As filed with the Securities and Exchange Commission on June 26, 1998
Registration No. 333-51725
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 1 TO
FORM S-3
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
Virginia CRESTAR SECURITIZATION, LLC 54-1901323
(State or other (I.R.S. Employer
jurisdiction of (Exact name of registrant as specified in its charter) Identification No.)
incorporation or 919 East Main Street
organization) Richmond, Virginia 23219
(804) 782-5000
(Address,including zip code, and telephone number, including area code,
of registrant's principal executive offices)
EUGENE S. PUTNAM COPIES TO: AND TO:
PRESIDENT AND CHIEF EXECUTIVE OFFICER RANDOLPH F. TOTTEN PAUL F. SEFCOVIC
919 EAST MAIN STREET JACK A. MOLENKAMP KIM L. SWANSON
RICHMOND, VIRGINIA 23219 HUNTON & WILLIAMS SQUIRE, SANDERS & DEMPSEY L.L.P
(804) 782-5619 951 EAST BYRD STREET 41 SOUTH HIGH STREET, SUITE 1300
(804) 782-7744 (TELECOPY) RICHMOND, VIRGINIA 23219 COLUMBUS, OHIO 43215
(Name, address, including zip code and (804) 788-8200 (614) 365-2700
telephone number, including area code (804) 788-8218 (TELECOPY) (614) 365-2499 (TELECOPY)
of agent for service)
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
FROM TIME TO TIME AFTER REGISTRATION STATEMENT
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities are being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1993, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box. [X]
If this Form is filed to register securities for an offering pursuant to
Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
======================================== ========================== ======================= ===================== ==================
PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
BEING REGISTERED REGISTERED(1)(2) PER UNIT(1)(2) OFFERING PRICE(1)(2) REGISTRATION FEE
======================================== ========================== ======================= ===================== ==================
Student Loan Asset Backed Notes $1,000,000 100% $1,000,000 $295.00(3)
======================================== ========================== ======================= ===================== ==================
(1) Estimated solely for calculating the registration fee.
(2) Also registered are secondary market sales of Notes that may be effected by Crestar Securities Corporation,
an affiliate of the Registrant.
(3) Previously paid.
====================================================================================================================================
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL
THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THE REGISTRATION STATEMENT SHALL THEREAFTER BECOME
EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
====================================================================================================================================
SUBJECT TO COMPLETION, DATED __________ __, 1998
PROSPECTUS SUPPLEMENT
$____________ Student Loan Asset Backed Notes
CRESTAR STUDENT LOAN TRUST 1998-__
Issuer
CRESTAR SECURITIZATION, LLC
Depositor
CRESTAR BANK
Transferor, Master Servicer and Administrator
Consider carefully the risk factors beginning on page 1 in the Prospectus and
page S-5 of this Prospectus Supplement.
A Note is not a deposit and neither the Notes nor the underlying accounts or
student loans are insured or guaranteed by the Federal Deposit Insurance
Corporation or any other governmental agency, except as expressly provided
herein.
The Notes will represent obligations of the Trust only and will not represent
interests in or obligations of Crestar Bank or any of its affiliates. The Notes
are not insured or guaranteed by any person.
This Prospectus Supplement may be used to offer and sell the Notes only if
accompanied by the Prospectus.
The Trust will issue - Class A Notes Class B Notes1 Total
Principal Amount $__________ $__________ $___________
Class Interest Rate One-Month One-Month
LIBOR plus [ ] %2 LIBOR plus [ ]%2
Interest Paid Monthly Quarterly
First Interest Payment Date [_______] [_______]
First Scheduled Principal
Payment Date [_______] [_______]
Legal Final Maturity ____ __, 2___ ____ __, 2___
Price to Public __________% _________% $___________
Underwriting Discount __________% _________% $___________
Proceeds to Issuer __________% _________% $___________
- --------------
(1) The Class B Notes are subordinated to the Class A Notes.
(2) Initially, ___% with respect to the Class A Notes, and ___% with respect to
Class B Notes. Following the initial Interest Accrual Period, subject to a
cap of [18%] and the Net Loan Rate.
Trust Assets:
The Trust will consist of Financed Student Loans with an aggregate principal
balance as of the Cut-off Date of $____________, proceeds thereof, and a
Reserve Account. [The principal amount of the Notes exceeds the principal
amount of the Financed Student Loans and accrued interest thereon as of the
Cut-off Date and the initial Reserve Fund deposit by approximately
$__________.]
Neither the SEC nor any state securities commission has
approved these Notes or determined that this Prospectus
Supplement or the Prospectus is accurate
or complete. Any representation to the contrary is a criminal offense.
Salomon Smith Barney Crestar Securities Corporation
____________ __, 1998
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
The Issuer provides information to you about the Notes in two
separate documents that progressively provide more detail: (a) the
accompanying Prospectus, which provides general information, some of which
may not apply to your Notes and (b) this Prospectus Supplement, which
describes the specific terms of your Notes.
If there is a conflict between this Prospectus Supplement and
the accompanying Prospectus, you should rely on the information in this
Prospectus Supplement.
This Prospectus Supplement and the accompanying Prospectus
include cross-references to captions in these materials where you can find
further related discussions. The following Table of Contents and the Table
of Contents included in the accompanying Prospectus provide the pages on
which these captions are located.
[The Issuer has filed preliminary information regarding the
Trust's assets and the Notes with the SEC. The information contained in
this document supersedes all of that preliminary information, which was
prepared by the Underwriters for prospective investors.]
-----------------------
Until ________, all dealers that effect transactions in the Notes,
whether or not participating in this offering, may be required to deliver a
Prospectus and Prospectus Supplement. This requirement is in addition to
the dealers' obligation to deliver a Prospectus and Prospectus Supplement
when acting as underwriters with respect to their unsold allotments or
subscriptions.
TABLE OF CONTENTS
Page
SUMMARY OF TERMS .....................................S-1
THE TRUST..........................................S-1
INTEREST...........................................S-1
PRINCIPAL..........................................S-2
PRIORITY OF PAYMENTS...............................S-2
TRUST ASSETS.......................................S-3
RESERVE ACCOUNT....................................S-3
OPTIONAL TERMINATION...............................S-4
Auction of Trust Assets.........................S-4
Optional Purchase...............................S-4
FEDERAL INCOME TAX CONSEQUENCES....................S-4
ERISA CONSIDERATIONS...............................S-4
REGISTRATION, CLEARING AND SETTLEMENT..............S-4
RATING.............................................S-4
RISK FACTORS..........................................S-5
THE TRUST.............................................S-5
The Trust.......................................S-5
Eligible Lender Trustee.........................S-5
Delaware Trustee................................S-6
Indenture Trustee...............................S-6
Master Servicer.................................S-6
Administrator...................................S-6
USE OF PROCEEDS.......................................S-6
THE FINANCED STUDENT LOANS............................S-7
Incentive Programs..............................S-12
MATURITY AND PREPAYMENT CONSIDERATIONS................S-12
Maturity and Prepayment Assumptions.............S-12
Weighted Average Life of the Notes..............S-13
THE SERVICERS.........................................S-14
General.........................................S-14
[Name of Servicer]..............................S-14
Servicing Compensation..........................S-14
THE GUARANTEE AGENCIES................................S-14
General.........................................S-14
[Name of Guarantee Agency]......................S-15
DESCRIPTION OF THE NOTES..............................S-15
General.........................................S-15
Interest........................................S-15
Principal.......................................S-16
Priority of Payments............................S-17
Advances........................................S-19
Reserve Account.................................S-20
Subordination of the Class B Notes..............S-20
Termination.....................................S-20
UNDERWRITING..........................................S-21
LEGAL MATTERS.........................................S-22
RATING ...............................................S-22
SUMMARY OF TERMS
This summary highlights selected information from this document 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 an offering of the
Notes, read carefully this entire document and the accompanying Prospectus.
This summary provides an overview of certain calculations, cash flows and
other information to aid your understanding and is qualified by the full
description of these calculations, cash flows and other information in this
Prospectus Supplement and the accompanying Prospectus.
You can find a definition of capitalized terms used in this summary and
not otherwise defined herein under the caption "Glossary of Principal
Definitions" beginning on page I-1 of the accompanying Prospectus.
} THE TRUST
The Trust is being organized by Crestar Securitization, LLC, an affiliate of
Crestar Bank. The Trust will acquire student loans from Crestar Securitization
and pledge them to the Indenture Trustee to secure payment of the Notes.
Crestar Bank will be responsible for servicing the student loans although it
may engage one or more other institutions to service the student loans on a
day-to-day basis. Crestar Bank also will serve as the administrator of the Trust
and be responsible for various accounting and administration functions with
respect to the Trust.
There are two institutional bank trustees of the Trust. __________ serves
as trustee for Delaware law purposes and __________ serves as trustee for
purposes of the Trust's beneficial ownership of the student loans. The
Indenture Trustee is __________. See "The Trust - Eligible Lender Trustee,"
"-Delaware Trustee" and "- Indenture Trustee" in this Prospectus Supplement.
Issuance of the Notes is scheduled for __________, 1998.
INTEREST
Class A. Interest on the Class A Notes is payable monthly on the 25th day of
each month or, if such day is not a Business Day, on the next succeeding
Business Day (each, a "Payment Date"). The Class A Notes will bear interest
through __________ at _____% per annum. Thereafter, the interest rate will be
adjusted monthly for each Interest Accrual Period to equal the lesser of
One-Month LIBOR plus [ ]% per annum and 18% per annum (the "Formula
Rate"), but not in excess of the Net Loan Rate for such period.
Class B. Interest on the Class B Notes is payable quarterly on the Payment
Dates occurring in ____________, ____________, ____________ and ____________
(each, a "Quarterly Payment Date"). The Class B Notes will bear interest through
__________ at _____% per annum. Thereafter, the interest rate will be adjusted
monthly for each Interest Accrual Period to equal the lesser of One-Month
LIBOR plus [ ]% per annum and 18% per annum, but not in excess of the
Net Loan Rate for such period.
LIBOR is the rate for deposits in U.S. dollars for a one-month period which
appears on the Dow Jones Telerate Page 5 (or substitute page) as of 11:00 a.m.,
London time, on the related monthly Interest Determination Date.
The Net Loan Rate for an Interest Accrual Period generally equals the
weighted average Effective Interest Rate of the Financed Student Loans as of
the last day of the Collection Period immediately preceding the commencement of
such Interest Accrual Period, less the Program Operating Expense Percentage
(initially ___% per annum, which may be increased from time to time with the
approval of the Rating Agencies). The Effective Interest Rate of a Financed
Student Loan is the interest rate on such Loan after giving effect to all
interest subsidies, rebate fees, Special Allowance Payments and borrower
incentives.
If interest at the Formula Rate for a Class exceeds interest at the Net Loan
Rate for an Interest Accrual Period, the excess interest, together with interest
thereon at the applicable Formula Rate ("Carryover Interest"), will be paid on
subsequent Quarterly Payment Dates only to the extent funds are available after
other required payments on the Notes, and may never be paid. See "Description of
the Notes - Interest" in this Prospectus Supplement.
The following time line shows the relevant dates for the first three Interest
Accrual Periods.
Quarterly
Closing Payment Payment Payment
Date Date Date Date
- ---- ------ ------- ---------
(8/13/98) (9/25/98) 10/27/98 11/25/98
| | | |
Interest Interest Interest Interest
Determination Determination Determination Determination
Date Date Date Date
8/11/98 9/23/98 10/22/98 11/20/98
You may obtain applicable Class Interest Rates for the current and immediately
preceding Interest Accrual Periods by telephoning the Indenture Trustee, at
its Corporate Trust Office at ( ) ___-____.
PRINCIPAL
Payments of principal on the Notes will not commence until ___________, 19___.
No principal will be paid on the Class B Notes until the Class A Notes have been
paid in full.
Principal will be payable on the Class A Notes
o on each Payment Date in an amount (the "Principal Payment Amount")
equal to the decline in the Pool Balance between the end of the
second Collection Period preceding such Payment Date and the end of the
immediately preceding Collection Period, and
o on each Quarterly Payment Date until the Parity Percentage equals _____%.
Principal will be payable on the Class B Notes on each Quarterly Payment Date
o in an amount (the "Principal Payment Amount") equal to the decline in the
Pool Balance between the end of the fourth Collection Period preceding such
Payment Date and the end of the immediately preceding Collection Period,
and
o until the Parity Percentage equals _____%.
A Collection Period is each calendar month, except that the first Collection
Period begins on _______ (the "Cut-off Date") and ends on ___________.
The Pool Balance as of the end of a Collection Period is equal to the
aggregate principal balance of the Financed Student Loans (including accrued
interest that is capitalized as of the end of the Collection Period), after
giving effect to all payments in respect of principal received by the Trust
during such Collection Period.
The Parity Percentage for any Payment Date or Quarterly Payment Date is the
percentage determined by dividing
o the Pool Balance as of the end of the preceding Collection Period, plus
accrued interest thereon, accrued Special Allowance Payments and Interest
Subsidy Payments as of the end of such Collection Period and all amounts
(including accrued interest thereon) in the Collection Account and Reserve
Account as of the end of the Collection Period (adjusted for payments made
on such Payment Date or Quarterly Payment Date), by
o the sum of the principal balance of the Notes (after payments thereon on
such Payment Date or Quarterly Payment Date), accrued interest thereon, and
accrued and unpaid Transaction Fees and Consolidation Loan Fees.
The final payment of principal and interest will be made no later than _________
on the Class A Notes, and no later than ________ on the Class B Notes (each, a
"Legal Final Maturity"). The actual maturity of a Class of Notes could occur
sooner as a result of a variety of factors. See "Maturity and Prepayment
Considerations" in the Prospectus and this Prospectus Supplement.
PRIORITY OF PAYMENTS
Collections on the Financed Student Loans will be allocated first to pay any
Consolidation Loan Fees and Transaction Fees (to the Master Servicer,
Administrator, Eligible Lender Trustee, Delaware Trustee and Indenture Trustee)
before being applied to pay the Notes. On each Payment Date that is not a
Quarterly Payment Date any remaining Available Funds will be applied (i) to pay
the Class Interest Amount on the Class A Notes; and (ii) to pay the Principal
Payment Amount (and any overdue Principal Payment Amount) on the Class A Notes
until the principal balance thereof has been reduced to zero. On each Quarterly
Payment Date, any remaining Available Funds will be applied generally in the
following priority:
o First, to pay the Class Interest Amount on the Class A Notes;
o Second, to pay the Class Interest Amount on the Class B Notes;
o Third, to pay the Principal Payment Amount (and any overdue Principal
Payment Amount) on the Class A Notes until the principal balance thereof
has been reduced to zero;
o Fourth, after the principal balance of the Class A Notes has been reduced
to zero, to pay the Principal Payment Amount (and any overdue Principal
Payment Amount) on the Class B Notes;
o Fifth, to the Reserve Account, the amount, if any, necessary to
attain the Specified Reserve Account Balance;
o Sixth, to pay any Parity Payments, first to the Class A Notes , and
thereafter to the Class B Notes; and
o Seventh, to pay any Carryover Interest, first on the Class A Notes and
thereafter on the Class B Notes.
If, however, following such payments, the principal amount of the Class A Notes
would exceed the sum of the Pool Balance and amounts in the Trust Accounts as of
the end of the preceding Collection Period, or if a payment Event of Default has
occurred with respect to the Notes, the Class B Notes will not receive their
Class Interest Amount pursuant to clause "Second" until after the Class A Notes
have received their Principal Payment Amount. See "Description of the Notes -
Priority of Payments" in this Prospectus Supplement.
Any remaining amounts on any Quarterly Distribution Date will be distributed
to the Certificateholder, initially expected to be the Depositor. Any amounts so
distributed will not thereafter be available to pay principal or interest on the
Notes.
TRUST ASSETS
The primary assets of the Trust consist of Financed Student Loans with an
aggregate principal balance of $________ as of the Cut-off Date. The Financed
Student Loans consist of certain education loans to students and parents of
students enrolled in accredited institutions of higher education. Of the
initial principal amount of Financed Student Loans, approximately _____% have
been originated by the Transferor and the balance have been acquired by the
Transferor from independent third parties. [Of the initial principal amount of
the Financed Student Loans, approximately ___% are FFELP Loans and approximately
___% are HEAL Loans.] See "Description of the FFEL Program" and "Description of
the HEAL Program" in the Prospectus.
________, _______ and _______ are the Guarantee Agencies that guarantee more
than 10% of the initial Financed FFELP Loans. Of the Financed FFELP Loans,
approximately ___% are guaranteed as to the payment of 100% of principal and
interest by a Guarantee Agency, and the balance are guaranteed as to [98]%.
Reimbursement of a Guarantee Agency by the Secretary of Education ranges from
78% to 100%. For a description of the Guarantee Agencies and guarantee
agreements, see "The Guarantee Agencies" in this Prospectus Supplement and
"Description of the Guarantee Agencies" in the Prospectus.
The HEAL Loans are insured as to payment of 100% of principal and interest by
the United States Department of Health and Human Services.
Additional Financed Student Loans may be substituted for those comprising the
initial pool under certain circumstances, including loss of insurance or
guarantee with respect to such Loan or the consolidation of loans made to the
same borrower.
RESERVE ACCOUNT
The Depositor will make an initial deposit of $________ into a Reserve Account.
The initial deposit will be supplemented on each Quarterly Payment Date with all
amounts remaining after making all required distributions on such date until the
Specified Reserve Account Balance is attained.
The "Specified Reserve Account Balance" on any Quarterly Payment Date is equal
to the greater of
___% of the outstanding principal balance of the Notes on such Payment
Date, after giving effect to payments on such Payment Date, or
$_______, but not in excess of the outstanding principal amount of the
Notes.
See "Description of the Notes - Reserve Account" in this Prospectus
Supplement.
OPTIONAL TERMINATION
Auction of Trust Assets
On or after __________, 20__, the Indenture Trustee will offer the Financed
Student Loans for sale. If the Indenture Trustee receives at least two bids
(which may include the Transferor or its affiliates), the Indenture Trustee will
accept the higher bid if it will pay transaction costs and all amounts due the
Noteholders (other than Carryover Interest), and the bid proceeds will be so
applied. If the bid proceeds are not sufficient to pay transaction costs and the
Notes, the Indenture Trustee will be under no obligation to continue to solicit
bids, although it may do so from time to time. See "Description of the Notes -
Termination - Auction Purchase" in this Prospectus Supplement.
Optional Purchase
At such time as the Pool Balance is equal to ___% or less of the Initial Pool
Balance, the Depositor may elect to purchase the Financed Student Loans for a
price equal to their principal amount, plus all accrued interest thereon, but
not less than an amount necessary to pay transaction costs and all amounts due
the Noteholders (other than Carryover Interest). The net proceeds of such
purchase will be applied to the payment of the Notes (other than Carryover
Interest). See "Description of the Notes - Termination - Optional Purchase" in
this Prospectus Supplement.
FEDERAL INCOME TAX CONSEQUENCES
The Notes will evidence debt obligations under the Internal Revenue Code of
1986, as amended (the "Code"), and interest paid or accrued thereon will be
taxable to Noteholders. It is [not] expected that the Notes will be issued with
original issue discount. See "Federal Income Tax Consequences - Original Issue
Discount" in the Prospectus. By acceptance of its Note, each Noteholder will be
deemed to have agreed to treat its Note as a debt instrument for purposes of
federal and state income tax, franchise tax and any other tax measured in whole
or in part by income. See "Federal Income Tax Consequences" in the Prospectus
for additional information concerning the application of federal income tax laws
with respect to the Notes and the Trust.
ERISA CONSIDERATIONS
It is expected that the Notes will be treated as debt obligations without
significant equity features for purposes of the regulations of the Department of
Labor set forth in 29 C.F.R. 2510.3-101 (the "Plan Asset Regulations"). See
"ERISA Considerations" in the Prospectus.
REGISTRATION, CLEARING AND SETTLEMENT
Persons acquiring beneficial ownership interests in the Notes will hold their
interests through DTC in the United States or Cedel Bank, societe anonyme or
the Euroclear System in Europe. The Noteholders will not be entitled to
receive definitive certificates representing their interests in the Notes,
except in certain limited circumstances. See "Description of the Notes -
Book-Entry Registration" in the Prospectus.
The Notes will be offered in minimum denominations of [$50,000] and integral
multiples of [$1,000] in excess thereof.
RATING
It is a condition to the issuance and sale of the Class A Notes that they be
rated by the following Rating Agencies as follows:
Fitch Moody's S&P
Class A Notes AAA Aaa AAA
Class B Notes A A2 A
See "Risk Factors - Rating" in the Prospectus.
RISK FACTORS
In addition to the Risk Factors set forth in the Prospectus, you should note the
following:
[Undercollateralization The aggregate principal amount of
the Notes exceeds the aggregate
principal amount of the
Financed Student Loans and
accrued interest thereon as of
the Cut-off Date and the initial
Reserve Fund deposit by
approximately $______________.
Payment of principal and interest
on the Notes is dependent upon
collections on the Financed
Student Loans, particularly
interest thereon. If the yield on
the Financed Student Loans does
not generally exceed the interest
rate on the Notes and Trust
expenses, the Trust may have
insufficient funds to repay the
Notes.]
THE TRUST
The Trust
Crestar Student Loan Trust 1998-__ is a statutory business trust that will be
formed on or prior to the Closing Date under the laws of the State of Delaware.
The Trust will not engage in any activity other than (i) acquiring, holding,
selling and managing the Financed Student Loans and the other assets of the
Trust and proceeds therefrom, (ii) issuing one or more classes of its
certificates and notes, (iii) making payments thereon and (iv) engaging in other
activities that are necessary, suitable or convenient to accomplish the
foregoing or are incidental thereto or connected therewith. For so long as the
Transferor or an affiliate of the Transferor is a Certificateholder, the Trust's
activities will be further limited to activities that are part of, or incidental
to, the business of banking as well.
The Trust initially will be capitalized with nominal equity represented by a
Certificate that initially will be held by the Depositor. The equity of the
Trust, together with the proceeds from the sale of the Notes, will be used by
the Eligible Lender Trustee in connection with its acquisition, on behalf of the
Trust, of the initial Financed Student Loans from the Transferor. A portion of
the net proceeds received from the transfer of the initial Financed Student
Loans will be used by the Depositor to make a Reserve Account Deposit in the
amount of $__________. Upon the consummation of such transactions, the assets of
the Trust will consist of (a) the pool of Financed Student Loans, legal title to
which is held by the Eligible Lender Trustee on behalf of the Trust, (b) all
funds in respect thereof collected on or after the applicable Cut-off Date, and
(c) all moneys and investments on deposit in the Collection Account, Note
Payment Account, Expense Account, Advance Account, Reserve Account and
Certificate Distribution Account. All of the foregoing accounts except the
Certificate Distribution Account will be maintained with and in the name of the
Indenture Trustee ("Trust Account"). To facilitate servicing and to minimize
administrative burden and expense, the related Servicer will be appointed
custodian of the promissory notes representing the Financed FFELP Loans by the
Eligible Lender Trustee.
The Trust's principal offices are located in the offices of the Eligible
Lender Trustee, c/o [____________, ----------,-------- -----].
Eligible Lender Trustee
[_____________________________] a [national banking association] organized under
the laws of the [United States] is the Eligible Lender Trustee for the Trust
under the Trust Agreement. The office of the Eligible Lender Trustee for
purposes of administering the Trust is located at [____________,
__________,________ _____]. The Eligible Lender Trustee, on behalf of the
Depositor, will acquire the Financed Student Loans from the Transferor pursuant
to a Sales Agreement. The Eligible Lender Trustee will acquire, on behalf of the
Trust, legal title to the Financed Student Loans from the Eligible Lender
Trustee acting on behalf of the Depositor pursuant to a Transfer and Servicing
Agreement. The Eligible Lender Trustee on behalf of the Trust will enter into a
Guarantee Agreement with each of the Guarantee Agencies with respect to each
Financed FFELP Loan and a HEAL Insurance Contract with the Department of HHS
with respect to each Financed HEAL Loan. The Eligible Lender Trustee qualifies
as an eligible lender and owner of Financed Student Loans for all purposes under
the Higher Education Act and the Guarantee Agreements with respect to such
Financed FFELP Loans, and under the HEAL Act and the HEAL Insurance Contract
with respect to such Financed HEAL Loans. Failure of the Financed Student Loans
to be owned by an eligible lender would result in the loss of Guarantee
Payments, Interest Subsidy Payments and Special Allowance Payments with respect
to Financed FFELP Loans and the loss of Insurance Payments with respect to
Financed HEAL Loans. See "Description of the FFEL Program," "Description of the
HEAL Program" and "Risk Factors - Offset by Guarantee Agencies" in the
Prospectus.
The Depositor or its affiliates may maintain other banking relationships with
[_______________] and its affiliates from time to time.
Delaware Trustee
[_____________], a [________________] banking corporation, will serve as
Delaware Trustee of the Trust. Its address is [__________________]. The
Depositor or its affiliates may maintain other banking relationships with
[________________] and its affiliates from time to time.
Indenture Trustee
On the Closing Date, the Trust will pledge the Financed Student Loans to the
Indenture Trustee under an indenture dated as of [____________], as supplemented
by an indenture supplement dated as of [_______________] (collectively, the
"Indenture"). The Indenture Trustee's corporate trust office is located at
[__________], and its telephone number is [___________]. The Depositor or its
affiliates may maintain other banking relationships with [________________] and
its affiliates from time to time.
Master Servicer
Crestar Bank, in its capacity as Master Servicer, will be responsible for
servicing the Financed Student Loans. The Master Servicer may arrange for
Servicers to perform its obligations. The Master Servicer will be entitled to
the Servicing Fee, but will be obligated to pay all costs of the Servicers
without further reimbursement by the Trust. See "The Servicers" in this
Prospectus Supplement.
Administrator
Crestar Bank, in its capacity as Administrator, is obligated (i) to direct
the Indenture Trustee to make the required distributions from the Trust Accounts
on each Payment Date and Quarterly Payment Date, (ii) to prepare (based on the
reports received from the Master Servicer) and provide periodic and annual
statements to the Eligible Lender Trustee and the Indenture Trustee with respect
to distributions to Noteholders and Certificateholders and any related federal
income tax reporting information and (iii) to provide the notices and to perform
other administrative obligations required by the Indenture and the Trust
Agreement. The Administrator will be entitled to the Administration Fee as
compensation for the performance of its obligations and as reimbursement
for its expenses related thereto. Affiliates of the Administrator may assist
it in performing its obligations .
USE OF PROCEEDS
The net proceeds from the sale of the Notes will be used to acquire the initial
Financed Student Loans from the Depositor on the Closing Date, which will, in
turn, use such proceeds to make the initial Reserve Account deposit and to
acquire the initial Financed Student Loans from the Transferor. The Transferor
is expected to use such proceeds for general corporate purposes.
THE FINANCED STUDENT LOANS
The initial Financed Student Loans were, and the Subsequent Financed Student
Loans will be, selected from the Transferor's portfolio of FFELP Loans and HEAL
Loans by several criteria, including the following: each Financed Student Loan
(i) was or will be originated in the United States or its territories or
possessions under and in accordance with the FFEL Program or the HEAL Program,
as the case may be, to or on behalf of a student who has graduated or is
expected to graduate from an accredited institution of higher education within
the meaning of the Higher Education Act or the HEAL Act, (ii) contains terms in
accordance with those required by the FFEL Program, the Guarantee Agreements,
the HEAL Program, the HEAL Insurance Contract and other applicable requirements,
and (iii) is not more than 90 days past due as of the Cut-off Date or, in the
case of a Subsequent Financed Student Loan, as of the subsequent cut-off date
set forth in the related transfer agreement (each, a "Subsequent Cut-Off Date").
As of the Cut-off Date, $__________ in principal amount of the initial Financed
Student Loans were delinquent for up to 59 days and none of the initial Financed
Student Loans was delinquent for more than 59 days. For this purpose,
delinquency refers to the number of days for which a payment is past due.
Each Financed Student Loan is required (i) to be insured by the Department of
HHS as to principal and interest to the extent provided under the HEAL Act, or
(ii) to be guaranteed as to principal and interest by a Guarantee Agency and
reinsured by the Department of Education to the extent provided under the Higher
Education Act and eligible for Special Allowance Payments and, with respect to
each Financed Student Loan that is a Stafford Loan, Interest Subsidy Payments
paid by the Department of Education. See "Description of the FFEL Program" and
"Description of the HEAL Program" in the Prospectus.
Subsequent Financed Student Loans that may be so transferred by the Depositor
include (i) Consolidation Loans or HEAL Consolidation Loans made by the
Transferor, provided that in no event shall the aggregate amount of Subsequent
Financed Student Loans that are Consolidation Loans or HEAL Consolidation Loans
transferred into the Trust exceed $___________; and (ii) Serial Loans owned by
the Transferor that are serial (i.e., made to the same borrower under the same
loan program and guaranteed by the same Guarantee Agency or insured by the
Department of HHS) to an existing Financed Student Loan owned by the Trust,
provided that each such Subsequent Financed Student Loan entitles the holder
thereof to receive interest based on the same interest rate index as the
Financed Student Loan to which it is serial, and provided further, that in no
event shall the aggregate amount of Subsequent Financed Student Loans that are
Serial Loans transferred into the Trust exceed $_________.
Except as described above, there will be no required characteristics of the
Subsequent Financed Student Loans and no limitations on the amount of Subsequent
Financed Student Loans that may be included in the Trust. Therefore, following
the transfer of Subsequent Financed Student Loans to the Eligible Lender Trustee
on behalf of the Trust, the aggregate characteristics of the entire pool of
Financed Student Loans, including the composition of the Financed Student Loans
and of the borrowers thereof, the distribution by interest rate and the
distribution by principal balance described in the following tables, will vary
from those of the initial Financed Student Loans as described herein.
Each of the Financed Student Loans provides for the amortization of the
outstanding principal balance of such Financed Student Loan over a series of
regular payments. Each regular payment consists of an installment of interest
which is calculated on the basis of the outstanding principal balance of such
Financed Student Loan multiplied by the applicable interest rate and further
multiplied by the period elapsed (as a fraction of a calendar year) since the
preceding payment of interest was made. As payments are received in respect of
such Financed Student Loan, the amount received is applied first to outstanding
late fees, if collected, then to interest accrued to the date of payment and the
balance is applied to reduce the unpaid principal balance. Accordingly, if a
borrower pays a regular installment before its scheduled due date, the portion
of the payment allocable to interest for the period since the preceding payment
was made will be less than it would have been had the payment been made as
scheduled, and the portion of the payment applied to reduce the unpaid principal
balance will be correspondingly greater. Conversely, if a borrower pays a
monthly installment after its scheduled due date, the portion of the payment
allocable to interest for the period since the preceding payment was made will
be greater than it would have been had the payment been made as scheduled, and
the portion of the payment applied to reduce the unpaid principal balance will
be correspondingly less. In either case, subject to any applicable Deferment
Periods or Forbearance Periods, the borrower pays a regular installment until
the final scheduled payment date, at which time the amount of the final
installment is increased or decreased as necessary to repay the then outstanding
principal balance of such Financed Student Loan.
Set forth below in the following tables is a description of certain additional
characteristics of the initial Financed Student Loans as of the Cut- off Date.
Composition of the Initial Financed Student Loans as of the Cut-off Date
Aggregate Outstanding Principal Balance...................................... $
Aggregate Outstanding Accrued Interest.......................................
Number of Borrowers..........................................................
Average Outstanding Principal Balance Per Borrower...........................
Number of Loans..............................................................
Average Outstanding Principal Balance Per Loan...............................
Weighted Average Annual Borrower Interest Rate...............................
Weighted Average Remaining Term (months) (does not include the months
remaining for the in-school, Grace, Deferment or Forbearance periods).....
Weighted Average Remaining Term (months) (including the months remaining for
the in-school, Grace, Deferment or Forbearance periods)...................
Distribution of the Initial Financed Student Loans
by Loan Type as of the Cut-off Date
Percent of
Loans by
Outstanding Outstanding
Number of Principal Principal
Loan Type Loans Balance Balance
Stafford-Subsidized.....................................
Stafford-Unsubsidized...................................
Consolidation...........................................
PLUS....................................................
SLS.....................................................
HEAL....................................................
Total.............................................
Distribution of the Initial Financed Student Loans by Borrower
Interest Rate as of the Cut- off Date
Percent of
Loans by
Outstanding Outstanding
Number of Principal Principal
Interest Rate (1) Loans Balance Balance
Less than 7.50%.........................................
7.50% to 7.99%..........................................
8.00% to 8.49%..........................................
8.50% to 8.99%..........................................
9.00% to 9.49%..........................................
9.50% or greater........................................
Total.............................................
- ---------------------------
(1) Determined using the interest rates applicable to the initial Financed
Student Loans as of the Cut-off Date. However, because certain of the Initial
Financed Student Loans bear interest at variable rates per annum, the existing
interest rates are not indicative of future interest rates on the Financed
Student Loans. See "Description of the FFEL Program" and "Description of the
HEAL Program" in the Prospectus.
Distribution of the Initial Financed Student Loans by Range
of Outstanding Principal Balances as of the Cut-off Date
Percent of
Loans by
Outstanding Outstanding
Number of Principal Principal
Principal Balance Loans Balance Balance
Less than $1,000........................................
$1,000-$1,999...........................................
$2,000-$2,999...........................................
$3,000-$3,999...........................................
$4,000-$4,999...........................................
$5,000-$5,999...........................................
$6,000-$6,999...........................................
$7,000-$7,999...........................................
$8,000-$8,999...........................................
$9,000-$9,999...........................................
$10,000-$10,999.........................................
$11,000-$11,999.........................................
$12,000-$12,999.........................................
$13,000-$13,999.........................................
$14,000-$14,999.........................................
$15,000 or greater......................................
Total.............................................
Distribution of the Initial Financed Student Loans
by Borrower Payment Status as of the Cut-off Date
Percent of
Loans by
Outstanding Outstanding
Number of Principal Principal
Borrower Payment Status Loans Balance Balance
In School...............................................
Grace...................................................
Repayment...............................................
Deferment...............................................
Forbearance.............................................
Total.............................................
Distribution of the Initial Financed Student Loans by
Remaining Term to Scheduled Maturity as of the Cut-off Date
Percent of
Loans by
Remaining Months Outstanding Outstanding
Until Scheduled Number of Principal Principal
Maturity Loans Balance Balance
1 to 12
13 to 24
25 to 36
37 to 48
49 to 60
61 to 72
73 to 84
85 to 96
97 to 108
109 to 120
121 to 180
181 to 240
241 to 300
Over 300
Total.........................
Geographic Distribution of the Initial
Financed Student Loans as of the Cut-off Date
Percent of
Loans by
Outstanding Outstanding
Number of Principal Principal
Location (1) Loans Balance Balance
[Virginia...............................................
Pennsylvania............................................
Maryland................................................
New York................................................
North Carolina].........................................
Others(2)...............................................
Total...........................................
- ---------------------------
(1) Based on the current permanent billing addresses of the borrowers of the
initial Financed Student Loans shown on the Servicer's records.
(2) Consist of locations that include [__] other states, U.S. territories,
possessions and commonwealths, foreign countries, overseas military
establishments, and unknown locations, none of the aggregate principal balance
of the Financed Student Loans relating to which exceeds ___% of the Initial Pool
Balance.
To the extent that states with a large concentration of Financed Student Loans
experience adverse economic or other conditions to a greater degree than other
areas of the country, the ability of such borrowers to repay their Financed
Student Loans may be impacted to a larger extent than if such borrowers were
dispersed more geographically.
Distribution of the Initial Financed Student Loans
by Insurance or Guarantee Level as of the Cut-off Date
Percent of
Loans by
Outstanding Outstanding
Number of Principal Principal
Guaranteed or Insurance Level Loans Balance Balance
FFELP Loan Guaranteed 100%..............................
FFELP Loan Guaranteed 98%...............................
HEAL Loan Insured 100%..................................
Total...........................................
Distribution of the Initial Financed Student Loans
by Guarantee Agency or by HEAL as of the Cut- off Date
Percent of
Loans by
Outstanding Outstanding
Number of Principal Principal
Guarantee Agency Loans Balance Balance
_______________________ Corporation.....................
_______________________ Agency..........................
HEAL Loans..............................................
Other Guarantors........................................
Total.............................................
Distribution of the Initial Financed Student Loans
by School Types as of the Cut- off Date
Percent of
Loans by
Outstanding Outstanding
Number of Principal Principal
School Type Loans Balance Balance
4 Year Public
4 Year Private
2 Year Public
2 Year Private
Proprietary/Vocational
Other/Unknown
Total..................................
.........Incentive Programs
The Transferor currently makes available and may hereafter make available
certain incentive programs to borrowers, including the Crestar Bank Top
Performer Program (the "TP Program"). The TP Program generally applies to all
Stafford Loans, Unsubsidized Stafford Loans and PLUS Loans with a first
disbursement made by the Transferor on or after November 1, 1996 ("TP Loans").
Under the TP Program, if the borrower makes 36 consecutive monthly payments of a
TP Loan on time, the applicable interest rate on such TP Loan is reduced by 1.0%
per annum for Stafford Loans and Unsubsidized Stafford Loans and 0.5% per annum
for PLUS Loans. Although less than [ ]% of the initial Financed Student Loans
are TP Loans, additional TP Loans may be included in the Subsequent Financed
Student Loans.
MATURITY AND PREPAYMENT CONSIDERATIONS
Maturity and Prepayment Assumptions
The rate of payment of principal of the Notes and the yield on the Notes will be
affected by (i) prepayments of the Financed Student Loans that may occur as
described below, (ii) the sale by the Trust of Financed Student Loans and (iii)
Parity Percentage Payments. All the Financed Student Loans are prepayable in
whole or in part by the borrowers at any time without penalty (including by
means of Consolidation Loans or HEAL Consolidation Loans) and may be prepaid as
a result of a borrower default, death, disability or bankruptcy and subsequent
liquidation or collection of Guarantee Payments or Insurance Payments with
respect thereto. The rate of such prepayments cannot be predicted and may be
influenced by a variety of economic, social and other factors, including those
described below. In general, the rate of prepayments may tend to increase to the
extent that alternative financing becomes available at prevailing interest rates
which fall significantly below the interest rates applicable to the Financed
Student Loans. However, because many of the Financed Student Loans bear interest
at a rate that either actually or effectively is floating, it is impossible to
determine whether changes in prevailing interest rates will be similar to or
vary from changes in the interest rates on the Financed Student Loans. To the
extent borrowers of Financed Student Loans elect to borrow Consolidation Loans
or HEAL Consolidation Loans, such Financed Student Loans will be prepaid. See
"Description of the FFEL Program - Loan Terms - Consolidation Loans" and
"Description of the HEAL Program - Consolidation of HEAL Loans" in the
Prospectus. In addition, the Depositor (and ultimately the Transferor) and
Master Servicer are obligated to repurchase any Financed Student Loan pursuant
to the Transfer and Servicing Agreement as a result of a breach of any of their
respective representations and warranties with respect to such Financed Student
Loan, which breach results in a loss of the guarantee or insurance with respect
to such Financed Student Loan and is not cured within the applicable cure
period. See "Description of the Agreements - Transfer and Servicing Agreement
Conveyance of Financed Student Loans; Representations and Warranties" and "-
Master Servicer Covenants" in the Prospectus. See also "Description of the Notes
- - Termination" in this Prospectus Supplement regarding the Transferor's option
to purchase the Financed Student Loans when the aggregate Pool Balance is less
than or equal to __% of the Initial Pool Balance and the auction by the
Indenture Trustee of any Financed Student Loans remaining in the Trust on or
after _________ __, 20__.
