that generally applies to payments of interest on registered
debt issued by U.S. persons, 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-8 BEN). Beneficial owners of Global
Securities that are non-U.S. persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 BEN. If the information shown on
Form W-8 BEN changes, a new Form W-8 BEN 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.
I-3
EXEMPTION OR REDUCED RATE FOR NON-U.S. PERSONS RESIDENT IN TREATY COUNTRIES
(FORM W-8 BEN). Non-U.S. persons that are beneficial owners residing in a
country that has a tax treaty with the United States can obtain an exemption or
reduced tax rate (depending on the treaty terms) by filing Form W-8 BEN.
EXEMPTION FOR U.S. PERSONS (FORM W-9). U.S. persons can obtain a complete
exemption from the withholding tax by filing Form W-9.
U.S. FEDERAL INCOME TAX REPORTING PROCEDURE. The Global Securities holder
files by submitting the appropriate form to the person through whom he holds
(e.g., the clearing agency, in the case of persons holding directly on the books
of the clearing agency). Forms W-8 BEN and W-8ECI are generally effective for
three calendar years.
U.S. PERSON. As used in this prospectus supplement the term "U.S. person"
means a beneficial owner of an Offered Certificate that is for United States
federal income tax purposes
- a citizen or resident of the United States,
- a corporation or partnership created or organized in or under the laws of
the United States or of any State thereof or the District of Columbia,
- an estate the income of which is subject to United States federal income
taxation regardless of its source, or
- a trust if a court within the United States is able to exercise primary
supervision of the administration of the trust and one or more United
States persons have the authority to control all substantial decisions of
the trust.
As used in this prospectus supplement, the term "non-U.S. person" means a
beneficial owner of an Offered Certificate that is not a U.S. person.
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 or
with the application of the extensive withholding regulations that are generally
effective with respect to payments made after December 31, 2000 which have
detailed rules regarding the determination of beneficial ownership. Investors
are advised to consult their own tax advisors for specific tax advice concerning
their holding and disposing of the Global Securities.
I-4
PROSPECTUS
ASSET-BACKED CERTIFICATES
ASSET-BACKED NOTES
(ISSUABLE IN SERIES)
------------------------------
CHEC FUNDING, LLC
(DEPOSITOR)
CENTEX CREDIT CORPORATION
D/B/A
CENTEX HOME EQUITY CORPORATION
(SELLER AND SERVICER)
------------------------------
OFFERED SECURITIES
Asset-Backed Certificates and Asset-Backed Notes will be sold from time to
time pursuant to a prospectus supplement in amounts, at prices and on terms to
be determined at the time of sale. Each series will include one or more classes
of certificates or one or more classes of notes with differing payment terms,
priority of payments, and maturities.
A series of certificates will evidence undivided interests in a trust fund
created in connection with the issuance of the series. A series of notes will be
issued pursuant to an indenture and secured by the trust fund. In each case, the
certificates and notes will be payable only from the assets of the trust fund.
Separate trust funds may be established for one or several classes of a
series of notes or certificates, with each class or group of classes being
entitled to payment only from the assets of their individual trust fund.
Crosscollateralization among trust funds may be permitted.
Credit enhancement will be provided for all offered securities.
TRUST FUND
Each trust fund will include the following assets, among others:
- closed-end home equity loans secured by first or second mortgages on one-
to four- family residential or mixed properties
- amounts received or due on the home equity loans
- the mortgaged properties securing the home equity loans and certain
proceeds of liquidation of these properties
- funds on deposit in one or more prefunding, capitalized interest, or other
accounts
- reserve funds, letters of credit, surety bonds, insurance policies and/or
other forms of credit enhancement
Prefunding accounts may be established to purchase additional home equity
loans during a specified prefunding period.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THESE SECURITIES OR DETERMINED WHETHER THIS
PROSPECTUS AND THE PROSPECTUS SUPPLEMENT ARE TRUTHFUL AND COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
JUNE 6, 2001
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS AND IN THE
ACCOMPANYING PROSPECTUS SUPPLEMENT
We provide information to you about the offered securities in two separate
documents that provide progressively more detail:
- this prospectus, which provides general information, some of which may not
be applicable to your series of notes or certificates; and
- the accompanying prospectus supplement, which describes the specific terms
of your series of notes or certificates.
IF THE DESCRIPTION OF YOUR NOTES OR CERTIFICATES IN THE ACCOMPANYING
PROSPECTUS SUPPLEMENT DIFFERS FROM THE RELATED DESCRIPTION IN THIS PROSPECTUS,
YOU SHOULD RELY ON THE INFORMATION IN THAT PROSPECTUS SUPPLEMENT.
You should rely only on the information provided in this prospectus and the
accompanying prospectus supplement, including the information incorporated by
reference. See "Available Information," "Reports to Holders" and "Incorporation
of Certain Documents by Reference" in this prospectus. You can request
information incorporated by reference from Centex Credit Corporation d/ b/a
Centex Home Equity Corporation by calling us at (214) 981-5000 or writing to us
at Centex Credit Corporation, 2828 N. Harwood Street, Dallas, Texas, 75201. We
have not authorized anyone to provide you with different information. We are not
offering the notes or certificates in any state where the offer is not
permitted.
TABLE OF CONTENTS
PAGE
--------
PROSPECTUS SUPPLEMENT....................... 3
REPORTS TO HOLDERS.......................... 3
AVAILABLE INFORMATION....................... 4
INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE................................. 4
INTRODUCTION................................ 5
THE DEPOSITOR............................... 5
THE SELLER AND THE SERVICER................. 5
General................................... 5
Underwriting Guidelines Applicable to the
Home Equity Loans....................... 6
Underwriting Criteria of the Seller....... 9
Servicing................................. 12
DESCRIPTION OF THE SECURITIES............... 13
General................................... 13
Book-Entry Securities..................... 15
Valuation of the Home Equity Loans........ 19
Payments of Interest...................... 19
Payments of Principal..................... 20
Final Scheduled Distribution Date......... 20
Special Redemption........................ 20
Weighted Average Life of the Securities... 21
THE TRUST FUNDS............................. 21
General................................... 21
The Home Equity Loans..................... 22
Additional Information.................... 24
ACCOUNTS.................................... 25
Certificate and Distribution Accounts..... 25
Prefunding and Capitalized Interest
Accounts................................ 25
Eligible Investments...................... 26
Revolving Period and Amortization Period;
Retained Interest....................... 27
ENHANCEMENT................................. 27
THE AGREEMENTS.............................. 29
General................................... 29
Repurchase and Substitution of
Non-Conforming Home Equity Loans........ 29
Assignment of Home Equity Loans........... 31
Servicing and Sub-Servicing............... 33
Deposits to Principal and Interest Account
and Certificate Account................. 33
Advances; Compensating Interest........... 34
Optional Repurchase of Defaulted Home
Equity Loans............................ 35
Realization Upon Defaulted Home Equity
Loans................................... 36
Hazard Insurance.......................... 36
General Servicing Standard................ 36
Sub-Servicing Arrangements................ 36
Certain Matters Regarding the Servicer.... 37
Removal and Resignation of Servicer....... 38
The Trustee............................... 38
Reporting Requirements.................... 39
PAGE
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Removal of Trustee for Cause.............. 40
Governing Law............................. 41
Amendments................................ 41
Termination of the Trust.................. 41
Optional Termination...................... 42
REMIC Administrator....................... 44
CERTAIN LEGAL ASPECTS OF THE HOME EQUITY
LOANS..................................... 44
Home Equity Loans......................... 44
Foreclosure............................... 45
Rights of Redemption...................... 47
Junior Home Equity Loans; Rights of Senior
Home Equity Loans....................... 48
Anti-Deficiency Legislation and Other
Limitations on Lenders.................. 48
Due-on-Sale Clauses in Home Equity
Loans................................... 50
Enforceability of Prepayment and Late
Payment Fees............................ 50
Equitable Limitations on Remedies......... 50
Applicability of Usury Laws............... 51
Environmental Legislation................. 51
Soldiers' and Sailors' Civil Relief Act of
1940.................................... 52
USE OF PROCEEDS............................. 52
FEDERAL INCOME TAX CONSEQUENCES............. 52
General................................... 52
Opinions.................................. 53
Taxation of Debt Securities (Including
Regular Interest Securities)............ 54
Status of Regular Interest Securities..... 60
REMIC Expenses; Single Class REMICs....... 61
Taxation of the REMIC..................... 61
Taxation of Holders of Residual Interest
Securities.............................. 63
Administrative Matters.................... 66
Tax Status as a Grantor Trust............. 66
Miscellaneous Tax Aspects................. 69
Tax Treatment of Foreign Investors........ 70
Tax Characterization of the Trust as a
Partnership or Division................. 71
Tax Consequences to Holders of the Notes
Issued by a Partnership or Division..... 72
Tax Consequences to Holders of the
Certificates Issued by a Partnership.... 72
STATE TAX CONSEQUENCES...................... 76
ERISA CONSIDERATIONS........................ 77
General................................... 77
ERISA Considerations Relating to
Certificates............................ 77
Underwriter Exemption..................... 77
ERISA Considerations Relating to Notes.... 82
LEGAL INVESTMENT............................ 83
PLAN OF DISTRIBUTION........................ 83
LEGAL MATTERS............................... 84
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 the
series of securities:
- the aggregate principal amount, interest rate, and authorized
denominations of each class;
- the type of securities to be issued with respect to each class;
- certain information concerning the home equity loans;
- the terms of any credit enhancement with respect to the series;
- the terms of any insurance related to the home equity loans;
- information concerning any other assets in the related trust fund,
including any reserve fund;
- the final scheduled distribution date of each class of the securities;
- the method to be used to calculate the amount of interest and principal
required to be applied to the securities of each class of the series on
each distribution date, the timing, order of priority and allocation of
interest and principal among the classes;
- the distribution dates on which payments of principal and interest on the
securities, along with other amounts specified in the prospectus
supplement, are made;
- any assumed reinvestment rate with respect to funds held in any fund or
account for the series;
- the amount, if any, deposited in a prefunding account available to
purchase additional home equity loans, the length of the prefunding period
and the criteria for determining which additional home equity loans may
become part of the trust fund;
- additional information with respect to the plan of distribution of the
securities; and
- whether one or more REMIC elections will be made with respect to some or
all of the trust fund for the series and if so, the designation of the
offered securities as regular interests or residual interests in a REMIC.
REPORTS TO HOLDERS
Depending on whether a series of certificates or a series of notes is being
issued, the agreements governing the transaction will include:
- a pooling and servicing agreement or a trust agreement for a transaction
involving the issuance of certificates; or
- a sale and servicing agreement and an indenture for a transaction
involving the issuance of notes.
The agreements require periodic and annual reports concerning the related
trust fund for a series of securities to be forwarded to holders. Unless
otherwise specified in the related prospectus supplement, these reports will not
be examined and reported on by an independent public accountant. If specified in
the prospectus supplement for a series of securities, the series or one or more
classes of the series will be issued in book-entry form. In this case, owners of
the notes or certificates will not be considered "holders" under the agreements
and will not receive any reports directly. Instead, reports will be furnished to
owners through the participants and indirect participants of the applicable
book-entry system. References in this prospectus to the rights of "holders" will
refer to the rights of owners as they may be exercised indirectly through these
participants.
WE REFER YOU TO "THE AGREEMENTS--REPORTING REQUIREMENTS" FOR MORE DETAIL.
3
AVAILABLE INFORMATION
The depositor has filed with the Securities and Exchange Commission (the
"SEC") a registration statement under the Securities Act of 1933, as amended,
with respect to the securities. This prospectus, which forms a part of the
registration statement, and the prospectus supplement relating to each series of
securities contain summaries of the material terms of the documents referred to
in the prospectus supplement and this prospectus, but do not contain all of the
information set forth in the registration statement pursuant to the rules and
regulations of the SEC. For further information, we refer investors to the
registration statement and the related exhibits. The registration statement and
exhibits can be inspected and copied at prescribed rates at the public reference
facilities maintained by the SEC at its Public Reference Section, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at its Regional Offices located as
follows, Midwest Regional Office, 500 West Madison Street, Chicago, Illinois
60661; and Northeast Regional Office, Seven World Trade Center, New York, New
York 10048. The SEC maintains an internet web site that contains reports, proxy
and information statements and other information regarding the registrants that
file electronically with the SEC, including the depositor. The address of the
internet web site is (http://www.sec.gov).
Each trust fund will be required to file certain reports with the SEC
pursuant to the requirements of the Securities Exchange Act of 1934, as amended.
The depositor and the seller intend to cause each trust fund to suspend filing
reports if and when these reports are no longer required under the Exchange Act.
No person has been authorized to give any information or to make any
representation other than those contained in this prospectus and any prospectus
supplement. Investors should not rely on any information or representations not
contained in this prospectus or any prospectus supplement. This prospectus and
any prospectus supplement do not constitute an offer to sell or a solicitation
of an offer to buy any securities other than the securities offered under this
prospectus and the applicable prospectus supplement, and is not an offer of the
securities to any person in any state or other jurisdiction in which an offer
would be unlawful. The delivery of this prospectus does not imply that
information contained in the prospectus is correct as of any time subsequent to
its date.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents subsequently filed with the SEC by or on behalf of the trust
fund referred to in the accompanying prospectus supplement 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 securities issued
by the 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
the documents. Any statement contained in a document incorporated or deemed to
be incorporated by reference in this prospectus should 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 accompanying prospectus supplement) or
in any other subsequently filed document which also is or is deemed to be
incorporated by reference modifies or replaces the statement. Any statement
modified or superseded in this manner should not be deemed, except as modified
or superseded, to constitute a part of this prospectus.
The seller on behalf of any trust fund will provide without charge to each
person to whom this prospectus is delivered, on written or oral 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 these exhibits are
specifically incorporated by reference into the information incorporated in this
prospectus).
4
INTRODUCTION
This prospectus provides for the issuance of series of certificates or notes
consisting of one or more classes, one or more of which may be classes of:
- Compound Interest Securities
- Planned Amortization Class Securities
- Variable Interest Securities
- Zero Coupon Securities
- Principal Only Securities
- Interest Only Securities
Certain classes of securities may be subordinated to other classes, both as
to payment priority and as to allocation of losses with respect to the home
equity loans. In addition, Residual Interest Securities representing a residual
interest in the trust fund may be provided for. Each class may differ in, among
other things, payment terms and priorities, final scheduled distribution dates
and distribution dates with respect to distributions of interest and principal.
The certificates will represent interests in, and the notes will be secured
by, all or a portion of the assets in the trust fund with respect to the series
issued. Where one or more classes of securities are backed by only a portion of
the assets in the trust fund, it will, unless crosscollateralization is
permitted pursuant to the prospectus supplement, only be entitled to payment out
of the assets of its portion of the trust fund.
This prospectus provides for various features, including a prefunding
account to be used to purchase assets after the closing date for a specified
prefunding period, revolving and amortizing periods, and optional termination of
the trust. Credit enhancement is available in a number of forms, which are
discussed in this prospectus.
THE DEPOSITOR
Unless otherwise specified in the prospectus supplement, CHEC Funding, LLC
will act as depositor. CHEC Funding, LLC is a limited liability company which
was formed in the State of Delaware on December 7, 1999, and is a wholly-owned
subsidiary of the seller. The depositor maintains its principal offices at 2728
N. Harwood Street, Dallas, Texas, 75201. Its telephone number is
(214) 981-5000.
The depositor does not have, nor is it expected in the future to have, any
significant assets.
THE SELLER AND THE SERVICER
GENERAL
The seller and servicer, Centex Credit Corporation d/b/a Centex Home Equity
Corporation, a Nevada corporation, is a sub-prime mortgage lender formed in 1994
that engages in originating primarily non-conforming home equity loans, through
five major origination sources. The seller was originally named Nova Credit
Corporation and was headquartered in Denver, Colorado. In the first calendar
quarter of 1997, the seller's operations were moved to Dallas, Texas and the
seller underwent a reorganization and the hiring of a new management team. In
April of 1997, the seller's name was changed to Centex Credit Corporation d/b/a
Centex Home Equity Corporation. The seller is a wholly-owned subsidiary of
Centex Financial Services, Inc., a financial services subsidiary of Centex
Corporation, headquartered in Dallas, Texas. Centex Corporation is a publicly
traded, diversified company with a market capitalization of approximately
$2.3 billion and is primarily engaged in the home building, financial services,
contracting and construction services industries. The seller is also affiliated
with CTX Mortgage Company, a Nevada corporation, which originates home mortgage
loans
5
conforming to Fannie Mae and/or Freddie Mac guidelines. Since inception, the
seller has focused on lending to individuals who have substantial equity in
their homes but have impaired or limited credit histories. The seller's home
equity loans to these borrowers are made for many purposes such as debt
consolidation, refinancing, home improvement or educational expenses.
Substantially all of the seller's home equity loans are secured by first or
second mortgage liens on one-to four-family residences, and have amortization
schedules ranging from five years to 30 years.
The seller is currently licensed to do business in 48 states plus the
District of Columbia and employs approximately 1,284 people located in 131
offices in 37 states. The seller originates home equity loans through its retail
branch network of 60 branch offices located in 29 states. In addition, the
seller originates home equity loans through a broker referral network from five
division offices with a total of 18 regions. A third production source for the
seller is referral of home equity loans from its affiliate conforming mortgage
company, CTX Mortgage Company. A fourth source of origination of home equity
loans for the seller is purchases of loans from approved wholesale sources that
fit the seller's criteria and pass its investigative process. The final source
of origination of home equity loans is the seller's direct sales unit which
sources loans through telemarketing and direct mail efforts. The seller's
strategy is to utilize these origination channels to generate growth in the
volume of the home equity loans originated while diversifying sources of the
home equity loans and maintaining emphasis on its underwriting standards.
The seller has centralized its underwriting, servicing and quality control
functions in its Dallas headquarters.
The seller's headquarters are located at 2828 North Harwood Street, Dallas,
Texas, 75201 and its telephone number is (214) 981-5000.
UNDERWRITING GUIDELINES APPLICABLE TO THE HOME EQUITY LOANS
THE PRE-UNDERWRITING PROCESS. The seller's home equity loan application
process is conducted by the seller's branch officers and approved mortgage
brokers who compile information necessary for the seller's underwriting
department to evaluate the home equity loan. The approval process is generally
coordinated over the telephone with applications and credit reports obtained by
branch processors or brokers and usually sent by facsimile transmission to the
processing department at one of the seller's offices. Branch personnel
communicate with the seller's centralized underwriting staff, located in Dallas,
Texas, which consists of approximately 28 underwriters. The seller also employs
22 other underwriters in five divisional offices, which have loan approval
authority on a limited basis. Branch operation personnel review the applicant's
credit history, based on the information contained in the application as well as
reports available from credit reporting bureaus, to see if the credit history is
acceptable given the seller's underwriting guidelines. A credit report from one
approved repository is required for pre-approval and one preferred credit bureau
report or two credit reports are required prior to underwriting review. These
credit reports are the primary means utilized to verify each borrower's mortgage
and other debt payment histories. Based on this review, the proposed terms of
the home equity loan are then communicated to the branch officer or broker
responsible for the application who in turn discusses the proposal with the home
equity loan applicant. If the applicant accepts the proposed terms, a branch
officer or broker will gather additional information necessary for the
underwriting, closing, and funding of the loan.
THE STANDARD NON-CONFORMING PROGRAM. The home equity loans were originated
under the seller's Standard Non-Conforming Program. The Standard Non-Conforming
Program is applicable to residential loans which, for credit reasons, do not
conform to "traditional lenders" underwriting guidelines comparable to those
employed by savings and loans and commercial banks. The seller began
underwriting home equity loans in accordance with the Standard Non-Conforming
Program in May 1997.
6
The seller's underwriting standards under the Standard Non-Conforming
Program are primarily intended to assess creditworthiness of the mortgagor, the
value of the mortgaged property and to evaluate the adequacy of the property as
collateral for the home equity loan. While the seller's primary consideration in
underwriting a home equity loan is the borrower's employment stability and
debt-to-income ratio, the condition and value of the mortgaged property relative
to the amount of the home equity loan is another critical factor. In addition,
it also considers, among other things, a mortgagor's credit history and
repayment ability, as well as the type and use of the mortgaged property.
The seller currently employs approximately 55 underwriters and has its
underwriting functions primarily centralized in its Dallas, Texas headquarters.
The seller does not delegate underwriting authority to any broker or
correspondent. The seller's underwriting department functions independently of
its mortgage origination departments. Underwriters are compensated on a salary
basis, and are not compensated on commission.
The seller's policy is that every home equity loan is reviewed and approved
by an underwriter with assigned approval authorities. Home equity loans
exceeding those authorities require a second approval, generally from a manager
of underwriting or an underwriting supervisor.
The seller has established classifications with respect to the credit
profile of the applicant, and each loan is placed into one of seven ratings "A+"
through "D". Terms of loans made by the seller as well as maximum loan-to-value
ratios and debt-to-income ratios vary depending on the classification of the
applicant. Home equity loan applicants with less favorable credit ratings are
generally offered home equity loans with higher interest rates and lower
loan-to-value ratios than applicants with more favorable credit ratings.
The home equity loans underwritten under the seller's Standard
Non-Conforming Program are adjustable and fixed rate loans. Except for balloon
loans, the fixed rate home equity loans originated by the seller have
amortization schedules ranging from 5 years to 30 years, and generally require
equal monthly payments which are due as of a scheduled day of each month which
is fixed at the time of origination. The fixed rate balloon loans, originated by
the seller, generally provide for scheduled amortization over 30 years, with a
maturity date and a balloon payment at the end of the fifteenth year. The seller
originates adjustable rate loan products called six-month ARMs or 2/28 ARMs,
both of which bear interest at rates which adjust based on six-month LIBOR, with
the initial rate adjustment date being either six months after the date of
origination of the loan or 24 months after the date of origination of the loan.
The six-month ARMs amortize over 15 to 30 years, adjust every six months and
allow for a maximum periodic rate adjustment of 1.00%. The maximum adjustment
over the life of a six-month ARM is capped at 7.00% above the initial interest
rate of the loan and the minimum interest rate is generally equal to the initial
interest rate. The 2/28 ARMs amortize over 30 years, have an initial interest
rate adjustment date which is 24 months after the date of origination and allow
for a maximum rate adjustment on the initial interest rate adjustment date of
2.00%. After the initial rate adjustment date, the 2/28 ARMs adjust every six
months, allow for a maximum periodic interest rate adjustment of 1.00%, have a
lifetime cap on interest rate adjustments of 7.00% above the initial interest
rate of the loan and allow for a minimum rate generally equal to the initial
interest rate of the loan. The seller does not currently originate ARMs with a
balloon feature. The principal amounts of the home equity loans originated by
the seller generally range from a minimum of $5,000 to a maximum of $500,000.
The collateral securing loans originated by the seller are generally one- to
four-family residences, including condominiums, cooperatives, townhomes and
manufactured housing treated as real property under applicable state law. These
properties may or may not be occupied by the owner. It is the seller's policy
not to accept commercial properties, mixed-use properties or unimproved land as
collateral. Rural property requires a 5% reduction in loan-to-value ratio.
Second mortgages require a 5% reduction in loan-to-value ratio on owner occupied
property. The seller generally does not originate second lien home equity loans
where any senior mortgage lien allows for
7
open-end advances or negative amortization, is a private party mortgage or has
shared appreciation provisions.
The seller has established a "piggyback" program where the seller may
originate a first and second mortgage loan with same borrower simultaneously.
Loan-to-value ratios on the first mortgage under the piggyback program must meet
standard "A+", "A-1" or "A-2" product guidelines. The second mortgage under
the piggyback program is allowed combined loan-to-value ratios up to 100%. The
requirements under the piggyback program for second mortgages in addition to
standard program requirements include: maximum loan size of $70,000, maximum
term of 180 months, single family detached owner occupied properties only with
full income documentation and "A-2" or better credit standards.
The home equity loans underwritten under the Standard Non-Conforming Program
are underwritten pursuant to the "Full Documentation" residential loan program,
the "Limited Documentation" residential loan program or the "Stated Income"
residential loan program. Under each of these programs, the seller reviews the
home equity loan applicant's source of income, calculates the amount of income
from sources indicated on the loan application or similar documentation, reviews
the credit history of the applicant, calculates the debt-to-income ratio to
determine the applicant's ability to repay the home equity loan, reviews the
type and use of the property being financed and reviews the property for
compliance with the seller's standards. In determining an applicant's ability to
repay a six-month ARM, the seller uses a qualifying rate equal to six-month
LIBOR plus a margin. In determining an applicant's ability to pay 2/28 ARM, the
seller uses a qualifying rate equal to the initial interest rate on the home
equity loans, that is, six-month LIBOR plus a margin up to 2.50%. It is the
policy of the seller for its underwriting process to consist of a thorough
credit review and a thorough appraisal review on each home equity loan by its
underwriting department. In addition, the Seller performs a separate appraisal
review by the seller's appraisal review department on home equity loans
considered to be higher risk loans. These include limited documentation loans,
stated income loans, loans secured by multi-unit properties, loans secured by
non-owner occupied collateral, loans with higher loan-to-value ratios, and loans
involving non-approved appraisers. Finally, the seller performs a full
compliance review, to ensure that all documents have been properly prepared, all
applicable disclosures given in a timely fashion, and that there has been proper
compliance with all federal and state regulations. Appraisals are performed by
third party, independent, fee-based, state-licensed appraisers generally
approved by the seller's staff appraiser and generally conforming to current
Fannie Mae and/or Freddie Mac secondary market requirements for residential
property appraisals. Each appraisal includes, among other things, an inspection
of the interior and exterior of the subject property and data from sales within
the same general location as the subject property where available.
The seller's underwriting criteria require it to determine the income of
each borrower and the source of funds (if applicable). Under the Full
Documentation Program, it is the policy of the seller that home equity loans to
borrowers who are salaried employees be supported by current employment
information in addition to employment history. This information for salaried
borrowers is verified based on any of the following: written confirmation from
employers, one or more pay-stubs, recent W-2 tax forms or recent tax returns. In
addition, a telephone confirmation of employment is made. Under the Limited
Documentation Program, self-employed borrowers are qualified based upon monthly
income stated on the home equity loan application. Current tax return or six
months of current bank statements and a signed profit and loss statement are
obtained to verify existence of business and acceptable cash flow. Under the
Stated Income Program, borrowers are qualified based upon monthly income as
stated on the home equity loan application and telephone confirmation of
employment. Self-employed borrowers under the Stated Income Program are required
to submit a business license, current bank statements, and verification with
directory assistance to ensure existence of the business.
Verification of the source of funds (if any) required by the applicant is
generally required under purchase money programs in the form of a standard
verification of deposit, current bank statement or
8
other acceptable documentation. Twelve months of mortgage payments or rental
history must be verified by lender or landlord. If appropriate compensating
factors exist, the seller may waive certain documentation requirements for
individual borrowers. All documentation should be no more than 60 days old at
underwriting and no more than 90 days old at the time of the funding of the
related loan. Upon completion of a home equity loan's underwriting and
processing, the closing of the loan is scheduled with a closing attorney or
agent approved by the seller. The closing attorney or agent is responsible for
completing the loan closing transaction in accordance with applicable law and
the seller's operating procedures. Title insurance that insures the seller's
interest as mortgagee and evidence of adequate homeowner's insurance naming the
seller and its assignees as an additional insured party are required on all
loans.
CREDIT INSURANCE. The seller is currently underwriting some, but not all,
of its home equity loans with truncated decreasing credit insurance that is
underwritten by an unrelated third party. One type of credit insurance is credit
life insurance which provides for the payment of indebtedness upon the death of
the insured. This type of insurance may be underwritten as either joint
insurance (covering both borrower and co-borrower) or single insurance (covering
the primary borrower only). The maximum coverage amount of the credit life
insurance is $100,000 and is based upon a net payoff basis. The term of the
coverage is limited to five years. A second type of credit insurance is
involuntary unemployment insurance. This type of insurance pays to the creditor
the scheduled monthly payment obligation of an insured debtor in cases where the
debtor has become unemployed involuntarily. The maximum monthly benefit is $750
with the term of the insurance being limited to five years.
UNDERWRITING CRITERIA OF THE SELLER
"A+" RISK. Under the "A+" risk category, the prospective borrower must have
repaid installment or revolving consumer debt according to its terms with no
30-day late payments within the last 12 months and within the prior 12 month
period no 30-day late payments are permitted on an existing mortgage. No
collection accounts, unpaid charge-offs, judgments or a derogatory public record
is permitted within the past two years (except medical collections under
$500.00). No bankruptcy or foreclosure may have occurred during the preceding
seven years commencing from the date of discharge or the date the foreclosure
was filed. No state or federal tax liens (paid or unpaid) and no delinquent
property taxes are permitted in the last two years. A maximum loan-to-value
ratio of 90% for home equity loans originated under the Full Documentation
Program (85% for Limited Documentation Program or 80% if the home equity loan is
originated under the Stated Income Program) is permitted for a home equity loan
of less than $500,000 on an owner-occupied property. A maximum loan-to-value
ratio of 85% for a home equity loan originated under the Full Documentation
Program (75% for Limited Documentation Program or 70% if the home equity loan is
originated under the Stated Income Program) is permitted for a home equity loan
of less than $500,000 on non-owner occupied property. The maximum debt
service-to-income ratio is 45%.