Scheduled payments with respect to, and maturities of, the Financed Student
Loans may be extended, including pursuant to Grace Periods, Deferment Periods
and, under certain circumstances, Forbearance Periods. The rate of payment of
principal of the Notes and the yield on the Notes may also be affected by the
rate of defaults resulting in losses on Financed Student Loans, by the severity
of those losses and by the timing of those losses, which may affect the ability
of the Guarantee Agencies to make Guarantee Payments with respect thereto.
The rate of prepayment on the Financed Student Loans cannot be predicted, and
any reinvestment risks resulting from a faster or slower incidence of prepayment
of Financed Student Loans or a faster or slower incidence of sales by the Trust
will be borne entirely by the Noteholders. Such reinvestment risks may include
the risk that interest rates and the relevant spreads above particular interest
rate bases are lower at the time Noteholders receive payments from the Trust
than such interest rates and such spreads would otherwise have been had such
prepayments not been made or had such prepayments been made at a different time.
Weighted Average Life of the Notes
The following information is given solely to illustrate the effect of
prepayments on the Financed Student Loans on the weighted average life of the
Notes under the assumptions stated below and is not a prediction of the
prepayment rate that might actually be experienced by the Financed Student Loans
held in the Trust.
Weighted average life refers to the average amount of time from the date of
issuance of a security until each dollar of principal of such security will be
repaid to the investor. The weighted average life of the Notes will be primarily
a function of the rate at which payments are made on the Financed Student Loans
held in the Trust. Payments on such Financed Student Loans may be in the form of
scheduled amortization of principal or prepayments (including, without
limitation, Guarantee Payments and Insurance Payments).
The Constant Prepayment Rate prepayment model ("CPR") represents an assumed
constant rate of prepayment of Financed Student Loans held in the Trust
outstanding as of the beginning of each quarter expressed as a per annum
percentage. There can be no assurance that such Financed Student Loans will
experience prepayments at a constant prepayment rate or otherwise in the manner
assumed by the prepayment model.
The weighted average lives in the following table were determined assuming that
(i) scheduled payments of principal on the Financed Student Loans are received
in a timely manner and prepayments are made at the percentages of the prepayment
model set forth in the table; (ii) the initial principal balance of the Financed
Student Loans is $__________ and such Financed Student Loans have the
characteristics described under "The Financed Student Loans;" (iii) payments are
made on the Notes on the 25th day of each month commencing _____________; (iv)
the Financed Student Loans are auctioned on the _________ Payment Date; and (v)
the Notes are issued on the Closing Date. No representation is made that these
assumptions will be correct, including the assumption that the Financed Student
Loans held in the Trust will not experience delinquencies or unanticipated
losses.
In making an investment decision with respect to the Notes, investors should
consider a variety of possible prepayment scenarios, including the limited
scenarios described in the table below.
Weighted Average Life of the Notes at the Respective CPRs Set Forth Below:
Weighted Average Life (years)
0% CPR 3% CPR 5% CPR 7% CPR 9% CPR 15% CPR
------ ------ ------ ------ ------ -------
Class A Notes............
Class B Notes............
THE SERVICERS
General
Crestar Bank will act as Master Servicer with respect to the Financed Student
Loans. __________, __________ and __________ each service more than 10% of the
initial Financed Student Loans . The Financed Student Loans may be serviced by
such other parties as may be approved by the Master Servicer from time to
time (subject to the approval of the Rating Agencies). Pursuant to a servicing
agreement, each servicer has agreed to service, and perform all other related
tasks with respect to, the Financed Student Loans in compliance with applicable
standards and procedures. See "Description of the Agreements - Transfer and
Servicing Agreements" in the Prospectus.
[Name of Servicer]
[Description of Servicer to be inserted]
Servicing Compensation
The Master Servicer will be entitled to receive on each Quarterly Payment Date a
fee (the "Servicing Fee") with respect to each quarter in an amount equal to (i)
___% per annum of the average of the Pool Balance as of the last day of the
Collection Period preceding such Quarterly Payment Date and the last day of the
Collection Period preceding the preceding Quarterly Payment Date (or the Cut-off
Date with respect to the first quarter), or (ii) such greater amount acceptable
to the Rating Agencies. The Servicing Fee will be payable in arrears, from
Available Funds and amounts on deposit in the Reserve Account on each Quarterly
Payment Date.
The Servicing Fee will compensate the Master Servicer and each other Servicer
for performing the functions of a third party servicer of student loans as an
agent for their beneficial owner, including collecting and posting all payments,
responding to inquiries of borrowers on the Financed Student Loans,
investigating delinquencies, pursuing, filing and collecting any Guarantee
Payments and Insurance Payments, including litigation costs, accounting for
collections and furnishing monthly and annual statements to the Administrator.
The Servicing Fee also will reimburse the Master Servicer for certain taxes,
accounting fees, outside auditor fees, data processing costs and other costs
incurred in connection with administering the Financed Student Loans.
THE GUARANTEE AGENCIES
General
Of the Financed Student Loans included in the Initial Pool Balance,
approximately [ ]% are guaranteed by [ ], a non-profit corporation ("[ ]"),
approximately [ ]% are guaranteed by [ ], an agency of [ ] ("[ ]"),
approximately [ ]% are HEAL Loans, and the remaining [ ]% are guaranteed by one
of the following Guarantee Agencies: [ ] and [ ].
Information relating to the particular Guarantee Agencies set forth in this
Prospectus Supplement has been provided by the respective Guarantee Agencies,
and neither such information nor information included in the reports referred to
herein has been verified by, or is guaranteed as to accuracy or completeness by,
the Depositor, the Transferor or the Underwriters. No representation is made by
the Depositor, the Transferor or the Underwriters as to the accuracy or adequacy
of such information or the absence of material adverse changes in such
information subsequent to the dates thereof.
[Name of Guarantee Agency]
[Description of Guarantee Agency to be inserted]
DESCRIPTION OF THE NOTES
General
The Notes will be available for purchase in denominations of [$50,000] and
integral multiples of [$1,000] in excess thereof in book-entry form only. The
Notes will initially be represented by one or more Notes registered in the name
of the nominee of DTC (together with any successor depository selected by the
Administrator, the "Depository"). Unless and until Definitive Notes are issued
under the limited circumstances described under "Description of the Notes -
Definitive Notes" in the Prospectus, no Noteholder will be entitled to receive a
physical certificate representing a Note. All references herein to actions by
Noteholders refer to actions taken by DTC upon instructions from its
participating organizations (the "Participants") and all references herein to
distributions, notices, reports and statements to Noteholders refer to
distributions, notices, reports and statements to DTC or its nominee, as the
registered holder of the Notes, for distribution to Noteholders in accordance
with DTC's procedures with respect thereto. See "Description of the Notes -
Book-Entry Registration" in the Prospectus.
Interest
Interest will accrue during each Interest Accrual Period on the principal
balance of each Class of Notes at a rate per annum equal to the related Class
Interest Rate and will be payable (i) monthly on each Payment Date to the Class
A Noteholders as of the related Record Date, and (ii) quarterly on each
Quarterly Payment Date to the Class B Noteholders as of the related Record Date.
The Record Date for each Class of Notes is the second Business Day preceding a
Payment Date. Any interest not paid when due shall be payable on the succeeding
Payment Date, together with interest thereon at the applicable Class Interest
Rate. Interest will be paid pro rata to the holders of each such Class of Notes
outstanding.
An Interest Accrual Period for the Class A Notes with respect to any Payment
Date begins on the preceding Payment Date and ends on the day preceding such
Payment Date, except the first Interest Accrual Period will begin on the Closing
Date.
An Interest Accrual Period for the Class B Notes with respect to any Quarterly
Payment Date corresponds to the three preceding Class A Interest Accrual Periods
for so long as the Class A Notes are outstanding. Thereafter, an Interest
Accrual Period begins on the 25th day of each month, except for the months in
which a Quarterly Payment Date occurs, in which event it begins on such
Quarterly Payment Date, and ends on the day prior to the succeeding Interest
Accrual Period.
An Interest Determination Date with respect to an Interest Accrual Period is the
second London, New York and Richmond Business Day prior to the first day of such
Interest Accrual Period.
The Class Interest Rate for each Class of Notes for each Interest Accrual Period
will equal the Formula Rate, subject to a cap of the Net Loan Rate for such
Interest Accrual Period to the extent it needs to be determined. The Formula
Rate for each Interest Accrual Period for the Class A Notes will equal One-Month
LIBOR as of the Interest Determination Date for such Interest Period plus [ ]%,
but in no event greater than [18.0]% per annum. The Formula Rate for each
Interest Accrual Period for the Class B Notes will equal One-Month LIBOR as of
the Interest Determination Date plus [__]%, but in no event greater than [18.0]%
per annum. See "Description of the Notes - Determination of LIBOR" in the
Prospectus. Interest on each Class of Notes will be calculated on the basis of
the actual number of days elapsed in each Interest Accrual Period divided by
360.
If, as of any Interest Determination Date, One-Month LIBOR as of the
preceding Interest Determination Date (or, in the case of the initial Interest
Determination Date, the Closing Date) exceeds by more than 100 basis points the
average of the bond equivalent rates of the 91-day Treasury bills
auctioned to the preceding Interest Determination Date during the calendar
quarter in which such preceding Interest Determination Date occurs (or in the
case of the initial Interest Determination Date, the Closing Date), the
Administrator will be required to determine the Net Loan Rate that will be
applicable to the succeeding Interest Accrual Period. The Net Loan Rate for any
Interest Accrual Period will be the rate per annum (rounded to the next highest
.01%) equal to (i) the weighted average Effective Interest Rate of the Financed
Student Loans as of the last day of the Collection Period immediately preceding
the commencement of such Interest Accrual Period, less (ii) the Program
Operating Expense Percentage. The "Effective Interest Rate" is the per annum
interest rate borne by a Financed Student Loan after giving effect to all
applicable Interest Subsidy Payments, Special Allowance Payments, rebate fees on
Consolidation Loans and reductions pursuant to borrower incentives. For this
purpose, the Special Allowance Payment rate will be computed based upon the
average of the bond equivalent rates of 91-day Treasury bills auctioned
during that portion of the then current calendar quarter that ends on the date
as of which the Effective Interest Rate is determined.
The "Program Operating Expense Percentage" is the fraction (expressed as a
percentage and calculated by the Administrator as of the end of a Collection
Period preceding a Quarterly Payment Date), the numerator of which is the
annualized operating expenses of the Trust for the calendar month then ended,
including, without limitation, the Transaction Fees, and the denominator of
which is the Pool Balance as of the last day of such Collection Period. The
initial Program Operating Expense Percentage is _____%.
If interest at the Formula Rate for any Class of Notes for any Interest Accrual
Period exceeds interest at the Net Loan Rate, the excess interest, together with
interest thereon at the applicable Formula Interest Rate ("Carryover Interest")
will be paid on the subsequent Payment Dates or Quarterly Payment Dates only to
the extent funds are available after other required payments on the Notes, and
may never be paid. See"- Priority of Payments" in this Prospectus Supplement.
Any Carryover Interest with respect to a Class of Notes remaining unpaid after
the earlier of the Distribution Date on which the outstanding principal amount
of such Class of Notes has been reduced to zero and the distribution of all
Available Funds on the Legal Final Maturity of such Class of Notes, will never
become due and payable and will be discharged as to the applicable Class of
Notes on such date. The ratings of the Notes do not address the likelihood of
payment of Carryover Interest. Any reference herein to "interest" excludes
Carryover Interest.
Principal
Payments of principal on the Notes will not commence until __________, 19__. No
principal will be paid on the Class B Notes until the Class A Notes have been
paid in full. Principal of the Class A Notes will be payable monthly on each
Payment Date, commencing [ ], 1998, and, following payment in full of the Class
A Notes, principal on the Class B Notes will be payable quarterly on each
Quarterly Payment Date.
The Principal Payment Amount payable monthly on the Class A Notes is equal to
the decline in the Pool Balance between the end of the second Collection Period
preceding a Payment Date and the end of the immediately preceding
Collection Period. The Principal Payment Amount payable quarterly on the Class B
Notes after the Class A Notes have been paid in full is equal to the decline in
the Pool Balance between the end of the fourth Collection Period preceding a
Quarterly Payment Date and the end of the immediately preceding Collection
Period (reduced with respect to the first Quarterly Payment Date on which
principal is to be paid on the Class B Notes, by the Principal Payment Amount on
the Class A Notes on such Quarterly Payment Date and on the two preceding
Payment Dates). In addition, accelerated Parity Payments will be payable on each
Quarterly Payment Date (to the class of Notes then receiving principal payments)
until the Parity Percentage equals ___%.
A "Collection Period" is each calendar month, except that the first Collection
Period begins on the Cut-off Date and ends on the last day of the month
preceding the month in which the first Payment Date occurs.
The "Pool Balance" as of the end of a Collection Period is equal to the
aggregate principal balance of the Financed Student Loans (including accrued
interest that is capitalized as of the end of the Collection Period), after
giving effect to all payments in respect of principal received by the Trust
during such Collection Period.
The Parity Percentage for any Payment Date or Quarterly Payment Date is
determined by dividing (i) the Pool Balance as of the end of the preceding
Collection Period, plus accrued interest thereon, accrued Special Allowance
Payments and Interest Subsidy Payments as of the end of such Collection Period
and all amounts (including accrued interest thereon) in the Collection Account
and Reserve Account as of the end of the Collection Period (adjusted for
payments made on such Payment Date or Quarterly Payment Date), by (ii) the sum
of the principal balance of the Notes (after payments thereon on such Payment
Date or Quarterly Payment Date), accrued interest thereon, and accrued and
unpaid Transaction Fees and Consolidation Loan Fees.
The Legal Final Maturity will be _________ on the Class A Notes, and ________ on
the Class B Notes. The actual maturity of one or more Classes of Notes could
occur sooner as a result of a variety of factors. See "Maturity and Prepayment
Considerations" in the Prospectus and this Prospectus Supplement.
If Available Funds are insufficient to pay the Principal Amount for a Payment
Date or a Quarterly Payment Date, such shortfall will be added to the principal
payable to the Noteholders on subsequent Payment Dates or Quarterly Payment
Dates and (except with respect to the Legal Final Maturity of a Class of Notes)
such shortfall will not constitute an Event of Default. Additionally, on the
Legal Final Maturity for a Class of Notes, amounts in the Reserve Account will
be available to reduce the principal balance of such Class of Notes to zero. See
"- Priority of Payments" in this Prospectus Supplement.
All principal payments of Notes of any Class shall be made pro rata within that
Class. In connection with each principal payment of Notes of any Class, the
Administrator shall compute the Principal Factor for that Class. The "Principal
Factor" shall be a number, carried to a seven-digit decimal, indicating the
principal balance of each Note of a Class as of a Payment Date (after giving
effect to any payments made on that date) as a fraction of the original
principal amount of such Note. The Principal Factor for each Class of Notes
shall be initially 1.0000000 and will thereafter decline to reflect the
reduction in the principal balance of the Notes of that Class after any payment
of principal. The principal balance of any Note can be determined by multiplying
the original principal amount of such Note by the Principal Factor applicable to
that Class of Notes.
Priority of Payments
Deposits to Collection Account. On or before each Payment Determination Date,
the Administrator will provide the Indenture Trustee and the Eligible Lender
Trustee a report setting forth by component the Available Funds for the
immediately preceding Collection Period (or the three preceding Collection
Periods if the Class A Notes are no longer outstanding).
For purposes hereof, the term "Available Funds" means the sum, without
duplication, of the following amounts with respect to the related Collection
Period: (i) all collections received by the Master Servicer or any Servicer on
the Financed Student Loans (including any Guarantee Payments and Insurance
Payments received with respect to the Financed Student Loans during such
Collection Period); (ii) any payments, including without limitation, Interest
Subsidy Payments and Special Allowance Payments received by the Eligible Lender
Trustee during such Collection Period with respect to the Financed Student
Loans; (iii) all proceeds from any sales of Financed Student Loans by the Trust
during such Collection Period; (iv) any payments of or with respect to interest
received by the Master Servicer or a Servicer during such Collection Period with
respect to a Financed Student Loan for which a Realized Loss was previously
allocated; (v) the aggregate Purchase Amounts received for those Financed
Student Loans purchased by the Transferor or the Master Servicer during the
related Collection Period; (vi) the aggregate amounts, if any, received from the
Depositor or the Master Servicer as reimbursement of non-guaranteed or uninsured
interest amounts (which shall not include, with respect to Financed FFELP Loans,
the portion of such interest amounts (i.e., 2%) for which the Guarantee Agency
did not have an obligation to make a Guarantee Payment), or lost Interest
Subsidy Payments and Special Allowance Payments with respect to the Financed
Student Loans pursuant to the Transfer and Servicing Agreement; (vii) net
Adjustment Payments; and (viii) investment earnings during such Collection
Period; provided, however, that Available Funds will exclude all payments and
proceeds of any Financed Student Loans the Purchase Amount of which has been
included in Available Funds for a prior Collection Period (which payments and
proceeds shall be paid to the Transferor), and amounts used to reimburse the
Master Servicer for Advances pursuant to the terms of the Transfer and Servicing
Agreement.
Distributions from Collection Account. On each Payment Determination Date, the
Administrator will advise the Indenture Trustee and the Eligible Lender Trustee
in writing of the applicable Class Interest Amount and Principal Payment Amount
with respect to each Class of Notes . Further, on each Payment Determination
Date relating to a Quarterly Payment Date, the Administrator will advise the
Indenture Trustee in writing of the Transaction Fees payable with respect to the
preceding quarter.
On each Payment Date or Quarterly Payment Date (and with respect to clause
(i)(A) below on each Payment Date while the Class A Notes are outstanding, and
thereafter, on the 25th day of each month, or if such day is not a Business
Day, the next succeeding Business Day), the Indenture Trustee will transfer from
the Collection Account the following amounts in the following priority, subject
to Available Funds for the immediately preceding Collection Period or three
Collection Periods, as applicable:
(i) to the Expense Account (A) an amount equal to accrued and
unpaid Consolidation Loan Fees as of the end of the
immediately preceding Collection Period, and (B) an amount
equal to accrued and unpaid Transaction Fees payable on a
Quarterly Payment Date;
(ii) to the Note Payment Account, an amount equal to the Class
Interest Amount for each Class of Notes due on such Payment
Date or Quarterly Payment Date;
(iii) to the Note Payment Account, an amount equal to the Principal
Payment Amount due on such Payment Date or Quarterly Payment
Date (and any overdue Principal Payment Amount).
On each Quarterly Payment Date (and with respect to clause (i) below on each
Payment Date while the Class A Notes are outstanding, and thereafter, on the
25th day of each month, or if such day is not a Business Day, the next
succeeding Business Day) following the transfer to the Expense Account described
in the preceding paragraph, the Indenture Trustee will distribute from the
Expense Account (in addition to any amounts transferred from the Reserve Account
as described herein) the following amounts in the following order of priority:
(i) to the Department of Education, the Consolidation Loan Fees
for the immediately preceding Collection Period together with
any overdue Consolidation Loan Fees for any prior Collection
Periods;
(ii) to the Master Servicer, the Servicing Fee for the preceding quarter and all
overdue Servicing Fees;
(iii) to the Administrator, the Administration Fee for the preceding
quarter and all overdue Administration Fees;
(iv) to the Indenture Trustee, the Indenture Trustee Fee for the
preceding quarter and all overdue Indenture Trustee Fees; and
(v) to the Eligible Lender Trustee and the Delaware Trustee, the
Eligible Lender Trustee Fee and the Delaware Trustee Fee,
respectively, for the preceding quarter and all overdue
Eligible Lender Trustee Fees and Delaware Trustee Fees.
On each Payment Date or Quarterly Payment Date, following the transfers to the
Note Payment Account described above, the Indenture Trustee will distribute to
the Noteholders as of the related Record Date the amounts transferred to the
Note Payment Account, together with any amounts transferred from the Reserve
Account and the Advance Account, in the following order of priority:
(i)
(i) first, to the Class A Noteholders, the Class Interest Amount;
(ii) second, if such Payment Date is a Quarterly Payment Date, to
the Class B Noteholders, the Class Interest Amount;
(iii) third, to the Class A Noteholders, the Principal Payment
Amount (and any overdue Principal Payment Amount) until the
outstanding amount of the Class A Notes has been reduced to
zero; and
(iv) fourth, after the principal balance of the Class A Notes has
been reduced to zero, if such Payment Date is a Quarterly
Payment Date, to the Class B Noteholders, the remaining
Principal Payment Amount (and any overdue Principal Payment
Amount) until the principal balance of the Class B Notes has
been reduced to zero.
On each Quarterly Payment Date, after making all required transfers to the
Expense Account, the Note Payment Account and, if applicable, the Certificate
Distribution Account, the Indenture Trustee will transfer any remaining
Available Funds for the preceding three Collection Periods (and with respect to
clause (ii) below, any amounts in the Reserve Account in excess of the Specified
Reserve Account Balance) in the following order of priority:
(i) to the Reserve Account, the amount, if any, necessary to
increase the balance thereof to the Specified Reserve Account
Balance;
(ii) to the Note Payment Account (for payment on such Quarterly
Payment Date to the Class A Noteholders, and upon payment in
full thereof, to the Class B Noteholders), Parity Payments to
the extent then required; and
(iii) to the Note Payment Account (for payment on such Quarterly
Payment Date to the Class A Noteholders, and upon payment
of all Carryover Interest due to the Class A Noteholders, to
the Class B Noteholders), the amount of any Carryover
Interest.
Any remaining Available Funds on a Quarterly Payment Date (other than amounts
representing payments received during such month) will be distributed to the
Certificateholders, and will not thereafter be available to make payments on
the Notes or Certificates.
Notwithstanding the foregoing, if on any Payment Date following all
distributions to be made on such Payment Date, the principal amount of the Class
A Notes would exceed the sum of the Pool Balance at the end of the immediately
preceding Collection Period plus the aggregate balance on deposit in the Trust
Accounts on such Payment Date following such distributions, or if a payment
Event of Default has occurred with respect to the Notes, interest will not be
paid on the Class B Notes until after payment of the Principal Payment Amount to
the Class A Noteholders.
Realized Losses. The Reserve Account is intended, among other things, to cover
Realized Losses on the Financed Student Loans that may occur from time to time.
See "Description of the Agreements - Transfer and Servicing Agreements -
Realized Losses" in the Prospectus.
Advances
If the Master Servicer has applied for an Insurance Payment from the Department
of HHS, a Guarantee Payment from a Guarantee Agency or an Interest Subsidy
Payment or a Special Allowance Payment from the Department of Education, and the
Master Servicer has not received the related payment prior to the end of the
Collection Period immediately preceding the Payment Date on which such amount
would be required to be distributed as a payment of interest, the Master
Servicer may, no later than the Payment Determination Date relating to such
Payment Date, deposit into the Advance Account an amount up to the amount of
such payments applied for but not received (such deposits by the Master Servicer
are referred to herein as "Advances"). On each related Payment Date, the
Indenture Trustee will distribute from the Advance Account to the Noteholders
the Advance for such Payment Date. Such Advances are recoverable by the Master
Servicer (i) first, from the source for which such Advance was made and (ii)
second, from payments received generally on or with respect to the Financed
Student Loans. The Master Servicer will have no obligation, legal or otherwise,
to make any Advance, and a determination by the Master Servicer to make an
Advance will not create any obligation of the Master Servicer, legal or
otherwise, to make any future Advances.
Reserve Account
On the Closing Date, the Depositor will deposit $_________ in cash or Eligible
Investments in the Reserve Account. The Reserve Account will be augmented on
each Quarterly Payment Date by deposit therein of the amount, if any, necessary
to attain or reinstate the balance of the Reserve Account to the Specified
Reserve Account Balance from the amount of Available Funds remaining after
making all prior distributions on such date as described above under "- Priority
of Payments." Also, if amounts were transferred from the Reserve Account to
cover a Realized Loss on a Financed Student Loan, any subsequent payments of
principal received on or with respect to such Financed Student Loan will be
deposited into the Reserve Account.
If on any Quarterly Payment Date (after giving effect to all deposits or
withdrawals therefrom on such Payment Date) the amount of the Reserve Account is
greater than the Specified Reserve Account Balance, the Administrator will,
subject to certain limitations, instruct the Indenture Trustee to distribute the
amount of the excess, after payment of any Parity Payments and Carryover
Interest then due, to the Depositor. Upon any distribution to the Depositor of
amounts from the Reserve Account, the Noteholders will not have any rights in,
or claims to, such amounts.
The Reserve Account is intended to enhance the likelihood of timely receipt by
the Noteholders of the full amount of interest due them, the ultimate receipt by
the Noteholders of the full amount of principal and to decrease the likelihood
that the Noteholders will experience losses. In certain circumstances, however,
the Reserve Account could be depleted. If the amount required to be withdrawn
from the Reserve Account to cover shortfalls in the amount of Available Funds
exceeds the amount of cash in the Reserve Account, a temporary shortfall in the
amount of principal and interest distributed to the Noteholders could result.
This could, in turn, increase the average life of the Notes. Moreover, amounts
on deposit in the Reserve Account (other than amounts in excess of the Specified
Reserve Account Balance) will not be available to cover any aggregate unpaid
Carryover Interest.
Subordination of the Class B Notes
The rights of the holders of the Class B Notes to receive principal and interest
payments will be subordinated to such rights of the holders of the Class A Notes
to the extent described herein. This subordination is intended to enhance the
likelihood of regular receipt of the Class Interest Rate and Principal Payment
Amount by the Class A Noteholders. See "- Priority of Payments" in this
Prospectus Supplement.
Termination
Optional Purchase. The obligations of the Master Servicer, the Transferor, the
Depositor, the Administrator, the Eligible Lender Trustee and the Indenture
Trustee pursuant to the Transfer and Servicing Agreements will terminate upon
(i) the maturity or other liquidation of the last Financed Student Loan and the
disposition of any amount received upon liquidation of any remaining Financed
Student Loans and (ii) the payment to the Noteholders and the Certificateholders
of all amounts required to be paid to them pursuant to the Transfer and
Servicing Agreements. To avoid excessive administrative expense, the Master
Servicer is permitted, at its option, to purchase from the Eligible Lender
Trustee, as of the end of any Collection Period immediately preceding a
Quarterly Payment Date, if the then outstanding Pool Balance is ___% or less of
the Initial Pool Balance, all remaining Financed Student Loans at a price equal
to the aggregate Purchase Amounts thereof as of the end of such Collection
Period, but not less than an amount necessary to pay transaction costs and all
amounts due the Noteholders (other than Carryover Interest). Upon payment and
redemption of the Notes and Certificates and the attendant termination of the
Trust, all remaining assets of the Trust will be conveyed and transferred to the
Depositor.
Auction Purchase. Any Financed Student Loans remaining in the Trust as of [ ]
will be offered for sale by the Indenture Trustee. The Transferor, its
affiliates and unrelated third parties may offer bids to purchase such Financed
Student Loans on or prior to such Payment Date. If at least two bids are
received, the Indenture Trustee will accept the highest bid if it will pay
transaction costs and all amounts due the Noteholders (other than Carryover
Interest). If at least two bids are not received or the bid proceeds are not
sufficient to pay transaction costs and the Notes, the Indenture Trustee will
not consummate such sale. The proceeds of any such sale will be used to redeem
any outstanding Notes on such Payment Date, after which time the Trust shall be
terminated. If the sale is not consummated in accordance with the foregoing, the
Indenture Trustee may, but shall not be under any obligation to, solicit bids to
purchase the Financed Student Loans on future Payment Dates upon terms similar
to those described above. No assurance can be given as to whether the Indenture
Trustee will be successful in soliciting acceptable bids to purchase the
Financed Student Loans.
UNDERWRITING
Subject to the terms and conditions set forth in an Underwriting Agreement dated
__________ __, 1998 (the "Underwriting Agreement"), among the Depositor, the
Transferor, Salomon Brothers Inc and Crestar Securities Corporation
(collectively, the "Underwriters"), the Depositor has agreed to sell to the
Underwriters, and each Underwriter has severally agreed to purchase from the
Depositor, the principal balance of each Class of Notes set forth below its name
on the following chart:
Class of Notes Salomon Brothers Inc Crestar Securities Corporation
Class A Notes.............................
Class B Notes.............................
Total............................
In the Underwriting Agreement, the Underwriters have severally agreed, subject
to the terms and conditions set forth therein, to purchase all of the Notes
offered hereby, if any Notes are purchased. In the event of a default by any
Underwriter, the Underwriting Agreement provides that, in certain circumstances,
purchase commitments of the non-defaulting Underwriter may be increased or
purchase commitments of all Underwriters may be terminated. The Depositor has
been advised by the Underwriters that the Underwriters propose initially to
offer the Notes to the public at the public offering price with respect to each
Class set forth on the cover page of this Prospectus. After the initial public
offering, the public offering price may be changed.
The Underwriting Agreement provides that the Depositor and the Transferor will
indemnify the Underwriters against certain liabilities, including liabilities
under applicable securities laws, or contribute to payments the Underwriters may
be required to make in respect thereof.
After the initial distribution of the Notes by the Underwriters, the Prospectus
and Prospectus Supplement may be used by Crestar Securities Corporation, an
affiliate of the Transferor and Depositor, in connection with offers and sales
relating to market making transactions in the Notes. Crestar Securities
Corporation may act as principal or agent in such transactions. Such sales will
be made at prices related to prevailing market prices at the time of sale.
The Underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under the Exchange Act. Over-allotment involves syndicate sales in excess of the
offering size, which creates a syndicate short position. Stabilizing
transactions permit bids to purchase the underlying security so long as the
stabilizing bids do not exceed a specific maximum. Syndicate covering
transactions involve purchases of the Notes in the open market after the
distribution has been completed in order to cover syndicate short positions.
Penalty bids permit the Underwriters to reclaim a selling concession from a
syndicate member when the Notes originally sold by such syndicate member are
purchased in a syndicate covering transaction to cover syndicate short
positions. Such stabilizing transactions, syndicate covering transactions and
penalty bids may cause the price of the Notes to be higher than it would
otherwise be in the absence of such transactions.
Crestar Securities Corporation is an affiliate of the Transferor and Depositor,
and a wholly owned indirect subsidiary of Crestar Financial Corporation.
LEGAL MATTERS
Certain legal matters relating to the Transferor, Depositor, Master Servicer and
Administrator will be passed upon by Hunton & Williams and Foley & Lardner.
Certain legal matters relating to the validity of the issuance of the Notes and
federal income tax matters will be passed upon for the Trust by Hunton &
Williams. Each of Hunton & Williams and Foley & Lardner has performed legal
services for the Transferor and it is expected that they will continue to
perform such services in the future. Certain legal matters will be passed upon
for the Underwriters by Squire, Sanders & Dempsey L.L.P.
RATING
It is a condition to the issuance and sale of each Class of the Class A Notes
that they each be rated "AAA" by [Standard & Poor's] and [Fitch] and "Aaa" by
[Moody's]. It is a condition to the issuance of the Class B Notes that they be
rated at least "A" by [Standard & Poor's] and [Fitch] and at least "A2" by
[Moody's]. 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 agency. The ratings of the Notes address the likelihood of the
ultimate payment of principal of and interest on the Notes pursuant to their
terms. The Rating Agencies do not evaluate, and the ratings on the Notes do not
address, the likelihood of prepayments on the Notes or the likelihood of payment
of the Carryover Interest.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR IN OTHER
INFORMATION TO WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO
PROVIDE YOU WITH DIFFERENT INFORMATION. THIS DOCUMENT DOES NOT CONSTITUTE AN
OFFER TO SELL ANY SECURITIES OTHER THAN THE NOTES NOR AN OFFER OF SUCH NOTES TO
ANY PERSON IN ANY STATE OR OTHER JURISDICTION IN WHICH SUCH OFFER WOULD BE
UNLAWFUL. THE DELIVERY OF THIS PROSPECTUS AND PROSPECTUS SUPPLEMENT AT ANY TIME
DOES NOT IMPLY THAT INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
ITS DATE.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
SUMMARY OF TERMS.................................S-1
RISK FACTORS.....................................S-5
THE TRUST........................................S-5
USE OF PROCEEDS..................................S-6
THE FINANCED STUDENT LOANS.......................S-7
MATURITY AND PREPAYMENT
CONSIDERATIONS................................S-12
THE SERVICERS...................................S-14
THE GUARANTEE AGENCIES..........................S-14
DESCRIPTION OF THE NOTES........................S-15
UNDERWRITING....................................S-21
LEGAL MATTERS...................................S-22
RATING..........................................S-22
PROSPECTUS
RISK FACTORS.......................................1
FORMATION OF THE TRUSTS............................6
USE OF PROCEEDS....................................7
THE TRANSFEROR.....................................7
THE DEPOSITOR......................................8
THE FINANCED STUDENT LOAN POOL.....................8
MATURITY AND PREPAYMENT
CONSIDERATIONS...................................9
DESCRIPTION OF THE FFEL PROGRAM...................10
DESCRIPTION OF THE GUARANTEE
AGENCIES........................................22
DESCRIPTION OF THE HEAL PROGRAM...................24
THE PRIVATE LOAN PROGRAMS.........................28
DESCRIPTION OF THE AGREEMENTS.....................29
SERVICING.........................................39
DESCRIPTION OF THE NOTES..........................42
FEDERAL INCOME TAX CONSEQUENCES...................53
STATE TAX CONSIDERATIONS..........................62
ERISA CONSIDERATIONS..............................62
AVAILABLE INFORMATION.............................63
REPORTS TO NOTEHOLDERS............................63
INCORPORATION OF CERTAIN
DOCUMENTS BY REFERENCE..........................63
PLAN OF DISTRIBUTION..............................63
FINANCIAL INFORMATION.............................64
RATING............................................64
GLOSSARY OF PRINCIPAL TERMS......................I-1
$ ____________
CRESTAR STUDENT LOAN
TRUST 1998-_____
STUDENT LOAN
ASSET BACKED NOTES
SENIOR LIBOR RATE
CLASS A NOTES
SUBORDINATE LIBOR RATE
CLASS B NOTES
PROSPECTUS
SALOMON SMITH BARNEY
CRESTAR SECURITIES CORPORATION
___________________ ___, 1998
PROSPECTUS
CRESTAR SECURITIZATION, LLC
DEPOSITOR
CRESTAR BANK
TRANSFEROR, MASTER SERVICER AND ADMINISTRATOR
STUDENT LOAN ASSET BACKED NOTES
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 1 IN THIS PROSPECTUS.
A Note is not a deposit and neither the Notes nor the underlying accounts or
student loans are insured or guaranteed by the Federal Deposit Insurance
Corporation or any governmental agency, except as expressly provided herein.
The Notes will represent obligations of the Trust only and will not represent
interests in or obligations of Crestar Bank or any of its affiliates. The
Notes are not insured or guaranteed by any person.
This Prospectus may be used to offer and sell any series of Notes only if
accompanied by the Prospectus Supplement for that Series.
EACH TRUST:
may issue periodically student loan asset backed notes in one or
more series with one or more classes; and
will own:
student loans;
payments due on those student loans; and
other property described ON THE COVER PAGE
OF the accompanying prospectus
supplement.
THE NOTES:
will be secured by the property of the Trust and will be paid only
from the Trust's assets;
will be rated in one of the four highest rating categories by at
least one nationally recognized rating organization;
may have one or more forms of credit enhancement; and
will be issued as part of a designated series that may include one
or more classes of notes and credit enhancement.
THE NOTEHOLDERS:
will receive interest and principal payments from collections on
the student loans and the Trust's other assets; and
are entitled to receive payments from collections on student loans
and other assets securing their series of Notes, but have no
entitlement to payments from student loans or other assets only
securing other series of Notes.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED
THESE NOTES OR DETERMINED THAT THIS PROSPECTUS IS ACCURATE OR COMPLETE.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
JUNE 26, 1998
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS AND THE ACCOMPANYING PROSPECTUS SUPPLEMENT
The Issuer provides information to you about the Notes in two
separate documents that progressively provide more detail: (a) this Prospectus,
which provides general information, some of which may not apply to a particular
Series of Notes, including your Series, and (b) the accompanying Prospectus
Supplement, which will describe the specific terms of your Series of Notes,
including:
the timing of interest and principal payments;
financial and other information about the Financed Student Loans;
information about credit enhancement for each Class; the ratings for each
Class; and the method for selling the Notes.
IF THE TERMS OF A PARTICULAR SERIES OF NOTES VARY BETWEEN THIS PROSPECTUS AND
THE PROSPECTUS SUPPLEMENT, YOU SHOULD RELY ON THE INFORMATION IN THE PROSPECTUS
SUPPLEMENT.
You should rely only on the information provided in this
Prospectus and the accompanying Prospectus Supplement, including the information
incorporated by reference. The Issuer has not authorized anyone to provide you
with different information. The Notes are not offered in any state where the
offer is not permitted.
The Issuer has included cross-references in this Prospectus and in
the accompanying Prospectus Supplement to captions in these materials where you
can find further related discussions. The following Table of Contents and the
Table of Contents included in the accompanying Prospectus Supplement provide the
pages on which these captions are located.
------------------
TABLE OF CONTENTS
Page
----
RISK FACTORS............................................1
FORMATION OF THE TRUSTS.................................6
The Trusts...........................................6
Eligible Lender Trustee..............................7
USE OF PROCEEDS.........................................7
THE TRANSFEROR..........................................7
THE DEPOSITOR...........................................8
THE FINANCED STUDENT LOAN POOL..........................8
MATURITY AND PREPAYMENT CONSIDERATIONS..................9
DESCRIPTION OF THE FFEL PROGRAM........................10
General.............................................10
Loan Terms..........................................11
Contracts with Guarantee Agencies...................17
Federal Special Allowance Payments..................21
Federal Student Loan Insurance Fund.................21
Direct Loans........................................22
DESCRIPTION OF THE GUARANTEE AGENCIES..................22
General.............................................22
Federal Agreements..................................23
Effect of Annual Claims Rate........................24
DESCRIPTION OF THE HEAL PROGRAM........................24
Eligible Borrower...................................24
Eligible Lender.....................................25
Insurance Benefits..................................25
Authorized Amounts of HEAL Loans....................25
Terms of HEAL Loans.................................25
Interest............................................26
Insurance Premium...................................27
Consolidation of HEAL Loans.........................27
Payments by Secretary of HHS........................27
Due Diligence.......................................27
Claims..............................................27
General.............................................28
Insurance Fund......................................28
Collection/Litigation...............................28
THE PRIVATE LOAN PROGRAMS..............................28
DESCRIPTION OF THE AGREEMENTS..........................29
General.............................................29
Sales Agreements....................................29
Transfer and Servicing Agreements...................29
The Indenture.......................................33
Administration......................................38
SERVICING..............................................39
Servicing Procedures................................39
Certain Matters Regarding the Master Servicer.......40
Master Servicer Covenants...........................40
Master Servicer Default.............................41
Servicing Compensation..............................41
DESCRIPTION OF THE NOTES...............................42
General.............................................42
Payment of Available Funds..........................42
Interest............................................43
Principal...........................................44
Determination of LIBOR..............................45
T-Bill Rate.........................................45
Auction Procedures..................................46
Credit Enhancement..................................47
Termination.........................................48
Book-Entry Registration.............................49
Definitive Notes....................................52
List of Noteholders.................................52
Reports to Noteholders..............................52
FEDERAL INCOME TAX CONSEQUENCES........................53
General.............................................53
Original Issue Discount.............................53
Variable Rate Notes.................................57
Anti-Abuse Rule.....................................59
Market Discount.....................................59
Amortizable Premium.................................60
Gain or Loss on Disposition.........................60
Miscellaneous Tax Aspects...........................61
STATE TAX CONSIDERATIONS...............................62
ERISA CONSIDERATIONS...................................62
AVAILABLE INFORMATION..................................63
REPORTS TO NOTEHOLDERS.................................63
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE........63
PLAN OF DISTRIBUTION...................................63
FINANCIAL INFORMATION..................................64
RATING.................................................64
GLOSSARY OF PRINCIPAL DEFINITIONS I-1
64
RISK FACTORS
You should consider the following risk factors in deciding whether to purchase
the Notes.