"A-1" RISK. Under the "A-1" risk category, the prospective borrower must
have generally repaid installment or revolving debt according to its terms with
no 60-day late payments within the last 12 months. A maximum of one 30-day late
payment is acceptable in the last 12 months on an existing mortgage. Consecutive
30-day delinquencies may be considered as a single late. This is limited to
30-days late only. Minor derogatory items are allowed as to non-mortgage credit.
No Collection Accounts, charge-offs or judgments over $500 within the last two
years are allowed. No bankruptcy or notice of default filings by the borrower
may have occurred during the preceding five years. A maximum loan-to-value ratio
of up to 90% (85% for the Limited Documentation Program or 80% for home equity
loans originated under the Stated Income Program) is permitted for a home equity
loan on a one-to-four family owner-occupied property. A maximum loan-to-value
ratio of up to 85% (75% for the Limited Documentation Program or 70% for home
equity loan originating under the Stated Income Program) is permitted for a home
equity loan on a non-owner occupied property. The debt
9
service-to-income ratio generally is 50% or less based on the relevant
qualifying rate for the home equity loan. The maximum loan amount is $500,000
for a one-to-four family property under the Full Documentation Program. The
maximum loan amount is $350,000 for a home equity loan on a one-to-four family
property under the Limited Documentation Program or Stated Income Program.
Exceptions to the maximum loan amount for a single-family, owner occupied
property are considered by the seller on a limited basis.
"A-2" RISK. Under the "A-2" risk category, the prospective borrower must
have generally repaid installment or revolving debt according to its terms with
no 90-day late payments within the last 12 months. A maximum of two 30-day late
payments and no 60-day late payments within the last 12 months is acceptable on
an existing home equity loan. Minor derogatory items are allowed as to
non-mortgage credit. No unpaid Collection Accounts, charge-offs or judgments
over $1,000 within the last two years are allowed. No bankruptcy or notice of
default filings by the borrower may have occurred during the preceding three
years. A maximum loan-to-value ratio of up to 90% (80% for Limited Documentation
Program or 80% for home equity loans originated under the Stated Income Program)
is permitted for a home equity loan on a one-to-four family owner occupied
property. A maximum loan-to-value ratio of up to 80% (75% for Limited
Documentation Program or 65% for home equity loans originated under the Stated
Income Program) is permitted for a home equity loan on a non-owner occupied
property. The debt service-to-income ratio generally is 50% or less based on the
relevant qualifying rate of the home equity loan. The maximum loan amount is
$500,000 for a one-to-four family property under the Full Documentation Program.
The maximum loan amount is $350,000 for a home equity loan on a one-to-four
family property under the Limited Documentation Program or Stated Income
Program. Exceptions to the maximum loan amount for a single-family, owner
occupied property are considered by the seller on a limited basis.
"B" RISK. Under the "B" risk category the prospective borrower must have
generally repaid consumer debt according to its terms with no 120-day late
payments within the last 12 months. A maximum of three 30-day late payments
within the last 12 months is acceptable on an existing home equity loan on the
subject property. As to non-mortgage credit, some prior defaults may have
occurred. Isolated and insignificant collections and/or charge-offs and
judgments within the last 24 months less than $2,500 are permitted and are not
required to be paid from the proceeds of the home equity loan. No bankruptcy or
foreclosure by the borrower may have occurred during the preceding 24 months. A
maximum loan-to-value ratio of 85% (80% for Limited Documentation Program or 75%
for Stated Income Program) is permitted for a home equity loan on a one-to-four
family owner occupied property. A maximum loan-to-value ratio of 75% (70% for
Limited Documentation Program or 65% for home equity loans originated under the
Stated Income Program) is permitted for a home equity loan on a non-owner
occupied property. The debt service-to-income ratio generally is 50% or less
based on the relevant qualifying rate for the home equity loan. The maximum loan
amount is $500,000 for a one-to-four family property under the Full
Documentation Program. The maximum loan amount is $350,000 for home equity loans
originated under the Limited Documentation Program or Stated Income Program.
"C-1" RISK. Under the "C-1" risk category, the prospective borrower may
have experienced significant credit problems in the past. Installment debt may
have been up to 120 days delinquent within the last twelve months. A maximum of
one 60-day late payment within the last 12 months is acceptable on an existing
home equity loan. The existing home equity obligation can be up to 60 days past
due at the funding of the loan. As to non-mortgage credit, significant prior
defaults may have occurred. There may be open collections or charge-offs not to
exceed $2,500 and up to $5,000 in isolated circumstances. However, Collection
Accounts, unpaid charge-offs or judgments are not required to be paid from the
proceeds of the home equity loan. No bankruptcy or notice of default filings by
the borrower may have occurred during the preceding 12 months. A maximum
loan-to-value ratio of 80% (75% on the Limited Documentation Program or 70% for
home equity loans originated
10
under the Stated Income Program) is permitted for a home equity loan on a
one-to-four family owner-occupied property. A maximum loan-to-value ratio of 70%
(65% on Limited Documentation Program) is permitted for a home equity loan on a
non-owner-occupied property. The debt service-to-income ratio is generally 50%
or less based on the relevant qualifying rate for the home equity loan. The
maximum loan amount is $350,000 for a home equity loan on a one-to-four family
owner-occupied or non-owner occupied property. The maximum loan amount is
$250,000 on the Limited Documentation Program.
"C-2" RISK. Under the "C-2" risk category, the prospective borrower may
have experienced significant credit problems in the past. Installment debt may
have been up to 120 days delinquent within the last twelve months. A maximum of
two 60-day late payments or one 90-day late payment within 12 months is
acceptable on an existing home equity loan on the subject property. The existing
home equity obligation can be up to 90 days past due at the funding of the loan.
As to non-mortgage credit, significant prior defaults may have occurred. There
may be open collections or charge-offs not to exceed $5,000 and Collection
Accounts, unpaid charge-offs or judgments are not required to be paid from the
proceeds of the home equity loan. No bankruptcy or notice of default filings by
the borrower may have occurred during the preceding 6 months. A maximum
loan-to-value ratio of 75% is permitted for a home equity loan on a one-to-four
family owner-occupied property. A maximum loan-to-value ratio of 65% is
permitted for a home equity loan on a non-owner-occupied property. The debt
service-to-income ratio is generally 50% or less based on the relevant
qualifying rate for the home equity loan. The maximum loan amount is $350,000.
"D" RISK. Under the "D" risk category, the prospective borrower may have
experienced significant credit problems in the past. As to non-mortgage credit,
significant prior defaults may have occurred. The borrower is sporadic in some
or all areas with a disregard for timely payment or credit standing. With
respect to an existing home equity loan on the subject property, the home equity
loan may be no more than one time 120 days late and may be in foreclosure
proceedings. The existing home equity loan is not required to be current at the
time the application is submitted. The borrower may have open collections,
charge-offs and judgments, which are generally paid through the loan proceeds if
the amount exceeds $5,000. Bankruptcy or notice of default filings by the
borrower may be present at the time of the loan. A maximum loan-to-value ratio
of 70% is permitted for a home equity loan on a one-to-four family
owner-occupied property. A maximum loan to value ratio of 50% is permitted for a
home equity loan on non-owner occupied one-to-four family property. The maximum
loan amount is $350,000. The debt service-to-income ratio generally is 50% or
less based on the relevant qualifying rate for the home equity loan.
EXCEPTIONS. As described above, the seller uses the foregoing categories
and characteristics as underwriting guidelines only. On a case-by-case basis, it
may determine that the prospective borrower warrants a risk category upgrade, a
debt service-to-income ratio exception, a pricing exception, a loan-to-value
exception or an exception from certain requirements of a particular risk
category. An upgrade or exception may generally be allowed if the application
reflects certain compensating factors, among others:
- reduced loan-to-value ratio;
- good property maintenance;
- mortgage history consistent with the risk category upgrade;
- stable employment;
- disposable income; and
- the length of residence in the subject property.
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Accordingly, the seller may classify certain home equity loan applications in a
more favorable risk category than other home equity loan applications that, in
the absence of these compensating factors, would satisfy only the criteria of a
less favorable risk category.
SERVICING
The servicer has been servicing loans since March 1997, when it assumed the
default management cycle of loans previously handled by CTX Mortgage Company,
which is primarily a conforming seller/ servicer. The servicer or one of its
affiliates originates all of the loans it services, other than those purchased
by it from approved wholesale sources. Servicing encompasses, among other
activities, the following processes: billing and collection of payments when
due, movement and reporting of cash to the payment clearing bank accounts,
customer help, reconveyance, recovery of delinquent installments, instituting
foreclosure, and liquidation of the underlying collateral. As of April 30, 2001,
the servicer was servicing a portfolio of approximately $3.3 billion. The
servicer is currently ranked "average" as a subprime loan servicer under
Standard & Poor's Ratings Services, a division of The McGraw-Hill
Companies, Inc. servicer evaluation rankings.
The servicer services all loans in its Dallas, Texas servicing facility
using a mid-range AS-400 based servicing platform, known as LSAMS, for which the
servicer purchased a separate user license in August of 1997. The LSAMS system
is also employed by other large, nonconforming servicers in the subprime
industry. The company has purchased an additional servicing system from London
Bridge Corporation, known as FORTRACS, an event-tracking system with separate
modules for foreclosure, bankruptcy, and REO property. FORTRACS has generally
increased the servicer's ability to track and monitor loans in the default
process.
The servicer's operating and compliance policies and procedures are
published and updated to comply with state and federal legal and regulatory
requirements.
The servicer's default management policy has been designed to identify
collection problems so as to facilitate a prompt response to the delinquent
borrower's situation. Early identification of a significant collection problem
is especially critical in the subprime mortgage environment.
Borrowers are mailed a monthly billing statement approximately two weeks
prior to their due date. Collection activity on an account begins as soon as
five days after the scheduled due date if a payment is not made. A "First
Notice" is generated by LSAMS and mailed to the mortgagor generally on the 12th
day after the due date. Loans on which one of the initial three payments on a
new loan have not been received will generally be called on the third day of
default to ensure that all terms of the new loan are understood by the
borrower(s) and to determine if any serious problems exist which will affect
prompt repayment of the loan.
The collection strategy is to determine the facts surrounding the
delinquency, obtain customer agreement for the solution, and to attempt to
preclude future delinquency on the part of the borrower. Generally, when a
promise for payment is obtained from the borrower by the collector, LSAMS will
target the loan in the "queue" for the date of the promised payment. If the
payment is made, the account is removed from the collection queue. If the
arrangement for payment was not kept, the loan is placed back in the call route
for the collector to contact and follow up on the previous arrangements for
payment. If the payment is received per the arrangements and no future promise
or target dates are noted on LSAMS, the loan will be removed from the collection
cycle unless the account becomes delinquent in the future.
Generally, when a loan appears in the LSAMS default management system, the
collector will telephone the borrower(s) to discuss the past due payment
situation. Standard collection form letters, approved by the servicer's legal
department, are generally utilized in conjunction with telephone calling, in
order to reach the delinquent borrower(s). Documentation of collection activity
is critically important
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in the default management process. Collectors have access on LSAMS to borrower
demographics, telephone numbers, loan payment history, and all previous
collection notes, to assist in the collection of a past due account. The policy
of the servicer is that managers in the collection department are required to
monitor collectors' work on LSAMS and to offer guidance and training to their
employees.
It is the policy of the servicer to send out a notice of demand at the 61st
day of delinquencies. This may be done sooner if the circumstances of a
particular account indicate that legal action appears likely. This letter will
give the customer 30 days' notice of the servicer's intent to initiate
foreclosure action on the loan. If an alternative to foreclosure is appropriate,
a recommended course of action will be prescribed by senior servicing
management. Servicing and collection practices regarding the liquidation of
properties (e.g., foreclosure) and the rights of the borrower vary from state to
state.
Prior to any foreclosure action, and intermittently updated throughout the
process, the servicer performs an in-depth market value analysis on all
defaulted loans. This analysis includes a current appraisal or broker price
opinion conducted by an independent vendor from the servicer's approved network
of appraisers or real estate brokers. The servicer uses the market value
analysis to develop its strategy for bidding, repairs, and sale of the property.
If the servicer acquires title to a property at a foreclosure sale or
through other means, the REO property department immediately begins working on
the file by obtaining at least two local real estate brokers to inspect the
property and provide an estimate of repairs needed and a recommended list price.
Repairs are performed if it is determined that they will increase the net
liquidation proceeds and speed of disposal.
If the property is not vacated when it is acquired, a local attorney will be
hired to commence eviction proceedings. Once it has listed a foreclosed
property, the REO property department will follow up closely with the listing
agent to ensure that the collateral is secure and that it is being aggressively
marketed.
The servicer outsources the tracking and follow up on homeowner's insurance
and property taxes. Expiration lists on homeowner insurance are provided on a
biweekly basis to the servicer by the service provider. When insurance policies
lapse, a letter is mailed to the borrower, advising that coverage has lapsed and
in the absence of a new policy, that the servicer will obtain a collateral
protection insurance policy on the borrower's behalf and at the borrower's
expense. The servicer has a master policy with the collateral protection
insurance provider which protects against errors and omissions with a blanket
policy covering the servicer's balance on the loan.
Despite the description of the seller's servicing procedures described
above, the servicer will be required to service the home equity loans in
accordance with the servicing standards and other terms set forth in the
relevant agreements.
DESCRIPTION OF THE SECURITIES
GENERAL
Each series of notes will be issued pursuant to an indenture between the
related trust fund and the entity named in the related prospectus supplement as
indenture trustee with respect to the series. A form of indenture has been filed
as an exhibit to the registration statement of which this prospectus forms a
part. Certificates will be issued in series pursuant to a pooling and servicing
agreement or a trust agreement among the depositor, the seller, the servicer and
the entity named in the prospectus supplement as the trustee. A form of pooling
and servicing agreement has been filed as an exhibit to the registration
statement of which this prospectus forms a part. A series may consist of both
notes and certificates. For purposes of this prospectus, the term "trustee" will
be used to refer to the trustee with respect to a series of certificates or the
indenture trustee with respect to a series of notes. The term
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"agreement" or "agreements" will refer to the relevant agreement or agreements
in the context in which the term appears.
The following summaries describe the material provisions in the agreements
common to each series of securities. The summaries do not purport to be complete
and are subject to, and are qualified in their entirety by reference to, the
provisions of the agreements and the prospectus supplement relating to each
series of securities. Where particular provisions or terms used in the
agreements are referred to, the actual provisions (including definitions of
terms) are incorporated in this prospectus by reference as part of the summaries
contained in this prospectus.
Each series of securities will consist of one or more classes of securities,
one or more of which may be:
- Compound Interest Securities, with respect to which, for a certain
specified period of time, instead of requiring payment of interest, all or
a portion of the accrued interest is capitalized, that is, added to the
principal balance on each distribution date. At the end of this period,
interest payments will be made on a principal balance that includes the
capitalized interest;
- Variable Interest Securities, with respect to which interest accrues at a
rate that is adjusted, based upon a predetermined index, at fixed periodic
intervals, as set forth in the related prospectus supplement;
- Planned Amortization Class (PAC) Securities, with respect to which
payments of principal are made in accordance with a schedule specified in
the related prospectus supplement, based on certain assumptions stated in
the prospectus supplement;
- Zero Coupon Securities, which are entitled to receive payments of
principal only;
- Principal Only Securities, which are entitled solely or primarily to
distributions of principal and identified as set forth in the prospectus
supplement; or
- Interest Only Securities, which are solely or primarily entitled to
distributions of interest as set forth in the related prospectus
supplement.
A series may also include one or more classes of subordinated securities.
The right to receive principal and/or interest on a subordinated security is
subordinated to the rights of more senior classes to distribution of interest
and/or principal, and the subordinated securities may also be allocated losses
and shortfalls prior to senior classes. Residual Interest Securities may also be
issued to represent a retained interest in the residual value of the trust fund.
The securities of each series will be issued only in fully registered form,
without coupons, in the authorized denominations for each class specified in the
related prospectus supplement. Upon satisfaction of the conditions, if any,
applicable to a class of a series, as described in the related prospectus
supplement, the transfer of the securities may be registered and the securities
may be exchanged at the office of the trustee specified in the prospectus
supplement without the payment of any service charge other than any tax or
governmental charge payable in connection with the registration of transfer or
exchange. If specified in the related prospectus supplement, one or more classes
of a series may be available in book-entry form only.
Payments of principal of and interest on a series of securities will be made
on the distribution dates specified in the related prospectus supplement (which
may be different for each class for the payment of principal and interest) by
check mailed to holders of the securities of the series registered as holders at
the close of business on the record date applicable to the relevant distribution
date, as specified in the related prospectus supplement, at their addresses
appearing on the security register. However, payments may be made by wire
transfer (which, unless otherwise specified in the related prospectus
supplement, will be at the expense of the holder requesting payment by wire
transfer) in
14
certain circumstances described in the related prospectus supplement. In
addition, final payments of principal in retirement of each security will be
made only upon presentation and surrender of the security at the office of the
trustee specified in the prospectus supplement. Notice of the final payment on a
security will be mailed to the holder of the security before the distribution
date on which the final principal payment on any security is expected to be made
to the holder of the security.
Payments of principal of and interest on the securities will be made by the
trustee, or a paying agent on behalf of the trustee, as specified in the related
prospectus supplement. All payments with respect to the home equity loans for a
series, together with reinvestment income on these payments, amounts withdrawn
from any reserve fund, and amounts available pursuant to any other credit
enhancement will be deposited into the Collection Account or the Certificate
Account as specified in the related agreement. If provided in the related
prospectus supplement, these amounts may be net of certain amounts payable to
the servicer and any other person specified in the prospectus supplement. These
amounts may then be deposited into the Distribution Account and will be
available to make payments on the securities of the series on the next
applicable distribution date. See "Accounts--Certificate and Distribution
Accounts."
BOOK-ENTRY SECURITIES
If specified in the related prospectus supplement, one or more classes of
securities may be issued in book-entry form. Persons acquiring beneficial
ownership interests in the book-entry securities will hold their securities
through The Depository Trust Company ("DTC") in the United States, or
Clearstream Banking societe anonyme ("Clearstream, Luxembourg") or the Euroclear
System ("Euroclear") in Europe if they are participants of those systems, or
indirectly through organizations which are participants in any of those systems.
The book-entry securities will be issued in one or more certificates which equal
the aggregate principal balance of the applicable class or classes of securities
and will initially be registered in the name of Cede & Co., the nominee of DTC.
Clearstream, Luxembourg and Euroclear will hold omnibus positions on behalf of
their participants through customers' securities accounts in Clearstream,
Luxembourg's and Euroclear's names on the books of their respective depositories
which in turn will hold positions in customers' securities accounts in the
depositories' names on the books of DTC. Citibank N.A. will act as depository
for Clearstream, Luxembourg and The Chase Manhattan Bank will act as depository
for Euroclear. Except as described below, no person acquiring a book-entry
security will be entitled to receive a physical definitive certificate
representing its security.
Unless and until definitive securities are issued, it is anticipated that
the only certificateholder or noteholder, as applicable, will be Cede & Co., as
nominee of DTC. Beneficial owners are only permitted to exercise their rights
indirectly through DTC or, in Europe, Clearstream, Luxembourg and Euroclear, and
their participants.
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 that maintains the beneficial owner's account for this
purpose. In turn, the financial intermediary's ownership of the book-entry
security will be recorded on the records of DTC (or of a participating firm that
acts as agent for the financial intermediary, whose interest will in turn he
recorded on the records of DTC, if the beneficial owner's financial intermediary
is not a DTC participant and on the records of Clearstream, Luxembourg or
Euroclear, as appropriate).
Beneficial owners will receive all distributions of principal of, and
interest on, the book-entry securities from the trustee through DTC and DTC
participants. While the book-entry securities are outstanding (except under the
circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations, DTC is required to make
book-entry transfers among participants on whose behalf it acts with respect to
the securities and is required to
15
receive and transmit distributions of principal of, and interest on, the
securities. Participants and indirect participants with whom beneficial owners
have accounts with respect to securities 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 DTC 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
representing their respective interests in the securities, except under the
limited circumstances described below. Unless and until definitive securities
are issued, beneficial owners who are not participants may transfer ownership of
securities only through participants and indirect participants by instructing
participants and indirect participants to transfer securities, by book-entry
transfer, through DTC for the account of the purchasers of these securities,
which must be maintained with their participants. Under the DTC rules and in
accordance with DTC's normal procedures, transfers of ownership of securities
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, 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 subsequent securities settlement
processing will be reported to the relevant Euroclear or Clearstream, Luxembourg
participants on that business day. Cash received in Clearstream, Luxembourg or
Euroclear as a result of sales of securities by or through a Clearstream,
Luxembourg participant or 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.
Transfers between participants will occur in accordance with DTC rules.
Transfers between Clearstream, Luxembourg participants and Euroclear
participants will occur in accordance with their respective rules and operating
procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Clearstream,
Luxembourg participants or Euroclear participants, on the other, will be
effected in DTC in accordance with DTC rules on behalf of the relevant European
international clearing system by the relevant European depository; however,
these 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 European depository to take action to effect final settlement on
its behalf by delivering or receiving securities in DTC, and making or receiving
payment in accordance with normal procedures for same day funds settlement
applicable to DTC. Clearstream, Luxembourg participants and Euroclear
participants may not deliver instructions directly to the European depositories.
DTC, which is a New York-chartered limited purpose trust company, performs
services for its participants, some of which (and/or their representatives) own
DTC. In accordance with its normal procedures, DTC is expected to record the
positions held by each DTC participant in the book-entry securities, whether
held for its own account or as a nominee for another person. In general,
beneficial ownership of book-entry securities will be subject to the rules,
regulations and procedures governing DTC and DTC participants as in effect from
time to time.
Clearstream, Luxembourg is incorporated under the laws of Luxembourg as a
professional depository. Clearstream, Luxembourg holds securities for its
participating organizations and facilitates
16
the clearance and settlement of securities transactions between Clearstream,
Luxembourg participants through electronic book-entry changes in accounts of
Clearstream, Luxembourg participants, thus eliminating the need for physical
movement of certificates. Transactions may be settled in Clearstream, Luxembourg
in any of 28 currencies, including United States dollars. Clearstream,
Luxembourg provides to its participants, among other things, services for
safekeeping, administration, clearance and settlement of internationally traded
securities and securities lending and borrowing. Clearstream, Luxembourg
interfaces with domestic markets in several countries. As a professional
depository, Clearstream, Luxembourg is subject to regulation by the Luxembourg
Monetary Institute. Clearstream, Luxembourg participants are recognized
financial institutions around the world, including underwriters, securities
brokers and dealers, banks, trust companies, clearing corporations and certain
other organizations. Indirect access to Clearstream, 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 its participants and to
clear and settle transactions between Euroclear 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. 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. The Brussels,
Belgium office of Morgan Guaranty Trust Company of New York functions as
Euroclear operator, under contract with Euroclear Clearance Systems S.C., a
Belgian cooperative corporation. All operations are conducted by the Euroclear
operator, and all Euroclear securities clearance accounts and Euroclear cash
accounts are accounts with the Euroclear operator, not Euroclear Clearance
Systems. The Euroclear Clearance Systems establish policy for Euroclear on
behalf of Euroclear participants. Euroclear participants include banks
(including central banks), securities brokers and dealers and other professional
financial intermediaries. Indirect access to Euroclear is also available to
other firms that clear through or maintain a custodial relationship with a
Euroclear participant, either directly or indirectly.
Because the Euroclear operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with 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.
These Terms and Conditions govern transfers of securities and cash within
Euroclear, withdrawals of securities and cash from Euroclear, and receipts of
payments with respect to securities in Euroclear. All securities in Euroclear
are held on a fungible basis without attribution of specific certificates to
specific securities clearance accounts. The Euroclear Operator acts under these
Terms and Conditions only on behalf of Euroclear participants, and has no record
of or relationship with persons holding through Euroclear participants.
Distributions on the book-entry securities will be made on each distribution
date by the trustee to DTC. DTC will be responsible for crediting the amount of
these payments to the accounts of the applicable DTC participants in accordance
with DTC's normal procedures. Each DTC participant will be responsible for
disbursing these payments to the beneficial owners 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
that it represents.
Under a book-entry format, beneficial owners may experience some delay in
their receipt of payments, since these payments will be forwarded by the trustee
to Cede & Co. Distributions with
17
respect to securities held through Clearstream, Luxembourg or Euroclear will be
credited to the cash accounts of Clearstream, Luxembourg participants or
Euroclear participants in accordance with the relevant system's rules and
procedures, to the extent received by the relevant European depository. These
distributions will be subject to tax reporting in accordance with relevant
United States tax laws and regulations. Because DTC can only act on behalf of
financial intermediaries, the ability of a beneficial owner to pledge book-entry
securities to persons or entities that do not participate in the Depository
system, or otherwise take actions in respect of the book-entry securities, may
be limited due to the lack of physical certificates for book-entry securities.
In addition, issuance of the book-entry securities in book-entry form may reduce
the liquidity of the securities in the secondary market since certain potential
investors may be unwilling to purchase securities for which they cannot obtain
physical certificates.
Monthly and annual reports on the applicable trust fund 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 DTC, and to the financial intermediaries to
whose DTC accounts the book-entry securities of the beneficial owners are
credited.
DTC has advised the trustee that, unless and until definitive securities are
issued, DTC will take any action permitted to be taken by the holders of the
book-entry securities under the relevant agreement only at the direction of one
or more financial intermediaries to whose DTC accounts the book-entry securities
are credited, to the extent that these actions are taken on behalf of financial
intermediaries whose holdings include the book-entry securities. Clearstream,
Luxembourg or the Euroclear operator, as the case may be, will take any other
action permitted to be taken by a holder under the relevant operating agreement
on behalf of a Clearstream, Luxembourg participant or Euroclear participant only
in accordance with its relevant rules and procedures and subject to the ability
of the relevant European depository to effect these actions on its behalf
through DTC. DTC may take actions, at the direction of the related participants,
with respect to some securities which conflict with actions taken with respect
to other securities.
Definitive securities will be issued to beneficial owners, or their
nominees, rather than to DTC, only if:
- DTC or the seller advises the trustee in writing that DTC is no longer
willing, qualified or able to discharge properly its responsibilities as
nominee and depository with respect to the book-entry securities and the
seller or the trustee is unable to locate a qualified successor;
- the seller, at its sole option, elects to terminate a book-entry system
through DTC; or
- after the occurrence of an event of default, beneficial owners owning a
majority in principal amount of the applicable securities advise the
trustee and DTC through the financial intermediaries and the DTC
participants in writing that the continuation of a book-entry system
through DTC (or its successor) is no longer in the best interests of
beneficial owners.
WE REFER YOU TO "THE AGREEMENTS--OPTIONAL TERMINATION--; EVENT OF DEFAULT;
TERMINATION UNDER INDENTURE" FOR A DISCUSSION OF WHAT CONSTITUTES AN EVENT OF
DEFAULT.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the trustee will be required to notify all applicable
beneficial owners of the occurrence of the event and the availability through
DTC of definitive securities. Upon surrender by DTC of the global certificate or
certificates representing the book-entry securities and instructions for
re-registration, the trustee will issue definitive securities, and thereafter
the trustee will recognize the holders of the definitive securities as
certificateholders or noteholders, as applicable, under the applicable
agreement.
Although DTC, Clearstream, Luxembourg and Euroclear have agreed to the
foregoing procedures in order to facilitate transfers of securities among
participants of DTC, Clearstream, Luxembourg and
18
Euroclear, they are under no obligation to perform or continue to perform these
procedures, and these procedures may be discontinued at any time.
Neither the depositor, the seller, the servicer the owner trustee (if
applicable), the trustee 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 securities held by Cede & Co.,
as nominee for DTC, or for maintaining, supervising or reviewing any records
relating to these beneficial ownership interests.
VALUATION OF THE HOME EQUITY LOANS
If specified in the related prospectus supplement for a series of
certificates or notes, each home equity loan included in the related trust fund
for a series will be assigned an initial "asset value." Generally, the related
agreement will specify that at any time the asset value of the home equity loans
will be equal to the product of the asset value percentage as set forth in the
related agreement and the lesser of:
- the stream of remaining regularly scheduled payments on the home equity
loans, net of certain amounts payable as expenses, together with income
earned on each scheduled payment received through the day preceding the
next distribution date at the "assumed reinvestment rate," if any,
discounted to present value at the highest interest rate on the
certificates or notes of the series over periods equal to the interval
between payments on the certificates or notes; and
- the then principal balance of the home equity loans.
Generally, the related agreement will specify that the initial asset value
of the home equity loans will be at least equal to the principal amount of the
certificates or notes of the related series at the date of issuance.
The assumed reinvestment rate, if any, for a series will be the highest rate
permitted by the relevant rating agency or a rate insured by means of a surety
bond, guaranteed investment contract, or other arrangement satisfactory to the
rating agency. If the assumed reinvestment rate is insured in this manner, the
related prospectus supplement will set forth the terms of the relevant insurance
arrangement.
PAYMENTS OF INTEREST
The securities of each class by their terms entitled to receive interest
will bear interest (which is generally calculated on the basis of a 360 day year
of twelve 30-day months) from the date and at the rate per annum specified, or
calculated in the method described, in the related prospectus supplement.
Interest on these securities will be payable on the distribution date specified
in the related prospectus supplement. If so specified in the related prospectus
supplement, the distribution date for the payment of interest of a class may be
different from, or occur more or less frequently than, the distribution date for
the payment of principal with respect to the class. The rate of interest on
securities of a series may be variable or may change with changes in the annual
percentage rates of the home equity loans included in the related trust fund
and/or as prepayments occur with respect to these home equity loans. Principal
Only Securities may not be entitled to receive any interest distributions or may
be entitled to receive only nominal interest distributions. Any interest on Zero
Coupon Securities that is not paid on the related distribution date will accrue
and be added to principal on the related distribution date.