Limited Ability To
Resell Notes The underwriters may assist in resales of
the Notes but they are not required to do
so. A secondary market for any Series of
Note may not develop. If a secondary market
does develop, it might not continue or it
might not be sufficiently liquid to allow
you to resell any of your Notes.
Limited Trust Assets Your Trust will not have any significant
assets or sources of funds except for the
Financed Student Loans and related assets.
The Notes are obligations solely of the
related Trust, and will not be insured or
guaranteed by the Depositor, the Transferor,
the Master Servicer, the Guarantee Agencies,
the Eligible Lender Trustee, any of their
affiliates, the Department of HHS or the
Department of Education. Noteholders must
rely for repayment upon proceeds realized
from the Financed Student Loans, Credit
Enhancement (if any), and related Trust
assets. See "Description of the
Notes--Payment of Available Funds" and
"Description of the Notes-- Credit
Enhancement" herein.
Failure To Comply with
Student Loan Origination
and Servicing Procedures The Higher Education Act AND HEAL ACT
REQUIRE loan holders and servicers to follow
specified procedures to ensure that the
FFELP Loans and HEAL Loans are properly
originated and SERVICED. Failure to follow
these procedures may result in:
(i) Loss of Interest Subsidies and
Special Allowance Payments. The
Department of Education's refusal to
make reinsurance payments to the
Guarantee Agencies or to make Interest
Subsidy Payments and Special Allowance
Payments to the Eligible Lender Trustee
with respect to the Financed FFELP
Loans;
(ii) Loss of Guarantee Payments. The
Guarantee Agencies' inability or refusal
to make Guarantee Payments with respect
to Financed FFELP Loans; and
(iii) Loss of Insurance Payments. The
Department of HHS' refusal to make
insurance payments under the
insurance contract with respect to
financed HEAL loans.
Loss of any such payments may adversely
affect your Trust's ability to pay principal
and interest on the notes. See "Description
of the FFEL Program," "Description of the
HEAL Program" and "Servicing -- Servicing
Procedures" herein.
Subordination Where one or more Classes in a Series are
subordinated, principal payments on the
subordinated Class or Classes generally will
not begin until the related senior Class or
Classes are repaid. In addition, interest
payments on a Payment Date on a subordinated
Class or Classes generally will be made only
after each senior class has received its
interest entitlement on that Payment Date
and sometimes will be made only after each
senior Class has received its principal
entitlement on that Payment Date.
Consequently, a subordinated Class will bear
losses on the Financed Student Loans prior
to such losses being borne by the more
senior Classes. In addition, subordinated
Noteholders may be limited in the remedies
that are available to them until the more
senior Noteholders are paid in full.
Obligations to Purchase
Financed Student Loans The Depositor or the Master Servicer will be
obligated to repurchase Financed Student
Loans if a breach of any representation,
warranty or obligation of the Depositor or
the Master Servicer results in a loss of
insurance or guaranty payments. The
Transferor generally will be obligated to
repurchase any financed student loan
required to be repurchased by the Depositor.
The Depositor, the Transferor or the Master
Servicer may not have the financial
resources to purchase any Financed Student
Loan. The failure of the Depositor, the
Transferor or the Master Servicer to
purchase a Financed Student Loan is a breach
of the Transfer and Servicing Agreement,
enforceable by a Trust or by the Indenture
Trustee, but is not an Event of Default
under the Indenture. See "Description of the
Agreements" herein.
Issuance of Additional
Series by a Trust A Trust identified as a master trust in the
accompanying Prospectus Supplement may
issue additional Series of Notes from time
to time. Additional Series may have terms
that are different from your Series
without the prior consent or review of
any Noteholders. It is a condition to the
issuance of each new series from the same
Trust that each Rating Agency that
originally rated an outstanding Series at
the request of the Depositor confirm in
writing that the issuance of the new
Series will not result in a reduction or
withdrawal of its rating. However, the
terms of a new Series could affect the
timing and amounts of payments on any other
outstanding Series of the same Trust.
Offset by Guarantee
Agencies or the Department
of Education The Eligible Lender Trustee may use a
Department of Education lender
identification number that may also be used
for other student loans held by the Eligible
Lender Trustee on behalf of entities
established by the Depositor, the
Transferor or their affiliates under other
indentures. If it does, the billings
submitted to the department of education
will be consolidated with the billings for
payments for student loans under other
indentures, and payments on such billings
would be made by the Department of Education
or the Guarantee Agency to the Eligible
Lender Trustee in lump sum form. These
payments would be allocated by the Eligible
Lender Trustee among the various indentures
using the same lender identification number.
If the Department of Education or a
Guarantee Agency determines that the
Eligible Lender Trustee owes a liability to
the Department of Education or the Guarantee
Agency on any FFELP Loan for which the
Eligible Lender Trustee is legal
titleholder, the Eepartment of Education or
the Guarantee Agency might seek to collect
that liability by offsetting against
payments due the Eligible Lender Trustee
under your Trust. Such offsetting or
shortfall of payments due to the Eligible
Lender Trustee with respect to your Trust
could adversely affect the amount of
Available Funds for any Collection Period
and your Trust's ability to pay interest and
principal on the Notes.
Although the various trusts and indentures
will contain provisions for
cross-indemnification with respect to such
payments and offsets, there can be no
assurance that the amount of funds available
to your trust with respect to such right of
indemnification may be adequate to
compensate your Trust and Noteholders for
any previous reduction in the Available
Funds for a Collection Period.
The Department of HHS does not currently
limit lender identification numbers with
respect to HEAL Loans, but the Trust
Agreement and Indenture will provide for the
sharing of lender identification numbers
with respect to the Financed HEAL Loans in a
similar manner to the sharing of lender
identification numbers for the Financed
FFELP Loans.
See "Description of the FFEL Program,"
"Description of the Guarantee Agencies" and
"Description of the Heal Program" herein.
Financial Status of
Guarantee Agencies The FFELP Loans are not secured by any
collateral of the borrower. Payments of
principal and interest are guaranteed by
Guarantee Agencies to the extent described
herein and in the related Prospectus
Supplement. Excessive Borrower defaults
could impair a Guarantee Agency's ability
to meet its guarantee obligations. In
addition, future legislation or
regulations may reduce Guarantee Agency
revenues by restricting the amount of
guarantee fees or reducing Secretary of
Education reimbursements. The financial
status of a Guarantee Agency could affect
the timing and amount of Available Funds
for any Collection Period and your Trust's
ability to pay principal of and interest on
the Notes. Although a holder of FFELP Loans
could submit claims for payment directly to
the Department of Education if the
Department determines that a Guarantee
Agency is unable to meet its insurance
obligations, there is no assurance that the
Department of Education would make such a
determination or that it would pay claims in
a timely manner. See "Description of the
FFEL Program" and "Description of the
Guarantee Agencies" herein.
Changes to HEAL Program
and FFEL Program The HEAL Act, the Higher Education Act and
other relevant federal or state laws may be
amended or modified in the future against
your interests. In particular, the level of
Guarantee Payments or Insurance Payments may
be adjusted from time to time. The issuer
cannot predict whether any changes will be
adopted or, if so, what impact such changes
may have on your trust or the Notes.
Federal Direct Student
Loan Program The Higher Education act provides for a
Federal Direct Student Loan Program.
This program could result in reductions in
the volume of loans made under the FFEL
Program. If so, the Master Servicer and
the Servicers may experience increased
costs due to reduced economies of scale.
These cost increases could reduce the
ability of the Master Servicer and the
Servicers to satisfy their obligations to
service the Financed Student Loans. This
could also reduce revenues received by the
Guarantee Agencies available to pay claims
on defaulted FFELP Loans. The competition
currently existing in the secondary
market for loans made under the FFEL Program
and HEAL Program could be reduced,
resulting in fewer potential buyers of the
FFELP Loans and Heal Loans and lower prices
available in the secondary market for those
loans.
The Department of Education has implemented
a direct consolidation loan program, which
may reduce the volume of loans made under
the FFEL Program and the HEAL Program and is
expected to result in prepayments of
Financed Student Loans. See "Description of
the FFEL Program herein."
Reinvestment Risk
and Prepayments Financed Student Loans may be prepaid by
borrowers at any time without penalty. the
rate of prepayments may be influenced by
economic and other factors, such as interest
rates, the availability of other financing,
and the general job market. In addition,
under certain circumstances, the Depositor
and the Master Servicer will be obligated
to purchase Financed Student Loans from
your Trust pursuant to the Transfer and
Servicing Agreement as a result of
breaches of the Depositor's
representations and warranties or the Master
Servicer's servicing obligations,
respectively. See "Description of the
Agreements -- Transfer and Servicing
Agreement -- Conveyance of Financed Student
Loans; Representations and Warranties"
and "Servicing" herein. To the extent
borrowers elect to borrow money through
Consolidation Loans or HEAL Consolidation
Loans, the Noteholders will receive as a
prepayment of principal the aggregate
principal amount of the loan.
If loan prepayments result in a Class of
Notes being prepaid prior to its expected
Legal Final Maturity, the holders of the
Notes may not be able to reinvest their
funds at the same yield as the yield on the
Notes. We cannot predict the prepayment rate
of any Notes, and reinvestment risks
resulting from a faster or slower prepayment
speed will be borne entirely by the holders
of the Notes. Generally, the effect of such
prepayments initially will be to increase
the rate of payment on senior Notes and,
therefore, increase the reinvestment risk
with respect to senior Notes. After the
senior Notes have been paid in full, the
amount of such prepayments will be applied
to the payment of the principal balance of
more subordinated Notes until they are paid
in full. Reinvestment risk resulting from
prepayments is expected to be borne first by
the holders of senior Classes of Notes, and
then by the holders of more subordinated
Classes of Notes.
** 1 Average Life Scheduled payments on the Financed Student
Loans and the maturities of the financed
student loans may be extended without your
consent, which may lengthen the weighted
average life of your investment.
Prepayments of principal on the Financed
Student Loans and Parity Payments may
shorten the life of your investment. See
"Maturity and Prepayment Considerations"
herein.
Basis Risk The Class Interest Rate for any Class of
LIBOR Rate Notes will be based generally on
the level of LIBOR. The Class Interest Rate
for any Class of Auction Rate Notes will be
based generally on the outcome of an Auction
of Notes. The Class Interest Rate for other
Classes of Notes may be based on the index,
formula or other method, such as the T-Bill
Rate, described in the related Prospectus
Supplement. The Financed Student Loans,
however, generally bear interest at the
T-Bill Rate plus a stated margin.
The foregoing interest rates generally will
be limited by the Net Loan Rate, which will
equal the weighted average Effective
Interest Rate of the Financed Student Loans,
less the Program Operating Expense
Percentage. For a Payment Date on which the
Net Loan Rate applies, the difference
between the amount of interest at the
Formula Rate described above and the amount
of interest at the Net Loan Rate (together
with interest thereon, "Carryover
Interest"), will be paid on succeeding
Payment Dates to the extent of Available
Funds and may never be paid. See
"Description of the Notes -- Interest"
herein.
Principal Balance of
Notes May Exceed
Pool Balance The principal amount of Notes issued by your
Trust may exceed the related Pool Balance.
If an Event of Default occurs and the assets
of your Trust are liquidated, the Financed
Student Loans would have to be sold at a
premium for the subordinated Noteholders
(and possibly the senior Noteholders) to
avoid a loss. The Depositor cannot predict
the rate or timing of accelerated payments
of principal or when the aggregate principal
amount of the Notes may be reduced to the
aggregate principal amount of the Financed
Student Loans.
Indenture Trustee May
Have Difficulty Liquidating
Financed Student Loans Generally, during an Event of Default, the
Indenture Trustee is authorized (with
certain Noteholder consent) to sell the
related Financed Student Loans. However,
the Indenture Trustee may not find a
purchaser for the Financed Student Loans.
Also, the market value of the Financed
Student Loans might not equal the principal
amount of Notes plus accrued interest. In
either event, the Noteholders may suffer
a loss. The principal amount required to
be paid on the Notes on any Payment Date
under the Indenture generally is limited
to amounts available for payment.
Therefore, failure to pay principal may
not result in the occurrence of an Event of
Default until the Legal Final Maturity of
the Notes.
Receivership or
conservatorship of transferor The Depositor views the transfer of the
Financed Student Loans from the Transferor
to the Depositor as a valid sale. However, a
court could treat this transfer as a secured
financing.
If the Federal Deposit Insurance Corporation
(the "FDIC") is appointed receiver or
conservator of the Transferor, the FDOC's
administrative expenses may have priority
over the Eligible Lender Trustee's interest
in the Financed Student Loans. In addition,
the Federal Deposit Insurance Act ("FDIA"),
as amended by the Financial Institutions
Reform, Recovery and Enforcement Act of 1989
("FIRREA"), sets forth certain powers that
the FDIC could exercise in its capacity as a
receiver or conservator of the Transferor.
To the extent that the transfer of the
Financed Student Loans to the Depositor is
deemed to be a secured financing and the
security interest is validly perfected
before the Transferor's insolvency (and was
not taken in contemplation of insolvency or
with the intent to hinder, delay or defraud
the Transferor or its creditors), then,
based upon opinions and statements of policy
issued by the fFDIC the security interest
should not be subject to avoidance, and
payments to your Trust with respect to the
Financed Student Loans should not be subject
to recovery by the FDIC as receiver or
conservator of the Transferor. Because the
Depositor is an affiliate of the Transferor,
however, the FDIC could assert a contrary
position, and rely upon certain provisions
of the FDIA which, at the request of the
FDIC, have been applied in recent lawsuits
to avoid security interests in collateral
granted by depository institutions, to
permit the FDIC to avoid such security
interest, thereby resulting in possible
delays and reductions in payments on the
Notes. In addition, if the FDIC were to
require the Indenture Trustee or the
Eligible Lender Trustee to establish its
right to such payments by submitting to and
completing the administrative claims
procedure under the FDIA, as amended by
FIRREA, delays in payments on the Notes and
possible reductions in the amount of those
payments could occur.
Bankruptcy of Depositor The Depositor is a limited purpose finance
subsidiary of Crestar Bank. If the Depositor
becomes bankrupt, the United States
Bankruptcy Code could materially limit or
prevent the enforcement of the Depositor's
obligations, including, without limitation,
its obligations under the Notes. The
Depositor's trustee in bankruptcy (or the
Depositor itself as debtor-in-possession)
may seek to accelerate payment on the Notes
and liquidate the assets in your Trust. If
principal on the Notes is declared due and
payable, you may lose the right to future
payments and face reinvestment risks
mentioned above.
Perfected Security
Interest in Financed
Student Loans If any transfer of the Financed Student
Loans is deemed to be a secured financing,
other persons may have an interest in the
loans prior to the Eligible Lender Trustee.
The Transferor and the Depositor will
represent that the Financed Student Loans
are transferred to the Eligible Lender
Trustee free and clear of all liens, and
covenant that they will not sell, pledge,
assign, transfer or grant any lien on = any
Financed Student Loan (or any interest
therein) other than to the Eligible Lender
Trustee.
Each Servicer will have custody of the
promissory notes related to the Financed
FFELP Loans. The Financed Student Loans may
not be physically segregated in the
Servicer's or other custodian's offices. If
any interest in the Financed Student Loans
were assigned to another party, that person
could acquire an interest in the Financed
Student Loans superior to the interest of
the Eligible Lender Trustee and the
Indenture Trustee.
Pre-Funding Account If your Trust includes a Pre-Funding
Account, the related Eligible Lender
Trustee will own the Financed Student Loans
and the Pre-Funded Amount on deposit in the
Pre-Funding Account. If the amount of
Financed Student Loans sold to your Trust
during the Pre-Funding Period is less than
the Pre-Funded Amount, your Trust will
prepay principal equal to the difference.
Each such Additional Student Loan must
satisfy the eligibility criteria
specified in the Transfer and Servicing
Agreement. See "Prospectus Summary--
Pre-Funding Account" and "Description of
the Agreements-- Transfer and Servicing
Agreements-- Pre-Funding Account" herein.
Changes in Repayment
Terms Under certain incentive programs, the
Transferor may terminate or change the terms
of the incentives with respect to any or all
of a borrower's loans. We cannot predict
which borrowers will qualify or decide to
participate in these programs. The effect of
these incentive programs may be to reduce
the yield on the Financed Student Loans.
Consumer Protection
Laws Consumer protection laws impose requirements
upon lenders and servicers. Some state laws
impose finance charge restrictions on
certain transactions and require contract
disclosures. These state laws are generally
preempted by the Higher Education Act and
the HEAL Act. However, the form of
promissory notes required by the Department
of Education for FFELP Loans provides that
holders of such promissory notes evidencing
certain loans made to borrowers attending
for-profit schools are subject to any
defenses that the borrower may have against
the school. Private Loan Programs would be
subject to applicable state laws regulating
loans to consumers.
Book-Entry Registration The notes may be represented by one or more
certificates registered in the name of Cede
& Co., the nominee for DTC, and will not be
registered in the names of the holders of
the Notes, if specified in the accompanying
Prospectus Supplement. If so, you will not
be recognized by the Indenture Trustee or
the Eligible Lender Trustee as to
"Noteholders." Also, you will only be able
to exercise the rights of Noteholders
indirectly through DTC and its participating
organizations. See "Description of the Notes
-- Book-Entry Registration" herein.
Rating A Rating Agency will rate each note in one
of its four highest rating categories. A
rating is not a recommendation to buy or
sell Notes or a comment concerning
suitability for any investor. A rating only
addresses the likelihood of the ultimate
payment of principal and stated interest and
does not address the likelihood of
prepayments on the Notes or the likelihood
of the payment of Carryover Interest. A
rating may not remain in effect for the life
of the Notes. See "Prospectus Summary --
Rating" and "Rating" herein and "Rating" in
the accompanying Prospectus Supplement.
FORMATION OF THE TRUSTS
The Trusts
Each Trust will be formed under the laws of the jurisdiction set forth in the
related Prospectus Supplement pursuant to a Trust Agreement for the transactions
described in this Prospectus and each Prospectus Supplement. Each Trust will be
a statutory business trust. A Trust will not engage in any activity other than
(i) acquiring, holding, selling and managing the Financed Student Loans and the
other assets of the Trust and proceeds therefrom, (ii) issuing one or more
classes of its certificates and notes, (iii) making payments thereon and (iv)
engaging in other activities that are necessary, suitable or convenient to
accomplish the foregoing or are incidental thereto or connected therewith. A
Trust may be a "master trust" that issues more than one Series of Notes if
specified in the accompanying Prospectus Supplement. For so long as the
Transferor is a Certificateholder of a Trust, the Trust's activities will be
FURTHER limited to activities that are part of, or incidental to, the business
of banking as well.
A Trust INITIALLY WILL BE CAPITALIZED WITH A NOMINAL CASH PAYMENT. THE RIGHT TO
RECEIVE ANY AMOUNTS REMAINING AFTER PAYMENT OF THE NOTES WILL BE REPRESENTED BY
THE CERTIFICATES, WHICH INITIALLY ARE EXPECTED TO BE HELD BY THE DEPOSITOR. The
equity of the Trust, together with the proceeds from the sale of each Series of
Notes, will be used by the related Eligible Lender Trustee in connection with
its acquisition, on behalf of the Trust, of the Financed Student Loans from the
Depositor pursuant to the Transfer and Servicing Agreement. A portion of the net
proceeds received from the transfer of the Financed Student Loans may be used by
the Depositor to make a Reserve Account Deposit or a Pre-Funding Account
Deposit. Upon the consummation of each such transaction, the property of a Trust
will consist of (a) the pool of Financed Student Loans, legal title to which is
held by the Eligible Lender Trustee on behalf of the Trust, (b) all funds
collected in respect thereof on or after the applicable Cut-off Date, (c) all
moneys and investments on deposit in the Collection Account, the Certificate
Distribution Account, the Note Payment Account, the Expense Account, the Advance
Account, the Reserve Account and the Pre-Funding Account, and (d) any other
property specified in the related Prospectus Supplement. The Notes will be
secured by certain property of the related Trust. The Collection Account, the
Note Payment Account, the Expense Account, the Reserve Account, the Pre-Funding
Account and the Advance Account will be maintained with and in the name of the
Indenture Trustee. To facilitate servicing and to minimize administrative burden
and expense, the related Servicer will be appointed custodian of the promissory
notes representing the Financed Student Loans by the Eligible Lender Trustee.
A Trust's principal offices will be located at the address of the applicable
Eligible Lender Trustee set forth in the related Prospectus Supplement.
ELIGIBLE LENDER TRUSTEE
The Eligible Lender Trustee for any Trust will be the entity named in the
applicable Prospectus Supplement and will acquire on behalf of a Trust legal
title to all the Financed Student Loans acquired by such Trust from time to time
pursuant to a Transfer and Servicing Agreement. The Eligible Lender Trustee on
behalf of a Trust will enter into a Guarantee Agreement with each of the
Guarantee Agencies with respect to such Financed FFELP Loans and a HEAL
Insurance Contract with the Department of HHS with respect to such Financed HEAL
Loans. The Eligible Lender Trustee qualifies, or prior to taking title to the
Financed Student Loans for which additional qualifications are necessary, will
qualify, as an eligible lender and owner of Financed Student Loans for all
purposes under the Higher Education Act and the Guarantee Agreements with
respect to such Financed FFELP Loans, under the HEAL Act and the HEAL Insurance
Contract with respect to such Financed HEAL Loans, and the applicable Private
Loan Programs. Failure of the Financed Student Loans to be owned by an eligible
lender would result in the loss of Guarantee Payments, Interest Subsidy Payments
and Special Allowance Payments with respect to Financed FFELP Loans and the loss
of Insurance Payments with respect to Financed HEAL Loans. See "Description of
the FFEL Program" and "Description of the HEAL Program."
The Transferor, the Depositor and their affiliates may maintain from time to
time other banking relationships with any Eligible Lender Trustee and its
affiliates.
USE OF PROCEEDS
The Trust will use the net proceeds from the sale of a Series of Notes to
acquire Financed Student Loans from the Depositor and permit the Depositor to
make various deposits with respect to the Notes. After any required funding of
accounts relating to the Notes, the Depositor will use the proceeds to acquire
such Financed Student Loans from the Transferor. The Transferor is expected to
use such proceeds for general corporate purposes, including the origination or
purchase of Financed Student Loans.
THE TRANSFEROR
Crestar Bank, the Transferor, is a Virginia banking corporation that offers a
broad range of banking services, including various types of deposit accounts and
instruments, commercial and consumer loans, trust and investment management.,
bank credit cards, and international banking to customers throughout Virginia,
Maryland and Washington, D.C. Services are also provided through non-bank
subsidiaries. Securities brokerage and investment banking services are offered
by Crestar Securities Corporation. The Transferor and its predecessors have been
originating and purchasing FFELP Loans since 1965 and HEAL Loans since 1995.
The Transferor is a wholly owned indirect subsidiary of Crestar Financial
Corporation, a bank holding company organized under the laws of the Commonwealth
of Virginia and registered under the Bank Holding Company Act of 1956, as
amended (the "BHCA"). Crestar Financial Corporation is supervised and examined
by the Board of Governors of the Federal Reserve System under the BHCA. The BHCA
requires Federal Reserve approval for bank acquisitions and regulates
non-banking activities of bank holding companies. Crestar Bank is regulated by
the State Corporation Commission of Virginia and the Federal Reserve Bank of
Richmond.
The Transferor generally will be obligated to purchase Financed Student Loans to
the extent that the Depositor is obligated to do so.
The principal executive office of the Transferor is located at Crestar
Center, 919 East Main Street, Richmond, Virginia 23219. Its telephone
number is (804) 782-5171.
The Notes are neither obligations of nor guaranteed by Crestar Financial
Corporation or any of Crestar Financial Corporation's Subsidiaries (including
the Transferor)
THE DEPOSITOR
Crestar Securitization, LLC, the Depositor, is a Virginia limited liability
company organized as a limited purpose finance company owned by the Transferor
and Crestar SP Corporation (the "Manager"), a Virginia corporation. The
Transferor owns all of the capital stock of the Manager. The Manager manages the
business operations of the Depositor, and each of the Manager's officers are
also officers of the Transferor. The Depositor and the Manager maintain their
principal executive offices at Crestar Center, 919 East Main Street, Richmond,
Virginia 23219. The Depositor and the Manager share the telephone number (804)
782-5171.
As described herein, the only obligations, if any, of the Depositor with respect
to any Series of Notes may be pursuant to certain limited representations and
warranties and limited undertakings to repurchase or substitute Financed Student
Loans under certain circumstances. The Depositor will have no ongoing servicing
obligations or responsibilities with respect to any Financed Student Loan. The
Depositor does not have, nor is it expected in the future to have, any
significant assets.
The Depositor will not insure or guarantee the Notes of any Series.
THE FINANCED STUDENT LOAN POOL
The pool of Financed Student Loans will include the Financed Student Loans
acquired by the applicable Eligible Lender Trustee on behalf of a Trust from
time to time as of the applicable Cut-off Date and, if set forth in the related
Prospectus Supplement, any Subsequent Financed Student Loans, Additional Student
Loans or other Financed Student Loans acquired by the applicable Eligible Lender
Trustee on behalf of a Trust as described in the related Prospectus Supplement.
The Financed Student Loans will be selected from the Transferor's portfolio of
FFELP Loans, HEAL Loans and Private Loans by several criteria, including the
following: each Financed Student Loan (i) was or will be originated in the
United States or its territories or possessions under and in accordance with the
FFEL Program, the HEAL Program or the applicable Private Loan Program, as the
case may be, to, or on behalf of, a student who has graduated or is expected to
graduate from an accredited institution of higher education, a for-profit
educational institution or to, or on behalf of, a student who is enrolled in
private primary or secondary schools, (ii) contains terms in accordance with
those required by the applicable program, the Guarantee Agreements and other
applicable requirements, and (iii) is not more than 90 days past due as of the
related Cut-off Date. The relative percentages of each type of Financed Student
Loan, as well as the relative percentages of Financed Student Loans originated
by the Transferor, to be included in the pool of Financed Student Loans will be
determined from time to time by the Transferor. See "Description of the FFEL
Program," "Description of the Guarantee Agencies," "Description of the HEAL
Program" and "The Private Loan Programs" herein.
In addition to the criteria described in the preceding paragraphs, an applicable
provider of Credit Enhancement may require certain other characteristics for
additional Financed Student Loans. However, following each transfer of
additional Financed Student Loans to an Eligible Lender Trustee on behalf of a
Trust, the aggregate characteristics of the entire pool of Financed Student
Loans, including the composition and type of the Financed Student Loans, the
distribution by weighted average interest rate and the distribution by principal
amount to be described in tables included in each Prospectus Supplement, may
vary significantly from those of the Financed Student Loans, if any, previously
transferred to such Trust. In addition, the distribution by weighted average
interest rate applicable to the Financed Student Loans on any date following the
related Cut-off Date may vary significantly from that set forth in the tables
included in the related Prospectus Supplement as a result of variations in the
effective rates of interest applicable to the Financed Student Loans. Moreover,
the information included in the related Prospectus Supplement with respect to
the original term to maturity and remaining term to maturity of Financed Student
Loans as of the related Cut-off Date may vary significantly from the actual term
to maturity of any of the Financed Student Loans as a result of the granting of
deferral and forbearance periods with respect thereto.
Each Prospectus Supplement will set forth, as of the related Cut-off Date,
various information with respect to the initial Financed Student Loans for such
Trust. Such information may include the composition of the Financed Student
Loans, the distribution by loan type, the distribution by interest rates, the
distribution by outstanding principal balance, the distribution by geography,
the distribution by insurance or guarantee level, the distribution by school
type, the distribution by Guarantee Agency, the distribution by remaining term
to scheduled maturity and the distribution by borrower payment status. See "The
Financed Student Loans" in the accompanying Prospectus Supplement.
Each of the FFELP Loans and HEAL Loans provides or will provide for the
amortization of the outstanding principal balance of such Financed Student Loan
over a series of regular payments. Each regular payment consists of an
installment of interest which is calculated on the basis of the outstanding
principal balance of such Financed Student Loan multiplied by the applicable
interest rate and further multiplied by the period elapsed (as a fraction of a
calendar year) since the preceding payment of interest was made. As payments are
received in respect of such Financed Student Loan, the amount received is
applied first to interest accrued to the date of payment and the balance is
applied to reduce the unpaid principal balance. Accordingly, if a borrower pays
a regular installment before its scheduled due date, the portion of the payment
allocable to interest for the period since the preceding payment was made will
be less than it would have been had the payment been made as scheduled, and the
portion of the payment applied to reduce the unpaid principal balance will be
correspondingly greater. Conversely, if a borrower pays a monthly installment
after its scheduled due date, the portion of the payment allocable to interest
for the period since the preceding payment was made will be greater than it
would have been had the payment been made as scheduled, and the portion of the
payment applied to reduce the unpaid principal balance will be correspondingly
less. In either case, subject to any applicable Grace Periods, Deferment Periods
or Forbearance Periods, the borrower pays a regular installment until the final
scheduled payment date, at which time the amount of the final installment is
increased or decreased as necessary to repay the then outstanding principal
balance of such Financed Student Loan. The Private Loans may contain different
amortization provisions.
MATURITY AND PREPAYMENT CONSIDERATIONS
The rate of payment of principal of the Notes and the yield on the Notes will be
affected by (i) prepayments of the Financed Student Loans that may occur as
described below (including repurchases by the Transferor, the Depositor or the
Master Servicer), (ii) the sale by the related Trust of Financed Student Loans,
(iii) the application of additional principal payments, if any, and (iv) the
issuance by a Trust of additional Notes. All the Financed Student Loans are
prepayable in whole or in part by the borrowers at any time (including by means
of Consolidation Loans as discussed below) and may be prepaid as a result of a
borrower default, death, disability or bankruptcy and subsequent liquidation or
collection of Guarantee Payments and Insurance Payments with respect thereto.
The rate of such prepayments cannot be predicted and may be influenced by a
variety of economic, social and other factors, including those described below.
In general, the rate of prepayments may tend to increase to the extent that
alternative financing becomes available at prevailing interest rates which fall
significantly below the interest rates applicable to the Financed Student Loans.
However, because many of the Financed Student Loans bear interest at a rate that
either actually or effectively is floating, it is impossible to determine
whether changes in prevailing interest rates will be similar to or vary from
changes in the interest rates on the Financed Student Loans. The Transferor and
the Depositor are obligated to purchase any Financed Student Loan pursuant to a
Sales Agreement or Transfer and Servicing Agreement as a result of a breach of
certain of their respective representations and warranties, and the Master
Servicer is obligated to purchase any Financed Student Loan pursuant to a
Transfer and Servicing Agreement as a result of a breach of certain covenants
with respect to such Financed Student Loan, in each case where such breach
results in the failure of a Guarantee Agency (including for this purpose any
guarantor under a Private Loan Program) to make a Guarantee Payment or the
Department of HHS to make an Insurance Payment. See "Description of the
Agreements -- Transfer and Servicing Agreements -- Conveyance of Financed
Student Loans; Representations and Warranties" herein. See also "Description of
the Notes -- Termination" regarding early termination of the Notes of a Series
as a consequence of the purchase of the related Financed Student Loans.
Scheduled payments with respect to, and maturities of, the Financed Student
Loans may be extended, including pursuant to Grace Periods, Deferment Periods
and, under certain circumstances, Forbearance Periods or as a result of
refinancings through Consolidation Loans to the extent such Consolidation Loans
are sold to the applicable Eligible Lender Trustee on behalf of a Trust as
described above. In that event, the fact that such Consolidation Loans will
likely have longer maturities than the Financed Student Loans they are replacing
may lengthen the remaining term of the Financed Student Loans and the average
life of the Notes of the related Trust. The rate of payment of principal of the
Notes and the yield on the Notes may also be affected by the rate of defaults
resulting in losses on Financed Student Loans, by the severity of those losses
and by the timing of those losses.
Each Trust established as a master trust may issue, from time to time, several
Series and Classes of Notes. The payment priorities of each Series and Class
will be described in the applicable Prospectus Supplement. Such priorities may
provide that a subsequently issued Class of Notes receive payments of principal
prior to a previously issued Class of Notes, even if such previously issued
Class of Notes had been receiving payments of principal. However, each Class of
Notes will be payable in full by its Legal Final Maturity.
The rate of prepayment on the Financed Student Loans cannot be predicted, and
any reinvestment risks resulting from a faster or slower incidence of prepayment
of Financed Student Loans or a faster or slower incidence of sales by the Trust
will be borne entirely by the Noteholders. Such reinvestment risks may include
the risk that interest rates and the relevant spreads above particular interest
rate bases are lower at the time Noteholders receive payments from the related
Trust than such interest rates and such spreads would otherwise have been had
such prepayments not been made or had such prepayments been made at a different
time.
DESCRIPTION OF THE FFEL PROGRAM
GENERAL
The Higher Education Act sets forth provisions establishing the FFEL Program,
pursuant to which state agencies or private nonprofit corporations administering
student loan insurance programs (referred to as "Guarantee Agencies") are
reimbursed for losses sustained in the operation of their programs, and holders
of certain loans made under such programs are paid subsidies for owning such
loans.
The Higher Education Act currently authorizes certain student loans to be
covered under the FFEL Program if they are contracted for and paid to the
student prior to September 30, 2002, unless a student has received a loan under
the FFEL Program prior to such date, in which case that student may receive a
student loan covered by the FFEL Program until September 30, 2006. Congress has
extended similar authorization dates in prior versions of the Higher Education
Act; however, there can be no assurance that the current authorization dates
will again be extended or that the other provisions of the Higher Education Act
will be continued in their present form.
Various amendments to the Higher Education Act have revised the FFEL Program
from time to time. These amendments include, but are not limited to, THE
INTERMODAL SURFACE TRANSPORTATION EFFICIENCY ACT OF 1998, the Balanced Budget
Act of 1997, the Higher Education Technical Amendments Act of 1993, the Omnibus
Budget Reconciliation Act of 1993 (the "1993 Amendments"), the Higher Education
Amendments of 1992, which reauthorized the FFEL Program, the Omnibus Budget
Reconciliation Act of 1990, the Omnibus Budget Reconciliation Act of 1989, the
Omnibus Budget Reconciliation Act of 1987, the Higher Education Technical
Amendments Act of 1987, the Higher Education Amendments of 1986, which
reauthorized the FFEL Program, the Consolidated Omnibus Budget Reconciliation
Act of 1985, the Postsecondary Student Assistance Amendments of 1981 and the
Education Amendments of 1980.
There can be no assurance that relevant federal laws, including the Higher
Education Act, will not be changed in a manner that may adversely affect the
receipt of funds by the Guarantee Agencies or by the Transferor or the Eligible
Lender Trustee with respect to Financed FFELP Loans. REAUTHORIZATION BILLS ARE
PENDING IN BOTH THE HOUSE OF REPRESENTATIVES AND THE SENATE OF THE UNITED STATES
which, if enacted into law, would amend the Higher Education Act TO make various
changes to the FFEL Program, including changes that would reduce various
payments to Guarantee Agencies and restructure guarantee agencies' operations
and programs, and revise terms of student loans and payments to the Eligible
Lender Trustee. There is no certainty that any of the PENDING LEGISLATION will
be enacted into law in ITS current form or at all, and the Transferor
cannot predict at this time how such legislation, if enacted, would affect a
Servicer's business or operations, or those of the Transferor.
This is only a summary of certain provisions of the Higher Education Act.
Reference is made to the text of the Higher Education Act for full and complete
statements of its provisions.
LOAN TERMS
General
Four types of loans are currently available under the FFEL Program: Stafford
Loans, Unsubsidized Stafford Loans, Plus Loans and Consolidation Loans. These
loan types vary as to eligibility requirements, interest rates, repayment
periods, loan limits and eligibility for interest subsidies and Special
Allowance Payments. Some of these loan types have had other names in the past.
References herein to the various loan types include, where appropriate,
predecessors to such loan types.
The primary loan under the FFEL Program is the Stafford Loan. Students who are
not eligible for Stafford Loans based on their economic circumstances may be
able to obtain Unsubsidized Stafford Loans. Parents of students may be able to
obtain Plus Loans. Consolidation Loans are available to borrowers with existing
loans made under the FFEL Program and certain other federal programs to
consolidate repayment of such existing loans. For periods of enrollment
beginning prior to July 1, 1994, SLS Loans were available to students with costs
of education that were not met by other sources and that exceeded the Stafford
or Unsubsidized Stafford Loan limits.
Eligibility
General. A student is eligible for loans made under the FFEL Program only if he
or she: (i) has been accepted for enrollment or is enrolled in good standing at
an eligible institution of higher education (which term includes certain
vocational schools), (ii) is carrying or planning to carry at least one-half the
normal full-time workload for the course of study the student is pursuing as
determined by the institution (which, in the case of a loan to cover the cost of
a period of enrollment beginning on or after July 1, 1987, must either lead to a
recognized educational credential or be necessary for enrollment in a course of
study that leads to such a credential), (iii) has agreed to notify promptly the
holder of the loan concerning any change of address, (iv) if presently
enrolled, is maintaining satisfactory progress in the course of study he or
she is pursuing, (v) does not owe a refund on, and is not (except as
specifically permitted under the Higher Education Act) in default under, any
loan or grant made under the Higher Education Act, (vi) has filed with the
eligible institution a statement of educational purpose, (vii) meets certain
citizenship requirements, and (viii) except in the case of a graduate or
professional student, has received a preliminary determination of eligibility
or ineligibility for a Pell Grant.
Stafford Loans. Stafford Loans generally are made only to student borrowers who
meet certain needs tests. The educational institution must provide the lender
with a statement evidencing a determination of need for a loan, and the amount
of such need, calculated by subtracting from the estimated cost of attendance
the sum of the expected family contribution with respect to the student plus the
estimated financial assistance available to such student. The amounts of the
expected family contribution, estimated available financial assistance, and
estimated costs of attendance are to be computed in accordance with standards
set forth in the Higher Education Act.
Unsubsidized Stafford Loans. A student borrower meeting the requirements set
forth under "General" above is eligible for an Unsubsidized Stafford Loan
without regard to need. Unsubsidized Stafford Loans were not available before
October 1, 1992.
Plus Loans. Plus Loans are made only to borrowers who are parents (and, under
certain circumstances, spouses of remarried parents) of dependent undergraduate
students. For Plus Loans made on or after July 1, 1993, the parent borrower must
not have an adverse credit history (as determined pursuant to criteria
established by the Department of Education). Prior to the Higher Education
Amendments of 1986, the Higher Education Act did not distinguish between Plus
Loans and SLS Loans. Student borrowers were eligible for Plus Loans; however,
parents of graduate and professional students were ineligible.
SLS Loans. Eligible borrowers for SLS Loans were limited to (a) graduate or
professional students, (b) independent undergraduate students, and (c) under
certain circumstances, dependent undergraduate students, if such students'
parents were unable to obtain a Plus Loan and were also unable to provide such
students' expected family contribution. Except as described in clause (c),
eligibility was determined without regard to need.
Consolidation Loans. To be eligible for a Consolidation Loan a borrower must (a)
have outstanding indebtedness on student loans made under the FFEL Program
and/or certain other federal student loan programs, and (b) be in repayment
status or in a Grace Period, or be a defaulted borrower who has made
arrangements to repay the defaulted loan(s) satisfactory to the holder of the
defaulted loan(s). A married couple who agree to be jointly liable on a
Consolidation Loan for which the application is received on or after January 1,
1993 may be treated as an individual for purposes of obtaining a Consolidation
Loan. For Consolidation Loans disbursed prior to July 1, 1994 the Borrower was
required to have outstanding student loan indebtedness of at least $7,500. Prior
to the adoption of the Higher Education Technical Amendments Act of 1993, Plus
Loans could not be included in the Consolidation Loan. For Consolidation Loans
for which the applications were received prior to January 1, 1993, the minimum
student loan indebtedness was $5,000 and the borrower could not be delinquent
more than 90 days in the payment of such indebtedness.
Interest Rates
The Higher Education Act establishes maximum interest rates for each of the
various types of loans. These rates vary not only among loan types, but also
within loan types depending upon when the loan was made or when the borrower
first obtained a loan under the FFEL Program. The Higher Education Act allows
lesser rates of interest to be charged. Many lenders, including the Transferor,
have offered repayment incentives or other programs that involve reduced
interest rates on certain loans made under the FFEL Program.
Stafford Loans. For a Stafford Loan made prior to July 1, 1994, the applicable
interest rate for a borrower who, on the date the promissory note was signed,
did not have an outstanding balance on a previous loan which was made, insured
or guaranteed under the FFEL Program (a "New Borrower"):
(a) is 7% per annum for a loan covering a period of
instruction beginning before January 1, 1981;
(b) is 9% per annum for a loan covering a period of
instruction beginning on or after January 1, 1981, but before September
13, 1983;
(c) is 8% per annum for a loan covering a period of
instruction beginning on or after September 13, 1983, but before July
1, 1988;
(d) for a loan made prior to October 1, 1992, covering a
period of instruction beginning on or after July 1, 1988, is 8% per
annum for the period from the disbursement of the loan to the date
which is four years after the loan enters repayment, and thereafter
shall be adjusted annually, and for any 12-month period commencing on a
July 1 shall be equal to the bond equivalent rate of 91-day U.S.
Treasury bills auctioned at the final auction prior to the preceding
June 1, plus 3.25% per annum (but not to exceed 10% per annum); or
(e) for a loan made on or after October 1, 1992 shall be
adjusted annually, and for any 12- month period commencing on a July 1
shall be equal to the bond equivalent rate of 91- day U.S. Treasury
bills auctioned at the final auction prior to the preceding June 1,
plus 3.1% per annum (but not to exceed 9% per annum).
For a Stafford Loan made prior to July 1, 1994, the applicable interest
rate for a borrower who, on the date the promissory note evidencing the
loan was signed, had an outstanding balance on a previous loan made,
insured or guaranteed under the FFEL Program (a "Repeat Borrower"):
(f) for a loan made prior to July 23, 1992 is the
applicable interest rate on the previous loan or, if such previous
loan is not a Stafford Loan, 8% per annum; or
(g) for a loan made on or after July 23, 1992 shall be
adjusted annually, and for any twelve month period commencing on a July
1 shall be equal to the bond equivalent rate of 91-day U.S. Treasury
bills auctioned at the final auction prior to the preceding June 1,
plus 3.1% per annum but not to exceed:
(i) 7% per annum in the case of a Stafford Loan made to a
borrower who has a loan described in clause (a)
above;
(ii) 8% per annum in the case of (A) a Stafford Loan made
to a borrower who has a loan described in clause (c)
above, (B) a Stafford Loan which has not been in
repayment for four years and which was made to a
borrower who has a loan described in clause (d) above
or (C) a Stafford Loan for which the first
disbursement was made prior to December 20, 1993 to a
borrower whose previous loans do not include a
Stafford Loan or an Unsubsidized Stafford Loan;
(iii) 9% per annum in the case of (A) a Stafford Loan made
to a borrower who has a loan described in clauses (b)
or (e) above or (B) a Stafford Loan for which the
first disbursement was made on or after December 20,
1993 to a borrower whose previous loans do not
include a Stafford Loan or an Unsubsidized Stafford
Loan; and
(iv) 10% per annum in the case of a Stafford Loan which
has been in repayment for four years or more and
which was made to a borrower who has a loan described
in clause (d) above.
The interest rate on all Stafford Loans made on or after July 1, 1994 BUT PRIOR
TO JULY 1, 1998, regardless of whether the borrower is a New Borrower or a
Repeat Borrower, is the rate described in clause (g) above, except that such
rate shall not exceed 8.25% per annum. For any Stafford Loan made on or after
July 1, 1995, the interest rate is further reduced prior to the time the loan
enters repayment and during any Deferment Periods. During such periods, the
formula described in clause (g) above is applied, except that 2.5% is
substituted for 3.1%, and the rate shall not exceed 8.25% per annum.
FOR STAFFORD LOANS MADE ON OR AFTER JULY 1, 1998 BUT BEFORE OCTOBER 1, 1998, THE
APPLICABLE INTEREST RATE SHALL BE ADJUSTED ANNUALLY, AND FOR ANY TWELVE MONTH
PERIOD COMMENCING ON A JULY 1 SHALL BE EQUAL TO THE BOND EQUIVALENT RATE OF
91-DAY U.S. TREASURY BILLS AUCTIONED AT THE FINAL AUCTION PRIOR TO THE PRECEDING
JUNE 1, PLUS (X) 1.7% PER ANNUM PRIOR TO THE TIME THE LOAN ENTERS REPAYMENT AND
DURING ANY DEFERMENT PERIODS, AND (Y) 2.3% PER ANNUM DURING REPAYMENT, BUT NOT
TO EXCEED 8.25% PER ANNUM.
For loans made on or after OCTOBER 1, 1998, the applicable rate will continue to
be adjusted annually, but for any 12-month period commencing on a July 1 will be
equal to the bond equivalent rate of securities with a comparable maturity (as
established by the Secretary of Education), plus 1% per annum, but not to exceed
8.25% per annum. There can be no assurance that the interest rate provisions for
such loans will not be further amended, either before or after the rate
described herein becomes effective.
Unsubsidized Stafford Loans. Unsubsidized Stafford Loans are subject to the
same interest rate provisions as Stafford Loans.
Plus Loans. The applicable interest rate on a Plus Loan:
(a) made on or after January 1, 1981, but before October
1, 1981, is 9% per annum;
(b) made on or after October 1, 1981, but before November
1, 1982, is 14% per annum;
(c) made on or after November 1, 1982, but before July 1,
1987, is 12% per annum;
(d) made on or after July 1, 1987 BUT before October 1,
1992, shall be adjusted annually, and for any
12-month period beginning on July 1 shall be equal to
the bond equivalent rate of 52-week U.S. Treasury
bills auctioned at the final auction prior to the
preceding June 1, plus 3.25% per annum (but not to
exceed 12% per annum);
(e) made on or after October 1, 1992, BUT BEFORE JULY 1,
1994, shall be adjusted annually, and for any
12-month period beginning on July 1 shall be equal to
the bond equivalent rate of 52-week U.S. Treasury
bills auctioned at the final auction prior to the
preceding June 1, plus 3.1% per annum (but not to
exceed 10% per annum);
(F) made on or after July 1, 1994, BUT BEFORE JULY 1,
1998, is the same as that described in clause (e)
above, except that such rate shall not exceed 9% per
annum; OR
(G) made on or after July 1, 1998, BUT BEFORE OCTOBER 1,
1998, SHALL BE ADJUSTED ANNUALLY, AND FOR ANY 12-MONTH
PERIOD BEGINNING ON JULY 1 SHALL BE EQUAL TO THE BOND
EQUIVALENT RATE OF 91-DAY U.S. TREASURY BILLS
AUCTIONED AT THE FINAL AUCTION PRIOR TO THE PRECEDING
JUNE 1, PLUS 3.1% PER ANNUM (BUT NOT TO EXCEED 9% PER
ANNUM).
FOR PLUS LOANS MADE ON OR AFTER OCTOBER 1, 1998, the applicable rate will
continue to be adjusted annually, but for any 12-month period commencing on a
July 1 will be equal to the bond equivalent rate of securities with a comparable
maturity (as established by the Secretary of Education), plus 2.1% per annum,
but not to exceed 9% per annum.
If requested by the borrower, an eligible lender may consolidate SLS or Plus
Loans of the same borrower held by the lender under a single repayment schedule.
The repayment period for each included loan shall be based on the commencement
of repayment of the most recent loan. The consolidated loan shall bear interest
at a rate equal to the weighted average of the rates of the included loans. Such
a consolidation shall not be treated as the making of a new loan. In addition,
at the request of the borrower, a lender may refinance an existing fixed rate
SLS or Plus Loan (including an SLS or Plus Loan held by a different lender who
has refused so to refinance such loan) at a variable interest rate. In such a
case, proceeds of the new loan are used to discharge the original loan.
SLS Loans. The applicable interest rates on SLS Loans made prior to October 1,
1992 are identical to the applicable interest rates on Plus Loans made at the
same time. For SLS Loans made on or after October 1, 1992, the applicable
interest rate is the same as the applicable interest rate on Plus Loans, except
that the ceiling is 11% per annum instead of 10% per annum.
Consolidation Loans. A Consolidation Loan made prior to July 1, 1994 bears
interest at a rate equal to the weighted average of the interest rates on the
loans retired, rounded to the nearest whole percent, but not less than 9% per
annum. Except as described in the next sentence, a Consolidation Loan made on or
after July 1, 1994 bears interest at a rate equal to the weighted average of the
interest rates on the loans retired, rounded upward to the nearest whole
percent, but with no minimum rate. For a Consolidation Loan for which the
application is received by an eligible lender on or after November 13, 1997 and
before October 1, 1998, the interest rate shall be adjusted annually, and for
any twelve month period commencing on a July 1 shall be equal to the bond
equivalent rate of 91-day U.S. Treasury bills auctioned at the final auction
prior to the preceding June 1, plus 3.1% per annum, but not to exceed 8.25% per
annum. Notwithstanding these general interest rates, the portion, if any, of a
Consolidation Loan that repaid a loan made under the HEAL Program has a
different variable interest rate. Such portion is adjusted on July 1 of each
year, but is the sum of the average of the T-Bill Rates auctioned for the
quarter ending on the preceding June 30, plus 3.0%, without any cap on the
interest rate. For a discussion of required payments that reduce the return on
Consolidation Loans, see "Fees -- Rebate Fees on Consolidation Loans" below.
Loan Limits
Each type of loan (other than Consolidation Loans, which are limited only by the
amount of eligible loans to be consolidated) is subject to limits as to the
maximum principal amount, both with respect to a given year and in the
aggregate. All of the loans are limited to the difference between the cost of
attendance and the other aid available to the student. Stafford Loans are also
subject to limits based upon the needs analysis as described above under
"Eligibility -- Stafford Loans" above. Additional limits are described below.
Stafford and Unsubsidized Stafford Loans. Except as described in the next
paragraph, Stafford and Unsubsidized Stafford Loans are generally treated as one
loan type for loan limit purposes. A student who has not successfully completed
the first year of a program of undergraduate education may borrow up to $2,625
in an academic year. A student who has successfully completed such first year,
but who has not successfully completed the second year may borrow up to $3,500
per academic year. An undergraduate student who has successfully completed the
first and second year, but who has not successfully completed the remainder of a
program of undergraduate education, may borrow up to $5,500 per academic year.
For students enrolled in programs of less than an academic year in length, the
limits are generally reduced in proportion to the amount by which such programs
are less than one year in length. A graduate or professional student may borrow
up to $8,500 in an academic year. The maximum aggregate amount of Stafford and
Unsubsidized Stafford Loans (including that portion of a Consolidation Loan used
to repay such loans) which an undergraduate student may have outstanding is
$23,000. The maximum aggregate amount for a graduate and professional student,
including loans for undergraduate education, is $65,500. The Secretary is
authorized to increase the limits applicable to graduate and professional
students who are pursuing programs which the Secretary determines to be
exceptionally expensive.
At the time that SLS Loans were eliminated, the loan limits for Unsubsidized
Stafford Loans to independent students, or dependent students whose parents
cannot borrow a Plus Loan, were increased by amounts equal to the prior SLS Loan
limits (as described below under "SLS Loans").
Prior to the enactment of the Higher Education Amendments of 1992, an
undergraduate student who had not successfully completed the first and second
year of a program of undergraduate education could borrow Stafford Loans in
amounts up to $2,625 in an academic year. An undergraduate student who had
successfully completed such first and second year, but who had not successfully
completed the remainder of a program of undergraduate education could borrow up
to $4,000 per academic year. The maximum for graduate and professional students
was $7,500 per academic year. The maximum aggregate amount of Stafford Loans
which a borrower could have outstanding (including that portion of a
Consolidation Loan used to repay such loans) was $17,250. The maximum aggregate
amount for a graduate or professional student, including loans for undergraduate
education, was $54,750. Prior to the 1986 changes, the annual limits were
generally lower.
Plus Loans. For Plus Loans made on or after July 1, 1993, the amounts of Plus
Loans are limited only by the student's unmet need. Prior to that time Plus
Loans were subject to limits similar to those to which SLS Loans were then
subject (see "SLS Loans" below), applied with respect to each student on behalf
of whom the parent borrowed.
SLS Loans. A student who had not successfully completed the first and second
year of a program of undergraduate education could borrow an SLS Loan in an
amount of up to $4,000. A student who had successfully completed such first and
second year, but who had not successfully completed the remainder of a program
of undergraduate education could borrow up to $5,000 per year. Graduate and
professional students could borrow up to $10,000 per year. SLS Loans were
subject to an aggregate maximum of $23,000 ($73,000 for graduate and
professional students). Prior to the 1992 changes, SLS Loans were available in
amounts of $4,000 per academic year, up to a $20,000 aggregate maximum. Prior to
the 1986 changes, a graduate or professional student could borrow $3,000 of SLS
Loans per academic year, up to a $15,000 maximum, and an independent
undergraduate student could borrow $2,500 of SLS Loans per academic year minus
the amount of all other FFEL Program loans to such student for such academic
year, up to a maximum amount of all FFEL Program loans to that student of
$12,500. In 1989, the amount of SLS Loans for students enrolled in programs of
less than an academic year in length were limited (similar to the limits
described above under "Stafford Loans").
Repayment
Loans made under the FFEL Program (other than Consolidation Loans) must provide
for repayment of principal in periodic installments over a period of not less
than five nor more than ten years. A Consolidation Loan must be repaid during a
period agreed to by the borrower and lender, subject to maximum repayment
periods which vary depending upon the principal amount of the borrower's
outstanding student loans (but no longer than 30 years). For Consolidation Loans
for which the application was received prior to January 1, 1993, the repayment
period could not exceed 25 years. The repayment period commences (a) not more
than twelve months after the borrower ceases to pursue at least a half-time
course of study with respect to Stafford Loans for which the applicable rate of
interest is 7% per annum, (b) not more than six months after the borrower ceases
to pursue at least a half-time course of study with respect to other Stafford
Loans and Unsubsidized Stafford Loans (the six month or twelve month periods are
the "Grace Periods") and (c) on the date of final disbursement of the loan in
the case of SLS, Plus and Consolidation Loans, except that the borrower of an
SLS Loan who also has a Stafford or Unsubsidized Stafford Loan may defer
repayment of the SLS Loan to coincide with the commencement of repayment of the
Stafford or Unsubsidized Stafford Loan. During periods in which repayment of
principal is required, payments of principal and interest must in general be
made at a rate of not less than the greater of $600 per year or the interest
that accrues during the year, except that a borrower and lender may agree at any
time before or during the repayment period that repayment may be at a lesser
rate. A borrower may agree, with concurrence of the lender, to repay the loan in
less than five years with the right subsequently to extend his minimum repayment
period to five years. Borrowers are entitled to accelerate, without penalty, the
repayment of all or any part of the loan.
In addition, since 1992, lenders of Consolidation Loans have been required to
establish graduated or income-sensitive repayment schedules and lenders of
Stafford and SLS Loans have been required to offer borrowers the option of
repaying in accordance with graduated or income-sensitive repayment schedules.
The Transferor may implement graduated repayment schedules and income-sensitive
repayment schedules. Use of income-sensitive repayment schedules may extend the
ten-year maximum term for up to five years. In addition, if the repayment
schedule on a loan that has been converted to a variable interest rate does not
provide for adjustments to the amount of the monthly installment payments, the
ten-year maximum term may be extended for up to three years.
No principal repayments need be made during certain periods of deferment
prescribed by the Higher Education Act ("Deferment Periods"). For loans to a
borrower who first obtained a loan which was disbursed before July 1, 1993,
deferments are available (i) during a period not exceeding three years while the
borrower is a member of the Armed Forces, an officer in the Commissioned Corps
of the Public Health Service or, with respect to a borrower who first obtained a
student loan disbursed on or after July 1, 1987, or a student loan to cover the
cost of instruction for a period of enrollment beginning on or after July 1,
1987, an active duty member of the National Oceanic and Atmospheric
Administration Corps, (ii) during a period not in excess of three years while
the borrower is a volunteer under the Peace Corps Act, (iii) during a period not
in excess of three years while the borrower is a full-time volunteer under the
Domestic Volunteer Act of 1973, (iv) during a period not exceeding three years
while the borrower is in service, comparable to the service referred to in
clauses (ii) and (iii), as a full-time volunteer for an organization which is
exempt from taxation under Section 501(c)(3) of the Code, (v) during a period
not exceeding two years while the borrower is serving an internship, the
successful completion of which is required to receive professional recognition
required to begin professional practice or service, or a qualified internship or
residency program, (vi) during a period not exceeding three years while the
borrower is temporarily totally disabled, as established by sworn affidavit of a
qualified physician, or while the borrower is unable to secure employment by
reason of the care required by a dependent who is so disabled, (vii) during a
period not to exceed twenty-four months while the borrower is seeking and unable
to find full-time employment, (viii) during any period that the borrower is
pursuing a full-time course of study at an eligible institution (or, with
respect to a borrower who first obtained a student loan disbursed on or after
July 1, 1987, or a student loan to cover the cost of instruction for a period of
enrollment beginning on or after July 1, 1987, is pursuing at least a half-time
course of study for which the borrower has obtained a loan under the FFEL
Program), or is pursuing a course of study pursuant to a graduate fellowship
program or a rehabilitation training program for disabled individuals approved
by the Secretary of Education, (ix) during a period, not in excess of 6 months,
while the borrower is on parental leave, and (x) only with respect to a borrower
who first obtained a student loan disbursed on or after July 1, 1987, or a
student loan to cover the cost of instruction for a period of enrollment
beginning on or after July 1, 1987, (A) during a period not in excess of three
years while the borrower is a full-time teacher in a public or nonprofit private
elementary or secondary school in a "teacher shortage area" (as prescribed by
the Secretary of Education), and (B) during a period not in excess of 12 months
for mothers, with preschool age children, who are entering or re-entering the
work force and who are compensated at a rate not exceeding $1 per hour in excess
of the federal minimum wage. For loans to a borrower who first obtains a loan on
or after July 1, 1993, deferments are available (a) during any period that the
borrower is pursuing at least a half-time course of study at an eligible
institution or a course of study pursuant to a graduate fellowship program or
rehabilitation training program approved by the Secretary, (b) during a period
not exceeding three years while the borrower is seeking and unable to find
full-time employment, and (c) during a period not in excess of three years for
any reason which the lender determines, in accordance with regulations under the
Higher Education Act, has caused or will cause the borrower economic hardship.
Economic hardship includes working full time and earning an amount not in excess
of the greater of the minimum wage or the poverty line for a family of two.
Additional categories of economic hardship are based on the relationship between
a borrower's educational debt burden and his or her income. Prior to the 1992
changes, only the Deferment Periods described above in clauses (vi) and (vii)
(with respect to the parent borrower) and the Deferment Period described in
clause (viii) (with respect to the parent borrower or a student on whose behalf
the parent borrowed) were available to Plus Loan borrowers, and only the
Deferment Periods described above in clauses (vi), (vii) and (viii) were
available to Consolidation Loan borrowers. Prior to the 1986 changes, Plus Loan
borrowers were not entitled to Deferment Periods. Deferment Periods extend the
ten-year maximum term.
The Higher Education Act also provides for periods of forbearance during which
the borrower, in case of temporary financial hardship, may defer any payments (a
"Forbearance Period"). A borrower is entitled to forbearance for a period not to
exceed three years while the borrower's debt burden under Title IV of the Higher
Education Act (which includes the FFEL Program) equals or exceeds 20% of the
borrower's gross income, and also is entitled to forbearance while he or she is
serving in a qualifying medical or dental internship program or in a "national
service position" under the National and Community Service Trust Act of 1993. In
addition, mandatory administrative forbearances are provided when exceptional
circumstances such as a local or national emergency or military mobilization
exist; or when the geographical area in which the borrower or endorser resides
has been designated a disaster area by the President of the United States or
Mexico, the Prime Minister of Canada, or by the governor of a state. In other
circumstances, forbearance is at the lender's option. Such forbearance also
extends the ten year maximum term.
As described under "Contracts with Guarantee Agencies -- Federal Interest
Subsidy Payments" below, the Secretary of Education makes interest payments on
behalf of the borrower of certain eligible loans while the borrower is in school
and during Grace and Deferment Periods. Interest that accrues during Forbearance
Periods and, if the loan is not eligible for Interest Subsidy Payments, while
the borrower is in school and during the Grace and Deferment Periods, may be
paid monthly or quarterly or capitalized (added to the principal balance) not
more frequently than quarterly.
Disbursement
Loans made under the FFEL Program (except Consolidation Loans) generally must
be disbursed in two or more installments, none of which may exceed 50% of the
total principal amount of the loan.
Fees
Guarantee Fee. A Guarantee Agency is authorized to charge a premium, or
guarantee fee, of up to 1% of the principal amount of the loan, which must be
deducted proportionately from each installment payment of the proceeds of the
loan to the borrower. Guarantee fees may not currently be charged to borrowers
of Consolidation Loans. However, lenders may be charged an insurance fee to
cover the costs of increased or extended liability with respect to Consolidation
Loans. For loans made prior to July 1, 1994, the maximum guarantee fee was 3% of
the principal amount of the loan, but no such guarantee fee was authorized to be
charged with respect to Unsubsidized Stafford Loans.
Origination Fee. An eligible lender is authorized to charge the borrower of a
Stafford or Plus Loan an origination fee in an amount not to exceed 3% of the
principal amount of the loan, and is required to charge the borrower of an
Unsubsidized Stafford Loan an origination fee in the amount of 3% of the
principal amount of the loan. These fees must be deducted proportionately from
each installment payment of the loan proceeds prior to payment to the borrower
and are not retained by the lender, but must be passed on to the Secretary of
Education. For loans made prior to July 1, 1994, the maximum authorized fee for
Stafford, Plus and SLS Loans was 5%, and the required fee for Unsubsidized
Stafford Loans was 6.5%, of the principal amount of the loan.
Lender Origination Fee. The lender of any loan under the FFEL Program made on
or after October 1, 1993 is required to pay to the Secretary of Education a fee
equal to 0.5% of the principal amount of such loan.
Rebate Fee on Consolidation Loans. The holder of any Consolidation Loan made on
or after October 1, 1993 is required to pay to the Secretary of Education a
monthly fee equal to .0875% (1.05% per annum) of the principal amount of, and
accrued interest on, such Consolidation Loan.
Loan Guarantees
Under the FFEL Program, Guarantee Agencies are required to guarantee the payment
of not less than 100% of the principal amount of loans made prior to October 1,
1993 and covered by their respective guarantee programs. For a description of
the requirements for loans to be covered by such guarantees, see "Description of
the Guarantee Agencies." For loans made on or after October 1, 1993, the minimum
percentage of the principal amount of loans which a Guarantee Agency must pay is
98% and the Department of Education has taken the position that a Guarantee
Agency may not pay more than 98% of the principal amount of and accrued interest
on such a loan. Under certain circumstances, guarantees may be assumed by the
Secretary of Education or another Guarantee Agency. See "-- Contracts with
Guarantee Agencies" below.
CONTRACTS WITH GUARANTEE AGENCIES
Under the FFEL Program, the Secretary of Education is authorized to enter into
guaranty and interest subsidy agreements with Guarantee Agencies. The FFEL
Program provides for reimbursements to Guarantee Agencies for default claims
paid by Guarantee Agencies, support payments to Guarantee Agencies for
administrative and other expenses, advances for a Guarantee Agency's reserve
funds, and Interest Subsidy Payments and Special Allowance Payments to the
holders of qualifying student loans made pursuant to the FFEL Program.
The Secretary of Education has certain oversight powers over Guarantee Agencies.
Guarantee Agencies are required to maintain their reserves at certain levels
based on the amount of outstanding loans that they have guaranteed. If a
Guarantee Agency falls below the required level in two consecutive years, or its
claims rate exceeds 9% in any year, or if the Secretary determines that the
agency's administrative or financial condition jeopardizes its ability to meet
its obligations, the Secretary can require the Guarantee Agency to submit and
implement a plan by which it will correct such problem(s). If a Guarantee Agency
fails to timely submit an acceptable plan or fails to improve its condition, or
if the Secretary determines that the Guarantee Agency is in danger of financial
collapse, the Secretary may terminate the Guarantee Agency's reimbursement
contract. The circumstances under which the Secretary may terminate such
reimbursement contracts also includes a determination that such action is
necessary to protect the federal fiscal interest or to ensure continued
availability of student loans or a smooth transition to direct lending. See "--
Direct Loans" below.
The Secretary of Education is authorized to assume the guarantee obligations of
a Guarantee Agency. The Higher Education Act now provides that, if the Secretary
terminates a Guarantee Agency's agreements under the FFEL Program, the Secretary
shall assume responsibility for all functions of the Guarantee Agency under its
program. To that end, the Secretary is authorized to, among other options,
transfer the guarantees to another Guarantee Agency or assume the guarantees. It
also provides that in the event the Secretary has determined that a Guarantee
Agency is unable to meet its guarantee obligations, holders of loans guaranteed
by such Guarantee Agency may submit claims directly to the Secretary for
payment, unless the Secretary has provided for the assumption of such guarantees
by another Guarantee Agency.
Federal Reimbursement
A Guarantee Agency's right to receive federal reimbursements for various
guarantee claims paid by such Guarantee Agency is governed by the Higher
Education Act and various contracts entered into between Guarantee Agencies and
the Secretary of Education. See "Description of the Guarantee Agencies --
Federal Agreements" herein. Under the Higher Education Act and the Federal
Reimbursement Contracts, the Secretary of Education currently agrees to
reimburse a Guarantee Agency for the amounts expended by the Guarantee Agency in
the discharge of its guarantee obligation (i.e., the unpaid principal balance of
and accrued interest on loans guaranteed by the Guarantee Agency, which loans
are referred to herein as "guaranteed loans") as a result of the default of the
borrower. With respect to loans made prior to October 1, 1993, the Secretary of
Education currently agrees to reimburse the Guarantee Agency for up to 100% of
the amounts so expended. For loans made on or after October 1, 1993, the
Secretary currently agrees to reimburse the Guarantee Agency for a maximum of
98% of the amount expended with respect to guaranteed loans. Depending on the
claims rate experience of a Guarantee Agency, such 100% (or 98%) reimbursement
may be reduced as discussed in the formula described below. The Secretary of
Education also agrees to repay 100% of the unpaid principal plus applicable
accrued interest expended by a Guarantee Agency in discharging its guarantee
obligation as a result of the bankruptcy, death, or total and permanent
disability of a borrower (or in the case of a Plus Loan, the death of the
student on behalf of whom the loan was borrowed), or in certain circumstances,
as a result of school closures, which reimbursements are not to be included in
the calculations of the Guarantee Agency's Claims Rate experience for the
purpose of federal reimbursement under the Federal Reimbursement Contracts.
The formula for computing the percentage of federal reimbursement under the
Federal Reimbursement Contracts is not accumulated over a period of years but is
measured by the amount of federal reimbursement payments in any one federal
fiscal year as a percentage of the original principal amount of loans under the
FFEL Program guaranteed by the Guarantee Agency and in repayment at the end of
the preceding fiscal year. Under the formula, federal reimbursement payments to
a Guarantee Agency in any one fiscal year not exceeding 5% of the original
principal amount of loans in repayment at the end of the preceding fiscal year
are to be paid by the Secretary of Education at 100% (or 98% for loans made on
or after October 1, 1993). Beginning at any time during any fiscal year that
federal reimbursement payments exceed 5%, and until such time as they may exceed
9%, of the original principal amount of loans in repayment at the end of the
preceding fiscal year, then reimbursement payments on claims submitted during
that period are to be paid at 90% (or 88% for loans made on or after October 1,
1993). Beginning at any time during any fiscal year that federal reimbursement
payments exceed 9% of the original principal amount of loans in repayment at the
end of the preceding fiscal year, then such payments for the balance of that
fiscal year will be paid at 80% (or 78% for loans made on or after October 1,
1993). The original principal amount of loans in repayment for purposes of
computing reimbursement payments to a Guarantee Agency means the original
principal amount of all loans guaranteed by such Guarantee Agency less: (1)
guarantee payments on such loans, (2) the original principal amount of such
loans that have been fully repaid, and (3) the original principal amount of such
loans for which the first principal installment payment has not become due or
such first installment need not be paid because of a Deferment Period.
Under present practice, after the Secretary of Education reimburses a Guarantee
Agency for a default claim paid on a guaranteed loan, the Guarantee Agency
continues to seek repayment from the borrower. The Guarantee Agency returns to
the Secretary of Education payments that it receives from a borrower after
deducting and retaining (i) a percentage amount equal to the complement of the
reimbursement percentage in effect at the time the loan was reimbursed, and (ii)
an amount equal to 27% (or 18 1/2% in the case of a payment from the proceeds of
a Consolidation Loan) of such payments for certain administrative costs. The
Secretary of Education may, however, require the assignment to the Secretary of
defaulted guaranteed loans, in which event no further collections activity need
be undertaken by the Guarantee Agency, and no amount of any recoveries shall be
paid to the Guarantee Agency. Prior to the 1993 changes, the percentage of
collections which Guarantee Agencies could retain (as described in clause (ii)
above) was 30%.
A Guarantee Agency may enter into an addendum to its Interest Subsidy Agreement
(as hereinafter defined), which addendum provides for the Guarantee Agency to
refer to the Secretary of Education certain defaulted guaranteed loans. Such
loans are then reported to the Internal Revenue Service to "offset" any tax
refunds which may be due any defaulted borrower. To the extent that the
Guarantee Agency has originally received less than 100% reimbursement from the
Secretary of Education with respect to such a referred loan, the Guarantee
Agency will not recover any amounts subsequently collected by the federal
government which are attributable to that portion of the defaulted loan for
which the Guarantee Agency has not been reimbursed.
Rehabilitation of Defaulted Loans
Under Section 428F of the Higher Education Act, the Secretary of Education is
authorized to enter into an agreement with a Guarantee Agency pursuant to which
the Guarantee Agency shall sell defaulted loans that are eligible for
rehabilitation to an eligible lender. The Guarantee Agency shall repay the
Secretary of Education an amount equal to 81.5% of the then current principal
balance of such loan, multiplied by the reimbursement percentage in effect at
the time the loan was reimbursed. The amount of such repayment shall be deducted
from the amount of federal reimbursement payments for the fiscal year in which
such repayment occurs, for purposes of determining the reimbursement rate for
that fiscal year.
For a loan to be eligible for rehabilitation, the Guarantee Agency must have
received consecutive payments for 12 months of amounts owed on such loan. Upon
rehabilitation, a loan is eligible for all the benefits under the Higher
Education Act for which it would have been eligible had no default occurred
(except that a borrower's loan may only be rehabilitated once).
Eligibility for Federal Reimbursement
To be eligible for federal reimbursement payments, guaranteed loans must be made
by an eligible lender under the applicable Guarantee Agency's Guarantee Program,
which must meet requirements prescribed by the rules and regulations promulgated
under the Higher Education Act, including the borrower eligibility, loan amount,
disbursement, interest rate, repayment period and guarantee fee provisions
described herein and the other requirements set forth in Section 428(b) of the
Higher Education Act.
Under the Higher Education Act, a guaranteed loan must be delinquent for 180
days if it is repayable in monthly installments or 240 days if it is payable in
less frequent installments before a lender may obtain payment on a guarantee
from the Guarantee Agency. The Guarantee Agency must pay the lender for the
defaulted loan prior to submitting a claim to the Secretary of Education for
reimbursement. The Guarantee Agency must submit a reimbursement claim to the
Secretary of Education within 45 days after it has paid the lender's default
claim. As a prerequisite to entitlement to payment on the guarantee by the
Guarantee Agency, and in turn payment of reimbursement by the Secretary of
Education, the lender must have exercised reasonable care and diligence in
making, servicing and collecting the GUARANTEED LOAN. GENERALLY, THESE
PROCEDURES REQUIRE THAT COMPLETED LOAN APPLICATIONS BE PROCESSED, A
DETERMINATION OF WHETHER AN APPLICANT IS AN ELIGIBLE BORROWER ATTENDING AN
ELIGIBLE INSTITUTION UNDER THE HIGHER EDUCATION ACT BE MADE, THE BORROWER'S
RESPONSIBILITIES UNDER THE LOAN BE EXPLAINED TO HIM OR HER, THE PROMISSORY NOTE
EVIDENCING THE LOAN BE EXECUTED BY THE BORROWER AND THAT THE LOAN PROCEEDS BE
DISBURSED BY THE LENDER IN A SPECIFIED MANNER. AFTER THE LOAN IS MADE, THE
LENDER MUST ESTABLISH REPAYMENT TERMS WITH THE BORROWER, PROPERLY ADMINISTER
DEFERMENTS AND FORBEARANCES AND CREDIT THE BORROWER FOR PAYMENTS MADE. IF A
BORROWER BECOMES DELINQUENT IN REPAYING A LOAN, A LENDER MUST PERFORM CERTAIN
COLLECTION PROCEDURES (PRIMARILY TELEPHONE CALLS, DEMAND LETTERS, SKIPTRACING
PROCEDURES AND REQUESTING ASSISTANCE FROM THE APPLICABLE GUARANTEE AGENCY) THAT
VARY DEPENDING UPON THE LENGTH OF TIME A LOAN IS DELINQUENT.
Federal Interest Subsidy Payments
"Interest Subsidy Payments" are interest payments paid with respect to an
eligible loan during the period prior to the time that the loan enters repayment
and during Grace and Deferment Periods. The Secretary of Education and the
Guarantee Agencies entered into the Interest Subsidy Agreements as described in
"Description of the Guarantee Agencies -- Federal Agreements," whereby the
Secretary of Education agrees to pay Interest Subsidy Payments to the holders of
eligible guaranteed loans for the benefit of students meeting certain
requirements, subject to the holders' compliance with all requirements of the
Higher Education Act. Only Stafford Loans, and Consolidation Loans for which the
application was received on or after January 1, 1993, are eligible for Interest
Subsidy Payments. Consolidation Loans made after August 10, 1993 are eligible
for Interest Subsidy Payments only if all loans consolidated thereby are
Stafford Loans, except that Consolidation Loans for which the application is
received by an eligible lender on or after November 13, 1997 and before October
1, 1998, are eligible for Interest Subsidy Payments on that portion of the
Consolidation Loan that repays Stafford Loans or similar subsidized loans made
under the direct loan program. In addition, to be eligible for Interest Subsidy
Payments, guaranteed loans must be made by an eligible lender under the
applicable Guarantee Agency's Guarantee Program, and must meet requirements
prescribed by the rules and regulations promulgated under the Higher Education
Act, including the borrower eligibility, loan amount, disbursement, interest
rate, repayment period and guarantee fee provisions described herein and the
other requirements set forth in Section 428(b) of the Higher Education Act.
The Secretary of Education makes Interest Subsidy Payments quarterly on behalf
of the borrower to the holder of a guaranteed loan in a total amount equal to
the interest which accrues on the unpaid principal amount prior to the
commencement of the repayment period of the loan or during any Deferment Period.
A borrower may elect to forego Interest Subsidy Payments, in which case the
borrower is required to make interest payments.
Federal Administrative Expense Allowances
Prior to the adoption of the 1993 Amendments, each Guarantee Agency was entitled
to receive from the Secretary of Education an administrative cost allowance
equal to 1% of the total principal amount of the loans (other than Consolidation
Loans) guaranteed by the Guarantee Agency in any fiscal year, for the purposes
of administrative costs of pre-claims assistance for default prevention and
collection of defaulted guaranteed loans, administrative costs of promoting
commercial lender participation, administrative costs of monitoring the
enrollment and repayment status of students, and for other such costs related to
the Guarantee Agency's Guarantee Program. The 1993 Amendments repealed such
entitlement, effective October 1, 1993. The 1993 Amendments, however, authorized
payments for transition support (including administrative costs) to Guarantee
Agencies, in connection with the transition to direct lending. See "Direct
Loans" below. Budget legislation adopted since that time has provided for the
payment to Guarantee Agencies of an administrative expense allowance equal to
0.85% of the agency's annual new guarantee volume, which has been extended
through the fiscal year ending September 30, 2002. After the fiscal year ending
September 30, 1997, however, such amounts are subject to decreasing aggregate
limits. There are no assurances as to the level of such payments that can be
made within such aggregate limits, or that Congress will require such payments
or that the Secretary of Education will determine to continue to make any such
payments in future years.