Interest payable on the securities on a distribution date will include all
interest accrued during the period specified in the related prospectus
supplement. In the event interest accrues during the calendar month preceding a
distribution date, the effective yield to holders will be reduced from the yield
that would otherwise be obtainable if interest payable on the securities were to
accrue through the day immediately preceding the distribution date.
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PAYMENTS OF PRINCIPAL
On each distribution date, principal payments will be made to the holders of
securities on which principal is then payable, to the extent set forth in the
related prospectus supplement. These payments will be made in an aggregate
amount determined as specified in the related prospectus supplement and will be
allocated among the relevant classes in the manner, at the times and in the
priority set forth in the prospectus supplement. The holders of one or more
classes of securities may have the right to request that principal distributions
allocable to the applicable class of securities be distributed directly to the
holder. If the requests of holders exceed the amount of principal to be
distributed, the requests generally will be filled in the order in which they
were received. If the amount of principal to be distributed exceeds the amount
of requests, the trustee will select random lots of $1,000 each to receive the
relevant principal distribution. Thus, some holders of the applicable class of
securities may receive no principal distributions or a disproportionate amount
of principal distributions. If specified in the related prospectus supplement,
the distribution date for the payment of principal of a class may be different
from, or occur more or less frequently than, the distribution date for the
payment of interest for the class.
FINAL SCHEDULED DISTRIBUTION DATE
The final scheduled distribution date with respect to each class of notes is
the date no later than the date on which principal will be fully paid. The
prospectus supplement may use the term "final payment date" or "final maturity
date" to refer to the final scheduled distribution date with respect to a class
of notes. With respect to each class of certificates, the final scheduled
distribution date will be the date on which the entire aggregate principal
balance is expected to be reduced to zero, in each case calculated on the basis
of the assumptions applicable to the relevant series described in the related
prospectus supplement. The final scheduled distribution date for each class of a
series will be specified in the related prospectus supplement. Since payments on
the home equity loans will be used to make distributions in reduction of the
outstanding principal amount of the securities, it is likely that the actual
final distribution date of a class will occur earlier, and may occur
substantially earlier, than its final scheduled distribution date. Furthermore,
with respect to a series of certificates, as a result of delinquencies, defaults
and liquidations of the home equity loans in the trust fund, the actual final
distribution date of any certificate may occur later than its final scheduled
distribution date. No assurance can be given as to the actual prepayment
experience with respect to a series. See "--Weighted Average Life of the
Securities" below.
SPECIAL REDEMPTION
If so specified in the prospectus supplement relating to a series of
securities having other than monthly distribution dates, one or more classes of
securities of the series may be subject to special redemption, in whole or in
part, on a special redemption date specified in the related prospectus
supplement if, as a consequence of prepayments on the home equity loans relating
to the securities or low yields then available for reinvestment, the entity
specified in the related prospectus supplement determines, based on assumptions
specified in the applicable agreement, that the amount available for the payment
of interest that will have accrued on the securities through the designated
interest accrual date specified in the related prospectus supplement is less
than the amount of interest that will have accrued on the securities. In this
event and as further described in the related prospectus supplement, the trustee
will redeem a principal amount of outstanding securities of the series as will
cause the amount available for payment of interest to equal the amount of
interest that will have accrued through the designated interest accrual date for
the series outstanding immediately after the special redemption has occurred.
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WEIGHTED AVERAGE LIFE OF THE SECURITIES
Weighted average life refers to the average amount of time that will elapse
from the date of issue of a security until each dollar of principal of the
security will be repaid to the investor. Generally, the weighted average life of
a class of securities will be influenced by the rate at which the amount
financed under the home equity loans included in the trust fund for a series is
paid, which may be in the form of scheduled amortization or prepayments.
Prepayments on loans and other receivables can be measured relative to a
prepayment standard or model. The prospectus supplement for a series of
securities will describe the prepayment standard or model, if any, used and may
contain tables setting forth the weighted average life of each class of
securities, and the percentage of the original principal amount of each class of
securities that would be outstanding on specified distribution dates for the
series, in each case based on the assumptions stated in the prospectus
supplement, including assumptions that prepayments on the home equity loans
included in the related trust fund are made at rates corresponding to various
percentages of the prepayment standard or model specified in the prospectus
supplement.
There is, however, no assurance that prepayment of the home equity loans
included in the related trust fund will conform to any level of any prepayment
standard or model specified in the related prospectus supplement. The rate of
principal prepayments on pools of loans may be influenced by a variety of
factors, including job related factors such as transfers, layoffs or promotions
and personal factors such as divorce, disability or prolonged illness. Economic
conditions, either generally or within a particular geographic area or industry,
also may affect the rate of principal prepayments. Demographic and social
factors may influence the rate of principal prepayments in that some borrowers
have greater financial flexibility to move or refinance than do other borrowers.
The deductibility of mortgage interest payments and servicing decisions also
affect the rate of principal prepayments. As a result, there can be no assurance
as to the rate or timing of principal prepayments of the home equity loans
either from time to time or over the lives of the home equity loans.
The rate of prepayments of conventional housing loans and other receivables
has fluctuated significantly in recent years. In general, however, if prevailing
interest rates fall significantly below the interest rates on the home equity
loans for a series, the loans are likely to prepay at rates higher than if
prevailing interest rates remain at or above the interest rates borne by the
loans. In this regard, it should be noted that the home equity loans for a
series may have different interest rates. In addition, the weighted average life
of the securities may be affected by the varying maturities of the home equity
loans. If any home equity loans for a series have actual terms-to-stated
maturity of less than those assumed in calculating the final scheduled
distribution date of the related securities, one or more classes of the series
may be fully paid prior to their respective final scheduled distribution date,
even in the absence of prepayments and a reinvestment return higher than the
assumed reinvestment rate for the series.
THE TRUST FUNDS
GENERAL
The notes of each series will be secured by the pledge of the assets of the
related trust fund, and the certificates of each series will represent interests
in the assets of the related trust fund. The trust fund of each series will
include:
- the home equity loans;
- amounts available from the reinvestment of payments on the home equity
loans at the assumed reinvestment rate, if any, specified in the related
prospectus supplement;
- any credit enhancement or the rights to any credit enhancement;
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- any mortgaged property that secured a home equity loan but which is
acquired by foreclosure or deed in lieu of foreclosure or repossession so
as to become an REO property; and
- the amount, if any, initially deposited in the Prefunding Account,
Capitalized Interest Account, Collection Account, Certificate Account or
Distribution Account for a series as specified in the related prospectus
supplement.
The securities will be non-recourse obligations of the related trust fund.
The assets of the trust fund specified in the related prospectus supplement for
a series or class of securities will serve as collateral only for that series or
class of securities unless the related prospectus supplement specifies that the
assets will serve as collateral for another series or class. Holders of a series
or class of notes, as applicable, may only proceed against the collateral
securing their series or class of notes in the case of a default with respect to
their series or class of notes and may not proceed against any assets of the
depositor, seller or the related trust fund not pledged to secure their notes.
The home equity loans for a series will be transferred by the seller to the
depositor and from the depositor to the trust fund. Home equity loans relating
to a series will be master serviced by the servicer pursuant to a pooling and
servicing agreement, with respect to a series consisting of only certificates,
or a sale and servicing agreement between the depositor, the seller, the trust
fund and the servicer, with respect to a series that includes notes.
If specified in the related prospectus supplement, a trust fund relating to
a series of securities may be a business trust formed under the laws of the
state specified in the related prospectus supplement pursuant to a trust
agreement between the seller and the trustee of the trust fund specified in the
related prospectus supplement.
With respect to each trust fund, prior to the initial offering of the
related series of securities, the trust fund will have no assets or liabilities.
No trust fund is expected to engage in any activities other than acquiring,
managing and holding the related home equity loans and other assets contemplated
in this prospectus and in the related prospectus supplement and proceeds of the
assets, issuing securities, making payments and distributions on the securities
and certain related activities. No trust fund is expected to have any source of
capital other than its assets and any related credit enhancement.
An agreement may provide that additional home equity loans may be added to
the trust fund if:
- the home equity loans were originated by the seller in the ordinary course
of its business;
- the inclusion of the home equity loans will maintain or increase the level
of overcollateralization; and
- the inclusion of the home equity loans will not result in the withdrawal
or downgrading of the ratings then assigned to the series.
In addition, an agreement may provide that home equity loans may be removed from
a trust fund from time to time if the actual level of overcollateralization
exceeds the amount of overcollateralization required to be maintained and
removal will not result in the withdrawal or downgrading of the ratings then
assigned to the securities of the related series.
THE HOME EQUITY LOANS
The home equity loans for a series may consist, in whole or in part, of
closed-end home equity loans secured by first or second mortgages primarily on
mortgaged properties, which may be subordinated to other mortgages on the same
mortgaged property. The home equity loans may have fixed interest rates or
adjustable interest rates and may provide for other payment characteristics as
described below.
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The full principal amount of a home equity loan is advanced at origination
of the loan and generally is repayable in equal (or substantially equal)
installments of an amount sufficient to fully amortize the loan at its stated
maturity. As more fully described in the related prospectus supplement, interest
on each home equity loan is calculated on the basis of the outstanding principal
balance of the loan multiplied by the applicable home equity loan interest rate
and, in the case of simple interest loans, further multiplied by a fraction, the
numerator of which is the number of days in the period elapsed since the
preceding payment of interest was made and the denominator is the number of days
in the annual period for which interest accrues on the loan. Interest on home
equity loans also may be calculated on an actuarial basis, in which case each
monthly payment consists of a decreasing amount of interest and an increasing
amount of principal, and the payment either earlier or later then the due date
for each payment will not affect the relative applications of principal and
interest. The home equity loans for a series may include home equity loans that
do not amortize their entire principal balance by their stated maturity in
accordance with their terms, and require a balloon payment of the remaining
principal balance at maturity, as specified in the related prospectus
supplement. The original terms to stated maturity of home equity loans will
generally not exceed 360 months.
The mortgaged properties will include single family property, which consists
of one- to four-family attached or detached residential housing, including
condominium units and cooperative dwellings, and may include mixed-use property.
A condominium unit is an individual housing unit in a multi-unit building,
buildings, or group of buildings (whether or not attached to each other), with
respect to which the owner has exclusive ownership and possession, and also
includes the owner's individual interest in all common areas of the building or
buildings. By contrast, a cooperative dwelling is an individual housing unit
owned by a corporation owned by tenant-stockholders who, through the ownership
of stock, shares or membership securities in the corporation, receive
proprietary leases or occupancy agreements which confer exclusive rights to
occupy specific units and which is described in Section 216 of the tax code.
Mixed-use properties may consist of structures of no more than three stories,
which include one to four residential dwelling units and space used for retail,
professional or other commercial uses. These uses, which may not involve more
than 50% of the space in the structure, may include doctor, dentist or law
offices, real estate agencies, boutiques, newsstands, convenience stores or
other similar types of uses intended to cater to individual customers as
specified in the related prospectus supplement. The properties may be located in
suburban or metropolitan districts. Any non-residential use must be in
compliance with local zoning laws and regulations. The mortgaged properties may
consist of detached individual dwellings, individual condominiums, townhouses,
duplexes, row houses, individual units in planned unit developments and other
attached dwelling units. The mortgaged properties also may include module or
manufactured homes which are treated as real estate under local law. Except for
condominium units and cooperative dwellings, each single family property must be
located on land owned in fee simple by the borrower or on land leased by the
borrower for a term at least as long as the term of the related home equity
loan. Attached dwellings may include owner-occupied structures where each
borrower owns the land upon which the unit is built, with the remaining adjacent
land owned in common or dwelling units subject to a proprietary lease or
occupancy agreement in a cooperatively owned apartment building. Mortgages on
cooperative dwellings consist of a lien on the shares issued by the cooperative
dwelling and the proprietary lease or occupancy agreement relating to the
cooperative dwelling.
The aggregate principal balance of home equity loans secured by mortgaged
properties that are owner-occupied will be disclosed in the related prospectus
supplement. The sole basis for determining that a given percentage of the home
equity loans are secured by single family property that is owner-occupied will
be either (1) the making of an oral representation by the mortgagor at
origination of the home equity loan either that the underlying mortgaged
property will be used by the mortgagor for a period of at least six months every
year or that the mortgagor intends to use the mortgaged property as a primary
residence, or (2) a finding that the address of the underlying mortgaged
property is the mortgagor's mailing address as reflected in the servicer's or
the applicable sub-servicer's records. The
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mortgaged properties also may include non-owner occupied investment properties
and vacation and second homes.
ADDITIONAL INFORMATION
The related prospectus supplement for each series will provide information
with respect to the home equity loans that are home equity loans as of the
cut-off date, including, among other things, and to the extent relevant:
- the aggregate unpaid principal balance of the home equity loans;
- the range and weighted average home equity loan interest rate on the home
equity loans, and, in the case of adjustable rate home equity loans, the
range and weighted average of the current home equity loan interest rates
and any lifetime rate caps;
- the range and average outstanding principal balance of the home equity
loans;
- the weighted average original and remaining term-to-stated maturity of the
home equity loans and the range of original and remaining terms-to-stated
maturity, if applicable;
- the range and weighted average of "combined loan-to-value ratios" (defined
below) for the home equity loans;
- the percentage (by outstanding principal balance as of the cut-off date)
of home equity loans that accrue interest at adjustable or fixed interest
rates;
- any special hazard insurance policy or bankruptcy bond or other
enhancement relating to the home equity loans;
- the geographic distribution of the mortgaged properties securing the home
equity loans;
- the percentage of home equity loans (by principal balance as of the
cut-off date) that are secured by single family mortgaged properties,
shares relating to cooperative dwellings, condominium units, investment
property and vacation or second homes;
- the lien priority of the home equity loans; and
- the delinquency status and year of origination of the home equity loans.
The related prospectus supplement will also specify any other limitations on
the types or characteristics of home equity loans for a series. No more than 5%
of the aggregate home equity loans as they will be constituted on the closing
date will deviate in any respect from the home equity loan pool characteristics
that are described in the prospectus supplement.
The "combined loan-to-value ratio" with respect to a home equity loan is the
percentage equivalent of a fraction, the numerator of which is the sum of
(1) the original principal amount of the home equity loan at its date of
origination and (2) the outstanding principal amount of any senior loan on the
mortgaged property at the time of origination of the home equity loan, and the
denominator of which is the "appraised value" (defined below) of the mortgaged
property at the date of origination.
"Appraised value" means, with respect to property securing a home equity
loan, the lesser of the appraised value determined in an appraisal obtained at
origination of the home equity loan or sales price of the property at that time.
If information of the nature described above respecting the home equity
loans is not known to the seller at the time the securities are initially
offered, approximate or more general information of the nature described above
will be provided in the prospectus supplement and additional information will be
set forth in a Current Report on Form 8-K to be available to investors on the
date of issuance of the related series and to be filed with the SEC within
15 days after the initial issuance of the securities.
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ACCOUNTS
CERTIFICATE AND DISTRIBUTION ACCOUNTS
A separate Certificate Account will be established for each series of
securities for receipt of all amounts received on or with respect to the home
equity loans. Certain amounts on deposit in the Certificate Account and certain
amounts available pursuant to any credit enhancement, as provided in the related
prospectus supplement, will be deposited into one or more Distribution Accounts.
Funds in the Certificate and Distribution Accounts generally will be invested in
eligible investments maturing, with certain exceptions, not later, in the case
of funds in the Certificate Account, than the day preceding the date the funds
are due to be deposited in the Distribution Account or otherwise distributed
and, in the case of funds in the Distribution Account, than the day preceding
the next distribution date for the related series of securities. With respect to
an issuance of notes, the term "Collection Account" may be used in place of
"Certificate Account."
WE REFER YOU TO "--ELIGIBLE INVESTMENTS" BELOW FOR MORE DETAIL.
PREFUNDING AND CAPITALIZED INTEREST ACCOUNTS
If specified in the related prospectus supplement, a trust fund will include
one or more Prefunding Accounts, that are segregated trust accounts established
and maintained with the trustee for the related series. If so specified, on the
closing date for the series, a prefunded amount representing a portion of the
proceeds of the sale of the securities limited to fifty percent of the aggregate
principal amount of the series may be deposited in the Prefunding Account and
may be used to purchase additional home equity loans during a prefunding period
limited to no more than six months specified in the related prospectus
supplement. Pending the purchase of additional home equity loans, funds
deposited in the Prefunding Account will be invested in eligible investments. If
any prefunded amount remains on deposit in the Prefunding Account at the end of
the prefunding period, this amount will be applied in the manner specified in
the related prospectus supplement to prepay the notes or the certificates of the
applicable series.
Each additional home equity loan must satisfy the eligibility criteria
specified in the related prospectus supplement and related agreements. This
eligibility criteria will be determined in consultation with the relevant rating
agencies and any credit enhancer prior to the issuance of the related series and
are designed to ensure that if the additional home equity loans were included as
part of the initial home equity loans, the credit quality of the assets as a
whole would continue to be consistent with the initial rating on the securities.
The eligibility criteria will apply to the aggregate pool of home equity loans,
including the original and the additional home equity loans, and must include a
minimum weighted average interest rate, a maximum weighted average remaining
term to maturity and a maximum weighted average combined loan-to-value ratio.
Depending on the composition of the original home equity loans and the type of
credit enhancement, additional eligibility criteria such as a minimum interest
rate, a maximum principal balance, a limitation on geographic concentration and
a limit on certain types of home equity loans such as balloon loans or loans
secured by other than primary residences. The seller will certify to the trustee
that all conditions precedent to the transfer of the additional home equity
loans, including the satisfaction of the eligibility criteria applicable to the
trust fund, have been satisfied. It is a condition to the transfer of any
additional home equity loans to the trust fund that no rating agency, after
receiving prior notice of the proposed transfer of the additional home equity
loans to the trust fund, advises the seller or the trustee or any credit
enhancer that the conveyance of the additional home equity loans will result in
a qualification, modification or withdrawal of its then current rating of any
class of notes or certificates of the series. Following the transfer of
additional home equity loans to the trust fund, the aggregate characteristics of
the home equity loans then held in the trust fund may vary from those of the
initial home equity loans. As a result, the additional home equity loans may
adversely affect the performance of the related securities.
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If a Prefunding Account is established, one or more Capitalized Interest
Accounts, which must be segregated trust accounts, may be established and
maintained with the trustee for the related series. On the relevant closing
date, a portion of the proceeds of the sale of the securities will be deposited
in the Capitalized Interest Account and used to pay interest accrued on the
securities and, if specified in the related prospectus supplement, certain fees
or expenses (such as trustee fees and credit enhancement fees) that are not
covered by interest generated by the home equity loans in the trust fund during
the prefunding period and available to pay these amounts. If specified in the
related prospectus supplement, amounts on deposit in the Capitalized Interest
Account may be released to the seller prior to the end of the prefunding period
subject to the satisfaction of certain tests specified in the related prospectus
supplement. Any amounts on deposit in the Capitalized Interest Account at the
end of the prefunding period will be distributed to the person specified in the
related prospectus supplement.
ELIGIBLE INVESTMENTS
Each agreement generally will define eligible investments to include the
following:
- direct obligations of, or obligations fully guaranteed as to timely
payment of principal and interest by, the United States or any agency or
instrumentality of the United States, if these obligations are backed by
the full faith and credit of the United States;
- repurchase agreements on obligations specified in the subparagraph above
maturing not more than three months from the date of acquisition, if the
short-term unsecured debt obligations of the party agreeing to repurchase
these obligations are at the time rated by each rating agency in its
highest short-term rating category;
- certificates of deposit, time deposits and bankers' acceptances of any
U.S. depository institution or trust company incorporated under federal or
state laws of the United States and subject to supervision and examination
by federal and/or state banking authorities, if the unsecured short-term
debt obligations of the depository institution or trust company at the
date of acquisition have been rated by each rating agency in its highest
unsecured short-term debt rating category;
- commercial paper (having original maturities of not more than 90 days) of
any corporation incorporated under federal or state laws of the United
States which, on the date of acquisition, has been rated by each rating
agency in its highest short-term rating category;
- short-term investment funds sponsored by any trust company or national
banking association incorporated under federal or state laws of the United
States which, on the date of acquisition, have been rated by each rating
agency in its highest rating category for long-term unsecured debt; and
- interests in any money market fund which at the date of acquisition and
throughout the time as the interest is held in the fund have a rating of
"Aaa" by Moody's, either "AAAm" or "AAAm-G" by Standard & Poor's Ratings
Group, a division of The McGraw-Hill Companies, Inc., or "AAA" by Fitch to
the extent Moody's, Standard & Poor's or Fitch rates the relevant series,
or equivalent ratings of any other rating agency that rates the series.
However, no instrument described above may evidence either the right to
receive (1) only interest with respect to the obligations underlying the
instrument or (2) both principal and interest payments derived from obligations
underlying the instrument and the interest and principal payments with respect
to the instrument provided a yield to maturity at par greater than 120% of the
yield to maturity at par of the underlying obligations. In addition, no
instrument may be purchased at a price greater than par if the instrument may be
prepaid or called at a price less than its purchase price prior to its stated
maturity.
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To the extent any investment would require registration of the trust fund as
an investment company, that investment will not constitute an eligible
investment.
REVOLVING PERIOD AND AMORTIZATION PERIOD; RETAINED INTEREST
If the related prospectus supplement so provides, there may be a revolving
period commencing on the date of issuance of a class or classes of notes or
certificates of a series and ending on the date set forth in the related
prospectus supplement during which limited or no principal payments will be made
to one or more classes of notes or certificates of the related series identified
in the prospectus supplement. Some or all collections of principal otherwise
allocated to these classes of notes or certificates may be:
- utilized during the revolving period to acquire additional home equity
loans which satisfy the criteria specified above and the criteria set
forth in the related prospectus supplement;
- held in an account and invested in eligible investments for later
distribution to securityholders;
- applied to those notes or certificates, if any, specified in the related
prospectus supplement that are in amortization; or
- otherwise applied as specified in the related prospectus supplement.
An amortization period is a period during which an amount of principal is
payable to holders of a series which, during the revolving period, were not
entitled to payments of principal. If specified in the related prospectus
supplement, during an amortization period all or a portion of principal
collections on the home equity loans may be applied as specified above for a
revolving period and, to the extent not so applied, will be distributed to the
classes of notes or certificates specified in the related prospectus supplement
as then being entitled to payments of principal. In addition, if specified in
the related prospectus supplement, amounts deposited in certain accounts for the
benefit of one or more classes of notes or certificates may be released from
time to time or on a specified date and applied as a payment of principal on
those classes of notes or certificates. The related prospectus supplement will
set forth the circumstances which will result in the commencement of an
amortization period.
Each series which has a revolving period may also issue to the depositor or
one of its affiliates a Retained Interest Security, which is an undivided
beneficial interest in the series not represented by the other securities issued
by the depositor. As further described in the related prospectus supplement, the
value of the Retained Interest Security will fluctuate as the outstanding amount
of notes and certificates of the related series is reduced.
ENHANCEMENT
The amounts and types of credit enhancement arrangements and the provider of
the credit enhancement, if applicable, with respect to a series or any class of
securities will be set forth in the related prospectus supplement. If specified
in the applicable prospectus supplement, credit enhancement for any series of
securities may cover one or more classes of notes or certificates, and
accordingly may be exhausted for the benefit of a particular class of notes or
certificates and afterwards be unavailable to other classes of notes or
certificates. Further information regarding any provider of credit enhancement,
including financial information when material, will be included in the related
prospectus supplement.
To the extent provided in the related prospectus supplement, credit
enhancement may include one or more of the following:
- a financial guaranty insurance policy, which will be issued by a monoline
insurance company and which, subject to the terms of the policy, will
guarantee timely payment of interest on, and
27
ultimate (as opposed to timely) payment of principal of, the applicable
class or classes of securities;
- overcollateralization, which will equal the excess of the aggregate
principal balance of the home equity loans over the aggregate principal
balance of the securities. Overcollateralization may be created by the
initial or subsequent deposit of home equity loans or may build over time
from the application of certain excess cash amounts generated by the home
equity loans to accelerate the amortization of the applicable class or
classes of securities;
- a letter of credit, which will be issued by a bank or other financial
institution in a maximum amount which may be permanently reduced as draws
are made or may be replenished as previous draws are repaid from certain
excess cash amounts generated by the home equity loans. Draws may be made
to cover shortfalls generally in collections, with respect to particular
types of shortfalls such as those due to particular types of losses or
with respect to specific situations such as shortfalls in amounts
necessary to pay current interest;
- a cash reserve fund which may be partially or fully funded on the date of
issuance or may be funded over time from certain excess cash amounts
generated by the home equity loans. Withdrawals may be made in
circumstances similar to those for which draws may be made on a letter of
credit;
- insurance policies, such as mortgage insurance, hazard insurance and other
insurance policies, which may insure a portion of the home equity loans
against credit losses, bankruptcy losses, fraud losses or special hazard
losses not covered by typical homeowners insurance policies;
- subordinated securities, which will be subordinated in the right to
receive distributions to one or more other classes of more senior
securities of the same series, some or all of which may themselves be
subordinated to other classes in the series. Subordination may be with
respect to distributions of interest, principal or both. In addition, all
or portions of certain types of losses on the home equity loans may be
allocated to one or more classes of subordinate securities prior to their
allocation to other classes of more senior securities in the applicable
series; or
- derivative products, which may include a swap to convert floating or fixed
rate payments, as applicable, on the home equity loans into fixed or
floating rate payments, as applicable, on the securities or a cap or floor
agreement intended to provide protection against changes in floating rates
of interest payable on the home equity loans and/or the securities.
The presence of credit enhancement is intended to increase the likelihood of
receipt by the certificateholders and the noteholders of the full amount of
principal and interest due on their securities and to decrease the likelihood
that the certificateholders and the noteholders will experience losses, or may
be structured to provide protection against changes in interest rates or against
other risks, such as basis risk and liquidity risk, to the extent and under the
conditions specified in the related prospectus supplement. Forms of credit
enhancement may provide for one or more classes of securities to be paid in
foreign currencies. The credit enhancement for a class of securities generally
will not provide protection against all risks of loss and may not guarantee
repayment of all principal and interest on the securities. If losses occur which
exceed the amount covered by any credit enhancement or which are not covered by
any credit enhancement, securityholders will bear their allocable share of
deficiencies. In addition, if a form of credit enhancement covers more than one
class of securities of a series, securityholders of one class will be subject to
the risk that the credit enhancement will be exhausted by the claims of
securityholders of other classes.
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THE AGREEMENTS
The following summaries describe the material provisions of the agreements
common to each series of securities. The summaries do not purport to be complete
and are subject to, and qualified in their entirety by reference to, the
provisions of the agreements. Where particular provisions or terms used in the
agreements are referred to, these provisions or terms are as specified in the
related agreements.
GENERAL
At the time of issuance of the securities of a series, the seller will
transfer, convey and assign to the depositor and the depositor will transfer,
convey and assign to the trust fund all right, title and interest of the seller
and the depositor in the home equity loans and other property to be transferred
to the depositor and trust fund for a series. The assignment will include all
principal and interest due or received on or with respect to the home equity
loans after the cut-off date to the extent specified in the related prospectus
supplement (except for any retained interests). The trustee will, concurrently
with the assignment, execute and deliver the securities.
REPURCHASE AND SUBSTITUTION OF NON-CONFORMING HOME EQUITY LOANS
Pursuant to the related pooling and servicing agreement or sale and
servicing agreement, upon the discovery by the depositor, the seller, the credit
enhancer, if any, the servicer, any sub-servicer, any holder, the custodian (as
defined below) or the trustee that the representations and warranties of the
seller or the servicer are untrue in any material respect as of the closing date
with the result that the interests of the holders or of the credit enhancer are
materially and adversely affected, the party discovering the breach is required
to give prompt written notice to the other parties.
Upon the earlier of the seller's discovery or receipt from any of the other
parties of notice of breach of a representation or warranty made by it with
respect to a home equity loan or the time that an existing untrue statement
results in a situation that materially and adversely affects the interests of
the holders or the credit enhancer, if any, in the home equity loan, the seller
will be required promptly to cure the breach in all material respects or the
seller will, on or prior to the second Monthly Remittance Date (defined below)
immediately succeeding the discovery, receipt of notice or applicable time:
- substitute each home equity loan which has given rise to the requirement
for action by the seller with a "Qualified Replacement Mortgage" (as
defined in the related pooling and servicing agreement or sale and
servicing agreement) and deliver an amount equal to the excess, if any, of
the outstanding principal balance of the home equity loan being replaced
over the outstanding principal balance of the replacement home equity loan
plus accrued and unpaid interest and plus the amount of any Delinquency
Advance and Servicing Advance (each defined below) (the "Substitution
Amount"), to the trustee (to be deemed part of the collections remitted by
the servicer on the applicable Monthly Remittance Date); or
- purchase the home equity loan from the trust at a purchase price equal to
the applicable Loan Purchase Price (defined below).
Despite any contradictory provision of the related pooling and servicing
agreement or sale and servicing agreement, if a REMIC election is made with
respect to the trust fund, no repurchase or substitution of any home equity loan
not in default or as to which no default is reasonably foreseeable may be made
unless the seller obtains for the trustee and any credit enhancer, an opinion of
counsel experienced in ERISA and federal income tax matters and acceptable to
the trustee and the credit enhancer stating that a repurchase or substitution of
this kind would not constitute a "prohibited transaction" (within the meaning of
ERISA and the federal income tax code) for the REMIC or otherwise subject the
REMIC to tax and would not jeopardize the status of the REMIC as such (a
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"REMIC Opinion"), addressed to the trustee and any credit enhancer and
acceptable to the trustee and any credit enhancer. The seller will also deliver
an officer's certificate to the trustee and any credit enhancer concurrently
with the delivery of a Qualified Replacement Mortgage stating that the home
equity loan meets the requirements of a Qualified Replacement Mortgage and that
all other conditions to substitution of the Qualified Replacement Mortgage have
been satisfied.
Any home equity loan as to which repurchase or substitution was delayed
pursuant to the related pooling and servicing agreement or sale and servicing
agreement will be repurchased or substituted for (subject to compliance with the
provisions of the related pooling and servicing agreement or sale and servicing
agreement) upon the earlier of the occurrence of a default or reasonably
foreseeable default with respect to the home equity loan and receipt by the
trustee and the credit enhancer, if any, of a REMIC Opinion. In connection with
any breach of a representation, warranty or covenant or defect in documentation
giving rise to a repurchase or substitution obligation, the seller agrees that
it will, at its expense, furnish the trustee and the credit enhancer, if any,
either a REMIC Opinion or an opinion of counsel rendered by independent counsel
that the effects described in a REMIC Opinion will not occur as a result of the
repurchase or substitution. The obligation of the seller to so substitute or
repurchase any home equity loan as to which a representation or warranty is
untrue in any material respect and has not been remedied constitutes the sole
remedy available to the holders and the trustee.
"Loan Purchase Price" means an amount equal to the aggregate principal
balance of a home equity loan as of the date of purchase (assuming that the
Monthly Remittance Amount (defined below) remitted by the servicer on the
applicable Monthly Remittance Date has already been remitted), plus all accrued
and unpaid interest on the home equity loan at the coupon rate to but not
including the date of purchase together with (without duplication) the aggregate
amount of (1) all unreimbursed Delinquency Advances and Servicing Advances
already made with respect to the home equity loan, (2) all Delinquency Advances
which the servicer has so far failed to remit with respect to the home equity
loan and (3) all reimbursed Delinquency Advances and Servicing Advances to the
extent that the reimbursement is not made from the mortgagor.
"Monthly Remittance Amount" means as of any Monthly Remittance Date:
- all interest received during the related Remittance Period with respect to
the home equity loans;
- all Compensating Interest (defined below) paid by the servicer on the
Monthly Remittance Date;
- the portion of the Loan Purchase Prices and Substitution Amount relating
to interest on the home equity loans paid by the seller or the servicer on
or prior to the Monthly Remittance Date;
- the interest portion of all Net Liquidation Proceeds (defined below)
actually collected by the servicer with respect to the home equity loans
during the related Remittance Period;
- the principal actually collected by the servicer with respect to home
equity loans during the related Remittance Period;
- the outstanding principal balance of each home equity loan that was
purchased from the trustee on or prior to the Monthly Remittance Date, to
the extent the outstanding principal balance was actually deposited in the
Principal and Interest Account (defined below) on or prior to the Monthly
Remittance Date;
- any Substitution Amounts relating to principal delivered by the seller in
connection with a substitution of a home equity loan to the extent these
Substitution Amounts were actually deposited in the Principal and Interest
Account (defined below) on or prior to the Monthly Remittance Date;
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- the principal portion of all Net Liquidation Proceeds actually collected
by the servicer with respect to the home equity loans during the related
Remittance Period (to the extent the Net Liquidation Proceeds related to
principal); and
- investment losses required to be deposited on the Monthly Remittance Date.
"Monthly Remittance Date" means the date specified in the related prospectus
supplement on which funds on deposit in the Principal and Interest Account are
remitted to the Certificate Account.
"Remittance Period" means with respect to any Monthly Remittance Date, the
calendar month preceding the Monthly Remittance Date. The term "Due Period" may
be used in place of the term "Remittance Period."
See "Advances; Compensating Interest" for a definition of what constitutes a
"Delinquency Advance" and a "Servicing Advance."
WE REFER YOU TO "FEDERAL INCOME TAX CONSEQUENCES" FOR A MORE DETAILED
DISCUSSION OF ERISA AND FEDERAL INCOME TAX IMPLICATIONS.
ASSIGNMENT OF HOME EQUITY LOANS
Pursuant to the related pooling and servicing agreement or related sale and
servicing agreement, the seller will transfer, assign, set over and otherwise
convey without recourse to the depositor and the depositor will transfer,
assign, set over and otherwise convey without recourse to the trustee in trust
for the benefit of the holders all right, title and interest of the seller in
and to each home equity loan and all its right, title and interest in and to
principal received and interest due on each home equity loan on and after the
cut-off date. However, the seller will reserve and retain all its right, title
and interest in and to principal received (including prepayments of the home
equity loans) and interest due on each home equity loan prior to the cut-off
date. As a protective measure only, the seller will also grant to the depositor
and the depositor will also grant to the trustee a security interest in the
trust fund in case the transfer of the home equity loans is considered by a
court of law or equity to be a loan and not a sale.
In connection with the transfer and assignment of the home equity loans, the
seller will be required to:
(i) deliver without recourse to the trustee or the custodian, which may
be an affiliate or agent of the trustee, on behalf of the trustee on the
date the home equity loans are assigned to the trust fund, identified in a
schedule of home equity loans in the relevant agreement:
- the original notes, endorsed in blank or to the order of the trustee;
- either (A) the original title insurance policy or a copy certified by
the issuer of the title insurance policy or, if not available, the
original title insurance commitment or a copy certified as a true copy
by the closing agent or the seller, or, (B) if title insurance is not
available in the applicable state, the relevant attorney's opinion of
title, or (C) for home equity loans the original principal balance of
which is $40,000 or less, a property report describing the status of
title to the mortgaged property and a related indemnity in favor of the
seller, its successors and assigns, issued by a title company qualified
to do business in the jurisdiction where the mortgaged property is
located;
- subject to the next paragraph, originals or copies of all intervening
assignments, if any, certified as true copies by the closing agent or
the seller, showing a complete chain of title from origination to the
seller, including warehousing assignments, if recorded;
- originals of all assumption and modification agreements, if any;
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- either the original mortgage, with evidence of recording (if the
original mortgage has been returned to the seller from the applicable
recording office), a copy of the mortgage (if the original mortgage has
not been returned to the seller) certified as a true copy by the
closing attorney or officer of the seller or a copy of the mortgage
certified by the public recording office in those instances where the
original recorded mortgage has been lost or retained by the recording
office; and
- the original assignments of mortgages in recordable form;
(ii) cause, within 60 days following the date the home equity loans are
assigned to the trust fund, assignments of the mortgages to the trustee to
be submitted for recording in the appropriate jurisdictions, if the seller
has not received the original recording information. Alternatively, (except
as provided in the related pooling and servicing agreement or sale and
servicing agreement) the seller may furnish to the trustee, any credit
enhancer and the rating agencies, by the date that the home equity loans are
assigned to the trust fund, at the seller's expense, an opinion of counsel
with respect to the relevant jurisdiction that recording is not required to
perfect the trustee's interests in the related home equity loans (in form
satisfactory to the trustee, any credit enhancer and the rating agencies);
and
(iii) deliver the title insurance policy, the original mortgages and the
recorded assignments, together with originals or duly certified copies of
any and all prior assignments (other than unrecorded warehouse assignments),
to the custodian on behalf of the trustee within 15 days of receipt by the
seller (but in any event, with respect to a mortgage as to which original
recording information has been made available to the seller, within one year
after the date the home equity loans are assigned to the trust fund).
The trustee will agree, for the benefit of the holders, to cause the
custodian to review each file with respect to the home equity loans within
45 days after the date that the home equity loans are assigned to the trust fund
(or the date of receipt of any documents delivered to the trustee after the
closing date), to ascertain that all required documents (or certified copies of
documents) have been executed and received.
If the custodian on behalf of the trustee during this 45-day period finds
any document constituting a part of a file which is not properly executed, has
not been received, or is unrelated to the home equity loans or that any home
equity loan does not conform in a material respect to the description as set
forth in the schedule of home equity loans in the relevant agreement, the
custodian will promptly notify the depositor, the seller, the holders and the
credit enhancer, if any. The seller will agree in the related pooling and
servicing agreement or sale and servicing agreement to use reasonable efforts to
remedy a material defect in a document constituting part of a file of which it
is notified by the custodian on behalf of the trustee.
If, however, within 90 days after notice to it with respect to the defect
the seller has not remedied the defect and the defect materially and adversely
affects the interest in the related home equity loan of the holders or any
credit enhancer, the seller will be required on the next succeeding Monthly
Remittance Date to (or will cause an affiliate of the seller to) (1) substitute
in lieu of the home equity loan a Qualified Replacement Mortgage and deliver the
Substitution Amount to the trustee (to be deemed part of the collections
remitted by the servicer on the Monthly Remittance Date) or (2) purchase the
home equity loan at a purchase price equal to the applicable Loan Purchase
Price, which will be delivered to the trustee along with the Monthly Remittance
Amount remitted by the servicer on the Monthly Remittance Date. However, this
substitution or purchase must occur within 90 days of the notice of defect if
the defect would prevent the home equity loan from being a Qualified Replacement
Mortgage and, if a REMIC election is made with respect to the trust fund, no
substitution or purchase of a home equity loan that is not in default or as to
which no default is reasonably foreseeable will be made unless the seller
obtains for the trustee and any credit enhancer a REMIC Opinion, addressed to
and acceptable to the trustee and any credit enhancer.
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In addition, the custodian on behalf of the trustee has agreed to undertake
a review during the 12th month after the closing date indicating the current
status of the exceptions previously indicated on the pool certification with
respect to the applicable agreement. After delivery of this final certification,
the custodian, on behalf of the trustee and the servicer will provide to the
credit enhancer, if any, at least monthly, updated certifications indicating the
then current status of exceptions, until all exceptions have been eliminated.
SERVICING AND SUB-SERVICING
Unless otherwise set forth in the related prospectus supplement, the seller
will also serve as the servicer of each home equity loan. The servicer will be
entitled to a periodic servicing fee as compensation in an amount specified in
the prospectus supplement. The servicer may assign its obligations under the
related pooling and servicing agreement or sale and servicing agreement, without
obtaining the written consent of the trustee and any credit enhancer; however,
the assignee must meet the eligibility requirements for a successor servicer set
forth in the related pooling and servicing agreement or sale and servicing
agreement.
The securities will not represent an interest in or obligation of, and the
home equity loans are not guaranteed by, the depositor, the trustee, the owner
trustee (if applicable), the seller, the servicer, or any of their affiliates,
except as described in this prospectus.
The servicer (other than a successor servicer) will be required to service
the home equity loans in accordance with the related pooling and servicing
agreement or sale and servicing agreement and the terms of the home equity
loans.
The servicer may retain the applicable servicing fee from the interest
portion of each monthly payment. In addition, the servicer will be entitled to
retain additional servicing compensation in the form of prepayment charges,
release fees, bad check charges, assumption fees, late payment charges,
prepayment penalties, any other servicing-related fees or Net Liquidation
Proceeds not required to be deposited in the Principal and Interest Account
pursuant to the related pooling and servicing agreement or sale and servicing
agreement, and similar items.
The servicer will be required to make reasonable efforts to collect all
payments called for under the terms and provisions of the home equity loans,
and, to the extent the procedures are consistent with the related pooling and
servicing agreement or sale and servicing agreement and the terms and provisions
of any applicable insurance policy, to follow collection procedures for all home
equity loans at least as rigorous as those described in Fannie Mae's Servicing
Guide. The servicer may in its discretion waive or permit to be waived (if the
waiver or permission is occasioned by the default or reasonable foreseeable
default of a home equity loan or is consistent with the continued treatment of
the homes equity loan as a Qualified Mortgage (as defined in the related pooling
and servicing agreement or sale and servicing agreement)) any late payment
charge, prepayment charge, assumption fee or any penalty interest in connection
with the prepayment of a home equity loan or any other fee or charge which the
servicer would be entitled to retain as additional servicing compensation. In
the event the servicer consents to the deferment of the due dates for payments
due on a home equity loan, the servicer must nevertheless pay any required
Delinquency Advances with respect to the interest payments extended by the
servicer as if the interest portion of the installment had not been deferred.
DEPOSITS TO PRINCIPAL AND INTEREST ACCOUNT AND CERTIFICATE ACCOUNT
Pursuant to the related pooling and servicing agreement or sale and
servicing agreement, the servicer will be required to create, or cause to be
created, a Principal and Interest Account in the name of the trustee, as a trust
account in the trust department of one or more depository institutions, which
may be affiliates of the servicer. All funds in the Principal and Interest
Account are required to be held uninvested or invested in eligible investments,
defined in the related pooling and servicing agreement or sale and servicing
agreement. Any investment of funds in the Principal and Interest Account must
33
mature or be withdrawable at par on or prior to the next Monthly Remittance
Date. Any investment earnings and losses on funds held in the Principal and
Interest Account are for the account of the servicer, and net losses must be
promptly replenished by the servicer.
Within two business days of receipt, the servicer will be required to
deposit, or cause to be deposited, to the Principal and Interest Account, all
principal received and interest due on the home equity loans (net of the
servicing fee) on and after the related cut-off date, including any prepayments
of the home equity loans, the proceeds of any liquidation of a home equity loan
net of expenses (including unreimbursed Servicing Advances) and unreimbursed
Delinquency Advances ("Net Liquidation Proceeds") and any income from REO
properties acquired on foreclosure or otherwise with respect to a defaulted home
equity loan, but net of the following:
- Net Liquidation Proceeds to the extent that Net Liquidation Proceeds
exceed the sum of (a) the loan balance of the related home equity loan
immediately prior to liquidation, (b) accrued and unpaid interest on the
home equity loan (net of the servicing fee) to the date of liquidation,
and (c) the amount of any reduction of the loan balance of the related
home equity loan by a court in an insolvency proceeding;
- principal (including prepayments of the home equity loans) collected and
interest due on the home equity loans prior to the cut-off date;
- reimbursements for unreimbursed Delinquency Advances and unreimbursed
Servicing Advances (in each case, solely from amounts recovered on the
related home equity loan); and
- reimbursement for amounts deposited in the Principal and Interest Account
representing payments of principal and/or interest on a home equity loan
by a mortgagor which are subsequently returned by a depository institution
as unpaid.
The servicer may make withdrawals for its own account from the Principal and
Interest Account for the following purposes:
- on each Monthly Remittance Date, to pay itself the servicing fee to the
extent not otherwise retained;
- to withdraw net investment earnings on amounts on deposit in the Principal
and Interest Account;
- to withdraw amounts that have been deposited to the Principal and Interest
Account in error;
- to reimburse itself for unrecovered Delinquency Advances and unrecovered
Servicing Advances (in each case, solely from amounts recovered on the
related home equity loan);
- to reimburse itself for nonrecoverable Delinquency Advances to the extent
provided below; and
- to clear and terminate the Principal and Interest Account following the
termination of the trust.
The servicer will remit to the trustee for deposit in the Certificate
Account the daily collections, Loan Purchase Price and Substitution Amounts
allocable to a Remittance Period not later than the related Monthly Remittance
Date.
ADVANCES; COMPENSATING INTEREST
DELINQUENCY ADVANCES. On each Monthly Remittance Date, the servicer will be
required to advance to the trustee for deposit to the Certificate Account out of
the servicer's own funds or from collections on any home equity loans that are
not required to be distributed on the distribution date occurring during the
month in which the advance is made (but which will be reimbursed by the servicer
on or before any subsequent Monthly Remittance Date on which the collection used
to make the advance are required to be part of the Monthly Remittance Amount)
any delinquent payment of interest with respect to each delinquent home equity
loan, which was not received on or prior to the
34
related Monthly Remittance Date and was not already advanced by the servicer.
Advances out of the servicer's own funds are called "Delinquency Advances." The
servicer may reimburse itself on any business day (as defined in the related
pooling and servicing agreement or sale and servicing agreement) for any
Delinquency Advances paid from the servicer's own funds, from amounts recovered
on the related home equity loan or from the Certificate Account as provided in
the related pooling and servicing agreement or sale and servicing agreement.
In the event that the servicer determines in its reasonable business
judgment in accordance with the servicing standards of the related pooling and
servicing agreement or the sale and servicing agreement that any proposed
Delinquency Advance if made would not be recoverable, the servicer will not be
required to make a Delinquency Advance with respect to the home equity loan. To
the extent that the servicer previously has made Delinquency Advances with
respect to a home equity loan that the servicer subsequently determines to be
nonrecoverable, the servicer will be entitled to reimbursement for the
Delinquency Advance.
SERVICING ADVANCES. Except to the extent that the servicer determines they
will not be recoverable, the servicer will be required to pay all "out of
pocket" costs and expenses incurred in the performance of its servicing
obligations, including:
- expenditures in connection with a foreclosed home equity loan prior to its
liquidation, including expenditures for real estate property taxes, hazard
insurance premiums, property restoration or preservation;
- the cost of any enforcement or judicial proceedings, including
foreclosures; and
- the cost of the management and liquidation of REO property (including
broker's fees).
These costs and expenses are "Servicing Advances." The servicer may recover
a Servicing Advance to the extent permitted by the home equity loans or, if not
recovered from the mortgagor on whose behalf the Servicing Advance was made,
from liquidation proceeds realized upon the liquidation of the related home
equity loan or from certain amounts on deposit in the Certificate Account as
provided in the related pooling and servicing agreement or the sale and
servicing agreement. Except as provided above, the servicer may not recover
Servicing Advances from the principal and interest payments on any other home
equity loan.
COMPENSATING INTEREST. A full month's interest at the coupon rate will be
due on the outstanding loan balance of each home equity loan as of the beginning
of each Remittance Period. If any prepayment occurs during any calendar month,
the servicer must deposit any difference between the interest collected from the
mortgagor in connection with the payoff and the full month's interest at the
coupon rate on the home equity loan that would be due on the related due date
for the home equity loan (the "Compensating Interest") (but not in excess of the
aggregate servicing fee for the related Remittance Period), to the Principal and
Interest Account on the next succeeding Monthly Remittance Date. This
Compensating Interest will be included in the Monthly Remittance Amount to be
made available to the trustee on the next Monthly Remittance Date. The servicer
will be entitled to reimbursement for any unreimbursed payments of Compensating
Interest as provided in the relating pooling and servicing agreement or sale and
servicing agreement.
OPTIONAL REPURCHASE OF DEFAULTED HOME EQUITY LOANS
Subject to certain limitations contained in the related pooling and
servicing agreement or sale and servicing agreement, the servicer will have the
right and the option, but not the obligation, to purchase for its own account
any home equity loan which becomes delinquent for the number of consecutive
monthly installments set forth in the related prospectus supplement or any home
equity loan as to which enforcement proceedings have been brought by the
servicer. However, the servicer may not purchase a home equity loan unless it
has delivered a REMIC Opinion to any credit enhancer and the
35
trustee, at its own expense. The purchase price for this home equity loan will
be equal to the Loan Purchase Price, which must be deposited in the Principal
and Interest Account on the next Monthly Remittance Date.
REALIZATION UPON DEFAULTED HOME EQUITY LOANS
The servicer is required to have liquidated any home equity loan relating to
an REO property that has not been liquidated within 35 months of effecting
ownership at a price that the servicer deems necessary to comply with this
requirement, or within a period of time that, in the opinion of counsel
nationally recognized in federal income tax matters, is permitted under the Code
(defined below).
HAZARD INSURANCE
The servicer will be required to have hazard insurance maintained with
respect to mortgaged property and to advance sums on account of the premiums if
not paid by the mortgagor if permitted by the terms of the home equity loan.
GENERAL SERVICING STANDARD
The servicer will have the right under the related pooling and servicing
agreement or sale and servicing agreement (upon receiving the prior written
consent of the credit enhancer, if any) to accept applications of mortgagors for
consent to partial releases of mortgages, alterations and removal, demolition or
division of mortgaged properties. No application for approval may be considered
by the servicer unless:
- the provisions of the related mortgage have been complied with;
- the loan-to-value ratio and debt-to-income ratio after any release does
not exceed the loan-to-value ratio and debt-to-income ratio of the home
equity loan on the cut-off date or any later date that the home equity
loan was acquired by the trust;
- any increase in the loan-to-value ratio does not exceed 5% unless approved
in writing by the credit enhancer, if any; and
- the lien priority of the related mortgage is not affected.
The servicer may not agree to any modification, waiver or amendment of any
provision of any home equity loan unless, in the servicer's good faith judgment,
the modification, waiver or amendment would minimize the loss that might
otherwise be experienced with respect to the home equity loan and only in the
event of a payment default with respect to the home equity loan or if a payment
default with respect to the home equity loan is reasonably foreseeable by the
servicer. However, no modification, waiver or amendment may extend the maturity
date of the home equity loan beyond the date that is six months after the final
scheduled distribution date of the latest class of securities then outstanding
issued by the trust fund. Despite any conflicting provisions in the related
pooling and servicing agreement or sale and servicing agreement, the servicer
will be permitted to modify, waive or amend any provision of a home equity loan
if required by statute or a court of competent jurisdiction to do so.
SUB-SERVICING ARRANGEMENTS
The servicer, with the prior written consent of any credit enhancer, may
under the related pooling and servicing agreement or sale and servicing
agreement enter into sub-servicing agreements with qualified sub-servicers for
any servicing and administration of home equity loans. A qualified sub-servicer
must be in compliance with the laws of each state necessary to enable it to
perform its obligations under the sub-servicing agreement, have experience
servicing home equity loans that are
36
similar to the home equity loans and have equity of not less than $5,000,000 (as
determined in accordance with generally accepted accounting principles).
The servicer will be required to provide notice of the appointment of any
sub-servicer to the trustee, securityholders, any credit enhancer and each
rating agency and to obtain confirmation from each rating agency that the
appointment of a sub-servicer will not result in any withdrawal or downgrade of
the then-current ratings on the securities (without giving effect to any credit
enhancement provided by the credit enhancer). A sub-servicing agreement will not
relieve the servicer of its obligations under the related pooling and servicing
agreement or sale and servicing agreement, and the servicer's obligations will
be the same as if it alone were servicing and administering the home equity
loans. The servicer will be entitled to enter into any agreement with a
sub-servicer for indemnification of the servicer by the sub-servicer and nothing
contained in the sub-servicing agreement will limit or modify the terms of the
related pooling and servicing agreement or sale and servicing agreement.
CERTAIN MATTERS REGARDING THE SERVICER
The servicer has agreed to indemnify and hold the trustee and any credit
enhancer harmless against any and all claims, losses, penalties, fines,
forfeitures, legal fees and related costs, judgments, and any other costs, fees
and expenses that the trustee and any credit enhancer may sustain in any way
related to the failure of the servicer to perform its duties and service the
home equity loans in compliance with the terms of the related pooling and
servicing agreement or the sale and servicing agreement, except to the extent
limited in the related pooling and servicing agreement or the sale and servicing
agreement. The servicer must immediately notify the trustee and any credit
enhancer if a claim is made by a third party with respect to the related pooling
and servicing agreement or the sale and servicing agreement, and the servicer
must assume the defense of any claim and pay all expenses in connection with the
claim, including reasonable counsel fees. It must also promptly pay, discharge
and satisfy any judgment or decree that may be entered against the servicer, the
trustee and/or any credit enhancer with respect to the claim. The trustee must
reimburse the servicer from amounts otherwise distributable on Residual Interest
Securities for the related series for all amounts advanced by it pursuant to the
preceding sentence, except when a final nonappealable adjudication determines
that the claim relates directly to the failure of the servicer to perform its
duties in compliance with the related pooling and servicing agreement or the
sale and servicing agreement. The indemnification provisions will survive the
termination of the related pooling and servicing agreement or the sale and
servicing agreement and the payment of the outstanding securities.
The servicer will be required to deliver to the trustee, the credit
enhancer, if any, and the rating agencies on or before July 31 of each year:
- an officer's certificate stating, as to each signatory, that (1) a review
of the activities of the servicer during the preceding calendar year and
of performance under the related pooling and servicing agreement or the
sale and servicing agreement has been made under the officer's
supervision, and (2) to the best of the officer's knowledge, based on his
review, the servicer has fulfilled all its obligations under the related
pooling and servicing agreement or the sale and servicing agreement for
the year, or, if there has been a default in the fulfillment of all the
servicer's obligations, specifying each default known to the officers and
the nature and status of each default including the steps being taken by
the servicer to remedy the default; and
- a letter or letters of a firm of independent, nationally recognized
certified public accountants reasonably acceptable to the credit enhancer,
if any, stating that it has examined the servicer's overall servicing
operations in accordance with the requirements of the Uniform Single
Attestation Program for Mortgage Bankers, and stating its conclusions
relating to its examination.
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REMOVAL AND RESIGNATION OF SERVICER
The credit enhancer, if any, or the holders (with the consent of the credit
enhancer, if any) will have the right, pursuant to the related pooling and
servicing agreement or the sale and servicing agreement, to remove the servicer
upon the occurrence of certain Servicer Termination Events including:
- certain acts of bankruptcy or insolvency on the part of the servicer;
- certain failures on the part of the servicer to perform its obligations
under the related pooling and servicing agreement or the sale and
servicing agreement (including certain performance tests related to the
delinquency rate and cumulative losses of the home equity loans which
tests may be amended by the related credit enhancer, if any, without the
consent of the holders);
- failure to cure material breaches of the servicer's representations in the
related pooling and servicing agreement or sale and servicing agreement;
or
- certain other events specified in the related pooling and servicing
agreement or sale and servicing agreement.
The servicer is not permitted to resign from the obligations and duties
imposed on it under the related pooling and servicing agreement or the sale and
servicing agreement except upon determination that its duties 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, as long as the
activities in question are of a type and nature carried on by the servicer on
the date of the related pooling and servicing agreement or sale and servicing
agreement. Any determination permitting the resignation of the servicer must be
evidenced by an opinion of counsel confirming these matters, which must be
delivered, and reasonably acceptable, to the trustee and any credit enhancer.
Upon removal or resignation of the servicer, the trustee may solicit bids
for a successor servicer as described in the related pooling and servicing
agreement or the sale and servicing agreement. Until a successor servicer is
appointed pursuant to the terms of the related pooling and servicing agreement
or sale and servicing agreement, the servicer must serve in the capacity of
successor servicer. The credit enhancer, if any, may appoint any successor
servicer other than the trustee. If an credit enhancer does not appoint a
successor servicer, the trustee, if it is unable to obtain a qualifying bid and
is prevented by law from acting as servicer, will be required to appoint or
petition a court of competent jurisdiction to appoint any housing and home
finance institution, bank or mortgage servicing institution designated as an
approved seller-servicer by Freddie Mac or Fannie Mae that has equity of not
less than $5,000,000, and is acceptable to any credit enhancer, as the successor
to the servicer in the assumption of all or any part of the responsibilities,
duties or liabilities of the servicer.
No removal or resignation of the servicer will become effective until the
trustee or another successor servicer shall have assumed the servicer's
responsibilities and obligations in accordance with the related pooling and
servicing agreement or sale and servicing agreement.
THE TRUSTEE
Unless otherwise specified in the related prospectus supplement, Bank One,
National Association, which has its principal corporate trust office at 1 Bank
One Plaza, Suite IL1-0126, Chicago, Illinois 60670-0126, will be named as
trustee under the related pooling and servicing agreement or sale and servicing
agreement.
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REPORTING REQUIREMENTS
On each distribution date the trustee will be required to report in writing
(based on information provided to the trustee by the servicer) to each holder,
each rating agency and the credit enhancer, if any:
- the amount of the principal and interest distribution with respect to each
class of securities (based on a security in the original principal amount
of $1,000);
- the amount of the distribution allocable to principal on the home equity
loans, separately identifying the aggregate amount of any prepayments in
full or partial prepayments or other recoveries of principal included in
the principal amount paid on the home equity loans (based on a security in
the original principal amount of $1,000) and any Target
Overcollateralization Amount (as defined in the related pooling and
servicing agreement or sale and servicing agreement);
- the amount of the distribution allocable to interest on the home equity
loans (based on a security in the original principal amount of $1,000);
- if the distribution (net of any payment by any credit enhancer) to the
holders of any class of securities on the distribution date was less than
the amounts distributable to these holders on the distribution date, the
related Carry-Forward Amount (as defined in the related pooling and
servicing agreement or sale and servicing agreement) resulting from the
shortfall;
- the amount of any payment by any credit enhancer included in the amounts
distributed to the holders of class of securities on the distribution
date;
- the outstanding principal balance of each class of securities (based on a
security in the original principal amount of $1,000) which will be
outstanding after giving effect to any payment of principal on the
distribution date;
- the amount of any Initial Target Overcollateralization Amount or Target
Overcollateralization Amount (each as defined in the relevant sale and
servicing agreement or pooling and servicing agreement), remaining after
giving effect to all distributions and transfers on the distribution date;
- the aggregate loan balance of all home equity loans and the aggregate loan
balance of the home equity loans in each home equity loan pool, in each
case after giving effect to any payment of principal on the distribution
date;
- the total of any Substitution Amount or Loan Purchase Price amounts
included in the distribution;
- the weighted average coupon rate of the home equity loans in each home
equity loan group (if applicable) and in the aggregate;
- other information that the credit enhancer or any beneficial owner of
securities may reasonably request with respect to delinquent home equity
loans;
- the largest home equity loan balance in each home equity loan group (if
applicable) and with respect to all home equity loans;
- the Pass-Through Rate (as defined in the relevant agreement) on any
securities subject to an available funds or weighted average coupon
limitation;
- during any prefunding period, the loan balance of any home equity loans
added to the trust during the related Remittance Period;
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- during any prefunding period, the remaining amounts in the Prefunding
Accounts as of the last day of the Remittance Period; and
- any other information specified in the related prospectus supplement
and/or related pooling and servicing agreement or sale and servicing
agreement.