Federal Advances
Pursuant to agreements entered into between the Guarantee Agencies and the
Secretary of Education under Sections 422 and 422(c) of the Higher Education
Act, the Secretary of Education was authorized to advance moneys from time to
time to the Guarantee Agencies for the purpose of establishing and strengthening
the Guarantee Agencies' reserves. Section 422(c) currently authorizes the
Secretary of Education to make advances to Guarantee Agencies in various
circumstances, on terms and conditions satisfactory to the Secretary, including
if the Secretary is seeking to terminate the Guarantee Agency's reimbursement
contract or assume the Guarantee Agency's functions, to assist the Guarantee
Agency in meeting its immediate cash needs or to ensure the uninterrupted
payment of claims.
FEDERAL SPECIAL ALLOWANCE PAYMENTS
The Higher Education Act provides for the payment by the Secretary of Education
of additional subsidies, called Special Allowance Payments, to holders of
qualifying student loans. The amount of the Special Allowance Payments, which
are made on a quarterly basis, is computed by reference to the average of the
bond equivalent rates of the 91-day Treasury bills auctioned during the
preceding quarter (the "T-Bill Rate"). The quarterly rate for Special Allowance
Payments for Student Loans made on or after October 1, 1981, and generally
before November 16, 1986, is computed by subtracting the applicable interest
rate on such loans from the T-Bill Rate, adding 3.5% to the resulting per
centum, and dividing the resulting per centum by four. For loans disbursed on or
after November 16, 1986, or loans to cover the costs of instruction for periods
of enrollment beginning on or after November 16, 1986, 3.25% has been
substituted for 3.5% in the foregoing formula. For loans disbursed on or after
October 1, 1992, 3.1% has been substituted for 3.5% in such formula. For
Stafford and Unsubsidized Stafford Loans made on or after July 1, 1995, 2.5% has
been substituted for 3.1% in such formula prior to the time such loans enter
repayment and during any Deferment Periods. For STAFFORD AND
UNSUBSIDIZED STAFFORD LOANS made on or after July 1, 1998, 1998 AMENDMENTS
SUBSTITUTE 2.1% FOR 3.1% IN SUCH FORMULA PRIOR TO THE TIME SUCH LOANS ENTER
REPAYMENT AND DURING ANY DEFERMENT PERIODS, AND SUBSTITUTE 2.8% FOR 3.1% IN SUCH
FORMULA WHILE SUCH LOANS ARE IN REPAYMENT. FOR LOANS MADE ON OR AFTER OCTOBER 1,
1998, the special allowance formula is to be revised similarly to the manner in
which the applicable interest rate formula is revised, as described above under
"Loan Terms -- Interest Rates -- Stafford Loans".
For Plus and SLS Loans which bear interest at rates adjusted annually, Special
Allowance Payments are made only in years during which the interest rate ceiling
on such loans operates to reduce the rate that would otherwise apply based upon
the applicable formula. See "Loan Terms -- Interest Rates -- Plus Loans" and "--
SLS Loans" above. Special Allowance Payments are paid with respect to Plus Loans
made on or after July 1, 1994 only if the rate that would otherwise apply
exceeds 10% per annum, notwithstanding that the interest rate ceiling on such
loans is 9% per annum. The portion, if any, of a Consolidation Loan that repaid
a loan made under the HEAL Program is ineligible for Special Allowance Payments.
The Balanced Budget and Deficit Control Act of 1985, as amended (known as the
"Gramm-Rudman Law") requires the President to issue a sequester order for any
federal fiscal year in which the projected budget exceeds the target for that
year. A sequester order for any fiscal year would apply to loans made on or
after October 1 of that fiscal year. The sequester order would change the
formula for calculating Special Allowance Payments for the first four Special
Allowance Payment periods relating to loans originally disbursed during that
fiscal year. The special allowance formula would be reduced to the T-Bill Rate
plus 3.0% (for loans with a special allowance formula of the T-Bill Rate plus
3.1%).
The Higher Education Act provides that if Special Allowance Payments or Interest
Subsidy Payments have not been made within 30 days after the Secretary of
Education receives an accurate, timely and complete request therefor, the
special allowance payable to such holder shall be increased by an amount equal
to the daily interest accruing on the special allowance and Interest Subsidy
Payments due the holder.
Special Allowance Payments and Interest Subsidy Payments are reduced by the
amount which the lender is authorized or required to charge as an origination
fee, as described above under "Loan Terms -- Fees -- Origination Fee." In
addition, the amount of the lender origination fee described above under "Loan
Terms -- Fees -- Lender Origination Fees" is collected by offset to Special
Allowance Payments and Interest Subsidy Payments.
FEDERAL STUDENT LOAN INSURANCE FUND
The Higher Education Act authorizes the establishment of a Student Loan
Insurance Fund by the Federal government for making the federal insurance and
the federal reimbursement payments on defaulted student loans to Guarantee
Agencies. If moneys in the fund are insufficient to make the federal payments on
defaults of such loans, the Secretary of Education is authorized, to the extent
provided in advance by appropriation acts, to issue to the Secretary of the
Treasury obligations containing terms and conditions prescribed by the Secretary
of Education and approved by the Secretary of the Treasury, bearing interest at
a rate determined by the Secretary of the Treasury. The Secretary of the
Treasury is authorized and directed by the Higher Education Act to purchase such
obligations.
DIRECT LOANS
The 1993 Amendments authorized a program of "direct loans," to be originated by
schools with funds provided by the Secretary of Education. Under the direct loan
program, the Secretary of Education is directed to enter into agreements with
schools, or origination agents in lieu of schools, to disburse loans with funds
provided by the Secretary. Participation in the program by schools is voluntary.
The goals set forth in the 1993 Amendments call for the direct loan program to
constitute 5% of the total volume of loans made under the FFEL Program and the
direct loan program for academic year 1994-1995, 40% for academic year
1995-1996, 50% for academic years 1996-1997 and 1997-1998 and 60% for academic
year 1998-1999. No provision is made for the size of the direct loan program
thereafter. Based upon information released by the General Accounting Office,
participation by schools in the direct loan program has not been sufficient to
meet the goals for the 1995-1996 or 1996-1997 academic years.
The loan terms are generally the same under the direct loan program as under the
FFEL Program, though more flexible repayment provisions are available under the
direct loan program. At the discretion of the Secretary of Education, students
attending schools that participate in the direct loan program (and their
parents) may still be eligible for participation in the FFEL Program, though no
borrower could obtain loans under both programs.
It is difficult to predict the impact of the direct lending program. There is no
way to accurately predict the number of schools that will participate in future
years, or, if the Secretary authorizes students attending participating schools
to continue to be eligible for FFEL Program loans, how many students will seek
loans under the direct loan program instead of the FFEL Program. In addition, it
is impossible to predict whether future legislation will eliminate, limit or
expand the direct loan program or the FFEL Program.
DESCRIPTION OF THE GUARANTEE AGENCIES
GENERAL
The Financed Student Loans for a Series of Notes may be guaranteed by any one or
more Guarantee Agencies identified in the related Prospectus Supplement. The
following discussion relates to Guarantee Agencies under the FFEL Program. The
particular arrangements of a guarantor with respect to a Private Loan Program
will be described in the Prospectus Supplement for a Series, as applicable.
A Guarantee Agency guarantees loans made to students or parents of students by
lending institutions such as banks, credit unions, savings and loan
associations, certain schools, pension funds and insurance companies. A
Guarantee Agency generally purchases defaulted student loans which it has
guaranteed from its cash and reserves (generally referred to herein as its
"Guarantee Fund"). A lender may submit a default claim to the Guarantee Agency
after the student loan has been delinquent for at least 180 days; however,
lenders are strongly encouraged not to file a claim until a loan is at least 210
days delinquent. The default claim package must include all information and
documentation required under the FFEL Program regulations and the Guarantee
Agency's policies and procedures. Under the Guarantee Agencies' current
procedures, assuming that the default claim package complies with the Guarantee
Agency's loan procedures manual or regulations, the Guarantee Agency pays the
lender for a default claim within 90 days of the lender's filing the claim with
the Guarantee Agency (WHICH GENERALLY IS EXPECTED TO BE 300 DAYS FOLLOWING THE
DATE A LOAN BECOMES DELINQUENT). The Guarantee Agency will pay the lender
interest accrued on the loan for up to 360 days after delinquency. The Guarantee
Agency must file a reimbursement claim with the Department of Education within
45 days after the Guarantee Agency has paid the lender for the default claim.
In general, a Guarantee Agency's Guarantee Fund has been funded principally by
administrative cost allowances paid by the Secretary of Education, guarantee
fees paid by lenders (the cost of which may be passed on to borrowers),
investment income on moneys in the Guarantee Fund, and a portion of the moneys
collected from borrowers on Guaranteed Loans that have been reimbursed by the
Secretary of Education to cover the Guarantee Agency's administrative expenses.
Various changes to the Higher Education Act have adversely affected the receipt
of revenues by the Guarantee Agencies and their ability to maintain their
Guarantee Funds at previous levels, and may adversely affect their ability to
meet their guarantee obligations. These changes include the reduction in
reinsurance payments from the Secretary of Education because of reduced
reimbursement percentages; the reduction in maximum permitted guarantee fees
from 3% to 1% for loans made on or after July 1, 1994; the reduction and
possible elimination of administrative expense allowances from the Secretary of
Education; the reduction in supplemental preclaims assistance payments from the
Secretary of Education; and the reduction in retention by a Guarantee Agency of
collections on defaulted loans from 30% to 27%. Additionally, the adequacy of a
Guarantee Agency's Guarantee Fund to meet its guarantee obligations with respect
to existing student loans depends, in significant part, on its ability to
collect revenues generated by new loan guarantees. The Federal Direct Student
Loan Program may adversely affect the volume of new loan guarantees. Pending
legislation and future legislation may make additional changes to the Higher
Education Act that would significantly affect the revenues received by Guarantee
Agencies and the structure of the guarantee agency program. For a more complete
description of provisions of the Higher Education Act that relate to payments
described in this paragraph or affect the funding of a Guarantee Fund, see
"Description of the FFEL Program."
The Higher Education Act gives the Secretary of Education various oversight
powers over Guarantee Agencies. These include requiring a Guarantee Agency to
maintain its Guarantee Fund at a certain required level and taking various
actions relating to a Guarantee Agency if its administrative and financial
condition jeopardizes its ability to meet its obligations. These actions
include, among others, providing advances to the Guarantee Agency, terminating
the Guarantee Agency's Federal Reimbursement Contracts, assuming responsibility
for all functions of the Guarantee Agency, and transferring the Guarantee
Agency's guarantees to another guarantee agency or assuming such guarantees. The
Higher Education Act provides that a Guarantee Agency's Guarantee Fund shall be
considered to be the property of the United States to be used in the operation
of the FFEL Program or the Federal Direct Student Loan Program, and, under
certain circumstances, the Secretary of Education may demand payment of amounts
in the Guarantee Fund. The Secretary of Education is required to demand payment
on September 1, 2002 of a total of one billion dollars from all the Guarantee
Agencies participating in the FFEL Program. The amounts to be demanded of each
Guarantee Agency shall be determined in accordance with formulas included in the
Higher Education Act. Each Guarantee Agency will be required to deposit funds in
a restricted account in installments, beginning in the federal fiscal year
ending September 30, 1998, to provide for such payment. The Secretary of
Education has made the determinations, and advised the Guarantee Agencies, of
the amounts required to be so transferred by the Guarantee Agencies. There can
be no assurance that relevant federal laws, including the Higher Education Act,
will not be further changed in a manner that may adversely affect the ability of
a Guarantee Agency to meet its guarantee obligations. See "Description of the
FFEL Program."
There are no assurances as to the Secretary of Education's actions if a
Guarantee Agency encounters administrative or financial difficulties or that the
Secretary of Education will not demand that a Guarantee Agency transfer
additional portions or all of its Guarantee Fund to the Secretary of Education.
Information relating to the particular Guarantee Agencies guaranteeing the
Financed Student Loans will be set forth in the Prospectus Supplement. Such
information will be provided by the respective Guarantee Agencies, and neither
such information nor information included in the reports referred to therein has
been verified by, or is guaranteed as to accuracy or completeness by, the
Depositor, the Transferor or the Underwriters. No representation is made by the
Depositor, the Transferor or the Underwriters as to the accuracy or adequacy of
such information or the absence of material adverse changes in such information
subsequent to the dates thereof.
FEDERAL AGREEMENTS
Each Guarantee Agency and the Secretary of Education have entered into Federal
Reimbursement Contracts pursuant to Section 428(c) of the Higher Education Act
(which include, for older Guarantee Agencies, a supplemental contract pursuant
to former Section 428A of the Higher Education Act), which provide for the
Guarantee Agency to receive 80% to 100% reimbursement of insurance payments that
the Guarantee Agency makes to eligible lenders with respect to loans guaranteed
by the Guarantee Agency prior to the termination of the Federal Reimbursement
Contracts or the expiration of the authority of the Higher Education Act. The
1993 Amendments reduced the reimbursement percentages referred to above with
respect to claims on most loans made on or after October 1, 1993. See "-- Effect
of Annual Claims Rate" below. The Federal Reimbursement Contracts provide for
termination under certain circumstances and also provide for certain actions
short of termination by the Secretary of Education to protect the federal
interest. See "Description of the FFEL Program -- Contracts with Guarantee
Agencies -- Federal Reimbursement."
In addition to guarantee benefits, qualified Student Loans acquired under the
FFEL Program benefit from certain federal subsidies. Each Guarantee Agency and
the Secretary of Education have entered into an interest subsidy agreement under
Section 428(b) of the Higher Education Act (as amended, an "Interest Subsidy
Agreement"), which entitles the holders of eligible loans guaranteed by the
Guarantee Agency to receive Interest Subsidy Payments from the Secretary of
Education on behalf of certain students while the student is in school, during a
six to twelve month Grace Period after the student leaves school, and during
certain Deferment Periods, subject to the holders' compliance with all
requirements of the Higher Education Act. See "Description of the FFEL Program
- -- Contracts with Guarantee Agencies -- Federal Interest Subsidy Payments" for a
more detailed description of the Interest Subsidy Payments.
United States Courts of Appeals have held that the federal government, through
subsequent legislation, has the right unilaterally to amend the contracts
between the Secretary of Education and the Guarantee Agencies described herein.
Amendments to the Higher Education Act in 1986, 1987, 1992 and 1993,
respectively (i) abrogated certain rights of guarantee agencies under contracts
with the Secretary of Education relating to the repayment of certain advances
from the Secretary of Education, (ii) authorized the Secretary of Education to
withhold reimbursement payments otherwise due to certain guarantee agencies
until specified amounts of such guarantee agencies' reserves had been
eliminated, (iii) added new reserve level requirements for guarantee agencies
and authorized the Secretary of Education to terminate the Federal Reimbursement
Contracts under circumstances that did not previously warrant such termination,
and (iv) expanded the Secretary of Education's authority to terminate such
contracts and to seize guarantee agencies' reserves. There can be no assurance
that future legislation will not further adversely affect the rights of the
Guarantee Agencies, or holders of loans guaranteed by a Guarantee Agency under
such contracts.
EFFECT OF ANNUAL CLAIMS RATE
A Guarantee Agency's ability to meet its obligation to pay default claims on
Financed Eligible Loans will depend on the adequacy of its Guarantee Fund and,
under the current federal reinsurance arrangement, the default experience of all
lenders under the Guarantee Agency's Guarantee Program. A high default
experience among lenders participating in a Guarantee Agency's Guarantee Program
may cause the Guarantee Agency's Claims Rate (as defined below) for its
Guarantee Program to exceed the 5% and 9% levels described below, and result in
the Secretary of Education reimbursing the Guarantee Agency at lower percentages
of default claims payments made by the Guarantee Agency.
In general, Guarantee Agencies are currently entitled to receive reimbursement
payments under the Federal Reimbursement Contracts in amounts that vary
depending on the Claims Rate experience of the Guarantee Agency. The "Claims
Rate" is computed by dividing total default claims since the previous September
30 by the total original principal amount of the Guarantee Agency's guaranteed
loans in repayment on such September 30. On October 1 of each year the Claims
Rate begins at zero, regardless of the experience in preceding years. For loans
made prior to October 1, 1993, if the Claims Rate remains equal to or below 5%
within a given federal fiscal year (October 1 through September 30), the
Secretary of Education is currently obligated to provide 100% reimbursement; if
and when the Claims Rate exceeds 5% and until such time, if any, as it exceeds
9% during the fiscal year, the reimbursement rate is at 90%; if and when the
Claims Rate exceeds 9% during the fiscal year, the reimbursement rate for the
remainder of the fiscal year is at 80%. For loans made prior to October 1, 1993,
each Guarantee Agency is currently entitled to at least 80% reimbursement from
the Secretary of Education on default claims that it purchases, regardless of
its Claims Rate. The reimbursement percentages for loans made on or after
October 1, 1993 are reduced from 100%, 90% and 80% to 98%, 88% and 78%,
respectively. See "Description of the FFEL Program."
DESCRIPTION OF THE HEAL PROGRAM
ELIGIBLE BORROWER
An eligible borrower under the HEAL Program is a student who (i) meets certain
citizen, national or resident requirements, (ii) has been accepted for
enrollment at a school of medicine, osteopathy, dentistry, veterinary medicine,
optometry, podiatry, pharmacy, public health or chiropractic, or a graduate
program in health administration or clinical psychology (an "eligible
institution") or, if attending an eligible institution, is in good standing at
that institution, but, in the case of a medical, dental or osteopathic student,
including only the last four years of an accelerated, integrated program of
study, (iii) is or will be a full-time student at the eligible institution, (iv)
has agreed that all funds received under the loan will be used solely for
tuition and other reasonable educational expenses and the insurance premium
charged on the loan, (v) requires the loan to pursue the course of study at the
institution, and (vi) if a pharmacy student, has satisfactorily completed three
years of training. Certain individuals who meet the same citizen, national or
resident requirements and have previously received a loan insured under the HEAL
Program while a full-time student at an eligible institution may also receive a
loan during the period before principal must be paid on the loan to repay
interest due on the previous loans under the HEAL Program.
ELIGIBLE LENDER
An eligible institution may apply to the Secretary of HHS to become a lender
under the HEAL Program. Various types of organizations may qualify to be
eligible lenders or holders of HEAL loans. Eligible lenders include an agency or
instrumentality of a state; a bank, savings and loan association, credit union
or insurance company which is subject to examination and supervision in its
capacity as a lender by an agency of the United States or of the state in which
it has its principal place of business; a pension fund approved by the Secretary
of HHS; and certain other entities specified in the HEAL Act. If the Secretary
of HHS approves the lender's application, the Secretary of HHS and the lender
enter into an insurance contract whereby the Secretary of HHS agrees to insure
each eligible HEAL Loan held by the lender against the borrower's default,
death, total and permanent disability, or bankruptcy.
An approved eligible lender can have either a standard insurance contract or a
comprehensive insurance contract with the Secretary of HHS. A lender with a
standard insurance contract must submit to the Secretary of HHS a borrower's
application for each loan that the lender determines to be eligible for
insurance. The Secretary of HHS notifies the lender whether or not the loan is
insurable, the amount of the insurance and the expiration of the loan
commitment. A lender with a comprehensive insurance contract may disburse a loan
without submitting an individual borrower's application to the Secretary of HHS
for initial approval. All eligible loans made by a lender with a comprehensive
insurance contract before a specified date are automatically insured up to the
aggregate amount stated in the insurance contract. The Secretary of HHS may
limit, suspend or terminate the lender's eligibility under the HEAL Program if
the lender violates any provision of the HEAL Act or agreements with the
Secretary of HHS concerning the HEAL Program. The Transferor and the Eligible
Lender Trustee are each a currently approved holder of a Comprehensive Insurance
Contract with the Secretary of HHS.
INSURANCE BENEFITS
The insurance provided by the Secretary of HHS covers 100% of the lender's
losses on both unpaid principal and interest except to the extent that a
borrower may have a defense on the loan (other than infancy). HEAL insurance is
not unconditional. The Secretary of HHS insures HEAL Loans on the implied
representation of the lender that all the requirements for the initial
insurability have been met. HEAL insurance is further conditioned upon
compliance by all holders of the loan with all laws, regulations and other
requirements. The insurance coverage on a loan under the HEAL Program ceases to
be effective after a 60-day default by the lender in the payment of the
insurance premium charged by the Secretary of HHS.
Payment on an approved insurance claim generally covers interest that accrues
through the date the claim is paid, except that the Secretary of HHS does not
pay interest that accrues between the end of the period that a claim is required
to be filed and the date the Secretary of HHS receives the claim, and, if a
claim is returned to the lender for additional documentation necessary for
approval of the claim, interest is only paid for the first 30 days following the
return of the claim to the lender.
AUTHORIZED AMOUNTS OF HEAL LOANS
An eligible student borrower may borrow an amount for an academic year equal to
the difference between the student's estimated cost of education for that period
and the amount of other financial aid the student will receive for that period.
An eligible non-student borrower may borrow in an amount that is no greater than
the sum of the HEAL insurance premium plus the interest that is expected to
accrue and must be paid on the borrower's HEAL Loan during the period for which
the new loan is intended. The total amount of HEAL Loans made to any borrower
which may be covered by federal insurance may not exceed $20,000 in any academic
year for a student enrolled in a school of, or in the field of, medicine,
osteopathy, dentistry, veterinary medicine, optometry or podiatry, up to a
maximum aggregate of $80,000, and $12,500 in any academic year for a borrower
enrolled in a school of, or in the field, of pharmacy, public health, or
chiropractic, or a graduate program in health administration or clinical
psychology, up to an aggregate maximum of $50,000.
TERMS OF HEAL LOANS
A loan made under the HEAL Program must be made without security, except that in
certain limited instances an endorsement may be required. The borrower may
prepay the whole or any part of the loan at any time without penalty.
The principal amount of the HEAL Loan must be repaid in installments over a
period of not less than 10 years or more than 25 years, beginning not earlier
than nine months nor later than twelve months (the "Grace Period") after the
date on which (i) the borrower ceases to be a participant in an accredited
internship or residency program of not more than four years in duration, or the
borrower completes the fourth year of an accredited internship or residency
program of more than four years in duration (for loans made on or after October
22, 1985), or the borrower ceases to carry, at an eligible institution, the
normal full-time academic workload, or (ii) the borrower, who is a graduate
student of an eligible institution, ceases to be a participant in a fellowship
training program not in excess of two years or a participant in a full-time
educational activity not in excess of two years, which is directly related to
the health profession for which the borrower prepared at an eligible
institution, as determined by the Secretary of HHS, and which may be engaged in
by the borrower during such a two-year period which begins within twelve months
after the completion of the borrower's participation in a program described in
clause (i) of this sentence or prior to the completion of the borrower's
participation in such program (for loans made on or after October 22, 1985),
except during periods of deferment (described below). The repayment period of
the loan may not exceed 33 years from the date of execution of the note or
written agreement evidencing it. Principal and interest need not be paid, but
interest accrues, during any period (i) during which the borrower is pursuing a
full-time course of study at an eligible institution (or at an eligible
institution under the FFEL Program), (ii) not in excess of four years during
which the borrower is a participant in an accredited internship or residency
program, (iii) not in excess of three years during which the borrower is a
member of the Armed Forces of the United States, (iv) not in excess of three
years during which the borrower is in service as a volunteer under the Peace
Corps Act (22 USCA ss.2501 et seq.) or is a member of the National Health
Service Corps, (v) not in excess of three years during which the borrower is in
service as a full-time volunteer under Title I of the Domestic Volunteer Service
Act of 1973, (vi) not in excess of three years for a borrower who has completed
an accredited internship or residency training program in osteopathic general
practice, family medicine, general internal practice, preventive medicine or
general pediatrics and who is practicing primary care, (vii) not in excess of
one year, for borrowers who are graduates of schools of chiropractic, (viii) not
in excess of two years which is described in clause (ii) of the first sentence
of this paragraph, and (ix) in addition to all other deferments for which the
borrower is eligible under clauses (i) through (viii) of this sentence during
which the borrower is a member of the Armed Forces on active duty during the
Persian Gulf conflict. The periods described in (i) through (ix) are "Deferment
Periods." In certain circumstances a Deferment Period may not be included in
determining the 25- and 33-year maximum repayment periods referred to above.
At least 30 and not more than 60 days before the commencement of the repayment
period, the borrower must contact the lender to establish the precise term of
repayment. The note must offer, in accordance with criteria prescribed by
regulation of the Secretary of HHS, a graduated repayment schedule. The borrower
may choose to repay under the graduated repayment schedule or a repayment
schedule which provides for substantially equal installment payments. The
Secretary of HHS has not promulgated regulations which set the criteria for a
graduated repayment schedule.
Unless agreed otherwise, in writing, the total of the payments by a borrower
during any year of the repayment period with respect to all loans of the
borrower under the HEAL Program should be at least equal to the annual interest
on the outstanding principal, except during Deferment Periods.
INTEREST
At the lender's option, the interest rate on the HEAL Loan may be calculated on
a fixed rate or on a variable rate basis. Whichever method is selected, that
method must continue over the life of the loan, except where the loan is
consolidated with another HEAL Loan. Interest that is calculated on a fixed rate
basis is determined for the life of the loan during the calendar quarter in
which the loan is disbursed. It may not exceed the maximum rate determined for
that quarter by the Secretary of HHS. Interest that is calculated on a variable
rate basis varies every calendar quarter throughout the life of the loan as the
market price of U.S. Treasury bills changes. For any quarter, it may not exceed
the maximum rate determined by the Secretary of HHS. For each calendar quarter,
the Secretary of HHS determines the general maximum annual HEAL interest rate by
(i) determining the average of the bond equivalent rates reported for the 91-day
U.S. Treasury bills auctioned for the preceding calendar quarter, (ii) adding 3
percentage points, and (iii) rounding that figure to the next higher one-eighth
of one percent. The HEAL Loans may bear interest at less than the statutory
rates to the extent specified in the related Prospectus Supplement.
As a general rule, unpaid accrued interest may be compounded semi-annually and
added to principal. However, if a borrower postpones payment of interest before
the beginning of the repayment period or during Deferment Periods or the lender
permits postponement during forbearance, the lender may refrain from semi-annual
compounding of interest and add accrued interest to principal only at the time
repayment of principal begins or resumes. A lender may do so only if this
practice does not result in interest being compounded more frequently than
semi-annually. Interest begins to accrue when a loan is disbursed. However, a
borrower may postpone payment of interest before the beginning of the repayment
period or during the Deferment Periods or a lender may permit postponement
during the forbearance. In these cases, payment of interest must begin or resume
on the date on which repayment of principal begins or resumes. If payment of
interest is postponed, it may be added to the principal for purposes of
calculating a repayment schedule.
INSURANCE PREMIUM
The Secretary of HHS charges each lender an insurance premium to provide the
insurance on HEAL Loans at the time of disbursement. The HEAL Act authorizes the
Secretary of HHS to charge an insurance premium payable in advance based on the
default rate of the educational institution and whether only the borrower
executes the loan or obtains a co-signer. Presently, the insurance premium
varies between 3% and 8%. The lender may pass along the cost of the insurance
premium to the borrower by billing for it separately or deducting the amount
from disbursed loan proceeds. Premiums are not refundable by the Secretary of
HHS and need not be refunded by the lender to the borrower. Eligible lenders and
eligible institutions may also be assessed additional risk based premiums based
on the eligible entity's default rate. The risk-based premium to be assessed
shall range from 6 percent of the principal amount of the loan to 10 percent of
the principal amount of the loan.
CONSOLIDATION OF HEAL LOANS
If a lender or holder holds two or more HEAL Loans made to the same borrower,
the lender or holder and the borrower may agree to consolidate the loans into a
single HEAL Loan obligation evidenced by one promissory note if the
consolidation will not result in terms less favorable to the borrower than if no
consolidation had occurred and certain other requirements are satisfied.
PAYMENTS BY SECRETARY OF HHS
The Secretary of HHS insures each lender for the losses which the lender may
incur on insured loans in the event that a borrower dies, becomes permanently
and totally disabled, files for bankruptcy or defaults on the loans. If a
borrower dies or becomes disabled, the Secretary of HHS discharges the
borrower's liability on the loan by repaying the amount owed. If the borrower
defaults after a substantial collection effort, the Secretary of HHS pays the
amount of the loss to the lender, and the borrower's loan is assigned to the
Secretary of HHS.
DUE DILIGENCE
A lender must follow certain procedures in making HEAL Loans, and must exercise
due diligence in the collection of a HEAL Loan with respect to both a borrower
and any endorser, in accordance with regulations of the Secretary of HHS.
GENERALLY, THESE PROCEDURES REQUIRE THAT COMPLETED LOAN APPLICATIONS BE
PROCESSED, A DETERMINATION OF WHETHER AN APPLICANT IS AN ELIGIBLE BORROWER
ATTENDING AN ELIGIBLE INSTITUTION UNDER THE HEAL ACT BE MADE, THE BORROWER'S
RESPONSIBILITIES UNDER THE LOAN BE EXPLAINED TO HIM OR HER, THE PROMISSORY NOTE
EVIDENCING THE LOAN BE EXECUTED BY THE BORROWER AND THAT THE LOAN PROCEEDS BE
DISBURSED BY THE LENDER IN A SPECIFIED MANNER. AFTER THE LOAN IS MADE, THE
LENDER MUST ESTABLISH REPAYMENT TERMS WITH THE BORROWER, PROPERLY ADMINISTER
DEFERMENTS AND FORBEARANCES AND CREDIT THE BORROWER FOR PAYMENTS MADE. IF A
BORROWER BECOMES DELINQUENT IN REPAYING A LOAN, A LENDER MUST PERFORM CERTAIN
COLLECTION PROCEDURES (PRIMARILY TELEPHONE CALLS, DEMAND LETTERS AND SKIPTRACING
PROCEDURES) THAT VARY DEPENDING UPON THE LENGTH OF TIME A LOAN IS DELINQUENT. If
these procedures are not followed or such due diligence is not exercised, the
LENDER'S CLAIM FOR INSURANCE MAY BE REJECTED BY THE DEPARTMENT OF HHS.
CLAIMS
"Default" means the persistent failure of the borrower to make a payment when
due, or to comply with other terms of the note or other written agreement
evidencing a loan under circumstances where the Secretary of HHS finds it
reasonable to conclude that the borrower no longer intends to honor the
obligation to repay. In the case of a loan repayable (or on which interest is
payable) in monthly installments, this failure must have persisted for 120 days.
In the case of a loan repayable (or on which interest is payable) in less
frequent installments, this failure must have persisted for 180 days. Upon the
occurrence of a default, the Secretary of HHS shall require the eligible lender
or holder to commence and prosecute an action for default. If, for a particular
loan, an automatic stay is imposed on collection activities by a Bankruptcy
Court, and the lender receives written notification of the automatic stay prior
to initiating legal proceedings against the borrower, the 120 or 180-day period
does not include any period prior to the end of the automatic stay. Unless a
lender has notified the Secretary of HHS that it has filed suit against a
defaulted borrower, it must file a default claim with the Secretary of HHS
within 30 days after a loan has been determined to be in default. Under various
circumstances, a lender must commence and prosecute an action for default
against a borrower before filing a default claim. A lender must file a death
claim with the Secretary of HHS within 30 days after the lender determines that
a borrower is dead. A lender must file a disability claim with the Secretary of
HHS within 30 days after it is notified that the Secretary of HHS had determined
a borrower to be totally and permanently disabled. A lender must file a
bankruptcy claim with the Secretary of HHS within 10 days of the initial date of
receipt of court notice or written notice from the borrower's attorney that the
borrower has filed for bankruptcy under chapters 11 or 13 of the Bankruptcy
Code, or has filed a complaint to determine the dischargeability of the HEAL
Loan under chapter 7 of the Bankruptcy Code.
GENERAL
The Secretary of HHS may enter into a special contract with a borrower who has
obtained a degree from an eligible institution. Under the contract, the borrower
agrees to serve for a continuous period of (i) not less than 12 months for each
12-month period the Secretary of HHS assumes such obligations, or (ii) 24
months, whichever is greater in a health manpower shortage area as a member of
the National Health Service Corps or as a private practitioner. In return, the
Secretary of HHS will pay an amount, not to exceed $10,000 per 12-month period,
to the holder of the borrower's HEAL Loan to be applied toward interest and
principal.
INSURANCE FUND
The federal government has established pursuant to the HEAL Act a student loan
insurance fund which is available without fiscal year limitation to the
Secretary of HHS for making payments in connection with the collection or
default of loans insured under the HEAL Program. If moneys in the fund are
insufficient to make the payments on collection or default of insured loans, the
Secretary of the Treasury may lend the fund such amounts as may be necessary to
make the payments involved, subject to the Federal Credit Reform Act of 1990 (42
USC ss.ss. 661 et seq.)
COLLECTION/LITIGATION
The use of litigation by the lender could affect the cost of collection on
defaulted HEAL Loans.
THE PRIVATE LOAN PROGRAMS
To the extent described in the Prospectus Supplement for a Series, the assets
securing the Notes of a Series may include Financed Private Loans issued under
one or more Private Loan Programs. The Private Loan Programs will be
specifically identified in the Prospectus Supplement with respect to such
Series. The Prospectus Supplement for a Series secured by Financed Private Loans
may specify a maximum percentage of Financed Private Loans that may comprise
part of the Financed Student Loans securing one or more Series of Notes. This
summary identifies characteristics common to most Private Loan Programs but is
qualified by the specific disclosure set forth in the related Prospectus
Supplement.
Private Loans made under most Private Loan Programs are based on the credit of
the Obligor or his or her parents or co-borrowers. In general, applicants are
required to have a minimum annual income and a monthly debt burden, including
the Financed Student Loan, of no greater than a specified percentage of their
monthly income. In determining whether a student or co-borrower is creditworthy,
a credit bureau report is obtained for each applicant, including the student.
The various Private Loan Programs have different standards as to what
constitutes a satisfactory credit history.
Eligible post-secondary borrowers of a Private Loan often are required to be
engaged in a course of study at a qualifying educational institution, which may
include two-year colleges, four-year colleges and for-profit schools. Certain
Private Loan Programs are specifically designed for graduate or professional
students, or for students attending elementary or secondary private schools. The
institutions generally must be located in the United States or Canada. Often,
the borrower (or a co-applicant) must be a citizen or resident of the United
States. Some Private Loans may be a consolidation of existing Private Loans.
The amount that may be borrowed under a Private Loan Program varies based upon
the Private Loan Program. Typically, borrowers must borrow at least a minimum
amount with respect to any academic year, and may not borrow more than a maximum
amount per academic year, or a maximum amount under the Private Loan Program.
However, the amount of the Private Loan plus other financial aid received by a
student, normally may not exceed the cost of education, as determined by the
school.
A guarantee fee typically is deducted from the Private Loan proceeds. All or a
portion of this fee is paid to the agency that has established the Private Loan
Program and that guarantees the repayment of all or a substantial portion of the
Private Loan under certain specified circumstances. The obligation to guarantee
is typically dependent upon the proper servicing of such Private Loan by the
Servicer thereof.
The interest rate on a Private Loan varies based upon the Private Loan Program
and can either be fixed or variable. Floating rates may be based upon the prime
rate or the T-Bill Rate, or some other objective standard. Interest typically
accrues at a rate equal to the index plus a margin, but subject to a maximum
rate per annum, with the interest rate being adjusted periodically.
Repayment of a Private Loan usually is required to commence within 45 to 90 days
following the borrowing. However, certain Private Loan Programs permit a
borrower to defer the repayment of principal while the student is in school
(often up to a maximum number of years). In such event, principal repayments
typically begin promptly following graduation. Most Private Loan Programs permit
prepayment of the Private Loan at any time without penalty. Borrowers typically
may schedule repayment over a 10- to 25-year period, subject to a minimum
monthly payment obligation.
DESCRIPTION OF THE AGREEMENTS
GENERAL
The following is a summary of the material terms of each Sales Agreement,
pursuant to which the Transferor will transfer the Financed Student Loans to an
eligible lender trustee on behalf of the Depositor; each Transfer and Servicing
Agreement, pursuant to which the Depositor will cause the eligible lender
trustee to transfer the Financed Student Loans to the Trust in the name of the
Eligible Lender Trustee and the Master Servicer will service the Financed
Students Loans; the Indenture, as supplemented from time to time, pursuant to
which each Series of Notes is issued; and each Administration Agreement,
pursuant to which the Administrator will undertake certain administrative duties
with respect to the Trust and the Financed Student Loans under the Transfer and
Servicing Agreement and the Indenture (collectively, the "Agreements"). The
summary does not purport to be complete and is qualified in its entirety by
reference to the provisions of the Agreements. Each of such Agreements will be
substantially in the form filed as an exhibit to the Registration Statement of
which this Prospectus is a part.
SALES AGREEMENTS
On the Closing Date for any Series of Notes, the Transferor will convey the
related Financed Student Loans to an eligible lender trustee on behalf of the
Depositor pursuant to the terms of a Sales Agreement between the Transferor and
the Depositor. The Sales Agreement will contain representations substantially
similar to those contained in the Transfer and Servicing Agreement.
Consequently, any obligation of the Depositor to repurchase Financed Student
Loans will likewise be an obligation of the Transferor. See "The Transferor" and
"-- Transfer and Servicing Agreements -- Conveyance of Financed Student Loans;
Representations and Warranties" herein.
TRANSFER AND SERVICING AGREEMENTS
On the Closing Date for any Series of Notes, the Depositor will cause its
eligible lender trustee to contribute and assign to the Eligible Lender Trustee
on behalf of the related Trust, without recourse, its entire interest in the
Financed Student Loans described in the Transfer and Servicing Agreement, all
collections received and to be received with respect thereto for the period on
or after the Cut-off Date and all rights under the Sales Agreement. Each
Financed Student Loan will be identified in schedules appearing as an exhibit to
the Transfer and Servicing Agreement.
Conveyance of Financed Student Loans; Representations and Warranties. The
Depositor will make certain representations and warranties with respect to the
Financed Student Loans to the related Trust, including, among other things, that
(i) each Financed Student Loan, at the time of transfer to the Trust, is free
and clear of all security interests, liens, charges and encumbrances, and no
offsets, defenses or counterclaims have been asserted or, to the Depositor's
knowledge, threatened; (ii) the information provided with respect to the
Financed Student Loans is true and correct in all material respects as of the
Cut-off Date; and (iii) each Financed Student Loan, at the time it was
originated, complied and, at the Closing Date, complies in all material respects
with applicable federal and state laws (including, without limitation, the
Higher Education Act, the HEAL Act, consumer credit, truth-in-lending, equal
credit opportunity and disclosure laws) and applicable restrictions imposed by
(A) the FFEL Program or under any Guarantee Agreement with respect to FFELP
Loans, (B) the HEAL Program or under the HEAL Insurance Contract with respect to
HEAL Loans, and (C) any related Private Loan Program with respect to Private
Loans.
Following the discovery by or notice to the Depositor of a breach of any such
representation or warranty with respect to any Financed Student Loan that
results in the failure of a Guarantee Agency (including for this purpose any
guarantor under a Private Loan Program) to make a Guarantee Payment or the
Department of HHS to make an Insurance Payment to the Eligible Lender Trustee,
the Depositor will, unless such breach is cured within 120 days, purchase such
Financed Student Loan from the Eligible Lender Trustee as of the first day
following the end of such 120-day period that is the last day of a Collection
Period, at a price equal to the applicable Purchase Amount; provided, however,
that in the case of any representation or warranty the breach of which may be
cured by reinstatement of the Guarantee Agency's obligation to guarantee payment
or the Department of HHS' obligation to insure payment, such cure period shall
be 360 days, in each case following the earlier of the date on which such breach
is discovered by the Depositor and the date of the Servicer's receipt of the
Guarantee Agency or Department of HHS reject transmittal form with respect to
such Financed Student Loan. Notwithstanding the foregoing, unless otherwise
provided in the Prospectus Supplement for a Series, if as of the last day of any
Collection Period the aggregate principal amount of Financed Student Loans with
respect to which claims have been filed with and rejected by a Guarantee Agency
or the Department of HHS as a result of a breach of a representation or warranty
of the Depositor or a breach of the obligations of the Master Servicer or with
respect to which the Master Servicer determines that claims cannot be filed
pursuant to the Higher Education Act or the HEAL Act, as the case may be, as a
result of such a breach exceeds the lesser of $250,000 or 0.25% of the Pool
Balance as of such date, the Depositor shall repurchase within 120 days of a
written request by the Eligible Lender Trustee or the Indenture Trustee,
affected Financed Student Loans in an aggregate principal amount such that after
such repurchases (or purchases by the Master Servicer as described below under
"Master Servicer Covenants") the aggregate principal amount of affected Financed
Student Loans is equal to or less than the lesser of $250,000 or 0.25% of the
Pool Balance. The Financed Student Loans to be repurchased by the Depositor or
the Transferor or purchased by the Master Servicer will be based on the date of
claim rejection, with the Financed Student Loans with the earliest such dates to
be repurchased or purchased first. The Prospectus Supplement for a Series may
specify shorter or longer cure periods, and establish different dollar or
percentage thresholds, to the extent set forth therein.
In addition, the Depositor or the Transferor will be obligated to reimburse the
related Trust (i) for any accrued interest amounts that the Department of HHS
refuses to pay with respect to Financed HEAL Loans, and (ii) for any accrued
interest amounts that a Guarantee Agency (including for this purpose any
guarantor under a Private Loan Program) refuses to pay pursuant to its Guarantee
Agreement, and for any Interest Subsidy Payments and Special Allowance Payments
that are lost or that must be repaid to the Department of Education with respect
to Financed FFELP Loans, as a result of a breach of any such representation or
warranty by the Depositor. Under certain circumstances, the Depositor also has
the right to repurchase, or transfer a Subsequent Financed Student Loan in
exchange for, a Financed Student Loan for which it has a reimbursement
obligation as described in the preceding sentence. The repurchase and
reimbursement obligations of the Depositor or the Transferor will constitute,
together with the right to receive certain amounts from Credit Enhancement, if
any, the sole remedy available to or on behalf of such Trust, the
Certificateholders or the Noteholders for any such uncured breach. The
Transferor's and the Depositor's repurchase and reimbursement obligations are
contractual obligations pursuant to the Transfer and Servicing Agreement that
may be enforced against the Transferor and the Depositor, but the breach of
which will not constitute an Event of Default under the Notes.
Pre-Funding Account. If a Pre-Funding Account has been established with respect
to a Trust and a Pre-Funded Amount has been deposited therein with respect to a
Series of Notes, the Trust will use such amounts to acquire additional Financed
Student Loans ("Additional Student Loans") from the Depositor from time to time
during the applicable Pre-Funding Period. The amount on deposit in any
Pre-Funding Account may not exceed a specified percentage of the initial Pool
Balance of the related Trust as set forth in the related Prospectus Supplement.
Additional Student Loans may include FFELP Loans, HEAL Loans and/or Private
Loans in such amounts as may be determined by the Depositor and satisfying any
conditions imposed by the Rating Agencies and any provider of Credit
Enhancement, if applicable.
The Trust may acquire from the Depositor during a Pre-Funding Period Additional
Student Loans having an aggregate principal balance up to the amount then on
deposit in the Pre-Funding Account. Monies in the Pre-Funding Account will be
invested exclusively in Eligible Investments. The obligation to accept any
Additional Student Loan by the Eligible Lender Trustee on behalf of the Trust is
subject to the condition, among others as may be set forth in the related
Prospectus Supplement, that such Additional Student Loan must satisfy all
applicable origination requirements and all other requirements specified in the
Transfer and Servicing Agreement. On such dates as may from time to time be
designated by the Depositor during a Pre-Funding Period, the Depositor may sell
and assign, without recourse, to the Eligible Lender Trustee on behalf of the
Trust, its entire interest in Additional Student Loans. Each agreement of
transfer will include as an exhibit a schedule identifying each Additional
Student Loan transferred. Upon such conveyance of Additional Student Loans to
the Eligible Lender Trustee on behalf of the Trust, the Pool Balance will be
adjusted.
Any amounts remaining in the Pre-Funding Account at the end of the related
Pre-Funding Period will be paid to the Noteholders as a prepayment of principal,
as set forth in the related Prospectus Supplement.
Subsequent Finance Period and Subsequent Financed Student Loans. During a period
from the Closing Date for a Series to a subsequent date identified in the
related Prospectus Supplement (the "Subsequent Finance Period"), the Depositor
may, at its option but subject to the conditions set forth in the Transfer and
Servicing Agreement, transfer to the Eligible Lender Trustee on behalf of the
related Trust, Subsequent Financed Student Loans, and direct the Eligible Lender
Trustee and the Indenture Trustee to apply Consolidation prepayments on deposit
in the Collection Account to pay the Purchase Price for such Subsequent Financed
Student Loans. Subsequent Financed Student Loans that may be so transferred by
the Depositor include (i) Consolidation Loans or HEAL Consolidation Loans made
by the Transferor, provided, however, that in no event shall the aggregate
amount of Subsequent Financed Student Loans that are Consolidation Loans or HEAL
Consolidation Loans transferred into the related Trust exceed any maximum amount
identified in the Prospectus Supplement; (ii) Serial Loans owned by the
Depositor that are serial (i.e., made to the same borrower under the same loan
program and guaranteed by the same Guarantee Agency or insured by the Department
of HHS) to an existing Financed Student Loan owned by the related Trust,
provided that each such Subsequent Financed Student Loan entitles the holder
thereof to receive interest based on the same interest rate index as the
Financed Student Loan to which it is serial, and provided further, that in no
event shall the aggregate amount of Subsequent Financed Student Loans that are
Serial Loans transferred into the related Trust exceed any maximum amount
identified in the Prospectus Supplement; and (iii) similar consolidation or
serial loans under applicable Private Loan Programs.
In addition, during the Subsequent Finance Period for any Series, subject to the
conditions set forth in the related Transfer and Servicing Agreement, the
Depositor may, at its option, in lieu of reimbursing certain lost interest
payments and Special Allowance Payments or depositing into the Collection
Account the Purchase Amount of a Financed Student Loan which has become
ineligible for lost interest payments or Special Allowance Payments (see
"Description of the Agreements -- Transfer and Servicing Agreements --
Conveyance of Financed Student Loans; Representations and Warranties" and
"Servicing -- Master Servicer Covenants"), the Depositor may transfer to the
Eligible Lender Trustee on behalf of the related Trust, a Subsequent Financed
Student Loan which satisfies the following criteria (or such other criteria as
may be set forth in the Prospectus Supplement for a Series): (A) the Subsequent
Financed Student Loan was originated under the same loan program as the Financed
Student Loan for which it is being exchanged and entitles the holder thereof to
receive interest based on the same interest rate index as the Financed Student
Loan for which it is being exchanged, (B) the Subsequent Financed Student Loan
will not, at any level of such interest rate index, have an interest rate that
is less than the Financed Student Loan for which it is being exchanged and (C)
the average principal balance per Obligor of the Subsequent Financed Student
Loans that are being transferred into the related Trust and the existing
Financed Student Loans for which they are being exchanged is within 10% (plus or
minus) of the average principal balance per Obligor of the Financed Student
Loans being transferred to the Depositor. If the aggregate outstanding principal
balance of the Subsequent Financed Student Loans is less than that of the
Financed Student Loans for which they are being exchanged, the Depositor shall
deposit the difference in the Collection Account concurrently with such
transfer. If the aggregate outstanding principal balance of the Subsequent
Financed Student Loans is greater than that of the Financed Student Loans for
which they are being exchanged, the Depositor shall be entitled to the
difference from amounts on deposit in the Collection Account. In either case,
such payments are referred to herein as "Adjustment Payments."
The Trust may not acquire Subsequent Financed Student Loans at any time that an
Event of Default under the Indenture, a Master Servicer Default under the
Transfer and Servicing Agreement or an Administrator Default under the
Administration Agreement has occurred and is continuing.
Accounts. The Indenture Trustee will establish and maintain the Collection
Account, Note Payment Account, Expense Account, Advance Account and, if set
forth in the related Prospectus Supplement, a Reserve Account and Pre-Funding
Account. The Eligible Lender Trustee will establish and maintain the Certificate
Distribution Account in the name of the
Eligible Lender Trustee on behalf of the Certificateholders. The foregoing
accounts are referred to collectively as the "Trust Accounts."
Funds in the Trust Accounts will be invested as provided in the Transfer and
Servicing Agreement in Eligible Investments. "Eligible Investments" include the
following:
(i) cash (insured at all times by the FDIC);
(ii) direct obligations of (including obligations issued or held
n book entry form on the books of) the Department of the
Treasury of the United States of America;
(iii) obligations of any of the following federal agencies which
obligations represent the full faith and credit of the United
States of America, including:
- Export-Import Bank
- Farm Credit System Financial Assistance Corporation
- Farmers Home Administration
- General Services Administration
- U.S. Maritime Administration
- Small Business Administration
- Government National Mortgage Association (GNMA)
- U.S. Department of Housing & Urban Development (PHA's)
- Federal Housing Administration;
(iv) senior debt obligations rated "AAA" or "Aaa" by each Rating
Agency and issued by the Federal National Mortgage Association
or the Federal Home Loan Mortgage Corporation
(v) U.S. dollar denominated deposit accounts, federal funds and
banker's acceptances with domestic commercial banks which have
a rating on their short term certificates of deposit on the
date of purchase of "A-1+" or "P-1" by each Rating Agency and
maturing no more than 360 days after the date of purchase
(ratings on holding companies not being considered the rating
of the bank);
(vi) commercial paper which is rated at the time of purchase in the
single highest classification, "A- 1+" or "P-1" by each Rating
Agency and which matures not more than 270 days after the date
of purchase;
(vii) investments in money market funds (including, but not limited
to, money market mutual funds) rated "AAAm" or "AAAm-G" or
better by each Rating Agency;
(viii) investment agreements acceptable to each Rating Agency,
written confirmation of which shall be furnished to the
Indenture Trustee prior to any such investment; and
(ix) other forms of investments acceptable to each Rating Agency,
written confirmation of which shall be furnished to the
Indenture Trustee prior to any such investment.
Notwithstanding anything in the Transfer and Servicing Agreement to the
contrary, for so long as the Transferor or any of its affiliates is a
Certificateholder, all investments of the related Trust shall be made in
investments permissible for a national bank. Investment earnings on funds
deposited in the Trust Accounts, net of losses and investment expenses, will be
deposited in the Collection Account.
The Trust Accounts will be maintained as Eligible Deposit Accounts. "Eligible
Deposit Account" means either (a) a segregated account with an Eligible
Institution or (b) a segregated trust account with the corporate trust
department of a depository institution organized under the laws of the United
States of America or any one of the states thereof or the District of Columbia
(or any domestic branch of a foreign bank), having corporate trust powers and
acting as trustee for funds deposited in such account, so long as any of the
securities of such depository institution have a credit rating from each Rating
Agency in one of its generic rating categories which signifies investment grade.
An "Eligible Institution" is generally a depository institution organized under
the federal or any state banking laws whose deposits are insured by the Federal
Deposit Insurance Corporation and whose unsecured long-term debt obligations or
short-term debt ratings are acceptable to each Rating Agency rating the related
Series of Notes.
Amendment. Each Transfer and Servicing Agreement may be amended by the parties
thereto, with the consent of the Indenture Trustee, for the purpose of adding
any provisions to or changing in any manner or eliminating any of the provisions
of a Transfer and Servicing Agreement or of modifying in any manner the rights
of Noteholders or Certificateholders; provided, however, that no such amendment
may (i) increase or reduce in any manner the amount of, or accelerate or delay
the timing of, collections of payments with respect to the Financed Student
Loans or distributions that are required to be made for the benefit of the
Noteholders or the Certificateholders, or (ii) reduce the percentage of the
Notes which are required to consent to any such amendment, without the consent
of the holders of all the outstanding Notes affected thereby.
Evidence as to Compliance . Each Transfer and Servicing Agreement with respect
to any Series of Notes will provide that a firm of independent public
accountants will furnish to the Eligible Lender Trustee and the Indenture
Trustee annually a statement (based on the examination of certain documents and
records and on such accounting and auditing procedures considered appropriate
under the circumstances) as to compliance by the Master Servicer during the
preceding calendar year with certain provisions of the Transfer and Servicing
Agreement relating to the servicing of the Financed Student Loans.
Each Transfer and Servicing Agreement will further provide that a firm of
independent public accountants (which may be the same firm referred to in the
immediately preceding paragraph) will furnish to the Eligible Lender Trustee and
the Indenture Trustee annually a statement (based on the examination of certain
documents and records and on such accounting and auditing procedures considered
appropriate under the circumstances) as to compliance by the Administrator
during the preceding calendar year with certain provisions of the Transfer and
Servicing Agreement relating to the administration of the Trust and the Financed
Student Loans.
Each Transfer and Servicing Agreement will also provide for delivery to the
Eligible Lender Trustee and the Indenture Trustee, concurrently with the
delivery of each statement of compliance referred to above, of a certificate
signed by an officer of the Master Servicer or the Administrator, as the case
may be, stating that, to his knowledge, the Master Servicer or the
Administrator, as the case may be, has fulfilled in all material respects all
its obligations under the Transfer and Servicing Agreement throughout the
preceding calendar year or, if there has been a default in the fulfillment of
any such obligation, specifying each such default known to such officer and the
nature and status thereof. Each of the Master Servicer and the Administrator has
agreed to give the Indenture Trustee and the Eligible Lender Trustee notice of
certain Master Servicer Defaults and Administrator Defaults, respectively, under
the Transfer and Servicing Agreement.
Copies of such statements and certificates may be obtained by Noteholders by a
request in writing addressed to the Indenture Trustee at the address identified
in the related Prospectus Supplement.
THE INDENTURE
General. The Notes will be issued pursuant to an Indenture by and between the
applicable Trust and Indenture Trustee, as supplemented from time to time by a
Terms Supplement. The Administrator will perform certain obligations of the
Trust under the Indenture for any Series.
The Indenture Trustee. The Indenture Trustee with respect to a Series of Notes
will be the entity named in the related Prospectus Supplement. An Indenture
Trustee may serve from time to time as trustee under indentures or trust
agreements with the Transferor or its affiliates relating to other issues of
their securities. In addition, the Transferor or its affiliates may have other
banking relationships with the Indenture Trustee and its affiliates.
Modification of Indenture; Supplemental Indentures. With the consent of the
holders of a majority of the aggregate principal amount of Directing Notes of a
Trust then outstanding (or, with respect to any change affecting only certain
Series or Classes of Notes, the holders of a majority of the aggregate principal
amount of Notes of such Series or Class) and the consent of any applicable
provider of Credit Enhancement, the applicable Indenture Trustee and the related
Trust may execute a supplemental indenture to add provisions to, or change in
any manner or eliminate any provisions of, the Indenture with respect to one or
more Series of Notes, or to modify (except as provided below) in any manner the
rights of the Noteholders.
Without the consent of the holder of each outstanding Note of a Series affected
thereby, however, no supplemental indenture will (i) change the date of payment
of any installment of principal of or interest on any Note of such Series or
reduce the principal amount thereof or the interest rate thereon, change the
provisions of the Indenture relating to the application of collections on, or
the proceeds of the sale of, the assets of the related Trust to payment of
principal of or interest on the Notes, or change any place of payment where, or
the coin or currency in which, any Note or any interest thereon is payable, (ii)
impair the right to institute suit for the enforcement of certain provisions of
the Indenture regarding payment, (iii) reduce the percentage of the aggregate
amount of the outstanding Notes of any Series or Class the consent of the
holders of which is required for any such supplemental indenture or the consent
of the holders of which is required for any waiver of compliance with certain
provisions of the Indenture or certain defaults thereunder and their
consequences as provided for in the Indenture, (iv) modify or alter certain
provisions of the Indenture regarding the determination of Notes that are
considered "outstanding" for consent, waivers and other matters, (v) reduce the
percentage of the aggregate outstanding amount of the Notes the consent of the
holders of which is required to direct the Indenture Trustee to direct the
related Trust to sell or liquidate the Financed Student Loans, (vi) decrease the
percentage of the aggregate principal amount of the Notes required to amend the
sections of the Indenture which specify the applicable percentage of aggregate
principal amount of the Notes necessary to amend the Indenture or certain other
related agreements, (vii) modify any of the provisions of the Indenture in such
manner as to affect the calculation of the amount of any payment of interest on
any Note, or (viii) except as otherwise permitted or contemplated in the
Indenture, terminate the lien of the Indenture on any such collateral or deprive
the holder of any Note of the security afforded by the lien of the Indenture.
Generally, a Trust and the related Indenture Trustee may also enter into
supplemental indentures, but without obtaining the consent of Noteholders, for
the purpose of adding any provisions to or changing in any manner or eliminating
any of the provisions of the Indenture or modifying in any manner the rights of
Noteholders so long as such action will not, in the opinion of counsel
satisfactory to the Indenture Trustee, materially and adversely affect the
interest of any Noteholder. Any such amendment or supplemental indenture shall
be deemed not to materially and adversely affect any Noteholder if there is
delivered to the Indenture Trustee written notification from each Rating Agency
to the effect that such amendment or supplement will not cause that Rating
Agency to reduce the then current rating assigned to such Notes.
Events of Default; Rights Upon Event of Default. Generally, an "Event of
Default" with respect to the Notes of a Series is defined in the Indenture as
consisting of the following: (i) a default for five business days or more in the
payment of any Principal Payment Amount (subject to the caveat noted below) or
Class Interest Rate on the Notes after the same becomes due and payable; (ii) a
default in the observance or performance of any covenant or agreement of the
applicable Trust made in the Indenture or the Transfer and Servicing Agreement
and the continuation of any such default for a period of 30 days after notice
thereof is given to such Trust by the Indenture Trustee or to such Trust and the
Indenture Trustee by the holders of at least 25% in aggregate principal amount
of the Directing Notes then outstanding; (iii) any representation or warranty
made by a Trust in the Indenture or in any certificate delivered pursuant
thereto or in connection therewith having been incorrect in a material respect
as of the time made, and such breach not having been cured within 30 days after
notice thereof is given to the Trust by the Indenture Trustee or to the Trust
and the Indenture Trustee by the holders of at least 25% in aggregate principal
amount of the Directing Notes then outstanding; or (iv) certain events of
bankruptcy, insolvency, receivership or liquidation of a Trust. Because the
amount of principal required to be distributed to Noteholders on any Payment
Date may be limited to the amount of Available Funds after payment of
Transaction Fees, Consolidation Loan Fees and the aggregate Class Interest Rate,
ANY DIFFERENCE BETWEEN THE PRINCIPAL PAYMENT AMOUNT AND THE REMAINING AVAILABLE
FUNDS WILL BE CARRIED OVER TO BE PAID ON SUCCEEDING PAYMENT DATES. THEREFORE,
THE FAILURE TO PAY PRINCIPAL ON ANY CLASS OF NOTES MAY NOT RESULT IN THE
OCCURRENCE OF AN EVENT OF DEFAULT UNTIL THE LEGAL FINAL MATURITY OF SUCH CLASS
OF NOTES. IN ADDITION, THE FAILURE TO PAY THE AGGREGATE AMOUNT OF CARRYOVER
INTEREST AS A RESULT OF INSUFFICIENT AVAILABLE FUNDS WILL NOT RESULT IN THE
OCCURRENCE OF AN EVENT OF DEFAULT.
If an Event of Default should occur and be continuing with respect to any Class
or Series of Notes, the Indenture Trustee or holders of a majority in aggregate
principal amount of the Directing Notes then outstanding may declare all
outstanding Notes to be immediately due and payable, by notice to the related
Trust or notice to the Indenture Trustee if given by the Noteholders. Such
declaration may be rescinded by the holders of a majority in aggregate principal
amount of the Directing Notes then outstanding at any time prior to the entry of
judgment in a court of competent jurisdiction for the payment of such amount if
(i) such Trust has paid to the Indenture Trustee a sum equal to all amounts then
due with respect to the Notes (without giving effect to such acceleration) and
due to the Indenture Trustee and (ii) all Events of Default (other than
nonpayment of amounts due solely as a result of such acceleration) have been
cured or waived.
If the Notes of any Series have been declared to be due and payable following an
Event of Default with respect thereto, the Indenture Trustee may, in its
discretion, require the Eligible Lender Trustee to sell the Financed Student
Loans or elect to have the Eligible Lender Trustee maintain possession of the
Financed Student Loans and continue to apply collections with respect to such
Financed Student Loans as if there had been no declaration of acceleration. The
Indenture Trustee, however, is prohibited from directing the Eligible Lender
Trustee to sell the Financed Student Loans following an Event of Default, other
than a default for five days or more in the payment of any principal or a
default for five days or more in the payment of any interest on any Note, unless
(i) the Noteholders of 100% of the aggregate amount of such Series of Notes
outstanding consent to such sale, (ii) the proceeds of such sale are sufficient
to pay in full the principal of and the accrued interest on the Notes
outstanding at the date of such sale or (iii) the Indenture Trustee determines
that the collections on the Financed Student Loans and other assets of the
related Trust would not be sufficient on an ongoing basis to make all payments
on the Notes as such payments would have become due if such obligations had not
been declared due and payable, and the Indenture Trustee obtains the consent of
the Noteholders of at least 66-2/3% of the aggregate principal amount of the
Notes then outstanding. In addition, the Indenture Trustee may not sell or
otherwise liquidate the Financed Student Loans following an Event of Default,
other than a default for five days or more in the payment of any principal or a
default for five days or more in the payment of any interest on any Note, unless
(i) the proceeds of such sale or liquidation payable to any Class of
subordinated Notes are sufficient to pay such Notes in full or (ii) following
notice that the proceeds of such sale or liquidation of Notes would be
insufficient to pay amounts due on such Notes at least a majority of the
aggregate outstanding amount of such Class of subordinated Notes consent
thereto.
The Indenture Trustee may not become the owner or holder of the Financed Student
Loans without entering into guarantee agreements with the applicable Guarantor
of each Financed FFELP Loan and with the Secretary of HHS with respect to the
Financed HEAL Loans. The Indenture Trustee has not entered into any such
agreements. As a result, if the Indenture Trustee determined to take title to or
hold the loans itself, it would not be permitted to do so without meeting the
criteria for an eligible lender under the Higher Education Act and the HEAL Act
at the time and entering into such agreements or retaining an eligible lender
trustee to do it on its behalf. See "Description of the FFEL Program" and
"Description of the HEAL Program" herein.
Subject to the provisions of the Indenture relating to the duties of the
Indenture Trustee, if an Event of Default should occur and be continuing with
respect to a Series of Notes, the Indenture Trustee will be under no obligation
to exercise any of the rights or powers under the Indenture at the request or
direction of any of the holders of a Series of Notes, if the Indenture Trustee
reasonably believes it will not be adequately indemnified against the costs,
expenses and liabilities which might be incurred by it in complying with such
request. Subject to such provisions for indemnification and certain limitations
contained in the Indenture, the holders of a majority in aggregate principal
amount of the outstanding Directing Notes will have the right to direct the
time, method and place of conducting any proceeding or any remedy available to
the Indenture Trustee and the holders of a majority in aggregate principal
amount of the Directing Notes then outstanding, may, in certain cases, waive any
default with respect thereto, except a default in the payment of principal or
interest or a default in respect of a covenant or provision of the Indenture
that cannot be modified without the waiver or consent of all the holders of the
outstanding Directing Notes.
No holder of any Series of Note will have the right to institute any proceeding
with respect to the Indenture, unless (i) such holder previously has given to
the Indenture Trustee written notice of a continuing Event of Default, (ii) the
holders of not less than 25% in principal amount of the outstanding Directing
Notes have requested in writing that the Indenture Trustee institute such
proceeding in its own name as Indenture Trustee, (iii) such holder or holders
have offered the Indenture Trustee reasonable indemnity, (iv) the Indenture
Trustee has for 60 days after notice failed to institute such proceeding and (v)
no direction inconsistent with such written request has been given to the
Indenture Trustee during such 60-day period by the holders of a majority in
aggregate principal amount of the outstanding Directing Notes.
None of the Indenture Trustee, the Transferor, the Depositor, the Administrator,
the Master Servicer, any Servicer or the Eligible Lender Trustee in its
individual capacity, nor any holder of a Certificate, nor any of their
respective owners, beneficiaries, agents, officers, directors, employees,
successors or assigns will, in the absence of an express agreement to the
contrary, be personally liable for the payment of the principal of or interest
on the Notes or for the agreements of the related Trust contained in the related
Indenture.
Certain Covenants. A Trust may not consolidate with or merge into any other
entity unless (i) the entity formed by or surviving such consolidation or merger
is organized under the laws of the United States, or any state thereof, and such
entity expressly assumes the Trust's obligation to make due and punctual
payments upon the Notes and the performance or observance of every agreement and
covenant of the Trust under the Indenture and any supplemental indenture, (ii)
no Event of Default has occurred and is continuing immediately after such merger
or consolidation, (iii) the Trust has received an opinion of counsel to the
effect that such consolidation or merger would have no material adverse federal
or applicable state tax consequence to the Trust or to any Certificateholder or
Noteholder, (iv) any action as is necessary to maintain the lien and security
interest created by the Indenture shall have been taken and (v) the Trust shall
have delivered to the Indenture Trustee an officer's certificate of the
Administrator and an opinion of counsel each stating that such consolidation or
merger and any supplemental indenture relating thereto comply with the terms of
the Indenture and that all conditions precedent provided for in the Indenture to
such transaction have been complied with (including any Exchange Act filings) in
all material respects.
Except as otherwise permitted by the Agreements, a Trust may not convey or
transfer all or substantially all its properties or assets, including the assets
securing the Notes, unless the conditions specified in (i) through (v) above
with respect to a permitted merger or consolidation are substantially met, plus
the acquiror must agree (a) that all right, title and interest in the property
and assets so conveyed or transferred are subordinate to the rights of the
Noteholders, (b) to indemnify the Trust (unless otherwise provided in a
supplemental indenture) and (c) to make all filings with the Commission required
by the Exchange Act in connection with the Notes.
A Trust will not, among other things, (i) except as expressly permitted by the
Agreements, sell, transfer, exchange or otherwise dispose of any of the assets
of the Trust, (ii) claim any credit on or make any deduction from the principal
and interest payable in respect of any Notes (other than amounts withheld under
the Code or applicable state law) or assert any claim against any present or
former holder of Notes because of the payment of taxes levied or assessed upon
the Trust, (iii) except as contemplated by the Agreements, dissolve or liquidate
in whole or in part, (iv) permit the validity or effectiveness of the Indenture
or any supplemental indenture to be impaired, or permit the lien of the
Indenture and any supplemental indenture to be amended, hypothecated,
subordinated, terminated or discharged, or permit any person to be released from
any covenants or obligations with respect to any Notes under the Indenture
except as may be expressly permitted thereby, (v) permit any lien, charge,
excise, claim, security interest, mortgage or other encumbrance (other than the
lien of the Indenture and any supplemental indenture) to be created on or extend
to or otherwise arise upon or burden the assets of the Trust or any part
thereof, or any interest therein or the proceeds thereof (other than certain tax
and other liens arising by operation of law, except as expressly permitted by
the Agreements) or (vi) permit the lien of the Indenture and any supplemental
indenture not to constitute a valid first priority (other than with respect to
such tax or other lien) security interest in the assets securing the Notes.
No Trust may engage in any activity other than financing, purchasing, owning,
selling, servicing and managing the Financed Student Loans and activities
incidental thereto.
No Trust will issue, incur, assume or guarantee or otherwise become liable for
any indebtedness other than the Series of Notes or otherwise in accordance
with the Agreements.
Annual Compliance Statement and Other Notices. The Administrator, on behalf of
each Trust, will be required to file annually with the Indenture Trustee a
written statement as to the fulfillment of the Trust's obligations under the
Indenture. Each Trust is required to give the Indenture Trustee written notice
of each Event of Default among other notices. The Indenture Trustee is obligated
to notify Noteholders of known defaults under the Indenture within 90 days after
their occurrence.
Satisfaction and Discharge of Indenture. The Indenture will be discharged with
respect to the collateral securing the Series of Notes upon the delivery to the
Indenture Trustee for cancellation of all the Notes of such Series or, with
certain limitations, upon deposit with the Indenture Trustee of funds sufficient
for the payment in full of all the Notes of such Series.
Statements to Indenture Trustee. On each Payment Determination Date immediately
preceding a Payment Date, the Master Servicer or the Administrator will provide
to the Indenture Trustee, and the Indenture Trustee will forward to each
Noteholder (other than a Noteholder of Auction Rate Notes, which may obtain the
following statement to the extent available upon written request to the
Indenture Trustee) a statement which will include the following information with
respect to such Payment Date or for the preceding Collection Period or
Collection Periods, to the extent applicable:
(i) the Principal Factor for each Class of Notes;
(ii) the amount of the payment allocable to principal of each Class
Notes;
(iii) the amount of the payment allocable to interest on each Class
of Notes, together with the interest rates applicable with
respect thereto (indicating whether such interest rates are
based on the Class Interest Rate or on the Net Loan Rate with
respect to each Class of Notes, and specifying what each such
interest rate would have been if it had been calculated using
the alternate;
(iv) the amount of the payment, if any, allocable to any Carryover
Interest together with the outstanding amount, if any, thereof
after giving effect to any such distribution;
(v) the Pool Balance as of the close of business on the last day
of the preceding Collection Period;
(vi) the aggregate outstanding principal balance of each Class of
Notes as of such Payment Date, after giving effect to payments
allocated to principal reported under clause (ii) above;
(vii) the amount of the Servicing Fee to be allocated to the Master
Servicer, the amount of the Administration Fee to be allocated
to the Administrator, the amount of the Indenture Trustee Fee
to be allocated to the Indenture Trustee, the amount of the
Eligible Lender Trustee Fee to be allocated to the Eligible
Lender Trustee, and the amount of fees paid to any other
entity described in the related Prospectus Supplement,
respectively, with respect to the upcoming Payment Date;
(viii) the amount of the aggregate Realized Losses, if any, for the
preceding Collection Period and the aggregate amount, if any,
received (stated separately for interest and principal) with
respect to Financed Student Loans for which Realized Losses
were allocated previously;
(ix) the amount of the distribution attributable to amounts in any
Reserve Account, Pre-Funding Account, or other account
identified in the related Prospectus Supplement, the amount of
any other withdrawals from such accounts for such Payment
Date, the balance of such accounts on such Payment Date, after
giving effect to changes therein on such Payment Date, the
then applicable Parity Percentage and the amount of the
distribution, if any, attributable to Parity Percentage
Payments;
(x) the aggregate amount, if any, paid for Financed Student Loans
purchased from the related Trust during the preceding
Collection Period;
(xi) during the Subsequent Finance Period only, the Adjustment
Payments, stated separately, for the preceding Collection
Period;
(xii) the number and principal amount of Financed Student Loans, as
of the preceding Collection Period, that are (A) 31 to 60 days
delinquent, (B) 61 to 90 days delinquent, (C) 91 to 120 days
delinquent, (D) more than 120 days delinquent and (E) for
which claims have been filed with the appropriate Guarantee
Agency, guarantor or the Department of HHS and which are
awaiting payment;
(xiii) any other information specified in the related Prospectus
Supplement.
Rights Upon Servicer Default or Administrator Default. As long as a Servicer
Default OR AN ADMINISTRATOR'S DEFAULT under a Transfer and Servicing Agreement
remains unremedied, the Indenture Trustee or holders of Directing Notes
evidencing not less than 25% in principal amount of then outstanding Directing
Notes may terminate all the rights and obligations of the Master Servicer OR
ADMINISTRATOR, as the case may be, UNDER SUCH TRANSFER AND SERVICING AGREEMENT,
whereupon a successor servicer or administrator appointed by the Indenture
Trustee or the Indenture Trustee will succeed to all the responsibilities,
duties and liabilities of the Master Servicer OR THE ADMINISTRATOR, as the case
may be, UNDER THE TRANSFER AND SERVICING AGREEMENT, and will be entitled to
similar compensation arrangements. If a successor Master Servicer or
Administrator, as the case may be, has not been appointed at the time when the
predecessor Master Servicer or Administrator has ceased to act as Master
Servicer or Administrator, then the Indenture Trustee shall automatically be
appointed successor Master Servicer or Administrator. Notwithstanding the above,
the Indenture Trustee shall, if it shall be unwilling or legally unable so to
act, appoint or petition a court of competent jurisdiction to appoint, any
established institution whose regular business shall include the servicing of
student loans, as the successor to the Master Servicer or Administrator, as the
case may be, under this Agreement. If a successor Master Servicer or
Administrator, as the case may be, has not been appointed at the time when the
predecessor Master Servicer or Administrator has ceased to act as Master
Servicer or Administrator, then the Indenture Trustee shall automatically be
appointed as successor Master Servicer or Administrator.
Waiver of Past Defaults. The holders of Directing Notes evidencing at least a
majority in principal amount of the then outstanding Directing Notes may, on
behalf of all Noteholders, waive any default by the Master Servicer OR THE
ADMINISTRATOR, as the case may be, IN THE PERFORMANCE OF ITS RESPECTIVE
OBLIGATIONS UNDER THE RELATED TRANSFER AND SERVICING AGREEMENT, except a default
in making any required payments from any of the Trust Accounts or giving
instructions regarding the same in accordance with such Transfer and Servicing
Agreement. No such waiver will impair the Noteholders' rights with respect to
subsequent defaults.
Termination. With respect to any Series, the obligations of the Master Servicer,
the Transferor, the Depositor, the Administrator, the Eligible Lender Trustee
and the Indenture Trustee pursuant to each Transfer and Servicing Agreement will
terminate upon (i) the maturity or other liquidation of the last Financed
Student Loan and the disposition of any amount received upon liquidation of any
remaining Financed Student Loans and (ii) the payment to the related Noteholders
and the Certificateholders of all amounts required to be paid to them pursuant
to the related Transfer and Servicing Agreement. See "Description of the
Notes--Termination" herein.
ADMINISTRATION
Crestar Bank, in its capacity as Administrator, will enter into A TRANSFER AND
SERVICING AGREEMENT pursuant to which IT will agree, to the extent provided
therein, (i) to direct the Indenture Trustee to make the required distributions
from the Trust Accounts on each Payment Date, (ii) to prepare (based on the
reports received from the Master Servicer) and provide periodic and annual
statements to the Eligible Lender Trustee and the Indenture Trustee with respect
to distributions to Noteholders and Certificateholders and any related Federal
income tax reporting information and (iii) to provide the notices and to perform
other administrative obligations required by the Indenture and the Trust
Agreement. As compensation for the performance of the Administrator's
obligations and as reimbursement for its expenses related thereto, the
Administrator will be entitled to the Administration Fee. Affiliates of the
Administrator may assist it in performing its obligations.
An "Administrator Default" under each TRANSFER AND SERVICING Agreement will
consist of (i) any failure by the Administrator to direct the Indenture Trustee
or the Eligible Lender Trustee, as applicable, to make any required
distributions from any of the Trust Accounts, which failure continues unremedied
for three Business Days after written notice from the Indenture Trustee or the
Eligible Lender Trustee is received by the Administrator or after discovery of
such failure by the Administrator; (ii) any failure by the Administrator duly to
observe or perform in any material respect any other covenant or agreement in a
Transfer and Servicing Agreement which failure materially and adversely affects
the rights of Noteholders, and which continues unremedied for 60 days after the
giving of written notice of such failure (A) to the Administrator by the
Indenture Trustee or the Eligible Lender Trustee or (B) to the Administrator and
to the Indenture Trustee and the Eligible Lender Trustee by holders of Directing
Notes evidencing not less than 25% in principal amount of the outstanding
Directing Notes; and (iii) certain events of insolvency, readjustment of debt,
marshaling of assets and liabilities, or similar proceedings with respect to the
Administrator and certain actions by the Administrator indicating its insolvency
or inability to pay its obligations.
SERVICING
SERVICING PROCEDURES
Pursuant to the Transfer and Servicing Agreement for each Series, the Master
Servicer will agree to service, and perform all other related tasks with respect
to, the Financed Student Loans. The Master Servicer is obligated to perform all
services and duties customary to the servicing of Financed Student Loans
(including all collection practices), and to do so with reasonable care and in
compliance with all standards and procedures provided for in the Higher
Education Act, the Guarantee Agreements, the Heal Act, the HEAL Insurance
Contract, all regulations and agreements respecting Private Loans and all other
applicable federal and state laws.
Without limiting the foregoing, the duties of the Master Servicer include, but
are not limited to, collecting and depositing into the Collection Account all
payments with respect to the Financed Student Loans, including claiming and
obtaining any Insurance Payments with respect to Financed HEAL Loans, and, with
respect to Financed FFELP Loans, any Guarantee Payments, Interest Subsidy
Payments and Special Allowance Payments and guarantee payments with respect to
Private Loans; responding to inquiries from borrowers on the Financed Student
Loans; and investigating delinquencies and sending out statements, payment
coupons and tax reporting information to borrowers. In addition, the Master
Servicer will keep ongoing records with respect to such Financed Student Loans
and collections thereon and will furnish monthly and annual statements to the
Administrator with respect to such information, in accordance with the customary
standards and as otherwise required in the Transfer and Servicing Agreement.
The Master Servicer may enter into servicing agreements with Servicers pursuant
to which some or all of the Financed Student Loans may be serviced on behalf of
the Master Servicer. No such servicing arrangement will relieve the Master
Servicer of its duties and obligations under any Transfer and Servicing
Agreement. The initial Servicers for a particular pool of Financed Student Loans
will be set forth in the related Prospectus Supplement.
The Master Servicer shall cause each Servicer to deposit in the Collection
Account, no less frequently than bi-weekly, all payments on Financed Student
Loans for which such Servicer is acting as primary servicer (from whatever
source) and all proceeds of such Financed Student Loans collected by it during
each Collection Period.