Certain obligations of the trustee to provide information to the holders are
conditioned upon the trustee's having received the information from the
servicer.
In addition, on each distribution date the trustee will be required to
distribute to each holder, the credit enhancer, if any, and the rating agencies,
together with the information described above, the following information
prepared by the servicer and furnished to the trustee:
- the number and aggregate principal balances of home equity loans
(1) 30-59 days delinquent, 60-89 days delinquent, or 90 or more days
delinquent, as of the close of business on the last day of the Remittance
Period immediately preceding the distribution date, (2) the number and
aggregate loan balances of all home equity loans, as of the close of
business on the last day of the Remittance Period immediately preceding
the distribution date, and (3) the percentage that each of the amounts
specified in clause (1) represents as a percentage of the amounts
specified in clause (2);
- the status and the number and dollar amounts of all home equity loans in
foreclosure proceedings as of the close of business on the last day of the
Remittance Period immediately preceding the distribution date;
- the number of mortgagors and the loan balances of the related mortgages
involved in bankruptcy proceedings as of the close of business on the last
day of the Remittance Period immediately preceding the distribution date;
- home equity loans that are "balloon" loans as of the close of business on
the last day of the Remittance Period immediately preceding the
distribution date;
- the existence and status of any mortgaged properties as to which title has
been taken in the name of, or on behalf of the trustee, as of the close of
business of the last day of the Remittance Period immediately preceding
the distribution date;
- the book value of any REO properties as of the close of business on the
last day of the Remittance Period immediately preceding the distribution
date;
- the realized losses incurred on home equity loans for the Remittance
Period and the cumulative realized losses incurred on the home equity
loans from the closing date to and including the Remittance Period
immediately preceding the distribution date; and
- the amount of net liquidation proceeds realized on the home equity loans
during the Remittance Period immediately preceding the distribution date.
REMOVAL OF TRUSTEE FOR CAUSE
The trustee may be removed upon the occurrence of any one of the following
events, whatever the reason for the event and whether it is voluntary or
involuntary or is effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body:
- failure by the trustee to make distributions of available amounts;
- breaches of covenants and representations by the trustee;
- certain acts of bankruptcy or insolvency on the part of the trustee; or
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- failure to meet the standards of trustee eligibility as set forth in the
related pooling and servicing agreement or sale and servicing agreement.
If any of these events occurs and is continuing, then the credit enhancer,
if any, or with the prior written consent of any credit enhancer (which may not
be unreasonably withheld), the depositor and the holders or, if there are no
securities then outstanding, the owners of the Residual Interest Securities may
appoint a successor trustee.
GOVERNING LAW
The agreements and each security will be construed in accordance with and
governed by the laws of the State of New York applicable to agreements made and
to be performed in New York.
AMENDMENTS
The trustee, the depositor, the seller and the servicer, with the consent of
the credit enhancer, if any, may, at any time and from time to time and without
notice to or the consent of the holders, amend the pooling and servicing
agreement or sale and servicing agreement in order to:
- if accompanied by a REMIC Opinion, remove the restriction against the
transfer of a Residual Interest Security to a "disqualified organization"
(as defined in the Code);
- comply with the requirements of the Code including any amendments
necessary to maintain REMIC status;
- cure any ambiguity;
- correct or supplement any provision in the pooling and servicing agreement
or the sale and servicing agreement that is inconsistent with any other
provisions in the pooling and servicing agreement or sale and servicing
agreement, as applicable; or
- for any other purpose, if the amendment will not adversely affect in any
material respect the interest of the holders (an amendment will be deemed
not to have such an effect if it will not result in a reduction of the
rating of the securities of a series without regard to any financial
guaranty insurance policy or other credit enhancement).
In no event may the amendment change in any manner the amount of, or delay
the timing of, payments required to be distributed to any holder without the
consent of that holder, change the percentages required to consent to any
amendment, without the consent of the holders of all outstanding securities of
the class or classes affected, or affect the terms or provisions of any
financial guaranty insurance policy.
The trustee will be required to furnish written notification of the
substance of any amendment to each holder in the manner set forth in the related
pooling and servicing agreement or sale and servicing agreement.
TERMINATION OF THE TRUST
Unless otherwise specified in the related prospectus supplement, the related
pooling and servicing agreement or sale and servicing agreement will provide
that the trust will terminate upon the payment to the holders (from amounts
other than those available under any financial guaranty insurance policy) of all
amounts required to be paid to the holders upon the later to occur of:
- the final payment or other liquidation of the last home equity loan (or
any advance made with respect to the home equity loan);
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- the disposition of all property acquired in respect of any home equity
loan remaining in the trust fund; and
- any time that a purchase by the servicer (or an affiliate thereof) or any
credit enhancer as an optional termination of the trust is effected as
described below under "--Optional Termination."
To effect an optional termination, the trustee must be furnished with an
opinion of counsel experienced in federal income tax matters acceptable to the
credit enhancer, if any, and the trustee to the effect that the optional
termination constitutes a "qualified liquidation" under the Code.
OPTIONAL TERMINATION
BY SERVICER OR CREDIT ENHANCER. At its option, the servicer (or, if
specified in the related prospectus supplement, an affiliate of the servicer or
the credit enhancer, if any, if the servicer or such affiliate fails to exercise
its option) may effect an optional termination of the trust (which may also be
referred to as a clean up call) to the extent specified in the related
prospectus supplement either (1) on any date that the aggregate outstanding
principal balance of the securities is 10% (or such other percentage as is
specified in the related pooling and servicing agreement or sale and servicing
agreement) or less than the initial aggregate outstanding principal balance of
the securities or (2) on any date when the aggregate outstanding loan balance of
the home equity loans is 10% (or such other percentage as is specified in the
related pooling and servicing agreement or sale and servicing agreement) or less
than the sum of the loan balances of all the home equity loans in the trust as
of the date the home equity loans were transferred to the trust. The servicer
(or affiliate) may effect an optional termination of the trust by purchasing
from the trust fund all (but not fewer than all) remaining home equity loans, in
whole only, and other property acquired by foreclosure, deed in lieu of
foreclosure, or otherwise then constituting the trust fund, at a purchase price
which will equal an amount up to the sum of (a) the greater of (i) 100% of the
fair market value of the home equity loans and (ii) 100% of the then outstanding
principal balance of the securities, plus (b) one month's interest at the
weighted average interest rate for each class of securities, plus (c) certain
reimbursement amounts. Upon such termination of the trust, the holders will be
paid the principal balance of the securities plus any previously accrued but
unpaid interest on the securities in accordance with the payment priorities
described under "Description of the Certificates--Distributions" in the related
prospectus supplement, thereby effecting early retirement of the securities.
TERMINATION UPON LOSS OF REMIC STATUS. Following a final determination by
the Internal Revenue Service or by a court of competent jurisdiction, from which
no appeal is taken within the permitted appeal period, or if any appeal is
taken, following a final determination with respect to the appeal from which no
further appeal can be taken, to the effect that the REMIC does not and will no
longer qualify as a "REMIC" pursuant to Section 860D of the Code the credit
enhancer, if any, or the holders with the consent of the credit enhancer, if
any, may within 30 calendar days following the final determination, direct the
trustee on behalf of the trust fund to adopt a plan of complete liquidation, as
contemplated by Section 860F(a)(4) of the Code.
EVENTS OF DEFAULT; TERMINATION UNDER INDENTURE. Events of Default under the
indenture for each series of notes include:
- a default for 30 days or more in the payment of any principal of or
interest on any note;
- failure to perform any other covenant of the trust fund in the indenture
which continues for a period of 60 days after notice is given in
accordance with the procedures described in the related prospectus
supplement;
- any representation or warranty made with respect to or affecting the
series by the seller or the trust fund in the indenture or in any
certificate or other writing delivered pursuant to or in connection with
the indenture having been incorrect in any material respect as of the time
made,
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and the breach is not cured within 60 days after notice is given in
accordance with the procedures described in the related prospectus
supplement;
- certain events of bankruptcy, insolvency, receivership or liquidation of
the seller or the trust fund; or
- any other event of default provided with respect to the notes.
If an Event of Default with respect to any outstanding notes occurs and is
continuing, either the trustee or the holders of a majority of the then
aggregate outstanding amount of the notes with, if specified in the related
prospectus supplement, the consent of the credit enhancer, may declare the
principal amount (or, if the notes are Zero Coupon Securities, the portion of
the principal amount specified in the terms of that series, as provided in the
related prospectus supplement) of all the notes to be due and payable
immediately. This declaration may, under certain circumstances, be rescinded and
annulled by the holders of a majority in aggregate outstanding amount of the
notes.
If, following an Event of Default with respect to any series of notes, the
notes have been declared to be due and payable, the trustee may, in its
discretion, elect to maintain possession of the collateral securing the notes
and to continue to apply distributions on the collateral as if there had been no
declaration of acceleration, if the collateral continues to provide sufficient
funds for the payment of principal of and interest on the notes as they would
have become due if there had not been any acceleration of payment. In addition,
the trustee may not sell or otherwise liquidate the collateral securing the
notes of a series following an Event of Default unless:
- the holders of 100% of the then aggregate outstanding amount of the notes
consent to the sale;
- the proceeds of the sale or liquidation are sufficient to pay in full the
principal of and accrued interest due and unpaid on the outstanding notes
at the date of the sale; or
- the trustee determines that the 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 accelerated, and the trustee
obtains the consent of the holders of 66 2/3% of the then aggregate
outstanding amount of the notes.
In the event that the trustee liquidates the collateral in connection with
an Event of Default involving a default for 30 days or more in the payment of
principal of or interest on the notes, the indenture provides that the trustee
will have a prior lien on the proceeds of any liquidation for unpaid fees and
expenses. As a result, upon the occurrence of the Event of Default, the amount
available for distribution to the noteholders may be less than would otherwise
be the case. However, the trustee may not institute a proceeding for the
enforcement of its lien except in connection with a proceeding for the
enforcement of the lien of the indenture for the benefit of the noteholders
after the occurrence of the Event of Default.
In the event that 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 their notes less the amount of the discount which is
unamortized.
Subject to the provisions of the indenture relating to the duties of the
trustee, even if an Event of Default has occurred and is continuing with respect
to a series of notes, the 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 notes of the series, unless the holders have offered to the
trustee security or indemnity satisfactory to it against the costs, expenses and
liabilities which might be incurred by it in complying with the request or
direction of the holders. Subject to these provisions for indemnification and
certain other limitations contained in the indenture, the holders of a majority
of the then aggregate outstanding amount of the notes of the series will have
the right to direct the time, method and place
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of conducting any proceeding for any remedy available to the trustee or
exercising any trust or power conferred on the trustee with respect to the
notes. The holders of a majority of the then aggregate outstanding amount of the
notes may, in certain cases, waive any default with respect to the notes, except
a default in the payment of principal or interest or a default in respect of a
covenant or provision of the indenture that cannot be modified without the
waiver or consent of all the holders of the outstanding notes affected.
The indenture will be discharged with respect to a series of notes (except
with respect to certain continuing rights specified in the indenture) upon the
delivery to the trustee for cancellation of all the notes of the series or, with
certain limitations, upon deposit with the trustee of funds sufficient for the
payment in full of all of the notes of the series.
In addition to this discharge, with certain limitations, the indenture will
provide that, if specified with respect to the notes of any series, the related
trust fund will be discharged from any and all obligations with respect to the
notes of the series (except for certain obligations relating to temporary notes
and exchange of notes, to register the transfer of or exchange notes of the
series, to replace stolen, lost or mutilated notes of the series, to maintain
paying agencies and to hold monies for payment in trust) upon the deposit with
the 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 accordance with their terms, will provide money in an
amount sufficient to pay the principal of and each installment of interest on
the notes on the final scheduled distribution date for the notes and any
installment of interest on the notes in accordance with the terms of the
indenture and the notes. In the event of any resulting defeasance and discharge
of the notes, holders of notes would be able to look only to this money and/or
direct obligations for all further payment of principal and interest, if any, on
their notes.
REMIC ADMINISTRATOR
For any series with respect to which a REMIC election is made, preparation
of certain reports and certain other administrative duties with respect to the
trust fund may be performed by a REMIC administrator, who may be the seller or
an affiliate of the seller.
CERTAIN LEGAL ASPECTS OF THE HOME EQUITY LOANS
The following discussion contains summaries of certain legal aspects of home
equity loans which are general in nature. Because certain of these legal aspects
are governed by applicable state law (which may differ substantially from state
to state), the summaries do not purport to be complete or to reflect the laws of
any particular state, or to encompass the laws of all states in which the
properties securing the home equity loans are situated.
HOME EQUITY LOANS
The home equity loans for a series will be secured by either mortgages,
deeds of trust, deeds to secure debt or similar security instruments, depending
upon the prevailing practice in the state in which the property subject to a
home equity loan is located. The filing of a mortgage, deed of trust, deed to
secure debt or similar security instrument creates a lien or title interest upon
the real property covered and represents the security for the repayment of an
obligation that is customarily evidenced by a promissory note. The priority of
the liens is important because, among other things, the foreclosure of a senior
lien will extinguish a junior lien, and because the holder of a senior lien
generally will have a right to receive insurance, condemnation or other proceeds
before the holder of a junior lien.
Priority between mortgages and deeds of trust (or other instruments of
record) generally depends in the first instance on the order of filing with the
appropriate government records office. Priority also
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may be affected by the express terms of the mortgage or the deed of trust and
any subordination agreement among the lenders.
Although priority among liens on the same property generally depends in the
first instance on the order of filing, there are a number of ways in which a
lien that is a senior lien when it is filed can become subordinate to a lien
filed at a later date. A deed of trust or mortgage generally is not prior to any
liens for real estate taxes and assessments, certain federal liens (including
certain federal criminal liens, environmental liens and tax liens), certain
mechanics and materialmen's liens, and other liens given priority by applicable
law.
There are two parties to a mortgage, the mortgagor, who is the
borrower/property owner or the land trustee (as described below), and the
mortgagee, who is the lender. Under the mortgage instrument, the mortgagor
delivers to the mortgagee a note or bond and the mortgage. In the case of a land
trust, there are three parties because title to the property is held by a land
trustee under a land trust agreement of which the borrower/property owner is the
beneficiary; at origination of a home equity loan, the borrower executes a
separate undertaking to make payments on the mortgage note. Under a deed of
trust or similar security instrument, the homeowner or borrower, called the
"grantor," grants the security property to a third-party grantee, called the
"trustee," for the benefit of the lender, called the "beneficiary." The deed of
trust gives the trustee the authority, if the borrower defaults and upon the
instructions of the beneficiary, to sell the security property in a
"foreclosure" or "trustee's sale" and to apply the sale proceeds to the secured
debt. The mortgagee's authority under a mortgage and the trustee's authority
under a deed of trust are governed by the law of the state in which the real
property is located, the express provisions of the mortgage or deed of trust,
and, in some cases, particularly in deed of trust transactions, the directions
of the beneficiary.
FORECLOSURE
Foreclosure of a mortgage is generally accomplished by judicial action, and
foreclosure of a deed of trust may be accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in completion
of the foreclosure occasionally may result from difficulties in effecting
service on necessary parties defendant. When the mortgagee's right to
foreclosure is contested, the legal proceedings necessary to resolve the issue
can be time-consuming and expensive. After the completion of a judicial
foreclosure proceeding, the court may issue a judgment of foreclosure and
appoint a receiver or other officer to conduct the sale of the property. In some
states, mortgages may also be foreclosed by advertisement or pursuant to a power
of sale provided in the mortgage. Foreclosure of a mortgage by advertisement is
essentially similar to foreclosure of a deed of trust by nonjudicial power of
sale.
If a borrower defaults under a loan secured by a deed of trust, the lender
generally may bring suit against the borrower. The lender generally also may
attempt to collect the loan by causing the deed of trust to be enforced against
the property it encumbers. Enforcement of a deed of trust is accomplished in
most cases by a trustee's sale in which the trustee, upon default of the
grantor, and subject to the expiration of applicable cure periods, sells the
security property at a public sale under the terms of the loan documents and
subject to the applicable procedural provisions of state law. In certain states,
the lender must exhaust the security through foreclosure (either judicially or
non-judicially) prior to other efforts to collect the balance of the promissory
note. Whether a lender may thereafter collect on the unpaid balance of the loan
is governed by the anti-deficiency statute in the applicable state governing the
collectibility of deficiency balances.
The trustee's sale generally must be conducted by public auction in the
county or city in which all or some part of the security property is located. At
the sale, the trustee generally requires a bidder to deposit with the trustee a
set amount or a percentage of the full amount of the bidder's final bid in cash
(or an equivalent satisfactory to the trustee) prior to and as a condition to
recognizing the bid,
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and may conditionally accept and hold these amounts for the duration of the
sale. The beneficiary of the deed of trust generally need not bid cash at the
sale, but may instead make a "credit bid" up to the extent of the total amount
due under the deed of trust, including costs and expenses actually incurred in
enforcing the deed of trust, as well as the trustee's fees and expenses. The
trustee will sell the security property to the highest proper bidder at the
sale.
A sale conducted in accordance with the terms of the power of sale contained
in the deed of trust generally is presumed to be conducted regularly and fairly,
and, on a conveyance of the property by trustee's deed, confers absolute legal
title to the property to the purchaser, free of all junior deeds of trust and
free of all other liens and claims subordinate to the deed of trust under which
the sale is made. The purchaser's title, however, is subject to all senior liens
and other senior claims. Thus, if the deed of trust being enforced is a junior
deed of trust, the trustee will convey title to the property to the purchaser
subject to the first deed of trust and any other prior liens and claims. A
trustee's sale or judicial foreclosure under a junior deed of trust generally
has no effect on the first deed of trust, with the possible exception of the
right of a senior beneficiary to accelerate its indebtedness under a default
clause or a "due-on-sale" clause contained in the senior deed of trust.
WE REFER YOU TO "--DUE-ON-SALE CLAUSES IN HOME EQUITY LOANS" BELOW FOR MORE
DETAIL.
Because a potential buyer at the sale may find it difficult to determine the
exact status of title and other facts about the security property, and because
the physical condition of the security property may have deteriorated, it
generally is more common for the lender, rather than an unrelated third party,
to purchase the security property at a trustee's sale or judicial foreclosure
sale. The lender (or other purchaser at the judicial foreclosure or trustee's
sale) will be subject to the burdens of ownership, including the obligations to
service any senior mortgage or deed of trust, to obtain hazard insurance and to
make any repairs at its own expense necessary to render the security property
suitable for resale. The lender commonly will attempt to resell the security
property and obtain the services of a real estate broker and agree to pay the
broker a commission in connection with the resale. Depending upon market
conditions, the ultimate proceeds of the resale of the security property may not
be high enough to equal the lender's investment.
The proceeds received by the trustee from the sale generally are applied
first to the costs, fees and expenses of sale and then in satisfaction of the
indebtedness secured by the deed of trust under which the sale was conducted.
Any remaining proceeds generally are payable to the holders of junior deeds of
trust and other liens and claims in order of their priority. Any balance
remaining generally is payable to the grantor. Following the sale, if there are
insufficient proceeds to repay the secured debt, the beneficiary under the
foreclosed lien generally may obtain a deficiency judgment against the grantor.
See "--Anti-Deficiency Legislation and Other Limitations on Lenders" below.
Some courts have been faced with the issue of whether federal or state
constitutional due process requires that borrowers under deeds of trust receive
notices in addition to the statutorily prescribed minimum. For the most part,
the courts in these cases have upheld the notice provisions and procedures
described above.
An action to foreclose a mortgage is an action to recover the mortgage debt
by enforcing the mortgagee's rights under the mortgage. It is regulated by
statutes and rules and subject throughout to the court's equitable powers.
Generally, a mortgagor is bound by the terms of the related mortgage note and
the mortgage as made and cannot be relieved from his default if the mortgagee
has exercised his rights in a commercially reasonable manner. However, since a
foreclosure action is equitable in nature, the court may exercise equitable
powers to relieve a mortgagor of a default and deny the mortgagee foreclosure on
proof that either the mortgagor's default was excusable or the mortgagee's
action established a waiver, fraud, bad faith, or oppressive or unconscionable
conduct such as to warrant a court of equity to refuse affirmative relief to the
mortgagee. Under certain circumstances a
46
court of equity may relieve the mortgagor from an entirely technical default
where the default was not willful.
A foreclosure action is subject to most of the delays and expenses of other
lawsuits if defenses or counterclaims are interposed, sometimes requiring up to
several years to complete. Moreover, a non-collusive, regularly conducted
foreclosure sale may be challenged as a fraudulent conveyance, regardless of the
parties' intent, if a court determines that the sale was for less than fair
consideration and the sale occurred while the mortgagor was insolvent and within
one year (or within the state statute of limitations if the trustee in
bankruptcy elects to proceed under state fraudulent conveyance law) of the
filing of bankruptcy. Similarly, a suit against the debtor on the related
mortgage note may take several years and, generally, is a remedy alternative to
foreclosure, the mortgagee being precluded from pursuing both at the same time.
In the case of foreclosure under either a mortgage or a deed of trust, the
sale by the referee or other designated officer or by the trustee is a public
sale. However, because of the difficulty potential third party purchasers at the
sale have in determining the exact status of title and because the physical
condition of the property may have deteriorated during the foreclosure
proceedings, it is relatively uncommon for a third party to purchase the
property at a foreclosure sale. Rather, it is more common for the lender to
purchase the property from the trustee or referee for an amount which may be
equal to the unpaid principal amount of the mortgage note secured by the
mortgage or deed of trust plus accrued and unpaid interest and the expenses of
foreclosure, in which event the mortgagor's debt will be extinguished or the
lender may purchase for a lesser amount in order to preserve its right against a
borrower to seek a deficiency judgment in states where a deficiency judgment can
be obtained. Afterward, subject to the right of the borrower in some states to
remain in possession during the redemption period, the lender will assume the
burdens of ownership, including obtaining hazard insurance, paying taxes and
making any repairs at its own expense necessary to render the property suitable
for sale. The lender will commonly obtain the services of a real estate broker
and pay the broker's commission in connection with the sale of the property.
Depending upon market conditions, the ultimate proceeds of the sale of the
property may not equal the lender's investment in the property. Any loss may be
reduced by the receipt of any mortgage guaranty insurance proceeds.
RIGHTS OF REDEMPTION
In some states, after foreclosure of a mortgage, the mortgagor and
foreclosed junior lienors are given a statutory period in which to redeem the
property from the foreclosure sale. The right of redemption should be
distinguished from the equity of redemption, which is a statutory or
non-statutory right that must be exercised prior to the foreclosure sale. In
some states, redemption may occur only upon payment of the entire principal
balance of the loan, accrued interest, expenses of foreclosure and reasonable
expenses incurred in maintaining the property. 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
will defeat the title of any purchaser at a foreclosure sale, or of any
purchaser from the lender subsequent to foreclosure. Consequently the practical
effect of a right of redemption is to force the lender to retain the property
and pay the expenses of ownership until the redemption period has run. In many
states, there is no right to redeem property after a trustee's sale under a deed
of trust, unless a deficiency judgment is sought by the lender.
When the lender under a junior mortgage or deed of trust cures the default
and reinstates or redeems the senior mortgage or deed of trust, the amount paid
by the lender for the cure generally becomes a part of the indebtedness secured
by the junior deed of trust.
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JUNIOR HOME EQUITY LOANS; RIGHTS OF SENIOR HOME EQUITY LOANS
The home equity loans comprising or underlying the home equity loans
included in the trust fund for a series will be secured by mortgages or deeds of
trust which may be junior to one or more other mortgages or deeds of trust held
by other lenders or institutional investors. The rights of the trust fund (and
therefore the holders), as mortgagee under a junior mortgage, are subordinate to
those of the mortgagee under the senior mortgage, including the prior rights of
the senior mortgagee to receive hazard insurance and condemnation proceeds and
to cause the property securing the home equity loan to be sold upon default of
the mortgagor, thus extinguishing the junior mortgagee's lien unless the junior
mortgagee asserts its subordinate interest in the property in foreclosure
litigation and, possibly, satisfies the defaulted senior mortgage. A junior
mortgagee may satisfy a defaulted senior home equity loan in full and, in some
states, may cure the default and bring the senior home equity loan current, in
either event adding the amounts expended to the balance due on the junior home
equity loan. In some states, absent a provision in the mortgage or deed of
trust, no notice of default is required to be given to a junior mortgagee. In
addition, as described above, the rights of the trust fund may be or become
subject to liens for real estate taxes and other obligations. Although the
seller generally does not cure defaults under a senior deed of trust or other
lien, it is the seller's standard practice to protect its interest by monitoring
any sale of which it is aware and bidding for property if it determines that it
is in the seller's best interests to do so.
The standard form of the mortgage or deed of trust used by most
institutional lenders, like that used by the seller, confers on the mortgagee or
beneficiary the right both to receive all proceeds collected under any hazard
insurance policy required to be maintained by the borrower and all awards made
in connection with condemnation proceedings. The lender generally has the right,
subject to the specific provisions of the mortgage or deed of trust securing its
home equity loan, to apply any proceeds and awards to repair of any damage to
the security property or to payment of any indebtedness secured by the mortgage
or deed of trust, in any order that the mortgagee or beneficiary may determine.
Thus, in the event improvements on the property are damaged or destroyed by fire
or other casualty, or in the event the property is taken by condemnation, the
mortgagee or beneficiary under underlying senior mortgages will have the prior
right to collect any insurance proceeds payable under a hazard insurance policy
and any award of damages in connection with the condemnation and to apply the
same to the indebtedness secured by the senior mortgages or deeds of trust. If
available, proceeds in excess of the amount of senior mortgage indebtedness, in
most cases, will be applied to the junior indebtedness.
Another provision typically found in the form of the mortgage or deed of
trust used by institutional lenders obligates the grantor or mortgagor to pay
before delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste, and to appear in and defend any action or proceeding purporting to affect
the property or the rights of the mortgagee or beneficiary under the mortgage.
Upon a failure of the grantor or mortgagor to perform any of these obligations,
the mortgagee or beneficiary is given the right to perform the obligation
itself, at its election, with the mortgagor or grantor agreeing to reimburse the
mortgagee or beneficiary for any sums expended by the mortgagee or beneficiary
on behalf of the mortgagor or grantor. The mortgage or deed of trust typically
provides that all sums so expended by the mortgagee or beneficiary become part
of the indebtedness secured by the mortgage or deed of trust.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have imposed statutory prohibitions which limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or
48
sale under a deed of trust. A deficiency judgment is a personal judgment against
the former borrower equal in most cases to the difference between the net amount
realized upon the public sale of the real property and the amount due to the
lender. However, some states calculate the deficiency as the difference between
the outstanding indebtedness and the greater of the fair market value of the
property and the sales price of the property. Other states require the
beneficiary or mortgagee to exhaust the security afforded under a deed of trust
or mortgage by foreclosure in an attempt to satisfy the full debt before
bringing a personal action against the borrower. In certain other states, the
lender has the option of bringing a personal action against the borrower on the
debt without first exhausting its security; however, in some of these states,
the lender, following judgment on its personal action, may be deemed to have
elected a remedy and may be precluded from exercising remedies with respect to
the security. Consequently, the practical effect of the election requirement,
when applicable, is that lenders will usually proceed first against the security
rather than bringing a personal action against the borrower. Finally, other
statutory provisions limit any deficiency judgment against the former borrower
following a foreclosure sale to the excess of the outstanding debt over the fair
market value of the property at the time of the public sale. The purpose of
these statutes is generally to prevent a beneficiary or a mortgagee from
obtaining a large deficiency judgment against the former borrower as a result of
low or no bids at the foreclosure sale.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other statutory provisions, including the federal bankruptcy laws, the Federal
Soldiers' and Sailors' Civil Relief Act and state laws affording relief to
debtors, may interfere with or affect the ability of the secured lender to
realize upon collateral and/or enforce a deficiency judgment. For example, with
respect to federal bankruptcy law, the filing of a petition acts as a stay
against the enforcement of remedies for collection of a debt. Foreclosure is
permitted during the pendency of this proceeding only with court permission
Moreover, a court with federal bankruptcy jurisdiction may permit a debtor
through a Chapter 13 rehabilitative plan under the federal bankruptcy code to
cure a monetary default with respect to a loan on a debtor's residence by paying
arrearages within a reasonable time period and reinstating the original loan
payment schedule even though the lender accelerated the loan and the lender has
taken all steps to realize upon its security (as long as no sale of the property
has yet occurred) prior to the filing of the debtor's Chapter 13 petition. Some
courts with federal bankruptcy jurisdiction have approved plans, based on the
particular facts of the reorganization case, that effected the curing of a loan
default by permitting the obligor to pay arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a home equity loan may be modified if the borrower has filed a petition
under Chapter 13. These courts have suggested that modifications may include
reducing the amount of each monthly payment, changing the rate of interest,
altering the repayment schedule and reducing the lender's security interest to
the value of the residence, thus leaving the lender a general unsecured creditor
for the difference between the value of the residence and the outstanding
balance of the home equity loan. Federal bankruptcy law and limited case law
indicate that the foregoing modifications cannot be applied to the terms of a
home equity loan secured by property that is the principal residence of the
debtor. In all cases, the secured creditor is entitled to the value of its
security plus post-petition interest, attorney's fees and costs to the extent
the value of the security exceeds the debt.