Advances. If the Master Servicer has applied for an Insurance Payment from the
Department of HHS, a Guarantee Payment from a Guarantee Agency or an Interest
Subsidy Payment or a Special Allowance Payment from the Department of Education
or a guarantee payment from a guarantor of a Private Loan, and the Master
Servicer has not received the related payment prior to the end of the Collection
Period immediately preceding the Payment Date on which such amount would be
required to be distributed as a payment of interest, the Master Servicer may, no
later than the Payment Determination Date relating to such Payment Date, deposit
into the Advance Account an amount up to the amount of such payments applied for
but not received (such deposits by the Master Servicer are referred to herein as
"Advances"). On each related Payment Date for a Series, the Indenture Trustee
will distribute from the Advance Account to the Noteholders the Advance for such
Payment Date. Such Advances are recoverable by the Master Servicer (i) first,
from the source for which such Advance was made and (ii) second, from payments
received generally on or with respect to the Financed Student Loans. The Master
Servicer will have no obligation, legal or otherwise, to make any Advance, and a
determination by the Master Servicer to make an Advance will not create any
obligation of the Master Servicer, legal or otherwise, to make any future
Advances.
Year 2000 Information Systems Procedures. The Master Servicer currently is
implementing its information systems so that they will be fully operable for
date recognition and information processing when the year 2000 begins. An
assessment of needed changes was completed by a corporate-wide task force, led
by the Master Servicer's Technology and Operations Group, with representation
from all major internal business segments. This task force continues to monitor
the Master Servicer's progress, in addition to communicating with external
service providers and selected customers to ensure they are taking appropriate
actions to address date recognition issues. A combination of internal and
external resources are being used by the Master Servicer to implement the needed
changes to its many different information systems. Some of the necessary changes
in the Master Servicer's computer code have been made during the course of
normal maintenance. Other changes will necessitate re-writing of the computer
code, which is expected to be completed at some point in 1998.
Information with respect to the Master Servicer's year 2000 date recognition and
information processing program is contained in Crestar Financial Corporation's
Exchange Act reports, which may be obtained from the Commission at the sources
identified herein under "Available Information."
The Master Servicer expects to require each Servicer to represent and warrant,
among other things, that the information systems used by such Servicers in
connection with the servicing of the Financed Student Loans will be fully
operable for date recognition and information processing when the year 2000
begins.
CERTAIN MATTERS REGARDING THE MASTER SERVICER
Each Transfer and Servicing Agreement will provide that the Master Servicer may
not resign from its obligations and duties as Master Servicer thereunder, except
upon determination that the Master Servicer's performance of such duties is no
longer permissible under applicable law or will violate any final order of a
court or administrative agency with jurisdiction over the Master Servicer or its
properties. Generally, no such resignation will become effective until the
Indenture Trustee or a successor servicer has assumed the Master Servicer's
servicing obligations and duties under the Transfer and Servicing Agreement.
Each Transfer and Servicing Agreement will further provide that neither the
Transferor, the Depositor, the Master Servicer nor any of their directors,
officers, employees or agents will be under any liability to the related Trust,
the Noteholders, the Certificateholders, the Indenture Trustee or the Eligible
Lender Trustee, except as provided under the Transfer and Servicing Agreement
for taking any action or for refraining from taking any action pursuant to the
Transfer and Servicing Agreement, or for errors in judgment; provided however,
that neither the Transferor, the Depositor, the Master Servicer nor any such
person will be protected against any liability that would otherwise be imposed
by reason of willful misfeasance, bad faith or negligence in the performance of
their respective duties thereunder. In addition, each Transfer and Servicing
Agreement will provide that the Transferor and the Master Servicer shall not be
under any obligation to appear in, prosecute, or defend any legal action that is
not incidental to its duties in accordance with the Transfer and Servicing
Agreement and that, in its opinion, may cause it to incur any expense or
liability.
Each Transfer and Servicing Agreement will provide that the Master Servicer will
be permitted to perform its services thereunder through any of its affiliates,
provided that the Master Servicer shall continue to be responsible for all
performance of such services.
Under the circumstances and subject to conditions specified in each Transfer and
Servicing Agreement, any entity into which the Master Servicer may be merged or
consolidated, or any entity resulting from any merger or consolidation to which
the Master Servicer is a party, or any entity succeeding to the business of the
Master Servicer will be the successor of the Master Servicer under the Transfer
and Servicing Agreement. Successors (other than Crestar Financial Corporation or
a Crestar Subsidiary (as defined below)) must execute an agreement expressly
assuming the Master Servicer's obligations under the related Transfer and
Servicing Agreement. Nothing in any Agreement prohibits or restricts the merger
of Crestar Bank with Crestar Financial Corporation or certain subsidiaries of
Crestar Financial Corporation (each a "Crestar Subsidiary"), the consolidation
of Crestar Bank and Crestar Financial Corporation or any Crestar Subsidiary, or
the sale of all or substantially all of the assets of Crestar Bank to Crestar
Financial Corporation or another Crestar Subsidiary.
MASTER SERVICER COVENANTS
In each Transfer and Servicing Agreement, the Master Servicer covenants that:
(a) it will duly satisfy or cause to be duly satisfied all obligations on its
part to be fulfilled under or in connection with the Financed Student Loans,
maintain in effect all qualifications required to service the Financed Student
Loans and comply in all material respects with all requirements of law and
program requirements for Private Loans in connection with servicing the Financed
Student Loans, the failure to comply with which would have a materially adverse
effect on the Noteholders; (b) it will not permit any rescission or cancellation
of a Financed Student Loan except as ordered by a court of competent
jurisdiction or other government authority or as otherwise consented to by the
Eligible Lender Trustee and the Indenture Trustee; (c) it will do nothing to
impair in any material respect the rights of the Noteholders in the Financed
Student Loans; and (d) it will not reschedule, revise, defer or otherwise
compromise with respect to payments due on any Financed Student Loan except
pursuant to any applicable Deferment or Forbearance Periods or otherwise in
accordance with its guidelines with respect to the servicing of the Financed
Student Loans; provided, however, that the Master Servicer may not agree to any
decrease of the interest rate on, or the principal amount payable with respect
to, any Financed Student Loan except as otherwise permitted by the applicable
student loan program. Notwithstanding the foregoing, the Master Servicer may, in
its sole discretion, without having to obtain the consent or approval of any
other party, (i) not collect late charges that may be due on Financed Student
Loans, and (ii) waive remaining amounts owing under a Financed Student Loan up
to and including $250 (or such other amount as may be specified in a Prospectus
Supplement for a Series).
Following the discovery by or notice to the Master Servicer of a breach of any
such obligations with respect to any Financed Student Loan that results in the
failure of a Guarantee Agency (including for this purpose a guarantor under a
Private Loan Program) to make a Guarantee Payment or the Department of HHS to
make an Insurance Payment, the Master Servicer is obligated to purchase such
Financed Student Loan and reimburse the Trust for certain payments, all on terms
corresponding to those for the Depositor. See "Description of the
Agreements--Transfer and Servicing Agreements--Conveyance of Financed Student
Loans; Representations and Warranties" herein. The purchase and reimbursement
obligations of the Master Servicer will constitute, together with any rights to
receive certain amounts from Credit Enhancement, the sole remedy available to or
on behalf of the related Trust, the Certificateholders or the Noteholders for
any such uncured breach. The Master Servicer's purchase and reimbursement
obligations are contractual obligations pursuant to the Transfer and Servicing
Agreement that may be enforced against the Master Servicer, but the breach
thereof will not constitute an Event of Default under the Notes.
MASTER SERVICER DEFAULT
A "Master Servicer Default" under a Transfer and Servicing Agreement will
consist of: (i) any failure by the Master Servicer to deliver to the Indenture
Trustee for deposit in any of the Trust Accounts at the time required for such
deposit any collections, Guarantee Payments, Insurance Payments, any payments by
a guarantor under a guarantee agreement for a Private Loan or other amounts
received by the Master Servicer with respect to the Financed Student Loans,
which failure continues unremedied for three Business Days after written notice
from the Indenture Trustee, the Administrator or the Eligible Lender Trustee is
received by the Master Servicer or after discovery by the Master Servicer; (ii)
any failure by the Master Servicer duly to observe or perform in any material
respect any other covenant or agreement of the Master Servicer in the Transfer
and Servicing Agreement which failure materially and adversely affects the
rights of Noteholders and which continues unremedied for 60 days after the
giving of written notice of such failure (A) to the Master Servicer by the
Indenture Trustee, the Eligible Lender Trustee or the Administrator or (B) to
the Master Servicer and to the Indenture Trustee and the Eligible Lender Trustee
by holders of Directing Notes evidencing not less than 25% in principal amount
of the outstanding Directing Notes; (iii) certain events of insolvency,
readjustment of debt, marshaling of assets and liabilities, or similar
proceedings with respect to the Master Servicer and certain actions by the
Master Servicer indicating its Insolvency, reorganization pursuant to bankruptcy
proceedings or inability to pay its obligations; and (iv) any limitation,
suspension or termination by the Department of Education or the Department of
HHS or by a guarantor of Financed Private Loans of the Master Servicer's
eligibility to service Student Loans which materially and adversely affects the
Master Servicer's ability to service Financed Student Loans.
SERVICING COMPENSATION
The Master Servicer will be entitled to receive a fee (the "Servicing Fee") with
respect to each Series of Notes in an amount identified in the related
Prospectus Supplement. The Servicing Fee may be payable in advance or arrears,
out of Available Funds on each Payment Date or Quarterly Payment Date (or in the
case of the initial Servicing Fee payable in advance, on the Closing Date).
The Servicing Fee is intended to compensate the Master Servicer and each other
Servicer for performing the functions of a third party servicer of student loans
as an agent for their beneficial owner, including collecting and posting all
payments, responding to inquiries of borrowers on the Financed Student Loans,
investigating delinquencies, pursuing, filing and collecting any Guarantee
Payments, Insurance Payments and guarantee payments by guarantors of Financed
Private Loans, including litigation costs, accounting for collections and
furnishing monthly and annual statements to the Administrator. The Servicing Fee
also will reimburse the Master Servicer for certain taxes, accounting fees,
outside auditor fees, data processing costs and other costs incurred in
connection with administering the Financed Student Loans.
The amount of the Servicing Fee and method of calculating the same with
respect to the Financed Student Loans for a Series will be as set forth in the
Prospectus Supplement for such Series.
DESCRIPTION OF THE NOTES
GENERAL
The Notes of any Series will be issued pursuant to the terms of the Indenture,
which has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part. The following summary describes the material terms of the
Notes and the Indenture. The summary does not purport to be complete and is
qualified in its entirety by reference to the provisions of the Notes, the
Indenture and the Terms Supplement, which provisions are incorporated by
reference herein.
It is expected that each Class of the Notes of a Series will initially be
represented by one or more Notes registered in the name of the nominee of DTC
(together with any successor depository selected by the Administrator, the
"Depository"). Notes generally will be available for purchase in denominations
of $50,000 and integral multiples of $1,000 in excess thereof in book-entry
form. The Depositor has been informed by DTC that DTC's nominee will be Cede &
Co. Accordingly, Cede & Co. is expected to be the holder of record of the Notes.
Unless and until Definitive Notes are issued under the limited circumstances
described herein or in the accompanying Prospectus Supplement, no Noteholder
will be entitled to receive a physical certificate representing his Note. All
references herein to actions by Noteholders refer to actions taken by DTC upon
instructions from its participating organizations (the "Participants") and all
references herein to distributions, notices, reports and statements to
Noteholders refer to distributions, notices, reports and statements to DTC or
Cede & Co., as the registered holder of the Notes, for distribution to
Noteholders in accordance with DTC's procedures with respect thereto. See "--
Book-Entry Registration" and "-- Definitive Notes" herein.
Each Class of Notes of a Series will evidence the interests specified in the
related Prospectus Supplement, which may (i) include the right to receive
payments allocable only to principal, only to interest or to any combination
thereof; (ii) include the right to receive payments only of prepayments of
principal throughout the lives of the Notes or during specified periods; (iii)
be subordinated in its right to receive distributions of scheduled payments of
principal, prepayments or principal, interest or any combination thereof to one
or more other Classes of Notes of the related Trust throughout the lives of the
Notes or during specified periods or may be subordinated with respect to certain
losses or delinquencies; (iv) include the right to receive such payments only
after the occurrence of events specified in the Prospectus Supplement; (v)
include the right to receive payments in accordance with a schedule or formula
or on the basis of collections from designated portions of the assets in the
related Trust; (vi) include, as to Notes entitled to payments allocable to
interest, the right to receive interest at a fixed rate or an adjustable rate;
(vii) include the right to have interest accrue but not be paid until the
occurrence of a specified event or the passing of time; and (viii) include, as
to Notes entitled to payments allocable to interest, the right to payments
allocable to interest only after the occurrence of events specified in the
related Prospectus Supplement.
PAYMENT OF AVAILABLE FUNDS
THE ADMINISTRATOR WILL PROVIDE THE INDENTURE TRUSTEE AND THE ELIGIBLE LENDER
TRUSTEE with respect to each Series of Notes A MONTHLY report setting forth by
component the Available Funds for the immediately preceding Collection Period.
"Available Funds" means the sum, without duplication, of the following amounts
with respect to the related Collection Period: (i) all collections received by
the Master Servicer or any Servicer on the Financed Student Loans (and any
Guarantee Payments and any payments by any guarantor under any Private Loan
Program) and Insurance Payments received with respect to the Financed Student
Loans during such Collection Period); (ii) any payments, including without
limitation, Interest Subsidy Payments and Special Allowance Payments received by
the Eligible Lender Trustee during such Collection Period with respect to the
Financed Student Loans; (iii) all proceeds from any sales of Financed Student
Loans by the Trust during such Collection Period; (iv) any payments of or with
respect to interest received by the Master Servicer or a Servicer during such
Collection Period with respect to a Financed Student Loan for which a Realized
Loss was previously allocated; (v) the aggregate Purchase Amounts received for
those Financed Student Loans purchased by the Depositor or the Master Servicer
during the related Collection Period; (vi) the aggregate amounts, if any,
received from the Depositor or the Master Servicer as reimbursement of
non-guaranteed or uninsured interest amounts (which shall not include, with
respect to Financed FFELP Loans, the portion of such interest amounts (i.e., 2%)
for which the Guarantee Agency did not have an obligation to make a Guarantee
Payment), or lost Interest Subsidy Payments and Special Allowance Payments with
respect to the Financed Student Loans pursuant to the Transfer and Servicing
Agreement; (vii) net Adjustment Payments, if any, during such Collection Period;
(viii) investment earnings for such Collection Period; and (ix) any other sums
identified in the related Prospectus Supplement; provided, however, that
Available Funds will exclude all payments and proceeds of any Financed Student
Loans the Purchase Amount of which has been included in Available Funds for a
prior Collection Period (which payments and proceeds shall be paid to the
Depositor), and amounts used to reimburse the Master Servicer for Advances
pursuant to the terms of the applicable Transfer and Servicing Agreement.
On each Payment Determination Date described in the Prospectus Supplement, the
Administrator will advise the Indenture Trustee and the Eligible Lender Trustee
in writing of the applicable Class Interest Rate payable on each Class of Notes
(and the Certificates) and the applicable Principal Payment Amount payable on
the Notes (or, after all the Notes have been paid in full, the Certificates) on
such Payment Date or Quarterly Payment Date. In addition, on each Payment
Determination Date the Administrator will advise the Indenture Trustee in
writing of the estimated Transaction Fees payable on such Payment Date or
Quarterly Payment Date.
Prior to making payments to the Note Payment Account, the Indenture Trustee
will, if so provided in the Prospectus Supplement for a Series, transfer from
the applicable Collection Account to the Expense Account an amount sufficient to
pay Transaction Fees. On each Payment Date or Quarterly Payment Date (other than
those relating to Accrual Notes during the related Accrual Period), the
Indenture Trustee will, subject to the amount of Available Funds, transfer from
the Collection Account to the Note Payment Account an amount equal to the Class
Interest Rate on each Class of the Notes, as described in the related Prospectus
Supplement. For each Payment Date during the related Accrual Period relating to
a Class of Accrual Notes, the related Class Interest Rate will be added to the
principal amount of such Class of Notes. On each Payment Date or Quarterly
Payment Date on which principal is payable on the Notes, the Indenture Trustee
will, subject to the amount of Available Funds, transfer from the Collection
Account to the Note Payment Account an amount equal to the Principal Payment
Amount, as described in the related Prospectus Supplement. On each Payment Date
or Quarterly Payment Date, the Indenture Trustee will pay to the Noteholders of
the applicable Class as of the related Record Date all amounts transferred to
the Note Payment Account as set forth above and in the related Prospectus
Supplement.
Following the payment of all required amounts due on the Notes on any Payment
Date or Quarterly Payment Date (and deposit of any required amounts in any
Reserve Account), the Indenture Trustee will, to the extent of Available Funds,
transfer from the Collection Account to the Certificate Distribution Account, an
amount equal to the related Interest Distribution Amount on the Certificates on
such Payment Date, and after payment in full of the Notes of a Series, the
amount required to reduce the Certificate principal balance to zero.
On each Payment Date or Quarterly Payment Date, as specified in the related
Prospectus Supplement, the Indenture Trustee will, after making all required
transfers to the Note Payment Account, Expense Account, Reserve Account and
Certificate Distribution Account, transfer any remaining available funds to the
Depositor. Payments made to the Depositor will not thereafter be available to
make payments on the Notes.
Notwithstanding the foregoing, if there has been an Event of Default with
respect to payment of the Notes issued by a Trust, the Certificateholders of
such Trust will not be entitled to any payments of principal or interest until
each outstanding Class of Notes of such Trust has been paid in full.
INTEREST
Interest will accrue on the principal balance of each Class of Notes of a Series
at a rate per annum (calculated as provided below or in the related Prospectus
Supplement) equal to the related Class Interest Rate. Interest is expected to
accrue initially from and including the Closing Date on which the related Series
was issued through and including the date set forth in the related Prospectus
Supplement and, thereafter, except as otherwise set forth in the related
Prospectus Supplement, for periods (each, an "Interest Accrual Period")
consisting of (i) with respect to LIBOR Rate Notes, generally a one-month or
three-month period beginning and ending on the dates set forth in the related
Prospectus Supplement, (ii) with respect to T-Bill Rate Notes, generally a
three-month period beginning and ending on the dates set forth in the related
Prospectus Supplement, (iii) with respect to Auction Rate Notes, as set forth in
the related Prospectus Supplement, or (iv) with respect to Notes accruing
interest based on some other method, the period set forth in the related
Prospectus Supplement. Interest on each Class of Notes will be payable (or with
respect to Accrual Notes during the related Accrual Period, added to the
principal amount thereof) on the Payment Dates described in the applicable
Prospectus Supplement.
Generally, the Class Interest Rate on each Class of Notes will equal the lesser
of (i) the interest rate and applicable margin, if any, and (ii) a cap specified
in the related Prospectus Supplement (the "Formula Rate"); provided that it will
not exceed the Net Loan Rate when it is required to be determined. The Net Loan
Rate NEED NOT BE DETERMINED ON ANY INTEREST DETERMINATION DATE UNLESS ONE-MONTH
LIBOR AS OF THE PRECEDING INTEREST DETERMINATION DATE EXCEEDS BY MORE THAN 100
BASIS POINTS THE AVERAGE OF THE BOND EQUIVALENT RATES OF THE 91-day Treasury
bills AUCTIONED TO THE preceding Interest Determination Date DURING THE CALENDAR
QUARTER IN WHICH SUCH PRECEDING Interest Determination Date OCCURS (OR IN THE
CASE OF THE INITIAL INTEREST DETERMINATION DATE, THE CLOSING DATE).
If on any Interest Determination Date, an Auction for a Class of Notes is not
held for any reason, then the Class Interest Rate for such Class of Notes will
be the Net Loan Rate or such other rate as may be described in a Prospectus
Supplement. The Class Interest Rate on each Class of Notes bearing interest
based upon a method other than LIBOR, T-Bill or Auction Rate will be described
in the related Prospectus Supplement.
With respect to Auction Rate Notes, the Administrator may, from time to time,
change the length of one or more Auction Periods to conform with then current
market practice or accommodate other economic or financial factors that may
affect or be relevant to the length of the Auction Period or any Class Interest
Rate (an "Auction Period Adjustment"). An Auction Period Adjustment will not
cause an Auction Period to be less than 7 days nor more than one year and will
not be allowed unless certain conditions described in the Auction Procedures in
Appendix I to the related Prospectus Supplement are satisfied. If an Auction
Period Adjustment is made, the intervals between Payment Dates will be adjusted
accordingly.
Payment of Interest. Payments of interest will be made on each Payment Date or
Quarterly Payment Date, as specified in the accompanying Prospectus Supplement.
Interest payments may include interest accrued on the assets of the related
Trust during one or more Interest Accrual Periods. Interest payments on the
Notes will generally be funded from Available Funds and Advances (and, when
applicable, amounts on deposit in any Reserve Account, Pre-Funding Account or
such other account as may be set forth in a Prospectus Supplement) remaining
after the deposit of the Transaction Fees in the Expense Account. If
insufficient funds are available to pay the applicable Class Interest Rate on a
Payment Date or Quarterly Payment Date, such shortfall will be paid from draws
on the applicable forms of Credit Enhancement to the extent described in the
related Prospectus Supplement.
Carryover Interest. If set forth in a Prospectus Supplement, with respect to any
Class of Notes of a Series for any Interest Accrual Period the LIBOR Rate,
T-Bill Rate, Auction Rate or other applicable interest rate plus the applicable
margin exceeds the Net Loan Rate, the applicable Class Interest Rate for such
Interest Accrual Period will be the Net Loan Rate, and the excess of the amount
of interest on such Class of Notes that would have accrued at a rate equal to
the LIBOR Rate, T-Bill Rate, Auction Rate or other applicable interest rate plus
any applicable margin, over the amount of interest on such Class actually
accrued at the Net Loan Rate will accrue as the Carryover Interest with respect
to such Class of Notes. Such determination of the Carryover Interest will be
made separately for each Class of Notes. The Carryover Interest on any Class of
Notes will bear interest at a rate equal to the Formula Rate, or the rate set
forth in the related Prospectus Supplement, from the Payment Date for the
Interest Accrual Period for which the Carryover Interest was calculated until
paid.
Carryover Interest will be paid as described in the related Prospectus
Supplement.
PRINCIPAL
All payments of principal of Notes of a Series will be made in an aggregate
amount determined as set forth in the related Prospectus Supplement and will be
paid at the times and will be allocated among the Classes of Notes of such
Series in the order and amounts, all as specified in the related Prospectus
Supplement. Principal may be paid pro rata to the Noteholders of any Class, or
may be repaid by lot, in either case as described in the related Prospectus
Supplement.
As described herein, each Trust that is a master trust may issue, from time to
time, several Series and Classes of Notes. A Series of Notes may contain one or
more Classes of Notes with a higher payment priority than one or more Classes of
Notes of a previously issued or subsequently issued Series. In such event, the
Classes of Notes with the lower payment priority will receive limited or no
payments of principal until each of the Classes of Notes with a higher payment
priority, regardless of when issued, have been paid to the extent set forth in a
Prospectus Supplement.
The aggregate outstanding principal amount of each Class of Notes of a Series
will be payable in full on the Payment Date identified in the related Prospectus
Supplement (the "Legal Final Maturity"). The actual date on which the aggregate
outstanding principal and accrued interest of any Class of Notes are paid may be
earlier than its respective Legal Final Maturity, based on a variety of factors,
including those described under "Maturity and Prepayment Considerations" herein.
Realized Losses. The Trust may experience losses with respect to the Financed
Student Loans. If such Realized Losses are not absorbed by the equity of the
Trust, they may result in the inability to pay the Notes of a Series in full.
With respect to each Financed FFELP Loan submitted to a Guarantee Agency for a
Guarantee Payment, a "Realized Loss" means the excess, if any, of (i) the unpaid
principal balance of such Financed FFELP Loan on the date it was first submitted
to a Guarantee Agency for a Guarantee Payment over (ii) all amounts received on
or with respect to principal on such Financed FFELP Loan up through the earlier
to occur of (A) the date a related Guarantee Payment is made or (B) the last day
of the Collection Period occurring 12 months after the date the claim for such
Guarantee Payment is first denied.
With respect to each Financed HEAL Loan submitted to the Department of HHS for
an Insurance Payment, a "Realized Loss" means the excess, if any, of (i) the
unpaid principal balance of such Financed HEAL Loan on the date it was first
submitted to the Department of HHS for an Insurance Payment over (ii) all
amounts received on or with respect to principal on such Financed HEAL Loan up
through the earlier to occur of (A) the date a related Insurance Payment is made
or (B) the last day of the Collection Period occurring 12 months after the date
the claim for such Insurance Payment is first denied.
With respect to each Private Loan, a "Realized Loss" generally will mean the
excess, if any, of (i) the unpaid principal balance of such Private Loan at the
time of default, plus accrued and unpaid interest thereon, if any, at such time
over (ii) all amounts received on or with respect to the liquidation of such
Private Loan. The Prospectus Supplement for any Series of Notes containing
Private Loans will describe the particular procedures with respect to the
realization of Realized Losses on the Private Loans of such Series.
DETERMINATION OF LIBOR
Pursuant to each Transfer and Servicing Agreement and each Prospectus
Supplement, for each Interest Accrual Period after the initial Interest Accrual
Period, the Master Servicer will determine the applicable LIBOR rate for
purposes of calculating the Class Interest Rate on the LIBOR Rate Notes for each
given Interest Accrual Period on the date which is both two Business Days (in
New York and Virginia) and two London Banking Days preceding the commencement of
each Interest Accrual Period (each, an "Interest Determination Date"). "London
Banking Day" means a business day on which dealings in deposits in United States
dollars are transacted in the London interbank market.
"LIBOR" means the rate of interest per annum equal to the London interbank
offered rate for deposits in U.S. dollars having the applicable maturity (i.e.,
one month or three months) commencing on the related Interest Determination Date
(the "Index Maturity") which appears on Telerate Page 5 as of 11:00 a.m., London
time, on such Interest Determination Date. If such rate does not appear on
Telerate Page 5, the rate for that day will be determined by reference to the
Reuters Screen LIBOR Page. If such rate does not appear on Telerate Page 5 or
the Reuters Screen LIBOR Page, the rate for that day will be determined on the
basis of the rates at which deposits in U.S. dollars, having the Index Maturity
and in a principal amount of not less than U.S. $1,000,000, are offered at
approximately 11:00 a.m., London time, on such Interest Determination Date to
prime banks in the London interbank market by the Reference Banks. The Master
Servicer will request the principal London office of each of such Reference
Banks to provide a quotation of its rate. If at least two such quotations are
provided, LIBOR for that day will be the arithmetic mean (rounded upwards, if
necessary, to the nearest .01%) of the quotations. If fewer than two quotations
are provided, LIBOR for that day will be the arithmetic mean (rounded upwards,
if necessary, to the nearest .01%) of the rates quoted by three major banks in
New York City, selected by the Master Servicer, or by the Trustee, as
applicable, at approximately 11:00 a.m., New York City time, on such Interest
Determination Date for loans in U.S. dollars to leading European banks having
the Index Maturity and in a principal amount equal to an amount of not less than
U.S. $1,000,000; provided, however, that if the banks selected as aforesaid are
not quoting as mentioned in this sentence, LIBOR in effect for the applicable
Interest Accrual Period will be LIBOR in effect for the previous Interest
Accrual Period.
T-BILL RATE
Pursuant to each Transfer and Servicing Agreement and the accompanying
Prospectus Supplement, for each Interest Accrual Period after the initial
Interest Accrual Period, the Master Servicer will determine the T-Bill Rate for
purposes of calculating the Class Interest Rate on each Class of T-Bill Rate
Notes of the related Series for each given Interest Accrual Period on the
related Interest Determination Date. The T-Bill Rate means the rate of interest
per annum equal to the average of the bond equivalent yields of the 91-day
Treasury bills auctioned during the preceding quarter (the "T-Bill Rate").
AUCTION PROCEDURES
A Series of Notes may contain one or more Classes of Auction Rate Notes. The
following discussion summarizes certain procedures that will be used in
determining the interest rates on the Auction Rate Notes. If any Auction Rate
Notes are included in a Series, the Prospectus Supplement will contain a more
detailed description of these procedures in an Appendix. Prospective investors
in the Auction Rate Notes should read carefully the following summary, along
with the more detailed description in the Prospectus Supplement.
The interest rate on each Class of Auction Rate Notes will be determined
periodically (generally, for periods ranging from 7 days to one year) by means
of a "Dutch Auction." In this Dutch Auction, investors and potential investors
submit orders through an eligible broker/dealer as to the principal amount of
Auction Rate Notes such investors wish to buy, hold or sell at various interest
rates. The broker/dealers submit their clients' orders to the auction agent, who
processes all orders submitted by all eligible broker/dealers and determines the
interest rate for the upcoming interest period. The broker/dealers are notified
by the auction agent of the interest rate for the upcoming interest period and
are provided with settlement instructions relating to purchases and sales of
Auction Rate Notes.
In the auction procedures, the following types of orders may be submitted:
(i) Bid/Hold Orders - the minimum interest rate that
a current investor is willing to accept in order to
continue to HOLD some or all of its Auction Rate
Notes for the upcoming interest period;
(ii) Sell Orders - an order by a current investor to SELL
a specified principal amount of Auction Rate Notes,
regardless of the upcoming interest rate; and
(iii) Potential Bid Orders - the minimum interest rate that
a potential investor (or a current investor wishing
to purchase additional Auction Rate Notes) is willing
to accept in order to BUY a specified principal
amount of Auction Rate Notes.
If an existing investor does not submit orders with respect to all its Auction
Rate Notes of the applicable Class, the investor will be deemed to have
submitted a Hold Order at the new interest rate for that portion of the Auction
Rate Notes for which no order was received.
In connection with each auction, Auction Rate Notes will be purchased and sold
between investors and potential investors at a price equal to their then
outstanding principal balance (i.e., par) plus any accrued interest. The
following example helps illustrate how the above-described procedures are used
in determining the interest rate on the Auction Rate Notes.
(a) Assumptions:
1. Denominations (Units) = $100,000
2. Interest Period = 28 Days
3. Principal Amount Outstanding = $50 Million (500 Units)
(b) Summary of All Orders Received For The Auction
BID/HOLD ORDERS SELL ORDERS POTENTIAL BID ORDERS
--------------- ----------- --------------------
10 Units at 2.90% 50 Units Sell 20 Units at 2.95%
30 Units at 3.02% 50 Units Sell 30 Units at 3.00%
60 Units at 3.05% 100 Units Sell 50 Units at 3.05%
100 Units at 3.10% 50 Units at 3.10%
100 Units at 3.12% 50 Units at 3.11%
50 Units at 3.14%
100 Units at 3.15%
Total units under existing Bid/Hold Orders and Sell Orders must always equal
issue size (in this case 500 Units).
(c) Auction Agent Organizes Orders In Ascending Order
Order Number Cumulative Order Number Cumulative
Number of Units Total (Units) % Number of Units Total (Units) %
------ -------- ------------- --- ------ -------- ------------- ---
1 10(W) 10 2.90% 7 100(W) 300 3.10%
2 20(W) 30 2.95% 8 50(W) 350 3.10%
3 30(W) 60 3.00% 9 50(W) 400 3.11%
4 30(W) 90 3.02% 10 100(W) 500 3.12%
5 50(W) 140 3.05% 11 50(L) 3.14%
6 60(W) 200 3.05% 12 100(L) 3.15%
- ------------------------
(W) Winning Order (L) Losing Order
Order #10 is the order that clears the market of all available units. All
winning orders are awarded the winning rate (in this case, 3.12%) as the
interest rate for the next Interest Accrual Period. Multiple orders at the
winning rate are allocated units on a pro rata basis. Notwithstanding the
foregoing, in no event will the interest rate exceed the lesser of the Net Loan
Rate or the Maximum Auction Rate.
The above example assumes that a successful auction has occurred (i.e., all Sell
Orders and all Bid/Hold Orders below the new interest rate were fulfilled). In
certain circumstances, there may be insufficient Potential Bid Orders to
purchase all the Auction Rate Notes offered for sale. In such circumstances, the
interest rate for the upcoming Interest Accrual Period will equal the lesser of
the Net Loan Rate and the Maximum Auction Rate. Also, if all the Auction Rate
Notes are subject to Hold Orders (i.e., each holder of Auction Rate Notes wishes
to continue holding its Auction Rate Notes, regardless of the interest rate) the
interest rate for the upcoming Interest Accrual Period will equal the lesser of
the Net Loan Rate and the rate at which all investors are willing to hold the
Notes.
CREDIT ENHANCEMENT
The amounts and types of Credit Enhancement arrangements and the provider
thereof, if applicable, with respect to a Series or any Class of Notes will be
set forth in the related Prospectus Supplement. If specified in the applicable
Prospectus Supplement, Credit Enhancement for any Series of Notes 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 thereafter be
unavailable to such other Classes of Notes or Certificates. Further information
regarding any provider of Credit Enhancement, including financial information
when material, will be included or incorporated by reference in the related
Prospectus Supplement. If and to the extent provided in the related Prospectus
Supplement, Credit Enhancement may include one or more of the following or any
combination thereof:
Reserve Account. A Reserve Account may be created with respect to any Series of
Notes, and on each Closing Date the Depositor may deposit cash or Eligible
Investments in an amount, if any, equal to the Reserve Account Deposit
identified in the related Prospectus Supplement. The Reserve Account may be
augmented on certain Payment Dates, as set forth in the related Prospectus
Supplement, by deposit therein of the amount, if any, necessary to cause the
balance of the Reserve Account to equal the Specified Reserve Account Balance
from the amount of Available Funds remaining after making all prior
distributions on such date as described in the related Prospectus Supplement;
provided, however, that, if and as set forth in the related Prospectus
Supplement, such Available Funds may be applied as an additional principal
payment. Also, if amounts were transferred from the Reserve Account to cover a
Realized Loss on a Financed Student Loan, any subsequent payments of principal
received on or with respect to such Financed Student Loan will be deposited into
the Reserve Account or, if so provided in the related Prospectus Supplement,
applied as an additional Principal Payment. Amounts on deposit in the Reserve
Account exceeding the Specified Reserve Account Balance will be distributed as
set forth in the related Prospectus Supplement.
A Reserve Account is intended to enhance the likelihood of timely receipt by the
Noteholders of the full amount of principal and interest due them and to
decrease the likelihood that the Noteholders will experience losses. In certain
circumstances, however, a Reserve Account could be depleted. Further, as
described above, amounts otherwise required to be deposited into the Reserve
Account may, with the consent of any provider of Credit Enhancement, if any, be
applied as additional Principal Payments. If the amount required to be withdrawn
from the Reserve Account to cover shortfalls in the amount of Available Funds
exceeds the amount of cash in the Reserve Account, a temporary shortfall in the
amount of principal and interest distributed to the Noteholders could result.
This shortfall could, in turn, increase the average life of the Notes. Moreover,
amounts on deposit in the Reserve Account (other than amounts in excess of the
Specified Reserve Account Balance) will not be available to cover any aggregate
unpaid Carryover Interest.
Subordination. The rights of the holders of a Class of Notes may be
subordinated to the rights of more senior Noteholders to the extent described
herein and in the related Prospectus Supplement.
Surety Bonds. A Surety Bond with respect to one or more Classes of a Series of
Notes may be obtained by the Depositor in favor of the Eligible Lender Trustee
solely on behalf of the Noteholders of the related Series. Except as provided
below or in a Prospectus Supplement, a Surety Bond will provide for coverage of
timely payment of all interest and ultimate payment of all principal due on the
related Series of Notes; provided, however, that Surety Bonds will not ensure
payment of any Carryover Interest.
The amount required to be paid to the issuer of each Surety Bond will be
described in the applicable Prospectus Supplement.
Other Forms of Credit Enhancement. If and to the extent specified in the related
Prospectus Supplement, Credit Enhancement with respect to a Series or any Class
of Notes may also include overcollateralization, letters of credit, liquidity
facilities, INTEREST RATE CAP AGREEMENTS, INTEREST RATE SWAP AGREEMENTS,
CURRENCY SWAP AGREEMENTS, insurance policies, spread accounts, one or more
Classes of subordinate securities, derivative products or other forms of credit
enhancement including but not limited to third party guarantees (collectively,
"Credit Enhancement"). The Credit Enhancement with respect to any Series or
Class of Notes may be structured to provide protection against delinquencies
and/or losses on the Financed Student Loans, against changes in interest rates,
or other risks, to the extent and under the conditions specified in the related
Prospectus Supplement. Any form of Credit Enhancement will have certain
limitations and exclusions from coverage thereunder, which will be described in
the related Prospectus Supplement.
TERMINATION
To avoid excessive administrative expense, the Master Servicer is permitted at
its option to purchase from the Eligible Lender Trustee, as of the end of any
Collection Period immediately preceding a Payment Date if the then outstanding
Pool Balance with respect to the related Trust is equal to or less than a
percentage specified in a Prospectus Supplement of the Initial Pool Balance, all
remaining Financed Student Loans at a price equal to the aggregate Purchase
Amounts thereof as of the end of such Collection Period, but not less than an
amount necessary to pay transaction costs and all amounts due the Noteholders
(other than Carryover Interest). The net proceeds of such purchase will be used
to retire the Notes of such Series. Upon termination of a Trust, remaining
assets will be conveyed and transferred to the Depositor after giving effect to
any final distributions to Noteholders and Certificateholders.
If specified in the Prospectus Supplement for any Series, as of a date specified
therein or as of a date when the Pool Balance is reduced to a specified
percentage of the Initial Pool Balance, any Financed Student Loans remaining in
the related Trust will be offered for sale by the Indenture Trustee. The
Transferor, the Depositor, their affiliates and unrelated third parties may
offer bids to purchase the related Financed Student Loans on or prior to such
Payment Date. If at least two bids are received, the Indenture Trustee will
accept the highest bid equal to or in excess of the greater of (a) the aggregate
Purchase Amounts of such Financed Student Loans as of the end of the Collection
Period immediately preceding such Payment Date or (b) an amount sufficient to
pay transaction costs and all amounts due the Noteholders (other than Carryover
Interest). If at least two bids are not received or the highest bid is not equal
to or in excess of the foregoing minimum, the Indenture Trustee will not
consummate such sale. The net proceeds of any such sale will be used to retire
the Notes of such Series. If the sale is not consummated in accordance with the
foregoing, the Indenture Trustee may, but shall not be under any obligation to,
solicit bids to purchase the Financed Student Loans on future Payment Dates upon
terms similar to those described above. No assurance can be given as to whether
the Indenture Trustee will be successful in soliciting acceptable bids to
purchase the Financed Student Loans on either such Payment Date or any
subsequent Payment Date.
BOOK-ENTRY REGISTRATION
The description which follows of the procedures and record keeping with respect
to beneficial ownership interests in a Series of Notes, payment of principal of
and interest on the Notes to DTC Participants, Cedel Participants and Euroclear
Participants or to purchasers of the Notes, confirmation and transfer of
beneficial ownership interests in the Notes, and other securities-related
transactions by and between DTC, Cedel, Euroclear, DTC Participants, Cedel
Participants, Euroclear Participants and Note Owners, is based solely on
information furnished by DTC, Cedel and Euroclear and has not been independently
verified by the Depositor, the Transferor or the Underwriters.
If specified in the accompanying Prospectus Supplement, Noteholders may hold
their certificates through DTC (in the United States) or Cedel or Euroclear (in
Europe) if they are participants of such systems, or indirectly through
organizations that are participants in such systems.