In a Chapter 11 case under the federal bankruptcy code, the lender is
precluded from foreclosing without authorization from the bankruptcy court. The
lender's lien may be transferred to other collateral and/or be limited in amount
to the value of the lender's interest in the collateral as of the date of the
bankruptcy. The loan term may be extended, the interest rate may be adjusted to
market rates and the priority of the loan may be subordinated to bankruptcy
court-approved financing. The bankruptcy court can, in effect, invalidate
due-on-sale clauses through confirmed Chapter 11 plans of reorganization.
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The federal bankruptcy code provides priority to certain tax liens over the
lender's security. This may delay or interfere with the enforcement of rights in
respect of a defaulted home equity loan. In addition, substantive requirements
are imposed upon lenders in connection with the origination and the servicing of
home equity loans by numerous federal and some state consumer protection laws.
The laws include the federal Truth-in-Lending Act, Real Estate Settlement
Procedures Act, Equal Credit Opportunity Act, Fair Credit Reporting Act and
related statutes and regulations. These federal laws impose specific statutory
liabilities upon lenders who originate loans and who fail to comply with the
provisions of the law. In most cases, this liability will affect assignees of
the loans.
DUE-ON-SALE CLAUSES IN HOME EQUITY LOANS
Due-on-sale clauses permit the lender to accelerate the maturity of the home
equity loan if the borrower sells or transfers, whether voluntarily or
involuntarily, all or part of the real property securing the loan without the
lender's prior written consent. The enforceability of these clauses has been the
subject of legislation or litigation in many states, and in some cases,
typically involving single family residential mortgage transactions, their
enforceability has been limited or denied. In any event, the Garn-St Germain
Depository Institutions Act of 1982 (the "Garn-St Germain Act") preempts state
constitutional, statutory and case law that prohibits the enforcement of
due-on-sale clauses and permits lenders to enforce these clauses in accordance
with their terms, subject to certain exceptions. As a result, due-on-sale
clauses have become generally enforceable except in those states whose
legislatures exercised their authority to regulate the enforceability of
due-on-sale clauses with respect to home equity that were originated or assumed
during the "window period" under the Garn-St Germain Act which ended in all
cases not later than October 15, 1982, and that were originated by lenders other
than national banks, federal savings institutions and federal credit unions.
Freddie Mac has taken the position in its published mortgage servicing standards
that, out of a total of eleven "window period states," five states (Arizona,
Michigan, Minnesota, New Mexico and Utah) have enacted statutes extending, on
various terms and for varying periods, the prohibition on enforcement of
due-on-sale clauses with respect to certain categories of window period loans.
Also, the Garn-St Germain Act does "encourage" lenders to permit assumption of
loans at the original rate of interest or at some other rate less than the
average of the original rate and the market rate.
In addition, under federal bankruptcy law, due-on-sale clauses may not be
enforceable in bankruptcy proceedings and may, under certain circumstances, be
eliminated in any modified mortgage resulting from the bankruptcy proceeding.
ENFORCEABILITY OF PREPAYMENT AND LATE PAYMENT FEES
Forms of notes, mortgages and deeds of trust used by lenders may contain
provisions obligating the borrower to pay a late charge if payments are not
timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations upon the late charges which a lender may
collect from a borrower for delinquent payments. Certain states also limit the
amounts that a lender may collect from a borrower as an additional charge if the
loan is prepaid. Late charges and prepayment fees are typically retained by
servicers as additional servicing compensation.
EQUITABLE LIMITATIONS ON REMEDIES
In connection with lenders' attempts to realize upon their security, courts
have invoked general equitable principles. The equitable principles are
generally designed to relieve the borrower from the legal effect of his defaults
under the loan documents. Examples of judicial remedies that have been fashioned
include judicial requirements that the lender undertake affirmative and
expensive actions to determine the causes of the borrower's default and the
likelihood that the borrower will be able to reinstate the loan. In some cases,
courts have substituted their judgment for the lender's judgment and
50
have required that lenders reinstate loans or recast payment schedules in order
to accommodate borrowers who are suffering from temporary financial disability.
In other cases, courts have limited the right of a lender to realize upon its
security if the default under the security agreement is not monetary, such as
the borrower's failure to adequately maintain the property or the borrower's
execution of secondary financing affecting the property. Finally, some courts
have been faced with the issue of whether or not federal or state constitutional
provisions reflecting due process concerns for adequate notice require that
borrowers under security agreements receive notices in addition to the
statutorily-prescribed minimums. For the most part, these cases have upheld the
notice provisions as being reasonable or have found that, in cases involving the
sale by a trustee under a deed of trust or by a mortgagee under a mortgage
having a power of sale, there is insufficient state action to afford
constitutional protections to the borrower.
Most conventional single-family home equity loans may be prepaid in full or
in part without penalty. A mortgagee to whom a prepayment in full has been
tendered may be compelled to give either a release of the mortgage or an
instrument assigning the existing mortgage. The absence of a restraint on
prepayment, particularly with respect to home equity loans having higher
mortgage rates, may increase the likelihood of refinancing or other early
retirements of these home equity loans.
APPLICABILITY OF USURY LAWS
Many states have usury laws which limit the interest and other amounts that
may be charged under certain loans. 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 certain types of
residential first home equity loans originated by certain lenders after
March 31, 1980. Similar federal statutes were in effect with respect to home
equity loans made during the first three months of 1980. Title V authorizes any
state to reimpose interest rate limits by adopting, before April 1, 1983, a
state law, or by certifying that the voters of the state have voted in favor of
any provision, constitutional or otherwise, which expressly rejects an
application of the federal law. Fifteen states adopted such a law prior to the
April 1, 1983 deadline. In addition, even where Title V is not so rejected, any
state is authorized by the law to adopt a provision limiting discount points or
other charges on home equity loans covered by Title V. State laws apply to
residential second mortgages; however, some state usury limitations do not apply
to residential second mortgages.
ENVIRONMENTAL LEGISLATION
A federal statute, the Comprehensive Environmental Response, Compensation,
and Liability Act, and a growing number of state laws impose a statutory lien
for associated costs on property that is the subject of a cleanup action on
account of hazardous wastes or hazardous substances released or disposed of on
the property. A lien of this type generally will have priority over all
subsequent liens on the property and, in certain of these states, will have
priority over prior recorded liens, including the lien of a mortgage or deed of
trust. The priority of the environmental lien under federal law depends on the
time of perfection of the federal lien compared to the time of perfection of any
competing liens under applicable state law. In addition, under federal
environmental legislation and possibly under state law in a number of states, a
secured party that takes a deed in lieu of foreclosure or acquires a property at
a foreclosure sale may be liable for the costs of cleaning up a contaminated
site. Although these costs could be substantial, they would probably not be
imposed on a secured lender (such as the applicable trust fund) if it promptly
marketed the foreclosed property for resale. In the event that a trust fund
acquired title to a property securing a home equity loan and cleanup costs were
incurred in respect of the property, the holders of the securities might incur a
delay in the payment if the costs were required to be paid by the trust fund.
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SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the Soldiers' and Sailors' Civil Relief Act of 1940, members of all
branches of the military on active duty, including draftees and reservists in
military service:
- are entitled to have interest rates reduced and capped at 6% per annum, on
obligations (including home equity loans) incurred prior to the
commencement of military service for the duration of military service;
- may be entitled to a stay of proceedings on any kind of foreclosure or
repossession action in the case of defaults on obligations entered into
prior to military service for the duration of military service; and
- may have the maturity of obligations incurred prior to military service
extended, the payments lowered and the payment schedule readjusted for a
period of time after the completion of military service.
However, these benefits are subject to challenge by creditors. If, in the
opinion of the court, the ability of a person to comply with these obligations
has not been materially impaired by military service, the court may apply
equitable principles accordingly. If a borrower's obligation to repay amounts
otherwise due on a home equity loan included in a trust fund for a series is
relieved pursuant to the Soldiers' and Sailors' Civil Relief Act of 1940, none
of the trust fund, the servicer, the seller, the trustee or the owner trustee
(if applicable) will be required to advance these amounts, and any resulting
loss may reduce the amounts available to be paid to the holders of the
securities of the series. Any shortfalls in interest collections on home equity
loans included in a trust fund for a series resulting from application of the
Soldiers' and Sailors' Civil Relief Act of 1940 will be allocated to each class
of securities of the series that is entitled to receive interest in respect of
the home equity loans in proportion to the interest that each class of
securities would have otherwise been entitled to receive in respect of the home
equity loans had the interest shortfall not occurred, unless the related
prospectus supplement allocates these shortfalls to particular classes.
USE OF PROCEEDS
The depositor will apply all or substantially all of the net proceeds from
the sale of each series of securities for one or more of the following purposes:
- to establish any reserve fund, Prefunding Account or Capitalized Interest
Account;
- to pay costs of structuring and issuing the securities, including the
costs of obtaining credit enhancement; and
- to acquire the home equity loans from the seller, who in turn will use the
proceeds for general corporate purposes.
FEDERAL INCOME TAX CONSEQUENCES
GENERAL
This section sets forth certain federal income tax opinions of Stroock &
Stroock & Lavan LLP, special counsel to the seller ("Federal Tax Counsel") and a
summary, based on the advice of Federal Tax Counsel, of the material federal
income tax consequences of the purchase, ownership and disposition of
securities. The summary focuses primarily upon investors who will hold
securities as "capital assets" (generally, property held for investment) within
the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended
(the "Code"), but much of the discussion is applicable to other investors as
well. Because tax consequences may vary based on the status or tax attributes of
the owner of a security, prospective investors are advised to consult their own
tax advisers concerning the
52
federal, state, local and any other tax consequences to them of the purchase,
ownership and disposition of the securities. For purposes of this tax discussion
(except with respect to information reporting, or where the context indicates
otherwise), any reference to the "holder" means the beneficial owner of a
security.
The summary is based upon the provisions of and the regulations promulgated
under the Code including, where applicable, proposed regulations, and the
judicial and administrative rulings and decisions now in effect, all of which
are subject to change or possible differing interpretations. The statutory
provisions, regulations, and interpretations on which this interpretation is
based are subject to change, and a change could apply retroactively.
The federal income tax consequences to holders will vary depending on
whether:
- the securities of a series are classified as indebtedness for federal
income tax purposes;
- an election is made to treat the trust fund (or certain assets of the
trust fund) relating to a particular series of securities as a real estate
mortgage investment conduit (REMIC) under the Code;
- the securities represent an ownership interest for federal income tax
purposes in some or all of the assets included in the trust fund for a
series; or
- for federal income tax purposes the trust fund relating to a particular
series of securities is classified as a partnership or is disregarded as
an entity separate from its owner.
The prospectus supplement for each series of securities will specify how the
securities will be treated for federal income tax purposes and will discuss
whether a REMIC election, if any, will be made with respect to the series.
OPINIONS
Federal Tax Counsel is of the opinion that:
(i) if a prospectus supplement indicates that one or more classes of
non-REMIC securities of the related series are to be treated as indebtedness
for federal income tax purposes, assuming that all of the provisions of the
applicable agreement are complied with, the securities so designated will be
considered indebtedness for federal income tax purposes and, for federal
income tax purposes, the related trust fund will not be an association,
publicly traded partnership, or taxable mortgage pool taxable as a
corporation;
(iv) if a prospectus supplement indicates that one or more REMIC
elections will be made with respect to the related trust fund, assuming that
these elections are timely made and all of the provisions of the applicable
agreement are complied with:
- each segregated pool of assets specified as a REMIC in the agreement
will constitute a REMIC for federal income tax purposes;
- the class or classes of securities of the related series which are
designated as "regular interests" in the prospectus supplement will be
considered "regular interests" in a REMIC for federal income tax
purposes; and
- the class of securities of the related series which is designated as
the "residual interest" in the prospectus supplement will be considered
the sole class of "residual interests" in the applicable REMIC for
federal income tax purposes; and
(v) if a prospectus supplement indicates that a trust fund will be
treated as a grantor trust for federal income tax purposes, assuming
compliance with all of the provisions of the applicable agreement, the trust
fund will be a grantor trust under Subpart E, Part I of Subchapter J of the
53
Code and will not be an association taxable as a corporation, and a holder
of the related certificates will be treated for federal income tax purposes
as the owner of an undivided interest in the home equity loans included in
the trust fund.
Each opinion is an expression of an opinion only, is not a guarantee of
results and is not binding on the Internal Revenue Service ("IRS") or any
third-party.
TAXATION OF DEBT SECURITIES (INCLUDING REGULAR INTEREST SECURITIES)
INTEREST AND ACQUISITION DISCOUNT. Securities representing regular
interests in a REMIC ("Regular Interest Securities") are generally taxable to
holders in the same manner as evidences of indebtedness issued by the REMIC.
Stated interest on the Regular Interest Securities will be taxable as ordinary
income and taken into account using the accrual method of accounting, regardless
of the holder's normal accounting method. Interest (other than original issue
discount ("OID")) on securities (other than Regular Interest Securities) that
are characterized as indebtedness for federal income tax purposes will be
includible in income by holders in accordance with their usual methods of
accounting. Securities characterized as debt for federal income tax purposes and
Regular Interest Securities are referred to in this section collectively as
"Debt Securities."
Debt Securities that are Compound Interest Securities will, and certain of
the other Debt Securities may, be issued with OID. The following discussion is
based in part on the rules governing OID which are set forth in Sections
1271-1275 of the Code and the Treasury regulations issued under these provisions
of the Code (the "OID Regulations"). A holder should be aware, however, that the
OID Regulations do not adequately address certain issues relevant to prepayable
securities, such as the Debt Securities.
In general, OID, if any, will equal the difference between the stated
redemption price at maturity of a Debt Security and its issue price. A holder of
a Debt Security must include the OID in gross income as ordinary interest income
as it accrues under a prescribed method which takes into account an economic
accrual of the discount. In general, OID must be included in income in advance
of the receipt of the cash representing that income. The amount of OID on a Debt
Security will be considered to be zero if it is less than a de minimis amount
determined under the Code. The issue price of a Debt Security is the first price
at which a substantial amount of Debt Securities of that class are sold to the
public (excluding bond houses, brokers, underwriters or wholesalers). If less
than a substantial amount of a particular class of Debt Securities is sold for
cash on or prior to the closing date, the issue price for that class will be
treated as the fair market value of the class on the closing date. The stated
redemption price at maturity of a Debt Security includes the original principal
amount of the Debt Security, but generally will not include distributions of
interest if the distributions constitute "qualified stated interest."
Under the OID Regulations, interest payments will not be 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 of
interest (other than late payment that occurs within a reasonable grace period)
or nonpayment of interest a remote contingency. It is unclear whether the terms
and conditions of the debt instruments underlying the Debt Securities or of the
Debt Securities themselves are determinative of whether the likelihood of late
payment or non-payment is a remote contingency. Accordingly, Federal Tax Counsel
is unable to opine whether the interest with respect to a Debt Security is
qualified stated interest, and consequently whether a Debt Security has OID as a
result of the failure of the interest to be treated as qualified stated
interest.
Certain Debt Securities will 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
54
that accrues prior to the closing date may be treated under the OID Regulations
either as part of the issue price and the stated redemption price at maturity of
the Debt Securities or as not included in the issue price or 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 these cases, for the sole purpose of
determining whether OID 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. The term "interest
period" may also be used to refer to the "accrual period" with respect to
interest on a class of notes or certificates.
Under the de minimis rule, OID on a Debt Security will be considered to be
zero if the OID is less than 0.25% of the stated redemption price at maturity of
the Debt Security. For this purpose, the weighted average maturity of the Debt
Security is computed as the sum of the amounts determined by multiplying the
number of full years (i.e., rounding down partial years) from the issue date
until each distribution in reduction of stated redemption price at maturity is
scheduled to be made by a fraction, the numerator of which is the amount of each
distribution included in the stated redemption price at maturity of the Debt
Security and the denominator of which is the stated redemption price at maturity
of the Debt Security. Holders generally must report de minimis OID pro rata as
principal payments are received, and the income will be capital gain if the Debt
Security is held as a capital asset. However, accrual method holders may elect
to accrue all de minimis OID as well as market discount under a constant
interest method. See "--Election to Treat All Interest as Original Issue
Discount."
The holder of a Debt Security issued with OID must include in gross income,
for all days during its taxable year on which it holds the Debt Security, the
sum of the 'daily portions' of the OID. The amount of OID includible in income
by a holder will be computed by allocating to each day during a taxable year a
pro rata portion of the OID that accrued during the relevant accrual period. In
the case of a Debt Security that is not a Regular Interest Security and the
principal payments on which are not subject to acceleration resulting from
prepayments on the home equity loans, the amount of OID includible in income of
a holder for an accrual period (generally the period over which interest accrues
on the debt instrument) will equal the product of the yield to maturity of the
Debt Security and the adjusted issue price of the Debt Security, reduced by any
payments of qualified stated interest. The adjusted issue price is the sum of
its issue price plus prior accruals of OID, reduced by the total payments made
with respect to the Debt Security in all prior periods, other than qualified
stated interest payments.
The amount of OID to be included in income by a holder of a debt instrument,
such as certain classes of the Debt Securities, that is subject to acceleration
due to prepayments on other debt obligations securing these debt instruments (a
"Pay-Through Security"), is computed by taking into account the anticipated rate
of prepayments assumed in pricing the debt instrument (the "Prepayment
Assumption"). The amount of OID that will accrue during an accrual period on a
Pay-Through Security is the excess (if any) of the sum of (a) the present value
of all payments remaining to be made on the Pay-Through Security as of the close
of the accrual period and (b) the payments during the accrual period of amounts
included in the stated redemption price of the Pay-Through Security, over the
adjusted issue price of the Pay-Through Security at the beginning of the accrual
period. The present value of the remaining payments is to be determined on the
basis of three factors: (1) the original yield to maturity of the Pay-Through
Security (determined on the basis of compounding at the end of each accrual
period and properly adjusted for the length of the accrual period), (2) events
which have occurred before the end of the accrual period and (3) the assumption
that the remaining payments will be made in accordance with the original
Prepayment Assumption. The effect of this method is to increase the portions of
OID required to be included in income by a holder to take into account
prepayments with respect to the home equity loans at a rate that exceeds the
Prepayment Assumption,
55
and to decrease (but not below zero for any period) the portions of OID required
to be included in income by a holder of a Pay-Through Security to take into
account prepayments with respect to the home equity loans at a rate that is
slower than the Prepayment Assumption. Although OID will be reported to holders
of Pay-Through Securities based on the Prepayment Assumption, no representation
is made to holders that home equity loans will be prepaid at that rate or at any
other rate.
The seller may adjust the accrual of OID on a class of Regular Interest
Securities (or other regular interests in a REMIC) in a manner that it believes
to be appropriate, to take account of realized losses on the home equity loans,
although the OID Regulations do not provide for these adjustments. If the IRS
were to require that OID be accrued without these adjustments, the rate of
accrual of OID for a class of Regular Interest Securities could increase.
Certain classes of Regular Interest Securities may represent more than one
class of REMIC regular interests. Unless the applicable prospectus supplement
specifies otherwise, the trustee intends, based on the OID Regulations, to
calculate OID on these securities as if, solely for the purposes of computing
OID, the separate regular interests were a single debt instrument.
A subsequent holder of a Debt Security will also be required to include OID
in gross income, but a holder who purchases a Debt Security for an amount that
exceeds its adjusted issue price will be entitled (as will an initial holder who
pays more than a Debt Security's issue price) to offset OID by comparable
economic accruals of portions of excess.
EFFECTS OF DEFAULTS AND DELINQUENCIES. Holders will be required to report
income with respect to their securities under an accrual method without giving
effect to delays and reductions in distributions attributable to a default or
delinquency on the home equity loans, except possibly to the extent that it can
be established that these amounts are uncollectible. As a result, the amount of
income (including OID) reported by a holder in any period could significantly
exceed the amount of cash distributed to the holder in that period. The holder
will eventually be allowed a loss (or will be allowed to report a lesser amount
of income) to the extent that the aggregate amount of distributions on the
securities is reduced as a result of a home equity loan default. However, the
timing and character of these losses or reductions in income are uncertain and,
accordingly, holders of securities should consult their own tax advisors on this
point.
INTEREST WEIGHTED SECURITIES. It is not clear how income should be accrued
on Debt Securities the payments on which consist solely or primarily of a
specified portion of the interest payments on qualified mortgages held by the
REMIC or on home equity loans underlying Pass-Through Securities (defined below)
("Interest Weighted Securities"). The trust fund intends to take the position
that all of the income derived from an Interest Weighted Security should be
treated as OID and that the amount and rate of accrual of the OID should be
calculated by treating the Interest Weighted Security as a Compound Interest
Security. However, in the case of Interest Weighted Securities that are entitled
to some payments of principal and that are Regular Interest Securities the IRS
could assert that income derived from an Interest Weighted Security should be
calculated as if the security were purchased at a premium equal to the excess of
the price paid by the holder for the security over its stated principal amount,
if any. Under this approach, a holder would be entitled to amortize this premium
amount, if any. Under this approach, a holder would be entitled to amortize the
premium only if it has in effect an election under Section 171 of the Code with
respect to all taxable debt instruments held by the holder, as described below.
VARIABLE RATE DEBT SECURITIES. Under the OID Regulations, Debt Securities
paying interest at a variable rate (a "Variable Rate Debt Security") are subject
to special rules. A Variable Rate Debt Security will qualify as a "variable rate
debt instrument" if:
- its issue price does not exceed the total noncontingent principal payments
due under the Variable Rate Debt Security by more than a specified de
minimis amount;
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- it provides for stated interest, paid or compounded at least annually, at
(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
- it does not provide for any principal payments that are contingent, as
defined in the OID Regulations, except the de minimis amount specified
above.
A "qualified floating rate" is any variable rate where the rate variations
can reasonably be expected to measure contemporaneous variations in the cost of
newly borrowed funds in the currency in which the Variable Rate Debt Security 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 (1) the product of a qualified floating rate
and a fixed multiple that is greater than 0.65 but not more than 1.35 or
(2) the product of a qualified floating rate and a fixed multiple that is
greater than 0.65 but not more than 1.35, increased or decreased by a fixed rate
will constitute a qualified floating rate for purposes of the OID Regulations.
In addition, under the OID Regulations, two or more qualified floating rates
that can reasonably be expected to have approximately the same values throughout
the term of the Variable Rate Debt Security will be treated as a single
qualified floating rate (a "Presumed Single Qualified Floating Rate"). Two or
more qualified floating rates with values within 25 basis points of each other
as determined on the Variable Rate Debt Security's issue date will be
conclusively presumed to be a Presumed Single Qualified Floating Rate.
Nevertheless, a variable rate that would otherwise constitute a qualified
floating rate but which is subject to one or more restrictions such as a cap or
floor, will not be a qualified floating rate for purposes of the OID Regulations
unless the restriction is fixed throughout the term of the Variable Rate Debt
Security or the restriction will not significantly affect the yield of the
Variable Rate Debt Security.
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. Nevertheless, a variable rate of interest on a Variable
Rate Debt Security will not constitute an objective rate if it is reasonably
expected that the average value of the variable rate during the first half of
the Variable Rate Debt 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 Variable Rate Debt Security's term. Further, an objective rate does not
include a rate that is based on information that is within the control of or
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 the
objective rate is equal to a fixed rate minus a qualified floating rate and
variations in the rate can reasonably be expected to inversely reflect
contemporaneous variations in the qualified floating rate.
The OID Regulations also provide that if a Variable Rate Debt Security
provides for stated interest at a fixed rate for an initial period of less than
one year followed by a variable rate that is either a qualified floating rate or
an objective rate and if the variable rate on the Variable Rate Debt Security's
issue date is intended to approximate the fixed rate, then the fixed rate and
the variable rate together will constitute either a single qualified floating
rate or objective rate, as the case may be (a "Presumed Single Variable Rate").
If the value of the variable rate and the initial fixed rate are within 25 basis
points of each other as determined on the Variable Rate Debt Security's issue
date, the variable rate will be conclusively presumed to approximate the fixed
rate.
For Variable Rate Debt Securities that qualify as a "variable rate debt
instrument" under the OID Regulations and provide for interest at either a
single qualified floating rate, a single objective rate, a
57
Presumed Single Qualified Floating Rate or a Presumed Single Variable Rate
throughout the term (a "Single Variable Rate Debt Security"), OID is computed as
described above based on the following:
- stated interest on the Single Variable Rate Debt Security which is
unconditionally payable in cash or property (other than debt instruments
of the issuer) at least annually will constitute qualified stated
interest;
- by assuming that the variable rate on the Single Variable Debt Security is
a fixed rate equal to: (a) in the case of a Single Variable Rate Debt
Security with a qualified floating rate or a qualified inverse floating
rate, the value, as of the issue date, of the qualified floating rate or
the qualified inverse floating rate or (b) in the case of a Single
Variable Rate Debt Security with an objective rate (other than a qualified
inverse floating rate), a fixed rate which reflects the reasonably
expected yield for the Single Variable Debt Security; and
- 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 above.
In general, any Variable Rate Debt Security other than a Single Variable
Rate Debt Security (a "Multiple Variable Rate Debt Security") 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 OID
and qualified stated interest on the Multiple Variable Rate Debt Security. The
OID Regulations generally require that the Multiple Variable Rate Debt Security
be converted into an "equivalent" fixed rate debt instrument by substituting any
qualified floating rate or qualified inverse floating rate provided for under
the terms of the Multiple Variable Rate Debt Security with a fixed rate equal to
the value of the qualified floating rate or qualified inverse floating rate, as
the case may be, as of the Multiple Variable Rate Debt Security's issue date.
Any objective rate (other than a qualified inverse floating rate) provided for
under the terms of the Multiple Variable Rate Debt Security is converted into a
fixed rate that reflects the yield that is reasonably expected for the Multiple
Variable Rate Debt Security.
In the case of a Multiple Variable Rate Debt Security that qualifies as a
"variable rate debt instrument" and provides for stated interest at a fixed rate
in addition to either one or more qualified floating rates or a qualified
inverse floating rate, the fixed rate is initially converted into a qualified
floating rate (or a qualified inverse floating rate, if the Multiple Variable
Rate Debt Security provides for a qualified inverse floating rate). Under these
circumstances, the qualified floating rate or qualified inverse floating rate
that replaces the fixed rate must be such that the fair market value of the
Multiple Variable Rate Debt Security as of the Multiple Variable Rate Debt
Security's issue date is approximately the same as the fair market value of an
otherwise identical debt instrument that provides for either the qualified
floating rate or qualified inverse floating rate rather than the fixed rate.
Subsequent to converting the fixed rate into either a qualified floating rate or
a qualified inverse floating rate, the Multiple Variable Rate Debt Security is
then converted into an "equivalent" fixed rate debt instrument in the manner
described above.
Once the Multiple Variable Rate Debt Security is converted into an
"equivalent" fixed rate debt instrument pursuant to the foregoing rules, the
amount of OID and qualified stated interest, if any, are determined for the
"equivalent" fixed rate debt instrument by applying the OID rules to the
"equivalent" fixed rate debt instrument in the manner described above. A holder
of the Multiple Variable Rate Debt Security will account for this OID and
qualified stated interest as if the holder held the "equivalent" fixed rate debt
instrument. Each accrual period appropriate adjustments will be made to the
amount of qualified stated interest or OID assumed to have been accrued or paid
with respect to the "equivalent" fixed rate debt instrument in the event that
these amounts differ from the accrual amount of interest accrued or paid on the
Multiple Variable Rate Debt Security during the accrual period.
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If a Variable Rate Debt Security does not qualify as a "variable rate debt
instrument" under the OID Regulations, then the Variable Rate Debt Security
would be treated as a contingent payment debt obligation. It is not clear under
current law how a Variable Rate Debt Security would be taxed if the Debt
Security were treated as a contingent payment debt obligation.
The IRS has issued final regulations (the "Contingent Regulations")
governing the calculation of OID on instruments having contingent interest
payments. The Contingent Regulations specifically do not apply however to debt
instruments to which Code Section 1272(a)(6) is applicable, such as a
Pay-Through Security. Additionally, the OID Regulations do not contain
provisions specifically interpreting Code Section 1272(a)(6). Until the Treasury
issues guidelines to the contrary, the trustee intends to base its computation
of OID on Pay-Through Securities as described in this prospectus. However,
because no regulatory guidance exists under Code Section 1272(a)(6), there can
be no assurance that this methodology represents the correct manner of
calculating OID.
MARKET DISCOUNT. A purchaser of a security may be subject to the market
discount rules of Sections 1276-1278 of the Code. A holder that acquires a Debt
Security with more than a prescribed de minimis amount of "market discount"
(generally, the excess of the principal amount of the Debt Security over the
purchaser's purchase price) will be required to include accrued market discount
in income as ordinary income in each month, but limited to an amount not
exceeding the principal payments on the Debt Security received in that month
and, if the securities are sold, the gain realized. This market discount would
accrue in a manner to be provided in Treasury regulations but, until the
regulations are issued, the market discount would in general accrue either
(1) on the basis of a constant yield (in the case of a Pay-Through Security,
taking into account a prepayment assumption) or (2) in the ratio of (a) in the
case of securities (or in the case of a Pass-Through Security, as set forth
below, the home equity loans underlying the Security) not originally issued with
OID, stated interest payable in the relevant period to total stated interest
remaining to be paid at the beginning of the period or (b) in the case of
securities (or, in the case of a Pass-Through Security, as described below, the
home equity loans underlying the Security) originally issued at a discount, OID
in the relevant period to total OID remaining to be paid.
Section 1277 of the Code provides that, regardless of the origination date
of the Debt Security (or, in the case of a Pass-Through Security, the home
equity loans), the excess of interest paid or accrued to purchase or carry a
security (or, in the case of a Pass-Through Security, as described below, the
underlying home equity loans) with market discount over interest received on the
security is allowed as a current deduction only to the extent the excess is
greater than the market discount that accrued during the taxable year in which
the interest expense was incurred. In general, the deferred portion of any
interest expense will be deductible when the market discount is included in
income, including upon the sale, disposition, or repayment of the Debt Security
(or in the case of a Pass-Through Security, an underlying home equity loan). A
holder may elect to include market discount in income currently as it accrues,
on all market discount obligations acquired by the holder during the taxable
year the election is made and thereafter, in which case the interest deferral
rule will not apply.
PREMIUM. A holder who purchases a Debt Security (other than an Interest
Weighted Security to the extent described above) at a cost greater than its
stated redemption price at maturity, generally will be considered to have
purchased the security at a premium, which it may elect to amortize as an offset
to interest income on the security (and not as a separate deduction item) on a
constant yield method. Although no regulations addressing the computation of
premium accrual on securities similar to the securities have been issued, the
legislative history of the Tax Reform Act of 1986 indicates that premium is to
be accrued in the same manner as market discount. Accordingly, it appears that
the accrual of premium on a class of Pay-Through Securities will be calculated
using the prepayment assumption used in pricing the class. If a holder makes an
election to amortize premium on a Debt Security, the election will apply to all
taxable debt instruments (including all REMIC regular interests and all
pass-through certificates representing ownership interests in a trust holding
debt obligations)
59
held by the holder at the beginning of the taxable year in which the election is
made, and to all taxable debt instruments acquired afterwards by the holder, and
will be irrevocable without the consent of the IRS. Purchasers who pay a premium
for the securities should consult their tax advisers regarding the election to
amortize premium and the method to be employed.
Current treasury regulations (the "Amortizable Bond Premium Regulations")
dealing with amortizable bond premium specifically do not apply to prepayable
debt instruments subject to Code Section 1272(a)(6) such as the Pay-Through
Securities. Absent further guidance from the IRS, the trustee intends to account
for amortizable bond premium in the manner described above. Prospective
purchasers of the securities should consult their tax advisors regarding the
possible application of the Amortizable Bond Premium Regulations.
ELECTION TO TREAT ALL INTEREST AS ORIGINAL ISSUE DISCOUNT. The OID
Regulations permit a holder of a Debt Security to elect to accrue all interest,
discount (including de minimis market or OID) and premium in income as interest,
based on a constant yield method for Debt Securities acquired on or after
April 4, 1994. If an election were to be made with respect to a Debt Security
with market discount, the holder of the Debt Security would be deemed to have
made an election to include in income currently market discount with respect to
all other debt instruments having market discount that the holder of the Debt
Security acquires during the year of the election or thereafter. Similarly, a
holder of a Debt Security that makes this election for a Debt Security that is
acquired at a premium will be deemed to have made an election to amortize bond
premium with respect to all debt instruments having amortizable bond premium
that holder owns or acquires. The election to accrue interest, discount and
premium on a constant yield method with respect to a Debt Security is
irrevocable.
SALE OR EXCHANGE. A holder's tax basis in its Debt Security is the price
the holder pays for a Debt Security, plus amounts of OID or market discount
included in income and reduced by any payments received (other than qualified
stated interest payments) and any amortized premium. Gain or loss recognized on
a sale, exchange, or redemption of a Debt Security, measured by the difference
between the amount realized and the Debt Security's basis as so adjusted, will
generally be capital gain or loss, assuming that the Debt Security is held as a
capital asset. In the case of a Debt Security held by a bank, thrift, or similar
institution described in Section 582 of the Code, however, gain or loss realized
on the sale or exchange of a Debt Security will be taxable as ordinary income or
loss. In addition, gain from the disposition of a Regular Interest Security that
might otherwise be capital gain will be treated as ordinary income to the extent
of the excess, if any, of (1) the amount that would have been includible in the
holder's income if the yield on the Regular Interest Security had equaled 110%
of the applicable federal rate as of the beginning of the holder's holding
period, over the amount of ordinary income actually recognized by the holder
with respect to the Regular Interest Security.
STATUS OF REGULAR INTEREST SECURITIES
Regular Interest Securities and securities representing a residual interest
in a REMIC (both types of securities collectively referred to as "REMIC
Securities") will be "real estate assets" for purposes of Section 856(c)(4)(A)
of the Code and assets described in Section 7701(a)(19)(C) of the Code (assets
qualifying under one or both of those sections, applying each section
separately, "qualifying assets" to the extent that the REMIC's assets are
qualifying assets). However, if at least 95 percent of the REMIC's assets are
qualifying assets, then 100 percent of the REMIC Securities will be qualifying
assets. Similarly, income on the REMIC Securities will be treated as "interest
on obligations secured by mortgages on real property" within the meaning of
Section 856(c)(3)(B) of the Code, subject to the limitations of the preceding
two sentences. In addition to home equity loans, the REMIC's assets will include
payments on home equity loans held pending distribution to holders of REMIC
Securities, amounts in reserve accounts (if any), other credit enhancements (if
any) and possibly buydown funds ("Buydown Funds"). The home equity loans
generally will be qualifying assets under both of the
60
foregoing sections of the Code. However, home equity loans that are not secured
by residential real property or real property used primarily for church purposes
may not constitute qualifying assets under Section 7701(a)(19)(C)(v) of the
Code. In addition, to the extent that the principal amount of a home equity loan
exceeds the value of the property securing the home equity loan, it is unclear
and Federal Tax Counsel is unable to opine whether the home equity loans will be
qualifying assets. The regulations under Sections 860A through 860G of the Code
(the "REMIC Regulations") treat credit enhancements as part of the mortgage or
pool of mortgages to which they relate, and therefore credit enhancements
generally should be qualifying assets. Regulations issued in conjunction with
the REMIC Regulations provide that amounts paid on loans and held pending
distribution to holders of Regular Interest Securities ("cash flow investments")
will be treated as qualifying assets. It is unclear whether reserve funds or
Buydown Funds would also constitute qualifying assets under either of those
provisions.
REMIC EXPENSES; SINGLE CLASS REMICS
As a general rule, all of the expenses of a REMIC will be taken into account
by holders of the Residual Interest Securities. In the case of a "single class
REMIC," however, the expenses will be allocated, under Treasury regulations,
among the holders of the Regular Interest Securities and the holders of the
Residual Interest Securities on a daily basis in proportion to the relative
amounts of income accruing to each holder on that day. In the case of a holder
of a Regular Interest Security who is an individual or a "pass-through interest
holder" (including certain pass-through entities but not including real estate
investment trusts), these expenses will be deductible only to the extent that
these expenses, plus other "miscellaneous itemized deductions" of the holder,
exceed 2% of the holder's adjusted gross income and the holder may not be able
to deduct these fees and expenses to any extent in computing its alternative
minimum tax liability. In addition, the amount of itemized deductions otherwise
allowable for the taxable year for an individual whose adjusted gross income
exceeds the applicable amount will be reduced by the lesser of (1) 3% of the
excess of adjusted gross income over the applicable amount, or (2) 80% of the
amount of itemized deductions otherwise allowable for the taxable year. For
taxable years beginning after December 31, 1997, in the case of a partnership
that has 100 or more partners and elects to be treated as an "electing large
partnership," 70% of the partnership'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 reduction or disallowance of this
deduction may have a significant impact on the yield of the Regular Interest
Security to this type of holder. In general terms, a single class REMIC is one
that either (1) would qualify, under existing Treasury regulations, as a grantor
trust if it were not a REMIC (treating all interests as ownership interests,
even if they would be classified as debt for federal income tax purposes) or
(2) is similar to such a trust and which is structured with the principal
purpose of avoiding the single class REMIC rules. Unless otherwise stated in the
applicable prospectus supplement, the expenses of the REMIC will be allocated to
holders of the related Residual Interest Securities.
TAXATION OF THE REMIC
GENERAL. Although a REMIC is a separate entity for federal income tax
purposes, a REMIC is not generally subject to entity-level tax. Rather, the
taxable income or net loss of a REMIC is taken into account by the holders of
residual interests. As described above, the regular interests are generally
taxable as debt of the REMIC.
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TIERED REMIC STRUCTURES. For certain series of 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. Solely for
purposes of determining whether the REMIC certificates 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 these certificates is interest described in
Section 856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one
REMIC.
CALCULATION OF REMIC INCOME. The taxable income or net loss of a REMIC is
determined under an accrual method of accounting and in the same manner as in
the case of an individual, with certain adjustments. In general, the taxable
income or net loss will be the difference between (1) the gross income produced
by the REMIC's assets, including stated interest and any OID or market discount
on loans and other assets, and (2) deductions, including stated interest and OID
accrued on Regular Interest Securities, amortization of any premium with respect
to home equity loans, and servicing fees and other expenses of the REMIC.
A holder of a Residual Interest Security that is an individual or a
"pass-through interest holder" (including certain pass-through entities, but not
including real estate investment trusts) will be unable to deduct servicing fees
payable on the home equity loans or other administrative expenses of the REMIC
for a given taxable year, to the extent that these expenses, when aggregated
with the holder's other miscellaneous itemized deductions for that year, do not
exceed 2% of the holder's adjusted gross income and the holder may not be able
to deduct these fees and expenses to any extent in computing its alternative
minimum tax liability. For taxable years beginning after December 31, 1997, in
the case of a partnership that has 100 or more partners and elects to be treated
as an "electing large partnership," 70% of the partnership'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.
For purposes of computing its taxable income or net loss, the REMIC should
have an initial aggregate tax basis in its assets equal to the aggregate fair
market value of the regular interests and the residual interests on the Startup
Day (generally, the day that the interests are issued). This aggregate basis
will be allocated among the assets of the REMIC in proportion to their
respective fair market values.
The OID provisions of the Code apply to loans of individuals originated on
or after March 2, 1984. Subject to possible application of the de minimis rules,
the method of accrual by the REMIC of OID income on these loans will be
equivalent to the method under which holders of Pay-Through Securities accrue
OID (i.e., under the constant yield method taking into account the Prepayment
Assumption). The REMIC will deduct OID on the Regular Interest Securities in the
same manner that the holders of the Regular Interest Securities include this
discount in income, but without regard to the de minimis rules.
WE REFER YOU TO "TAXATION OF DEBT SECURITIES (INCLUDING REGULAR INTEREST
SECURITIES)" ABOVE FOR MORE DETAIL.
A REMIC that acquires loans at a market discount must include the market
discount in income currently, as it accrues, on a constant interest basis.
To the extent that the REMIC's basis allocable to loans that it holds
exceeds their principal amounts, the resulting premium, if attributable to
mortgages originated after September 27, 1985, will be amortized over the life
of the loans (presumably taking into account the Prepayment Assumption) on a
constant yield method. Although the law is somewhat unclear regarding recovery
of premium attributable to loans originated on or before this date, it is
possible that the premium may be recovered in proportion to payments of loan
principal.
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PROHIBITED TRANSACTIONS AND CONTRIBUTIONS TAX. The REMIC will be subject to
a 100% tax on any net income derived from a "prohibited transaction." For this
purpose, net income will be calculated without taking into account any losses
from prohibited transactions or any deductions attributable to any prohibited
transaction that resulted in a loss. In general, prohibited transactions
include:
- subject to limited exceptions, the sale or other disposition of any
qualified mortgage transferred to the REMIC;
- subject to a limited exception, the sale or other disposition of a cash
flow investment;
- the receipt of any income from assets not permitted to be held by the
REMIC pursuant to the Code; or
- the receipt of any fees or other compensation for services rendered by the
REMIC.
It is anticipated that a REMIC will not engage in any prohibited
transactions in which it would recognize a material amount of net income. In
addition, subject to a number of exceptions, a tax is imposed at the rate of
100% on amounts contributed to a REMIC after the Startup Day. The holders of
Residual Interest Securities will generally be responsible for the payment of
any of these taxes imposed on the REMIC. To the extent not paid by these holders
or otherwise, however, these taxes will be paid out of the trust fund and will
be allocated pro rata to all outstanding classes of securities of the REMIC.
TAXATION OF HOLDERS OF RESIDUAL INTEREST SECURITIES
The holder of a Residual Interest Security will take into account the "daily
portion" of the taxable income or net loss of the REMIC for each day during the
taxable year on which the holder held the Residual Interest Security. The daily
portion is determined by allocating to each day in any calendar quarter its
ratable portion of the taxable income or net loss of the REMIC for the quarter,
and by allocating that amount among the holders (on that day) of the Residual
Interest Securities in proportion to their respective holdings on that day.
The holder of a Residual Interest Security must report its proportionate
share of the taxable income of the REMIC whether or not it receives cash
distributions from the REMIC attributable to this income or loss. The reporting
of taxable income without corresponding distributions could occur, for example,
in certain REMIC issues in which the home equity loans held by the REMIC were
issued or acquired at a discount, since mortgage prepayments cause recognition
of discount income, while the corresponding portion of the prepayment could be
used in whole or in part to make principal payments on REMIC Regular Interest
Securities issued without any discount or at an insubstantial discount. (If this
occurs, it is likely that cash distributions will exceed taxable income in later
years.) Taxable income may also be greater in earlier years of certain REMIC
issues as a result of the fact that interest expense deductions, as a percentage
of outstanding principal on REMIC Regular Interest Securities, will typically
increase over time as lower yielding securities are paid, whereas interest
income with respect to loans will generally remain constant over time as a
percentage of loan principal.
In any event, because the holder of a residual interest is taxed on the net
income of the REMIC, the taxable income derived from a Residual Interest
Security in a given taxable year will not be equal to the taxable income
associated with investment in a corporate bond or stripped instrument having
similar cash flow characteristics and pretax yield. Therefore, the after-tax
yield on the Residual Interest Security may be less than that of a corporate
bond or stripped instrument.
LIMITATION ON LOSSES. The amount of the REMIC's net loss that a holder may
take into account currently is limited to the holder's adjusted basis at the end
of the calendar quarter in which the loss arises. A holder's basis in a Residual
Interest Security will initially equal the holder's purchase price, and will
subsequently be increased by the amount of the REMIC's taxable income allocated
to the
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holder, and decreased (but not below zero) by the amount of distributions made
and the amount of the REMIC's net loss allocated to the holder. Any disallowed
loss may be carried forward indefinitely, but may be used only to offset income
of the REMIC generated by the same REMIC. The ability of holders of Residual
Interest Securities to deduct net losses may be subject to additional
limitations under the Code, as to which holders should consult their tax
advisers.
DISTRIBUTIONS. Distributions on a Residual Interest Security (whether at
their scheduled times or as a result of prepayments) will generally not result
in any additional taxable income or loss to a holder of a Residual Interest
Security. If the amount of the payment exceeds a holder's adjusted basis in the
Residual Interest Security, however, the holder will recognize gain (treated as
gain from the sale of the Residual Interest Security) to the extent of the
excess.
SALE OR EXCHANGE. A holder of a Residual Interest Security will recognize
gain or loss on the sale or exchange of a Residual Interest Security equal to
the difference, if any, between the amount realized and the holder's adjusted
basis in the Residual Interest Security at the time of the sale or exchange.
Except to the extent provided in regulations, which have not yet been issued,
any loss upon disposition of a Residual Interest Security will be disallowed if
the selling holder acquires any residual interest in a REMIC or similar mortgage
pool within six months before or after the disposition.
EXCESS INCLUSIONS. The portion of the REMIC taxable income of a holder of a
Residual Interest Security consisting of "excess inclusion" income may not be
offset by other deductions or losses, including net operating losses, on the
holder's federal income tax return. Further, if the holder of a Residual
Interest Security is an organization subject to the tax on unrelated business
income imposed by Code Section 511, the holder's excess inclusion income will be
treated as unrelated business taxable income of the holder. In addition, under
Treasury regulations yet to be issued, if a real estate investment trust, a
regulated investment company, a common trust fund, or certain cooperatives were
to own a Residual Interest Security, a portion of dividends (or other
distributions) paid by the real estate investment trust (or other entity) would
be treated as excess inclusion income. If a Residual Security is owned by a
foreign person, excess inclusion income is subject to tax at a rate of 30% which
may not be reduced by treaty, is not eligible for treatment as "portfolio
interest" and is subject to certain additional limitations.
WE REFER YOU TO "TAX TREATMENT OF FOREIGN INVESTORS" FOR MORE DETAIL.
The Small Business Job Protection Act of 1996 eliminated the special rule
permitting Section 593 institutions ("thrift institutions") to use net operating
losses and other allowable deductions to offset their excess inclusion income
from REMIC residual certificates that have "significant value" within the
meaning of the REMIC Regulations, effective for taxable years beginning after
December 31, 1995, except with respect to residual certificates held by thrift
institutions since November 1, 1995.
In addition, the Small Business Job Protection Act of 1996 provides three
rules for determining the effect on excess inclusions on the alternative minimum
taxable income of a residual holder. First, alternative minimum taxable income
for the residual holder is determined without regard to the special rule that
taxable income cannot be less than excess inclusions. Second, a residual
holder's alternative minimum income for a tax year cannot be less than excess
inclusions for the year. Third, the amount of any alternative minimum tax net
operating loss deductions must be computed without regard to any excess
inclusions. These rules are effective for tax years beginning after
December 31, 1986, unless a residual holder elects to have the rules apply only
to tax years beginning after August 20, 1996.
The excess inclusion portion of a REMIC's income is generally equal to the
excess, if any, of REMIC taxable income for the quarterly period allocable to a
Residual Interest Security, over the daily accruals for the quarterly period of
(1) 120% of the long term applicable federal rate on the Startup Date multiplied
by (2) the adjusted issue price of the Residual Interest Security at the
beginning of the quarterly period. The adjusted issue price of a Residual
Interest Security at the beginning of each
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calendar quarter will equal its issue price (calculated in a manner analogous to
the determination of the issue price of a Regular Interest Security), increased
by the aggregate of the daily accruals for prior calendar quarters, and
decreased (but not below zero) by the amount of loss allocated to a holder and
the amount of distributions made on the Residual Interest Security before the
beginning of the quarter. The long-term federal rate, which is announced monthly
by the Treasury Department, is an interest rate that is based on the average
market yield of outstanding marketable obligations of the United States
government having remaining maturities in excess of nine years.
Under the REMIC Regulations, in certain circumstances, transfers of Residual
Interest Securities may be disregarded.
WE REFER YOU TO "--RESTRICTIONS ON OWNERSHIP AND TRANSFER OF RESIDUAL
INTEREST SECURITIES" AND "TAX TREATMENT OF FOREIGN INVESTORS" BELOW FOR MORE
DETAIL.
RESTRICTIONS ON OWNERSHIP AND TRANSFER OF RESIDUAL INTEREST SECURITIES. As
a condition to qualification as a REMIC, reasonable arrangements must be made to
prevent the ownership of a REMIC residual interest by any "disqualified
organization." Disqualified organizations include the United States, any State
or political subdivision of the United States, any foreign government, any
international organization, or any agency or instrumentality of any of the
foregoing, a rural electric or telephone cooperative described in
Section 1381(a)(2)(C) of the Code, or any entity exempt from the tax imposed by
Sections 1-1399 of the Code, if the entity is not subject to tax on its
unrelated business income. Accordingly, the applicable agreement will prohibit
disqualified organizations from owning a Residual Interest Security. In
addition, no transfer of a Residual Interest Security will be permitted unless
the proposed transferee has furnished to the trustee an affidavit representing
and warranting that it is neither a disqualified organization nor an agent or
nominee acting on behalf of a disqualified organization.
If a Residual Interest Security is transferred to a disqualified
organization (in violation of the restrictions set forth above), a substantial
tax will be imposed on the transferor of the Residual Interest Security at the
time of the transfer. In addition, if a disqualified organization holds an
interest in a pass-through entity (including, among others, a partnership,
trust, real estate investment trust, regulated investment company, or any person
holding as nominee an interest in a pass-through entity), that owns a Residual
Interest Security, the pass-through entity will be required to pay an annual tax
on its allocable share of the excess inclusion income of the REMIC. For taxable
years beginning after December 31, 1997, all partners of certain electing
partnerships having 100 or more partners ("electing large partnerships") will be
treated as disqualified organizations for purposes of the tax imposed on
pass-through entities if these electing large partnerships hold residual
interests in a REMIC. However, the electing large partnership would be entitled
to exclude the excess inclusion income from gross income for purposes of
determining the taxable income of the partners.
The REMIC Regulations provide that a transfer of a "noneconomic residual
interest" will be disregarded for all federal income tax purposes unless
impeding the assessment or collection of tax was not a significant purpose of
the transfer. A residual interest will be treated as a "noneconomic residual
interest" unless, at the time of the transfer:
- the present value of the expected future distributions on the residual
interest at least equals the product of (x) the present value of all
anticipated excess inclusions with respect to the residual interest and
(y) the highest corporate tax rate, currently 35 percent; and
- the transferor reasonably expects that for each anticipated excess
inclusion, the transferee will receive distributions from the REMIC, at or
after the time at which taxes on this excess inclusion accrue, sufficient
to pay these taxes.
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
(had "improper knowledge") that the
65
transferee would be unwilling or unable to pay taxes due on its share of the
taxable income of the REMIC. A transferor will be presumed not to have improper
knowledge if:
- the transferor conducts, at the time of the transfer, a reasonable
investigation of the financial condition of the transferee and, as a
result of the investigation, the transferor finds that the transferee has
historically paid its debts as they came due and finds no significant
evidence to indicate that the transferee will not continue to pay its
debts as they come due in the future; and
- the transferee represents to the transferor that the transferee
understands that it might incur tax liabilities in excess of any cash
received with respect to the residual interest and intends to pay the
taxes associated with owning the residual interest as they come due.
Proposed Treasury regulations issued on February 4, 2000 (the "New Proposed
Regulations") would modify the safe harbor described above, which, if satisfied,
establishes the presumption that the transferor of a Residual Interest Security
does not have improper knowledge. Under the New Proposed Regulations, a transfer
of a noneconomic residual interest will not qualify under the safe harbor
unless, in addition to satisfying the safe harbor described above, the present
value of the anticipated tax liabilities associated with holding the Residual
Interest Security does not exceed the sum of the present values of (i) any
consideration given to the transferee to acquire the interest, (ii) the expected
future distributions on the interest, and (iii) any anticipated tax savings
associated with holding the interest as the related REMIC generates losses. For
purposes of this calculation, the present values generally are calculated using
a discount rate equal to the applicable federal rate. The New Proposed
Regulations indicate that the effective date for the modification of the safe
harbor if finalized will be February 4, 2000.
A different formulation of these transfer restriction rules applies to
transfers of Residual Interest Security by or to foreign transferees.
WE REFER YOU TO "TAX TREATMENT OF FOREIGN INVESTORS" FOR MORE DETAIL.
MARK TO MARKET RULES. Treasury regulations provide that any REMIC Residual
Interest acquired after January 3, 1995 is not a security and cannot be marked
to market under Section 475.
ADMINISTRATIVE MATTERS
The REMIC's books must be maintained on a calendar year basis and the REMIC
must file an annual federal income tax return. The REMIC will also be subject to
the procedural and administrative rules of the Code applicable to partnerships,
including the determination of any adjustments to, among other things, items of
REMIC income, gain, loss, deduction, or credit, by the IRS in a unified
administrative proceeding.
TAX STATUS AS A GRANTOR TRUST
GENERAL. As further described below, each holder of a security issued by a
grantor trust (a "Pass-Through Security") must report on its federal income tax
return the gross income from the portion of the home equity loans that is
allocable to its Pass-Through Security and may deduct the portion of the
expenses incurred or accrued by the trust fund that is allocable to its
Pass-Through Security, at the same time and to the same extent as these items
would be reported by the holder if it had purchased and held directly this
interest in the home equity loans and received or accrued directly its share of
the payments on the home equity loans and incurred or accrued directly its share
of expenses incurred or accrued by the trust fund when those amounts are
received, incurred or accrued by the trust fund.
A holder of a Pass-Through Security that is an individual, estate, or trust
will be allowed deductions for these expenses only to the extent that the sum of
those expenses and the holder's other
66
miscellaneous itemized deductions exceeds 2% of the holder's adjusted gross
income. Further, the amount of itemized deductions otherwise allowable for the
taxable year for an individual whose adjusted gross income exceeds a prescribed
amount will be reduced by the lesser of (1) 3% of the excess of adjusted gross
income over the prescribed amount, or (2) 80% of the amount of itemized
deductions otherwise allowable for the taxable year. For taxable years beginning
after December 31, 1997, in the case of a partnership that has 100 or more
partners and elects to be treated as an "electing large partnership," 70% of the
partnership'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. Moreover, a holder of a Pass-Through Security that is not a
corporation cannot deduct these expenses for purposes of the alternative minimum
tax (if applicable). These deductions will include servicing, guarantee and
administrative fees paid to the servicer of the home equity loans. As a result,
the trust fund will report additional taxable income to holders of Pass-Through
Securities in an amount equal to their allocable share of these deductions, and
certain holders of Pass-Through Securities may have taxable income in excess of
the cash received.
STATUS OF THE PASS-THROUGH SECURITIES. The Pass-Through Securities will be
"real estate assets" for purposes of Section 856(c)(4)(A) of the Code and "loans
secured by an interest in real property" within the meaning of
Section 7701(a)(19)(C)(v) of the Code (assets qualifying under one or both of
those sections, applying each section separately, "qualifying assets") to the
extent that the trust fund's assets are qualifying assets. The Pass-Through
Securities may not be qualifying assets under any of the foregoing sections of
the Code to the extent that the trust fund's assets include Buydown Funds,
reserve funds, or payments on mortgages held pending distribution to
certificateholders. Further, the Pass-Through Securities may not be "real estate
assets" to the extent loans held by the trust are not secured by real property,
and may not be "loans secured by an interest in real property" to the extent
loans held by the trust are not secured by residential real property or real
property used primarily for church purposes. In addition, to the extent that the
principal amount of a loan exceeds the value of the property securing the loan,
it is unclear and Federal Tax Counsel is unable to opine whether the loans will
be qualifying assets.
TAXATION OF PASS-THROUGH SECURITIES UNDER STRIPPED BOND RULES. The federal
income tax treatment of the Pass-Through securities will depend on whether they
are securities ("Stripped Securities") subject to the "stripped bond" rules of
section 1286 of the Code. The Pass-Through Securities will be Stripped
Securities if stripped interest-only certificates are issued. In addition,
whether or not stripped interest-only certificates are issued, the IRS may
contend that the stripped bond rules apply on the ground that the servicer's
servicing fee, or other amounts, if any, paid to (or retained by) the servicer
or its affiliates, as specified in the applicable prospectus supplement,
represent greater than an arm's length consideration for servicing the home
equity loans and should be characterized for federal income tax purposes as an
ownership interest in the home equity loans. The IRS has taken the position in
Revenue Ruling 91-46 that a retained interest in excess of reasonable
compensation for servicing is treated as a "stripped coupon" under the rules of
Code Section 1286.
If interest retained for the servicer's servicing fee or other interest is
treated as a "stripped coupon," the Pass-Through Securities will either be
subject to the OID rules or the market discount rules. A holder of a Pass-
Through Security will account for any discount on the Pass-Through Security as
market discount rather than OID if either (1) the amount of OID with respect to
the Pass-Through Security was treated as zero under the OID de minimis rule when
the Pass-Through Security was stripped or (2) no more than 100 basis points
(including any amount of servicing in excess of reasonable servicing) is
stripped off from the home equity loans. If neither of the above exceptions
applies, the OID rules will apply to the Pass-Through Securities.
If the OID rules apply, the holder of a Pass-Through Security (whether a
cash or accrual method taxpayer) will be required to report interest income from
the Pass-Through Security in each taxable
67
year equal to the income that accrues on the Pass-Through Security in that year
calculated under a constant yield method based on the yield of the Pass-Through
Security (or, possibly, the yield of each mortgage underlying the Pass-Through
Security) to the holder. This yield would be computed at the rate (assuming
monthly compounding) that, if used in discounting the holder's share of the
payments on the mortgages, would cause the present value of those payments to
equal the price at which the holder purchased the Pass-Through Security. With
respect to certain categories of debt instruments including "any pool of debt
instruments the yield on which may be affected by reason of prepayments (or to
the extent provided in regulations, by reason of other events),"
Section 1272(a)(6) of the Code requires that OID be accrued based on a
prepayment assumption determined in a manner prescribed by forthcoming
regulations. If required to report interest income on the Pass-Through
Securities to the IRS under the stripped bond rules, it is anticipated that the
trustee will calculate the yield of the Pass-Through Securities based on a
representative initial offering price of the Pass-Through Securities and a
reasonable assumed rate of prepayment of the home equity loans (although the
yield may differ from the yield to any particular holder that would be used in
calculating the interest income of the holder). The prospectus supplement for
each series of Pass-Through Securities will describe the prepayment assumption
that will be used for this purpose, but no representation is made that the home
equity loans will prepay at that rate or at any other rate.
If a home equity loan is prepaid in full, the holder of a Pass-Through
Security acquired at a discount or premium generally will recognize ordinary
income or loss equal to the difference between the portion of the prepaid
principal amount of the home equity loan that is allocable to the Pass-Through
Security and the portion of the adjusted basis of the Pass-Through Security (see
"Sales of Pass-Through Securities" below) that is allocable to the home equity
loan. It is not clear whether any other adjustments would be required to reflect
differences between the prepayment rate that was assumed in calculating yield
and the actual rate of prepayments.
TAXATION OF PASS-THROUGH SECURITIES IF STRIPPED BOND RULES DO NOT APPLY. If
the stripped bond rules do not apply to a Pass-Through Security, then the holder
will be required to include in income its share of the interest payments on the
home equity loans in accordance with its tax accounting method. In addition, if
the holder purchased the Pass-Through Security at a discount or premium, the
holder will be required to account for this discount or premium in the manner
described below. The treatment of any discount will depend on whether the
discount is OID as defined in the Code and, in the case of discount other than
OID, whether this other discount exceeds a de minimis amount. In the case of
OID, the holder (whether a cash or accrual method taxpayer) will be required to
report as additional interest income in each month the portion of this discount
that accrues in that month, calculated based on a constant yield method. In
general it is not anticipated that the amount of OID to be accrued in each
month, if any, will be significant relative to the interest paid currently on
the home equity loans. However, OID could arise with respect to a home equity
loan ("ARM") that provides for interest at a rate equal to the sum of an index
of market interest rates and a fixed number. The OID for ARMs generally will be
determined under the principles discussed in "Taxation of Debt Securities
(Including Regular Interest Securities)--Variable Rate Debt Securities."
The Taxpayer Relief Act of 1997 amended the OID provisions of the Code to
provide that for "any pool of debt instruments, the yield on which may be
affected by reason of prepayments," OID is to be accrued based on a prepayment
assumption determined in a manner prescribed by forthcoming regulations. The
prospectus supplement for each series of Pass-Through Securities will describe
the prepayment assumption that will be used for this purpose, but no
representation is made regarding the actual rate at which prepayments will
occur.
If discount other than OID exceeds a de minimis amount (described below),
the holder will also generally be required to include in income in each month
the amount of the discount accrued through this month and not previously
included in income, but limited, with respect to the portion of the discount
allocable to any home equity loan, to the amount of principal on the home equity
loan
68
received by the trust fund in that month. Because the home equity loans will
provide for monthly principal payments, this discount may be required to be
included in income at a rate that is not significantly slower than the rate at
which the discount accrues (and therefore at a rate not significantly slower
than the rate at which the discount would be included in income if it were OID).
The holder may elect to accrue the discount under a constant yield method based
on the yield of the Pass-Through Security to the holder (or possibly based on
the yields of each home equity loan). In the absence of such an election, it may
be necessary to accrue the discount under a more rapid straight-line method.
Under the de minimis rule, market discount with respect to a Pass-Through
Security will be considered to be zero if it is less than the product of
(1) 0.25% of the principal amount of the home equity loans allocable to the
Pass-Through Security and (2) the weighted average life (in complete years) of
the home equity loans remaining at the time of purchase of the Pass-Through
Security.
If a holder purchases a Pass-Through Security at a premium, the holder may
elect under Section 171 of the Code to amortize the portion of the premium that
is allocable to a home equity loan under a constant yield method based on the
yield of the home equity loan to the holder, provided that the home equity loan
was originated after September 27, 1985. Premium allocable to a home equity loan
originated on or before that date should be allocated among the principal
payments on the home equity loan and allowed as an ordinary deduction as
principal payments are made or, perhaps, upon termination.
It is not clear whether the foregoing adjustments for market discount or
premium would be made based on the scheduled payments on the home equity loans
or taking account of a reasonable prepayment assumption, and Federal Tax Counsel
is unable to opine on this issue.
If a home equity loan is prepaid in full, the holder of a Pass-Through
Security acquired at a discount or premium will recognize ordinary income or
loss equal to the difference between the portion of the prepaid principal amount
of the home equity loan that is allocable to the Pass-Through Security and the
portion of the adjusted basis of the Pass-Through Security (see "Sales of
Pass-Through Securities" below) that is allocable to the home equity loan.
Adjustments might be required to reflect differences between the prepayment rate
that was assumed in accounting for discount or premium and the actual rate of
prepayments.
MISCELLANEOUS TAX ASPECTS
BACKUP WITHHOLDING. A holder, other than a holder of a Residual Interest
Security, may, under certain circumstances, be subject to "backup withholding"
at a rate of 31% with respect to distributions or the proceeds of a sale of
securities to or through brokers that represent interest or OID on the
securities. This withholding generally applies if the holder of a security:
- fails to furnish the trustee with its taxpayer identification number
("TIN");
- furnishes the trustee an incorrect TIN;
- fails to report properly interest, dividends or other "reportable
payments" as defined in the Code; or
- under certain circumstances, fails to provide the trustee or the holder's
securities broker with a certified statement, signed under penalty of
perjury, that the TIN provided is its correct number and that the holder
is not subject to backup withholding.
Backup withholding will not apply, however, with respect to certain payments
made to holders, including payments to certain exempt recipients (such as exempt
organizations) and to certain foreign investors, that is, investors that for
United States federal income tax purposes are treated as:
- corporations or partnerships created outside of the United States;
69
- individuals that are not citizens or residents of the United States; or
- foreign estates or trusts within the meaning of Internal Revenue Code
section 7701.
Holders should consult their tax advisers as to their qualification for
exemption from backup withholding and the procedure for obtaining the exemption.
Treasury regulations (the "Final Withholding Regulations"), which are
generally effective with respect to payments made after December 31, 2000,
consolidate and modify the current certification requirements and means by which
a holder may claim exemption from United States federal income tax withholding
and provide certain presumptions regarding the status of holders when payments
to the holders cannot be reliably associated with appropriate documentation
provided to the payor. All holders should consult their tax advisers regarding
the application of the Final Withholding Regulations.
The trustee will report to the holders and to the servicer for each calendar
year the amount of any "reportable payments" during the year and the amount of
tax withheld, if any, with respect to payments on the securities.
TAX TREATMENT OF FOREIGN INVESTORS
Subject to the discussion below with respect to trust funds which are
treated as partnerships for federal income tax purposes unless interest
(including OID) paid on a security (other than a Residual Interest Security) is
considered to be "effectively connected" with a trade or business conducted in
the United States by a foreign investor, the interest will normally qualify as
portfolio interest (except where the recipient is a holder, directly or by
attribution, of 10% or more of the capital or profits interest in the issuer, or
a controlled foreign corporation to which the issuer is a related person) and
will be exempt from federal income tax.
See "--Tax Consequences to holders of the Certificates Issued by a
Partnership--Tax Consequences to Foreign Certificateholders." Upon receipt of
appropriate ownership statements, the issuer normally will be relieved of
obligations to withhold tax from these interest payments. These provisions
supersede the generally applicable provisions of United States law that would
otherwise require the issuer to withhold at a 30% rate (unless the rate were
reduced or eliminated by an applicable tax treaty) on, among other things,
interest and other fixed or determinable, annual or periodic income paid to
foreign investors. Holders of Pass-Through Securities however, may be subject to
withholding to the extent that the home equity loans were originated on or
before July 18, 1984.
Interest and OID of a foreign investor are not subject to withholding if
they are effectively connected with a United States business conducted by the
holder and the holder timely provides an IRS Form 4224. They will, however,
generally be subject to the regular United States income tax.
The Final Withholding Regulations consolidate and modify the current
certification requirements and means by which a non-United States person may
claim exemption from United States federal income tax withholding. All foreign
investors should consult their tax advisors regarding the application of the
Final Withholding Regulations, which are generally effective with respect to
payments made after December 31, 2000.
Payments to holders of Residual Interest Securities who are foreign
investors will generally be treated as interest for purposes of the 30% (or
lower treaty rate) United States withholding tax. Holders should assume that
this income does not qualify for exemption from United States withholding tax as
"portfolio interest." It is clear that, to the extent that a payment represents
a portion of REMIC taxable income that constitutes excess inclusion income, a
holder of a Residual Interest Security will not be entitled to an exemption from
or reduction of the 30% (or lower treaty rate) withholding tax rule. If the
payments are subject to United States withholding tax, they generally will be
taken into
70
account for withholding tax purposes only when paid or distributed (or when the
Residual Interest Security is disposed of). The Treasury has statutory
authority, however, to promulgate regulations which would require these amounts
to be taken into account at an earlier time in order to prevent the avoidance of
tax. These regulations could, for example, require withholding prior to the
distribution of cash in the case of Residual Interest Securities that do not
have significant value.
Under the REMIC Regulations, if a Residual Interest Security has tax
avoidance potential, a transfer of a Residual Interest Security to a foreign
investor will be disregarded for all federal tax purposes. A Residual Interest
Security has tax avoidance potential unless, at the time of the transfer the
transferor reasonably expects that the REMIC will distribute to the transferee
residual interest holder amounts that will equal at least 30% of each excess
inclusion, and that these amounts will be distributed at or after the time at
which the excess inclusions accrue and not later than the calendar year
following the calendar year of accrual. If a foreign investor transfers a
Residual Interest Security to a United States person (that is, a person that is
not a foreign investor), and if the transfer has the effect of allowing the
transferor to avoid tax on accrued excess inclusions, then the transfer is
disregarded and the transferor continues to be treated as the owner of the
Residual Interest Security for purposes of the withholding tax provisions of the
Code.
WE REFER YOU TO "TAXATION OF HOLDERS OF RESIDUAL INTEREST SECURITIES--EXCESS
INCLUSIONS" FOR MORE DETAIL.
Subject to the discussion in the previous paragraph, any capital gain
realized on the sale, redemption, retirement or other taxable disposition of a
security by a foreign person will be exempt from United States federal income
and withholding tax, provided that (1) this gain is not effectively connected
with the conduct of a trade or business in the United States by the foreign
person and (2) 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.
TAX CHARACTERIZATION OF THE TRUST AS A PARTNERSHIP OR DIVISION
If a trust fund is intended to be a partnership for federal income tax
purposes the applicable agreements will provide that the nature of the income of
the trust fund will exempt it from the rule that certain publicly traded
partnerships are taxable as corporations or the issuance of the certificates
will be structured as a private placement under an IRS safe harbor, so that the
trust fund will not be characterized as a publicly traded partnership taxable as
a corporation, and that no action will be taken that is inconsistent with the
treatment of the trust fund as a partnership (such as election to treat the
trust fund as a corporation for federal income tax purposes). If, however, the
trust fund has a single owner for federal income tax purposes, it will be
treated as a division of its owner and as such will be disregarded as an entity
separate from its owner for federal income tax purposes, assuming no election
will be made to treat the trust fund as a corporation for federal income tax
purposes.
Certain entities classified as "taxable mortgage pools" are subject to
corporate level tax on their net income. A "taxable mortgage pool" is generally
defined as an entity that meets the following requirements:
(1) the entity is not a REMIC (or, after September 1, 1997, a FASIT);
(2) substantially all of the assets of the entity are debt obligations,
and more than 50 percent of these debt obligations consists of real estate
mortgages (or interests in real estate mortgages);
(3) the entity is the obligor under debt obligations with two or more
maturities; and
(4) payments on the debt obligations on which the entity is the obligor
bear a relationship to the payments on the debt obligations which the entity
holds as assets.
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With respect to requirement (3), the Code authorizes the IRS to provide by
regulations that equity interests may be treated as debt for purposes of
determining whether there are two or more maturities. If the trust fund were
treated as a taxable mortgage pool, it would be ineligible to file consolidated
returns with any other corporation and could be liable for corporate tax.
Treasury regulations do not provide for the recharacterization of equity as debt
for purposes of determining whether an entity has issued debt with two
maturities, except in the case of transactions structured to avoid the taxable
mortgage pool rules. Federal Tax Counsel will deliver its opinion for a trust
fund which is intended to be a partnership for federal income tax purposes, as
specified in the related prospectus supplement, generally to the effect that the
trust fund will not be a taxable mortgage pool. This opinion will be based on
the assumption that the terms of the agreements and related documents will be
complied with, and on Federal Tax Counsel's conclusion that either the number of
classes of debt obligations issued be the trust fund, or the nature of the
assets held by the trust fund will exempt the trust fund from treatment as a
taxable mortgage pool.
TAX CONSEQUENCES TO HOLDERS OF THE NOTES ISSUED BY A PARTNERSHIP OR DIVISION
TREATMENT OF THE NOTES AS INDEBTEDNESS. The trust fund will agree, and the
noteholders will agree by their purchase of notes, to treat the notes as debt
for federal income tax purposes. Except as otherwise provided in the related
prospectus supplement, Federal Tax Counsel will advise the seller that the notes
will be classified as debt for federal income tax purposes. Consequently,
holders of notes will be subject to taxation as described in "Taxation of Debt
Securities (Including Regular Interest Securities)" above for Debt securities
which are not Regular Interest securities.
POSSIBLE ALTERNATIVE TREATMENT OF THE NOTES. 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 fund. If so treated, the trust fund
would likely be treated as a publicly traded partnership that would not be
taxable as a corporation because it would meet certain qualifying income tests.
Nonetheless, treatment of the notes as equity interests in such a publicly
traded partnership could have adverse tax consequences to certain holders. For
example, income to foreign investors generally would be subject to U.S. federal
income tax and U.S. federal income tax return filing and withholding
requirements, income to certain tax-exempt entities would be "unrelated business
taxable income," and individual holders might be subject to certain limitations
on their ability to deduct their share of the trust fund's expenses.
TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES ISSUED BY A PARTNERSHIP
TREATMENT OF THE TRUST FUND AS A PARTNERSHIP. In the case of a trust fund
intended to qualify as a partnership for federal income tax purposes, the trust
fund and the seller will agree, and the certificateholders will agree by their
purchase of certificates, to treat the trust fund as a partnership for purposes
of federal and state income tax, franchise tax and any other tax measured in
whole or in part by income, with the assets of the partnership being the assets
held by the trust fund, the partners of the partnership being the
certificateholders, and the notes, if any, being debt of the partnership, or if
there is a single certificateholder for federal income tax purposes, to
disregard the trust fund as an entity separate from the certificateholder.
However, the proper characterization of the arrangement involving the
certificates, the notes, the trust fund and the servicer is not clear because
there is no authority on transactions closely comparable to that contemplated 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 fund. Generally, provided the
certificates are issued at or close to face value, any characterization would
not result in materially adverse tax consequences to certificateholders as
compared to the consequences from treatment of the certificates as equity in a
partnership, described below. The following discussion assumes that the
certificates represent equity interests in a partnership. The following
discussion also
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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 OID regulations, 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 these certificates will be disclosed in the applicable prospectus supplement.
PARTNERSHIP TAXATION. As a partnership, the trust fund will not be subject
to federal income tax. Rather, each certificateholder will be required to
separately take into account its allocated share of income, gains, losses,
deductions and credits of the trust fund. The trust fund's income will consist
primarily of interest and finance charges earned on the home equity loans
(including appropriate adjustments for market discount, OID and bond premium)
and any gain upon collection or disposition of home equity loans. The trust
fund's deductions will consist primarily of interest and OID accruing with
respect to the notes, servicing and other fees, and losses or deductions upon
collection or disposition of home equity loans.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (here, the
trust agreement and related documents). The trust agreement will provide, in
general, that the certificateholders will be allocated taxable income of the
trust fund for each month equal to the sum of:
(1) the interest that accrues on the certificates in accordance with
their terms for that month, including interest accruing at the Pass-Through
Rate for that month and interest on amounts previously due on the
certificates but not yet distributed;
(2) any trust fund income attributable to discount on the home equity
loans that corresponds to any excess of the principal amount of the
certificates over their initial issue price;
(3) prepayment premium payable to the certificateholders for the
applicable month; and
(4) any other amounts of income payable to the certificateholders for
the applicable month.
This allocation will be reduced by any amortization by the trust fund of
premium on home equity loans that corresponds to any excess of the issue price
of certificates over their principal amount. All remaining taxable income of the
trust fund will be allocated to the seller. Based on the economic arrangement of
the parties, this approach for allocating trust fund income should be
permissible under applicable Treasury regulations, although no assurance can be
given that the IRS would not require a greater amount of income to be allocated
to certificateholders. Moreover, even under the foregoing method of allocation,
certificateholders may be allocated income equal to the entire Pass-Through Rate
plus the other items described above even though the trust fund might not have
sufficient cash to make current cash distributions of this amount. Thus, cash
basis holders will in effect be required to report income from the certificates
on the accrual basis and certificateholders may become liable for taxes on trust
fund income even if they have not received cash from the trust fund to pay these
taxes. In addition, because tax allocations and tax reporting will be done on a
uniform basis for all certificateholders but certificateholders may be
purchasing certificates at different times and at different prices,
certificateholders may be required to report on their tax returns taxable income
that is greater or less than the amount reported to them by the trust fund.
If notes are also issued, all of the taxable income allocated to a
certificateholder that is a pension, profit sharing or employee benefit plan or
other tax-exempt entity (including an individual retirement account) will
constitute "unrelated business taxable income" generally taxable to such a
holder under the Code.
An individual taxpayer's share of expenses of the trust fund (including fees
to the servicer but not interest expense) would be miscellaneous itemized
deductions. These deductions might be disallowed to
73
the individual in whole or in part and might result in the holder being taxed on
an amount of income that exceeds the amount of cash actually distributed to the
holder over the life of the trust fund.
The trust fund intends to make all tax calculations relating to income and
allocations to certificateholders on an aggregate basis. If the IRS were to
require that these calculations be made separately for each home equity loan,
the trust fund might be required to incur additional expense but it is believed
that there would not be a material adverse effect on certificateholders.
DISCOUNT AND PREMIUM. It is believed that the home equity loans will not
have been issued with OID and, therefore, the trust should not have OID income.
However, the purchase price paid by the trust fund for the home equity loans may
be greater or less than the remaining principal balance of the home equity loans
at the time of purchase. If so, the home equity loan will have been acquired at
a premium or discount, as the case may be. (As indicated above, the trust fund
will make this calculation on an aggregate basis, but might be required to
recompute it on a home equity loan by home equity loan basis.)
If the trust fund acquires the home equity loans at a market discount or
premium, the trust fund will elect to include this discount in income currently
as it accrues over the life of the home equity loans or to offset the premium
against interest income on the home equity loans. As indicated above, a portion
of the market discount income or premium deduction may be allocated to
certificateholders.
SECTION 708 TERMINATION. Under Section 708 of the Code, the trust fund will
be deemed to terminate for federal income tax purposes if 50% or more of the
capital and profits interests in the trust fund are sold or exchanged within a
12-month period. If a termination occurs, the trust fund will be considered to
distribute its assets to the partners, who would then be treated as
recontributing those assets to the trust fund as a new partnership. The trust
fund will not comply with certain technical requirements that might apply when a
constructive termination occurs. As a result, the trust fund may be subject to
certain tax penalties and may incur additional expenses if it is required to
comply with those requirements. Furthermore, the trust fund might not be able to
comply 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.
A certificateholder's tax basis in a certificate will generally equal the
holder's cost increased by the holder's share of trust fund income (includible
in income) and decreased by any distributions received with respect to the
related certificate. In addition, both the tax basis in the certificates and the
amount realized on a sale of a certificate would include the holder's share of
the notes and other liabilities of the trust fund. A holder acquiring
certificates at different prices may be required to maintain a single aggregate
adjusted tax basis in those certificates, and, upon 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).
Any gain on the sale of a certificate attributable to the holder's share of
unrecognized accrued market discount on the home equity loans would generally be
treated as ordinary income to the holder and would give rise to special tax
reporting requirements. The trust fund does not expect to have any other assets
that would give rise to special reporting requirements. Thus, to avoid those
special reporting requirements, the trust fund will elect to include market
discount in income as it accrues.
If a certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the certificates that exceeds the aggregate
cash distributions with respect to those certificates, this excess will
generally give rise to a capital loss upon the retirement of the certificates.
74
ALLOCATIONS BETWEEN SELLERS AND TRANSFEREES. In general, the trust fund's
taxable income and losses will be determined monthly and the tax items for a
particular calendar month will be apportioned among the certificateholders in
proportion to the principal amount of certificates owned by them as of the close
of the last day of the applicable month. As a result, a holder purchasing
certificates may be allocated tax items (which will affect its tax liability and
tax basis) attributable to periods before the actual transaction.
The use of a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the trust fund might be reallocated among the certificateholders. The trust
fund's method of allocation between transferors and transferees may be revised
to conform to a method permitted by future regulations.
SECTION 754 ELECTION. In the event that a certificateholder sells its
certificates at a profit (loss), the purchasing certificateholder will have a
higher (lower) basis in the certificates than the selling certificateholder had.
The tax basis of the trust fund's assets will not be adjusted to reflect that
higher (or lower) basis unless the trust fund were to file an election under
Section 754 of the Code. In order to avoid the administrative complexities that
would be involved in keeping accurate accounting records, as well as potentially
onerous information reporting requirements, the trust fund currently does not
intend to make an election. As a result, certificateholders might be allocated a
greater or lesser amount of trust fund income than would be appropriate based on
their own purchase price for certificates.
ADMINISTRATIVE MATTERS. The trustee is required to keep or have kept
complete and accurate books of the trust fund. These books will be maintained
for financial reporting and tax purposes on an accrual basis and the fiscal year
of the trust fund will be the calendar year. The trustee will file a partnership
information return (IRS Form 1065) with the IRS for each taxable year of the
trust fund and will report each certificateholder's allocable share of items of
trust fund income and expense to holders and the IRS on Schedule K-1. The trust
fund will provide the Schedule K-1 information to nominees that fail to provide
the trust fund with the information statement described below and these nominees
will be required to forward the information to the beneficial owners of the
certificates. Generally, holders must file tax returns that are consistent with
the information return filed by the trust fund or be subject to penalties unless
the holder notifies the IRS of all 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 fund
with a statement containing certain information on the nominee, the beneficial
owners and the certificates so held. This information includes (1) the name,
address and taxpayer identification number of the nominee and (2) as to each
beneficial owner:
- the name, address and identification number of the relevant person;
- whether this 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
- certain information on certificates that were held, bought or sold on
behalf of this person throughout the year.
In addition, brokers and financial institutions that hold certificates
through a nominee are required to furnish directly to the trust fund information
as to themselves and their ownership of certificates. A clearing agency
registered under Section 17A of the Exchange Act is not required to furnish any
information statement to the trust fund. The information referred to above for
any calendar year must be furnished to the trust fund on or before the following
January 31. Nominees, brokers and financial institutions that fail to provide
the trust fund with the information described above may be subject to penalties.
75
The seller will be designated as the tax matters partner in the related
trust agreement and, as such, will be responsible for representing the
certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the trust fund by the appropriate taxing authorities
could result in an adjustment of the returns of the certificateholders, and,
under certain circumstances, a certificateholder may be precluded from
separately litigating a proposed adjustment to the items of the trust fund. An
adjustment could also result in an audit of a certificateholder's returns and
adjustments of items not related to the income and losses of the trust fund.
TAX CONSEQUENCES TO FOREIGN CERTIFICATEHOLDERS. It is not clear whether the
trust fund would be considered to be engaged in a trade or business in the
United States for purposes of federal withholding taxes with respect to foreign
investors 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 fund would be engaged in a trade or business in
the United States for these purposes, the trust fund will withhold as if it were
so engaged in order to protect the trust fund from possible adverse consequences
of a failure to withhold. The trust fund expects to withhold pursuant to
Section 1446 of the Code on the portion of its taxable income that is allocable
to certificateholders that are foreign investors, as if the income were
effectively connected to a U.S. trade or business, at a rate of 35% for foreign
holders that are taxable as corporations and 39.6% for all other foreign
holders. Subsequent adoption of Treasury regulations or the issuance of other
administrative pronouncements may require the trust fund to change its
withholding procedures.
Each certificateholder that is a foreign investor might be required to
file a U.S. individual or corporate income tax return (including, in the case of
a corporation, the branch profits tax) on its share of the trust fund's income.
A foreign holder generally would be entitled to file with the IRS a claim for
refund with respect to taxes withheld by the trust fund taking the position that
no taxes were due because the trust fund was not engaged in a U.S. trade or
business. However, interest payments made (or accrued) to a certificateholder
who is a foreign investor generally will be considered guaranteed payments to
the extent the payments are determined without regard to the income of the trust
fund. If these interest payments are properly characterized as guaranteed
payments, then the interest probably will not be considered "portfolio
interest." As a result, certificateholders will be subject to United States
federal income tax and withholding tax at a rate of 30%, unless reduced or
eliminated pursuant to an applicable treaty. In this case, a foreign investor
would only be entitled to claim a refund for that portion of the taxes, if any,
in excess of the taxes that should be withheld with respect to the guaranteed
payments.
BACKUP WITHHOLDING. Distributions made on the certificates and proceeds
from the sale of the certificates will be subject to a "backup" withholding tax
of 31% if, in general, the certificateholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code and, if necessary, adequately demonstrates
this status.
STATE TAX CONSEQUENCES
In addition to the federal income tax consequences described in "FEDERAL
INCOME TAX CONSEQUENCES," potential investors should consider the state and
local income tax consequences of the acquisition, ownership, and disposition of
the securities. State and local income tax law may differ substantially from the
corresponding federal law, and this discussion does not purport to describe any
aspect of the income tax laws of any state or locality. Therefore, potential
investors should consult their own tax advisors with respect to the various
state and local tax consequences of an investment in the securities.
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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 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 Section2510.3-101 (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
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.
UNDERWRITER EXEMPTION
The DOL has issued to each of a number of underwriters of mortgage and
asset-backed securities individual prohibited transaction exemptions each of
which was amended by Prohibited Transaction Exemption 97-34 ("PTE 97-34") and
was 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 one of such underwriters or
their affiliates is the sole underwriter, manager or co-manager of an
underwriting syndicate or is the selling or placement agent.
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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-family, mixed-use and multi-family residential mortgage loans,
home equity loans or 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 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 seller, (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 seller 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 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 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.
78
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
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 fund assets which are residential, home equity, manufactured housing,
multi-family or commercial 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 be considered Designated Transactions
for purposes of 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
seller.
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
79
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
80
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 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 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
81
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. In addition, each Plan's investment in each class of
Certificates cannot exceed 25% of the outstanding Certificates in the class, and
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 fund containing assets which are sold or serviced by the same entity.
Finally, 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, must be 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,
82
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 securities will not constitute "mortgage-related securities" within the
meaning of the Secondary Mortgage Market Enhancement Act of 1984 unless the
related prospectus supplement specifies that the securities will constitute
"mortgage related securities." Accordingly, investors whose investment authority
is subject to legal restrictions should consult their own legal advisors to
determine whether and the extent to which the securities constitute legal
investments for them.
PLAN OF DISTRIBUTION
On the terms and conditions set forth in an underwriting agreement with
respect to each trust fund, the depositor will agree to sell to each of the
underwriters named in the agreement and in the related prospectus supplement,
and each of these underwriters will severally agree to purchase from the
depositor, the principal amount of each class of securities of the related
series set forth in the underwriting agreement and in the related prospectus
supplement.
In each underwriting agreement, the several underwriters will agree, subject
to the terms and conditions set forth in the agreement, to purchase all of the
securities described in the underwriting agreement that are offered pursuant to
the related prospectus supplement if any of the securities are purchased. In the
event of a default by any underwriter, each underwriting agreement will provide
that, in certain circumstances, purchase commitments of the nondefaulting
underwriters may be increased, or the underwriting agreement may be terminated.
Each prospectus supplement will either (1) set forth the price at which each
class of securities being offered will be offered to the public and any
concessions that may be offered to certain dealers participating in the offering
of the securities or (2) specify that the related securities are to be resold by
the underwriters in negotiated transactions at varying prices to be determined
at the time of each sale. After the initial public offering of any securities,
the public offering price and the concessions may be changed.
83
Each underwriting agreement will provide that the depositor will indemnify
underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended.
Under each underwriting agreement, the closing of the sale of any class of
securities subject to the underwriting agreement will be conditioned on the
closing of the sale of all other classes subject to the underwriting agreement.
The place and time of delivery for the securities with respect to which this
prospectus is delivered will be set forth in the related prospectus supplement.
LEGAL MATTERS
Unless otherwise specified in the related prospectus supplement, certain
legal matters in connection with the securities will be passed upon for the
seller by Stroock & Stroock & Lavan LLP, New York, New York.
84
$480,000,000
(APPROXIMATE)
CENTEX HOME EQUITY LOAN TRUST 2001-B
[LOGO]
CENTEX HOME EQUITY LOAN
ASSET-BACKED CERTIFICATES, SERIES 2001-B
CENTEX CREDIT CORPORATION
D/B/A
CENTEX HOME EQUITY CORPORATION
AS ORIGINATOR AND SERVICER
CHEC FUNDING, LLC
AS DEPOSITOR
-------------------
PROSPECTUS SUPPLEMENT
-------------------
LEHMAN BROTHERS
BANC OF AMERICA SECURITIES LLC
CREDIT SUISSE FIRST BOSTON
SALOMON SMITH BARNEY
JUNE 6, 2001