DTC will hold the global Notes. Cedel and Euroclear will hold omnibus positions
on behalf of the Cedel Participants and the Euroclear Participants,
respectively, through customers securities accounts in Cedel's and Euroclear's
names on the books of their respective depositories (collectively, the
"Depositories") which in turn will hold such positions in customers' securities
accounts in the Depositories' names on the books of DTC.
DTC is a limited-purpose trust company organized under the New York Banking Law,
a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
holds securities for its Participants ("DTC Participants") and facilitates the
clearance and settlement among DTC Participants of securities transactions, such
as transfers and pledges, in deposited securities through electronic book-entry
changes in DTC Participants' accounts, thereby eliminating the need for physical
movement of securities certificates. DTC Participants include securities brokers
and dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to the DTC system is also available to others
such as securities brokers and dealers, banks, and trust companies that clear
through or maintain a custodial relationship with a DTC Participant, either
directly or indirectly ("Indirect Participants"). The rules applicable to DTC
and its DTC Participants are on file with the Commission.
Transfers between DTC Participants will occur in accordance with DTC rules.
Transfers between Cedel Participants and Euroclear Participants will occur in
the ordinary way in accordance with their applicable rules and operating
procedures.
Cross-market transfers between persons holding directly or indirectly through
DTC, on the one hand, and directly or indirectly through Cedel Participants or
Euroclear Participants, on the other, will be effected in DTC in accordance with
DTC rules on behalf of the relevant European international clearing system by
its Depository; however, such cross-market transactions will require delivery of
instructions to the relevant European international clearing system by the
counterparty in such system in accordance with its rules and procedures and
within its established deadlines (European time). The relevant European
international clearing system will, if the transaction meets its settlement
requirements, deliver instructions to its 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. Cedel Participants and Euroclear
Participants may not deliver instructions directly to the Depositories.
Because of time-zone differences, credits of securities in Cedel or Euroclear as
a result of a transaction with a DTC Participant will be made during the
subsequent securities settlement processing, dated the business day following
the DTC settlement date, and such credits or any transactions in such securities
settled during such processing will be reported to the relevant Cedel
Participant or Euroclear Participant on such business day. Cash received in
Cedel or Euroclear as a result of sales of securities by or through a Cedel
Participant or a Euroclear Participant to a DTC Participant will be received
with value on the DTC settlement date but will be available in the relevant
Cedel or Euroclear cash account only as of the business day following settlement
in DTC.
Day traders that use Cedel or Euroclear and that purchase the globally offered
Notes from DTC Participants for delivery to Cedel Participants or Euroclear
Participants should note that these trades may fail on the sale side unless
affirmative actions are taken. Participants should consult with their clearing
system to confirm that adequate steps have been taken to assure settlement.
Purchases of Notes under the DTC system must be made by or through DTC
Participants, which will receive a credit for the Notes on DTC's records. The
ownership interest of each actual owner of a Note (a "Note Owner") is in turn to
be recorded on the DTC Participants' and Indirect Participants' records. Note
Owners will not receive written confirmation from DTC of their purchase, but
Note Owners are expected to receive written confirmations providing details of
the transaction, as well as periodic statements of their holdings, from the DTC
Participant or Indirect Participant through which the Note Owner entered into
the transaction. Transfers of ownership interests in the Notes are to be
accomplished by entries made on the books of DTC Participants acting on behalf
of Note Owners. Note Owners will not receive certificates representing their
ownership interest in Notes, except in the event that use of the book-entry
system for the Notes is discontinued.
To facilitate subsequent transfers, all Notes deposited by DTC Participants with
DTC are registered in the name of DTC's nominee, Cede & Co. The deposit of Notes
with DTC and their registration in the name of Cede & Co. effects no change in
beneficial ownership. DTC has no knowledge of the actual Note Owners of the
Notes; DTC's records reflect only the identity of the DTC Participants to whose
accounts such Notes are credited, which may or may not be the Note Owners. The
DTC Participants will remain responsible for keeping account of their holdings
on behalf of their customers.
Conveyance of notices and other communications by DTC to DTC Participants, by
DTC Participants to Indirect Participants, and by DTC Participants and Indirect
Participants to Note Owners will be governed by arrangements among them, subject
to any statutory or regulatory requirements as may be in effect from time to
time.
Neither DTC nor Cede & Co. will consent or vote with respect to the Notes. Under
its usual procedures, DTC mails an omnibus proxy to the issuer as soon as
possible after the record date, which assigns Cede's consenting or voting rights
to those DTC Participants to whose accounts the Notes are credited on the record
date (identified in a listing attached thereto).
Principal and interest payments on the Notes will be made to DTC. DTC's practice
is to credit DTC Participants' accounts on the applicable Payment Date in
accordance with their respective holdings shown on DTC's records unless DTC has
reason to believe that it will not receive payment on such Payment Date.
Payments by DTC Participants to Note Owners will be governed by standing
instructions and customary practices, as is the case with securities held for
the accounts of customers in bearer form or registered in "street name" and will
be the responsibility of such DTC Participant and not of DTC, the Indenture
Trustee or the Transferor, subject to any statutory or regulatory requirements
as may be in effect from time to time. Payment of principal and interest to DTC
is the responsibility of the Indenture Trustee, disbursement of such payments to
DTC Participants shall be the responsibility of DTC, and disbursement of such
payments to Note Owners shall be the responsibility of DTC Participants and
Indirect Participants.
DTC may discontinue providing its services as securities depository with respect
to the Notes at any time by giving reasonable notice to the Transferor or the
Indenture Trustee. Under such circumstances, in the event that a successor
securities depository is not obtained, Definitive Notes are required to be
printed and delivered. The Administrator may decide to discontinue use of the
system of book-entry transfers through DTC (or a successor securities
depository). In that event, Definitive Notes will be delivered to Noteholders.
See "-- Definitive Notes" herein.
Cedel is incorporated under the laws of Luxembourg as a professional depository.
Cedel holds securities for its participating organizations ("Cedel
Participants") and facilitates the clearance and settlement of securities
transactions between Cedel Participants through electronic book-entry changes in
accounts of Cedel Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in Cedel in any of 32
currencies, including United States dollars. Cedel provides to its Cedel
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Cedel interfaces with domestic markets in several
countries. As a professional depository, Cedel is subject to regulation by the
Luxembourg Monetary Institute. Cedel Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations and may include the underwriters of any Series of Notes. Indirect
access to Cedel is also available to others, such as banks, brokers, dealers and
trust companies that clear through or maintain a custodial relationship with a
Cedel Participant, either directly or indirectly.
The Euroclear System was created in 1968 to hold securities for participants of
the Euroclear System ("Euroclear Participants") and to clear and settle
transactions between Euroclear Participants through simultaneous electronic
book-entry delivery against payment, thereby eliminating the need for physical
movement of certificates and any risk from lack of simultaneous transfers of
securities and cash. Transactions may now be settled in any of 32 currencies,
including United States dollars. The Euroclear System includes various other
services, including securities lending and borrowing and interfaces with
domestic markets in 25 countries generally similar to the arrangements for
cross-market transfers with DTC described above. The Euroclear System is
operated by Morgan Guaranty Trust Company of New York, Brussels, Belgium office
(the "Euroclear Operator" or "Euroclear"), under contract with Euroclear
Clearance System, Societe Cooperative, a Belgian cooperative corporation (the
"Cooperative"). All operations are conducted by the Euroclear Operator, and all
Euroclear securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear Operator, not the Cooperative. The Cooperative Board
establishes policy for the Euroclear System. Euroclear Participants include
banks (including central banks), securities brokers and dealers and other
professional financial intermediaries and may include the underwriters of any
Series of Notes. Indirect access to the Euroclear System is also available to
other firms that maintain a custodial relationship with a Euroclear Participant,
either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking corporation
which is a member bank of the Federal Reserve System. As such, it is regulated
and examined by the Board of Governors of the Federal Reserve System and the New
York State Banking Department, as well as the Belgian Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator are
governed by the Terms and Conditions Governing Use of Euroclear and the related
Operating Procedures of the Euroclear System (collectively, the "Terms and
Conditions"). The Terms and Conditions govern transfers of securities and cash
within the Euroclear System, withdrawal of securities and cash from the
Euroclear System, and receipts of payments with respect to securities in the
Euroclear System. All securities in the Euroclear System are held on a fundable
basis without attribution of specific certificates to specific securities
clearance accounts. The Euroclear Operator acts under the Terms and Conditions
only on behalf of Euroclear Participants and has no record of or relationship
with persons holding through Euroclear Participants.
The Euroclear Operator has advised as follows: Under Belgian law, investors that
are credited with securities on the records of the Euroclear Operator have a
co-property right in the fungible pool of interests in securities on deposit
with the Euroclear Operator in an amount equal to the amount of interests in
securities credited to their accounts. In the event of the insolvency of the
Euroclear Operator, Euroclear Participants would have a right under Belgian law
to the return of the amount and type of interests in securities credited to
their accounts with the Euroclear Operator. If the Euroclear Operator did not
have a sufficient amount of interests in securities on deposit of a particular
type to cover the claims of all Euroclear Participants credited with such
interests in securities on the Euroclear Operator's records, all Euroclear
Participants having an amount of interests in securities of such type credited
to their accounts with the Euroclear Operator would have the right under Belgian
law to the return of their pro-rata share of the amount of interests in
securities actually on deposit. Under Belgian law, the Euroclear Operator is
required to pass on the benefits of ownership in any interests in securities on
deposit with it (such as dividends, voting rights and other entitlements) to any
person credited with such interests in securities on its records.
Distributions with respect to Notes held through Cedel or Euroclear will be
credited to the cash accounts of Cedel Participants or Euroclear Participants in
accordance with the relevant system's rules and procedures, to the extent
received by its Depository. Such distributions will be subject to tax reporting
in accordance with relevant United States tax laws and regulations. See "Federal
Income Tax Consequences" herein. Cedel or the Euroclear Operator, as the case
may be, will take any other action permitted to be taken by a Noteholder under
the Agreement on behalf of a Cedel Participant or Euroclear Participant only in
accordance with its relevant rules and procedures and subject to its
Depository's ability to effect such actions on its behalf through DTC.
Although DTC, Cedel and Euroclear have agreed to the foregoing procedures in
order to facilitate transfers of Notes among participants of DTC, Cedel and
Euroclear, they are under no obligation to perform or continue to perform such
procedures and such procedures may be discontinued at any time.
DEFINITIVE NOTES
If set forth in the accompanying Prospectus Supplement, Notes of any Series will
be issued in fully registered, certificated form (the "Definitive Notes") to
Note owners or their nominees rather than to DTC or its nominee, if (i) the
Administrator advises the Indenture Trustee for such Series in writing that DTC
is no longer willing or able to discharge properly its responsibilities as
Depository with respect to such Series of Notes, and the Administrator is unable
to locate a qualified successor, (ii) the Administrator, at its option, advises
the Trustee in writing that it elects to terminate the book-entry system through
DTC or successor securities depository or (iii) after the occurrence of an Event
of Default, Master Servicer Default or Administrator Default Noteholders
representing not less than 50% of the outstanding principal balance of the
Directing Notes advise the Indenture Trustee and DTC through DTC Participants in
writing that the continuation of a book-entry system through DTC (or a successor
thereto) is no longer in the best interest of the Noteholders.
Upon the occurrence of any of the events described in the immediately preceding
paragraph, the Indenture Trustee will cause DTC to notify all DTC Participants
of the availability through DTC of Definitive Notes. Upon surrender by DTC of
the definitive certificate representing the Notes and instructions for
registration, the Indenture Trustee will issue the Notes as Definitive Notes,
and thereafter the Indenture Trustee will recognize the holders of such
Definitive Notes as Noteholders under the Indenture.
Distribution of principal of and interest on the Notes will be made by the
Indenture Trustee directly to Noteholders of Definitive Notes in accordance with
the procedures set forth herein and in the Transfer and Servicing Agreement.
Interest payments and any principal payments on each Payment Date will be made
to Noteholders in whose names the Definitive Notes were registered at the close
of business on the related Record Date. The final payment on any Note (whether
Definitive Notes or the Notes registered in the name of Cede & Co. representing
the Notes), will he made only upon presentation and surrender of such Note at
the office or agency specified in the notice of final distribution to
Noteholders. The Indenture Trustee will provide such notice to registered
Noteholders prior to the Payment Date on which it expects such final
distributions to occur.
Definitive Notes will be transferable and exchangeable at the offices of the
transfer agent and registrar for the Notes, which shall initially be the
Indenture Trustee. No service charges will be imposed for any registration of
transfer or exchange, but the Transfer Agent and Registrar may require payment
of a sum sufficient to cover any tax or other governmental charge imposed in
connection therewith.
LIST OF NOTEHOLDERS
A Noteholder may, by written request to the Indenture Trustee, obtain access to
the list of all Noteholders of the related Trust maintained by the Indenture
Trustee for the purpose of communicating with other Noteholders with respect to
their rights under the Indenture or the Notes. The Indenture Trustee may elect
not to afford the requesting Noteholders access to the list of Noteholders if it
agrees to mail the desired communication or proxy, on behalf and at the expense
of the requesting Noteholders, to all Noteholders.
REPORTS TO NOTEHOLDERS
On each Payment Date, the Indenture Trustee will provide to the applicable
Noteholders of record as of the related Record Date, a statement setting forth
substantially the same information as is required to be provided on the report
provided to the Indenture Trustee and the Trust described under "Description of
Agreements -- Statements to Indenture Trustee" herein.
Within the prescribed period of time for tax reporting purposes after the end of
each calendar year during the term of the Indenture, the Indenture Trustee will
mail to each person who at any time during such calendar year was a Noteholder
and received any payment thereon, a statement containing certain information for
the purposes of such Noteholder's preparation of federal income tax returns. See
"Federal Income Tax Consequences" herein.
FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following REPRESENTS THE OPINION OF HUNTON & WILLIAMS AS TO the anticipated
material federal income tax consequences of the purchase, ownership and
disposition of the Notes. The summary is based upon the provisions of the Code,
the regulations promulgated thereunder, 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 summary is based are subject to change, and such a
change could apply retroactively.
The summary does not purport to deal with all aspects of federal income taxation
that may affect particular investors in light of their individual circumstances,
nor with certain categories of investors subject to special treatment under the
federal income tax laws. This summary focuses primarily on investors who will
hold Notes as "capital assets" (generally held for investment) within the
meaning of Section 1221 of the Code, but much of the discussion is applicable to
other investors as well. The summary does not purport to address the anticipated
state income tax consequences to investors of owning and disposing of the Notes.
Consequently, potential purchasers of Notes are advised to consult their own tax
advisors concerning the federal, state or local tax consequences to them of the
purchase, holding, and disposition of the Notes.
For each Series of Notes, HUNTON & WILLIAMS, SPECIAL TAX COUNSEL TO THE TRUST
("SPECIAL TAX COUNSEL"), WILL CONFIRM TO THE ISSUER ITS OPINION that, based upon
the facts as they exist, the Notes OF SUCH SERIES will be treated for federal
income tax purposes as indebtedness, and not as an ownership interest in the
Financed Student Loans or an equity interest in a separate association taxable
as a corporation. However, there are no regulations, published rulings or
judicial decisions involving the characterization for federal income tax
purposes of securities with terms substantially the same as the Notes.
Accordingly, although that opinion will be based on existing law, there can be
no assurance that the law will not change or that contrary positions will not be
taken by the Internal Revenue Service (the "Service"). If the Service were to
make and prevail upon the contention that the Notes did not constitute
indebtedness for federal income tax purposes, the Notes could be treated as
equity interests in the Trust. HOWEVER, IN THAT EVENT, AS LONG AS AT LEAST 90%
OF THE GROSS INCOME DERIVED BY THE TRUST CONSTITUTES QUALIFYING PASSIVE-TYPE
INCOME (E.G., INTEREST) AND SUCH INCOME IS NOT DERIVED IN THE CONDUCT OF A
FINANCIAL BUSINESS, THE TRUST WOULD be treated as a partnership that is not a
publicly traded partnership. It is anticipated that more than 90% of the Trust's
gross income will consist of passive-type income. Furthermore, although the
applicable law is not entirely clear, Hunton & Williams is of the opinion that
such income should not be treated as derived in the conduct of a financing
business. The Issuer may redeem a Class or Classes of Notes at any time upon a
determination by the Issuer, based upon an opinion of counsel, that a
substantial risk exists that the Notes of the Class to be redeemed will not be
treated for federal income tax purposes as evidences of indebtedness. Such
redemption could occur when a Noteholder could not reinvest the proceeds at an
interest rate at least equal to the applicable Class Interest Rate.
Payments received by Noteholders on the Notes generally WILL be accorded the
same tax treatment under the Code as payments received on other taxable debt
instruments. Except as described below for Notes issued with original issue
discount, acquired with market discount, or issued or acquired at a premium,
interest paid or accrued on a Note will be treated as ordinary income to the
Noteholder and a principal payment on a Note will be treated as a return of
capital. In general, interest paid to Noteholders who report their income on the
cash receipts and disbursements method should be taxable to them when received.
Interest earned by Noteholders who report their income on the accrual method
will be taxable when accrued, regardless of when it is actually received. The
Trustee will report annually to the Service and to Noteholders of record with
respect to interest paid or accrued, and original issue discount and market
discount, if any, accrued, on the Notes.
One or more Classes of Notes may be subordinated to one or more other Classes of
Notes of the same Series. In general, such subordination WILL not affect the
federal income tax treatment of either the subordinated or the senior Notes.
Employee benefit plans subject to the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), should consult their tax advisors before purchasing
any subordinated Note. See "ERISA Considerations" herein and in the accompanying
Prospectus Supplement.
ORIGINAL ISSUE DISCOUNT
Notes issued at a price less than their stated principal amount ("Discount
Notes"), Notes upon which interest is accrued and is compounded and added to the
principal balance thereof periodically ("Accretion Notes"), and certain other
Classes of Notes will be issued with "original issue discount" within the
meaning of Section 1273(a) of the Code. SUCH original issue discount will equal
the difference between the "stated redemption price at maturity" of the Note
(generally, its principal amount) and its issue price. Original issue discount
is treated as ordinary interest income, and Holders of Notes with original issue
discount must include the amount of original issue discount in income on an
accrual basis in advance of the receipt of the cash to which it relates.
The amount of original issue discount required to be included in a Noteholder's
income in any taxable year will be computed in accordance with Section
1272(a)(6) of the Code, which provides rules for the accrual of original issue
discount under a constant yield method for certain debt instruments, such as the
Notes, that are subject to prepayment by reason of prepayments of underlying
debt obligations. Under Section 1272(a)(6), the amount and rate of accrual of
original issue discount on a Note generally is to be calculated based on (i) a
single constant yield to maturity and (ii) the prepayment rate of the Financed
Student Loans and the reinvestment rate on amounts held pending distribution
that were assumed in pricing the Note (the "Pricing Prepayment Assumptions"). No
regulatory guidance currently exists under Code Section 1272(a)(6). Accordingly,
until the Treasury issues guidance to the contrary, the Master Servicer or other
person responsible for computing the amount of original issue discount to be
reported to a Noteholder each taxable year (the "Tax Administrator"), except as
otherwise provided herein, expects to base its computations on Code Section
1272(a)(6) and final regulations governing the accrual of original issue
discount on debt instruments (the "OID Regulations"). Investors should be aware,
however, that the OID regulations do not address directly the treatment of
instruments that are subject to Code Section 1272(a)(6), and, accordingly, there
can be no assurance that such methodology, which is described below, represents
the correct manner of calculating original issue discount on the Notes. The Tax
Administrator intends to account for income on certain Notes that provide for
one or more contingent payments as described in "-- Variable Rate Notes" herein.
The amount of original issue discount on a Note equals the excess, if any, of
the Note's "stated redemption price at maturity" over its "issue price." Under
the OID Regulations, a debt instrument's stated redemption price at maturity is
the sum of all payments provided by the instrument other than "qualified stated
interest" ("Deemed Principal Payments"). Qualified stated interest, in general,
is stated interest that is unconditionally payable in cash or property (other
than debt instruments of the Issuer) at least annually at (i) a single fixed
rate or (ii) a variable rate that meets certain requirements set out in the OID
Regulations. See "-- Variable Rate Notes" herein. Thus, in the case of any Note
providing for such stated interest other than an Accretion Note, the stated
redemption price at maturity generally will equal the total amount of all Deemed
Principal Payments due on that Note. Because an Accretion Note generally does
not require unconditional payments of interest at least annually, the stated
redemption price at maturity of such a Note will equal the aggregate of all
payments due, whether designated as principal, accrued interest, or current
interest. The issue price of a Note generally will equal the initial price at
which a substantial amount of such Notes is sold to the public.
Under a de minimis rule, a Note will be considered to have no original issue
discount if the amount of original issue discount is less than 0.25% of the
Note's stated redemption price at maturity multiplied by the weighted average
maturity ("WAM") of the Note. For that purpose, the WAM of a Note is the sum of
the amounts obtained by multiplying the amount of each Deemed Principal Payment
by a fraction, the numerator of which is the number of complete years from the
Note's issue date until the payment is made, and the denominator of which is the
Note's stated redemption price at maturity. Although no Treasury regulations
have been issued with respect to computing the WAM of instruments like a Note,
it is expected that the WAM of a Note will be computed using the Pricing
Prepayment Assumptions. A Noteholder will include de minimis original issue
discount in income on a pro rata basis as stated principal payments on the Note
are received or, if earlier, upon disposition of the Note, unless the Noteholder
makes an "All OID Election" (as defined below).
Notes of certain Series may bear interest under terms that provide for a teaser
rate period, interest holiday, or other period during which the rate of interest
payable on the Notes is lower than the rate payable during the remainder of the
life of the Notes ("Teaser Notes"). The OID Regulations provide a more expansive
test under which a Teaser Note may be considered to have a de minimis amount of
original issue discount even though the amount of the original issue discount on
the Note would be more than de minimis as determined under the regular test. The
expanded test applies to a Teaser Note only if the stated interest on such Note
would be qualified stated interest but for the fact that during one or more
accrual periods its interest rate is below the rate applicable for the remainder
of its term. Under the expanded test, the amount of original issue discount on a
Teaser Note that is measured against the de minimis amount of original issue
discount allowable on the Note is the greater of (i) the excess of the stated
principal amount of the Note over its issue price ("True Discount") and (ii) the
amount of interest that would be necessary to be payable on the Note in order
for all stated interest to be qualified stated interest (the "Additional
Interest Amount").
The holder of a Note must include in gross income the sum, for all days during
his taxable year on which he holds the Note, of the "daily portions" of the
original issue discount on such Note. THE daily portions of original issue
discount with respect to A Note will be determined by allocating to each day in
any accrual period the Note's ratable portion of the excess, if any, of (i) the
sum of (a) the present value of all payments under the Note yet to be received
as of the close of such period and (b) the amount of any Deemed Principal
Payments received on the Note during such period over (ii) the Note's "adjusted
issue price" at the beginning of such period. The present value of payments yet
to be received on a Note is computed by using the Pricing Prepayment Assumptions
and the Note's original yield to maturity (adjusted to take into account the
length of the particular accrual period), and taking into account Deemed
Principal Payments actually received on the Note prior to the close of the
accrual period. The adjusted issue price of a Note at the beginning of the first
accrual period is its issue price. The adjusted issue price at the beginning of
each subsequent period is the adjusted issue price of the Note at the beginning
of the preceding period increased by the amount of original issue discount
allocable to that period and decreased by the amount of any Deemed Principal
Payments received during that period. Thus, an increased (or decreased) rate of
prepayments received with respect to a Note will be accompanied by a
correspondingly increased (or decreased) rate of recognition of original issue
discount by the holder of such Note.
The yield to maturity of a Note is calculated based on (i) the Pricing
Prepayment Assumptions and (ii) any contingencies not already taken into account
under the Pricing Prepayment Assumptions that, considering all the facts and
circumstances as of the issue date, are more likely than not to occur.
Contingencies, such as the exercise of "mandatory redemptions," that are taken
into account by the parties in pricing the Note typically will be subsumed in
the Pricing Prepayment Assumptions and thus will be reflected in the Note's
yield to maturity. The Tax Administrator's determination of whether a
contingency relating to a Class of Notes is more likely than not to occur is
binding on each holder of a Note of such Class unless the holder explicitly
discloses on its federal income tax return that its determination of the yield
and maturity of the Note is different from that of the Tax Administrator.
The Notes of a Series may be subject to optional redemption by the Issuer before
their stated maturity dates. Under the OID Regulations, the Issuer will be
presumed to exercise its option to redeem for purposes of computing the accrual
of original issue discount if, and only if, by using the optional redemption
date as the maturity date and the optional redemption price as the stated
redemption price at maturity, the yield to maturity of the Notes is lower than
it would be if the Notes were not redeemed early. If the Issuer is presumed to
exercise its option to redeem the Notes, original issue discount on such Notes
will be calculated as if the redemption date were the maturity date and the
optional redemption price were the stated redemption price at maturity. In cases
in which all of the Notes of a particular Series are issued at par or at a
discount, the Issuer will not be presumed to exercise its option to redeem the
Notes because a redemption by the Issuer would not lower the yield to maturity
of the Notes. If, however, some Notes of a particular Series are issued at a
premium, the Issuer may be able to lower the yield to maturity of the Notes by
exercising its redemption option. In determining whether the Issuer will be
presumed to exercise its option to redeem Notes when one or more Classes of the
Notes are issued at a premium, the Tax Administrator will take into account all
Classes of Notes that are subject to the optional redemption to the extent that
they are expected to remain outstanding as of the optional redemption date,
based on the Pricing Prepayment Assumptions. If, determined on a combined
weighted average basis, the Notes of such Classes were issued at a premium, the
Tax Administrator will presume that the Issuer will exercise its option.
However, the OID Regulations are unclear as to how the redemption presumption
rules should apply to instruments such as the Notes, and there can be no
assurance that the Service will agree with the Tax Administrator's position.
The OID Regulations provide that a Noteholder may make an election (an "All OID
Election") to include in gross income all stated interest, original issue
discount, de minimis original issue discount, market discount (as described
below under "-- Market Discount"), and de minimis market discount that accrues
on the Note (as reduced by any amortizable premium, as described below under
"Amortizable Premium," or acquisition premium, as described below) under the
constant yield method used to account for original issue discount. To make an
All OID Election, the holder of the Note must attach a statement to its timely
filed federal income tax return for the taxable year in which the holder
acquired the Note. The statement must identify the instruments to which the
election applies. An All OID Election is irrevocable unless the holder obtains
the consent of the Service. If an All OID Election is made for a debt instrument
with market discount, the holder is deemed to have made an election to include
in income currently the market discount on all of the holder's other debt
instruments with market discount, as described in "-- Market Discount" below. In
addition, if an All OID Election is made for a debt instrument with amortizable
premium, the holder is deemed to have made an election to amortize the premium
on all of the holder's other debt instruments with amortizable premium under the
constant yield method. See "-- Amortizable Premium." Noteholders should be aware
that the law is unclear as to whether an All OID Election is effective for a
Note that is subject to the contingent payment rules. See "-- Variable Rate
Notes" herein.
A Note having original issue discount may be acquired in a transaction
subsequent to its issuance for more than its adjusted issue price. If the
subsequent holder's adjusted basis in such a Note, immediately after its
acquisition, exceeds the sum of all Deemed Principal Payments to be received on
the Note after the acquisition date, the Note will no longer have original issue
discount, and the holder may be entitled to reduce the amount of interest income
recognized on the Note by the amount of amortizable premium. See "-- Amortizable
Premium" herein. If the subsequent holder's adjusted basis in the Note
immediately after the acquisition exceeds the adjusted issue price of the Note,
but is less than or equal to the sum of the Deemed Principal Payments to be
received under the Note after the acquisition date, the amount of original issue
discount on the Note will be reduced by a fraction, the numerator of which is
the excess of the Note's adjusted basis immediately after its acquisition over
the adjusted issue price of the Note and the denominator of which is the excess
of the sum of all Deemed Principal Payments to be received on the Note after the
acquisition date over the adjusted issue price of the Note. For that purpose,
the adjusted basis of a Note is reduced by the amount of any qualified stated
interest that is accrued but unpaid as of the acquisition date. Alternately, the
subsequent purchaser of a Note having original issue discount may make an All
OID Election with respect to the Note.
If the interval between the issue date of a Note that pays interest at the Class
Interest Rate on a current basis (a "Current Interest Note") and the first
Distribution Date (the "First Distribution Period") contains more days than the
number of days of stated interest that are payable on the first Distribution
Date, the effective interest rate received by the Noteholder during the first
Distribution Period will be less than the Note's stated interest rate making
such Note a Teaser Note. If the amount of original issue discount on the Note
measured under the expanded de minimis test exceeds the de minimis amount of
original issue discount allowable on the Note, the amount by which the stated
interest on the Note exceeds the interest that would be payable on the Note at
the effective rate of interest for the First Distribution Period (the
"Nonqualified Interest Amount") would be treated as part of the Note's stated
redemption price at maturity. Accordingly, the holder of a Teaser Note may be
required to recognize ordinary income arising from original issue discount
attributable to the First Distribution Period in addition to any qualified
stated interest that accrues in that period.
Similarly, if the First Distribution Period is shorter than the interval between
subsequent Distribution Dates, the effective rate of interest payable on a Note
during the First Distribution Period will be higher than the stated rate of
interest if a Noteholder receives interest on the first Distribution Date based
on a full accrual period. Unless the "Pre-Issuance Accrued Interest Rule"
described below applies, such Note (a "Rate Bubble Note") would be issued with
original issue discount unless the amount of original issue discount is de
minimis. The amount of original issue discount on a Rate Bubble Note
attributable to the First Distribution Period would be the amount by which the
interest payment due on the first Distribution Date exceeds the amount that
would have been payable had the effective rate for that Period been equal to the
stated interest rate. However, under the Pre-Issuance Accrued Interest Rule, if
(i) a portion of the initial purchase price of a Rate Bubble Note is allocable
to interest that has accrued under the terms of the Note prior to its issue date
("Pre-Issuance Accrued Interest") and (ii) the Note provides for a payment of
stated interest on the first payment date within one year of the issue date that
equals or exceeds the amount of the Pre-Issuance Accrued Interest, the Note's
issue price may be computed by subtracting from the issue price the amount of
Pre-Issuance Accrued Interest. If the Noteholder opts to apply the Pre-Issuance
Accrued Interest Rule, the portion of the interest received on the first
Distribution Date equal to the Pre-Issuance Accrued Interest would be treated as
a return of such interest and would not be treated as a payment on the Note.
Thus, where the Pre-Issuance Accrued Interest Rule applies, a Rate Bubble Note
will not have original issue discount attributable to the First Distribution
Period, provided that the increased effective interest rate for that Period is
attributable solely to Pre-Issuance Accrued Interest, as typically will be the
case. The Tax Administrator intends to apply the Pre-Issuance Accrued Interest
Rule to each Rate Bubble Note for which it is available if the Note `s stated
interest otherwise would be qualified stated interest. If, however, the First
Distribution Period of a Rate Bubble Note is longer than subsequent Distribution
Periods, the application of the Pre-Issuance Accrued Interest Rule typically
will not prevent disqualification of the Note's stated interest because its
effective interest rate during the First Distribution Period typically will be
less than its stated interest rate. Thus, a Note with a long First Distribution
Period typically will be a Teaser Note, as discussed above. The Pre-Issuance
Accrued Interest Rule will not apply to any amount paid at issuance for such a
Teaser Note that is normally allocable to interest accrued under the terms of
such Note before its issue date. All amounts paid for such a Teaser Note at
issuance, regardless of how designated, will be included in the issue price of
such Note for federal income tax accounting purposes.
In view of the complexities and current uncertainties as to the manner of
inclusion in income of original issue discount on the Notes, each investor
should consult his own tax advisor to determine the appropriate amount and
method of inclusion in income of original issue discount on the Notes for
federal income tax purposes.
VARIABLE RATE NOTES
A Note may pay interest at a variable rate (a "Variable Rate Note"). A Variable
Rate Note that qualifies as a "variable rate debt instrument" as that term is
defined in the OID Regulations (a "VRDI") will be governed by the rules
applicable to VRDIs in the OID Regulations, which are described below. A
Variable Rate Note qualifies as a VRDI under the OID Regulations if (i) the Note
is not issued at a premium to its noncontingent principal amount in excess of
the lesser of (a) .015 multiplied by the product of such noncontingent principal
amount and the WAM (as that term is defined above in the discussion of the de
minimis rule) of the Note or (b) 15 percent of such noncontingent principal
amount (an "Excess Premium"); (ii) stated interest on the Note compounds or is
payable unconditionally 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 (iii) the qualified floating
rate or the objective rate in effect during an accrual period is set at a
current value of that rate (i.e., the value of the rate on any day occurring
during the interval that begins three months prior to the first day on which
that value is in effect under the Note and ends one year following that day).
However, if the Variable Rate Note provides for any contingent payments (which
do not include qualified stated interest), the Tax Administrator intends to
account for the income thereon as described below.
Under the OID Regulations, a rate is a qualified floating rate if variations in
the rate reasonably can be expected to measure contemporaneous variations in the
cost of newly borrowed funds in the currency in which the debt instrument is
denominated. A qualified floating rate may measure contemporaneous variations in
borrowing costs for the Issuer of the debt instrument or for Depositors in
general. A multiple of a qualified floating rate is considered a qualified
floating rate only if the rate is equal to either (a) the product of a qualified
floating rate and a fixed multiple that is greater than 0.65 but not more than
1.35 or (b) the product of a qualified floating rate and a fixed multiple that
is greater than 0.65 but not more than 1.35, increased or decreased by a fixed
rate. If a Note provides for two or more qualified floating rates that
reasonably can be expected to have approximately the same values throughout the
term of the Note, the qualified floating rates together will constitute a single
qualified floating rate. Two or more qualified floating rates conclusively will
be presumed to have approximately the same values throughout the term of a Note,
if the values of all such rates on the issue date of the Note are within 25
basis points of each other.
A variable rate will be considered a qualified floating rate if it is subject to
a restriction or restrictions on the maximum stated interest rate (a "Cap"), a
restriction or restrictions on the minimum stated interest rate (a "Floor"), a
restriction or restrictions on the amount of increase or decrease in the stated
interest rate (a "Governor"), or other similar restriction only if: (a) the Cap,
Floor, or Governor is fixed throughout the term of the related Note or (b) the
Cap, Floor, Governor, or similar restriction is not reasonably expected, as of
the issue date, to cause the yield on the Note to be significantly less or
significantly more than the expected yield on the Note determined without such
Cap, Floor, Governor, or similar restriction, as the case may be. Although the
OID Regulations are unclear, it appears that a VRDI, the principal rate on which
is subject to a Cap, Floor, or Governor that itself is a qualified floating
rate, bears interest at an objective rate.
Under the OID Regulations, an objective rate is a rate (other than a qualified
floating rate) that (i) is determined using a single fixed formula, (ii) is
based on objective financial or economic information, and (iii) is not based on
information that either is within the control of the Issuer (or a related party)
or is unique to the circumstances of the Issuer (or related party), such as
dividends, profits, or the value of the Issuer's (or related party's) stock.
That definition would include a rate that is based on changes in a general
inflation index. In addition, a rate would not fail to be an objective rate
merely because it is based on the credit quality of the Issuer.
Under the OID Regulations if interest on a Variable Rate Note is stated 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 for a
subsequent period, and the value of the variable rate on the issue date is
intended to approximate the fixed rate, the fixed rate and the variable rate
together constitute a single qualified floating rate or objective rate. A
variable rate conclusively will be presumed to approximate an initial fixed rate
if the value of the variable rate on the issue date does not differ from the
value of the fixed rate by more than 25 basis points.
Under the OID Regulations, all interest payable on a Variable Rate Note that
qualifies as a VRDI and provides for stated interest unconditionally payable in
cash or property at least annually at a single qualified floating rate or a
single objective rate (a "Single Rate VRDI Note") is treated as qualified stated
interest. The amount and accrual of OID on a Single Rate VRDI Note is
determined, in general, by converting such Note into a hypothetical fixed rate
Note and applying the rules applicable to fixed rate Notes described under
"Original Issue Discount" above to such hypothetical fixed rate Note. Qualified
stated interest or original issue discount allocable to an accrual period with
respect to a Single Rate VRDI Note also must be increased (or decreased) if the
interest actually accrued or paid during such accrual period exceeds (or is less
than) the interest assumed to be accrued or paid during such accrual period
under the related hypothetical fixed rate Note.
Except as provided below, the amount and accrual of OID on a Variable Rate Note
that qualifies as a VRDI but is not a Single Rate VRDI Note (a "Multiple Rate
VRDI Note") is determined by converting such Note into a hypothetical equivalent
fixed rate Note that has terms that are identical to those provided under the
Multiple Rate VRDI Note, except that such hypothetical equivalent fixed rate
Note will provide for fixed rate substitutes in lieu of the qualified floating
rates or objective rates provided for under the Multiple Rate VRDI Note. A
Multiple Rate VRDI Note that provides for a qualified floating rate or rates or
a qualified inverse floating rate is converted to a hypothetical equivalent
fixed rate Note by assuming that each qualified floating rate or the qualified
inverse floating rate will remain at its value as of the issue date. A Multiple
Rate VRDI Note that provides for an objective rate or rates is converted to a
hypothetical equivalent fixed rate Note by assuming that each objective rate
will equal a fixed rate that reflects the yield that reasonably is expected for
the Multiple Rate VRDI Note. Qualified stated interest or original issue
discount allocable to an accrual period with respect to a Multiple Rate VRDI
Note must be increased (or decreased) if the interest actually accrued or paid
during such accrual period exceeds (or is less than) the interest assumed to be
accrued or paid during such accrual period under the hypothetical equivalent
fixed rate Note.
Under the OID Regulations, the amount and accrual of OID on a Multiple Rate VRDI
Note that provides for stated interest at either one or more qualified floating
rates or at a qualified inverse floating rate and in addition provides for
stated interest at a single fixed rate (other than an initial fixed rate that is
intended to approximate the subsequent variable rate) is determined using the
method described above for all other Multiple Rate VRDI Notes except that prior
to its conversion to a hypothetical equivalent fixed rate Note, such Multiple
Rate VRDI Note is treated as if it provided for a qualified floating rate (or a
qualified inverse floating rate), rather than the fixed rate. The qualified
floating rate (or qualified inverse floating rate) replacing the fixed rate must
be such that the fair market value of the Multiple Rate VRDI Note as of its
issue date would be approximately the same as the fair market value of an
otherwise identical debt instrument that provides for the qualified floating
rate (or qualified inverse floating rate), rather than the fixed rate.
Notes of certain Series may provide for the payment of interest at a rate
determined as the difference between two interest rate parameters, one of which
is a variable rate and the other of which is a fixed rate or a different
variable rate ("Inverse Floater Notes"). Under the OID Regulations, Inverse
Floater Notes generally bear interest at objective rates because their rates
either constitute "qualified inverse floating rates" under those Regulations or,
although not qualified floating rates themselves, are based on one or more
qualified floating rates. Consequently, if such Notes are not issued at an
Excess Premium and their interest rates otherwise meet the test for qualified
stated interest, the income on such Notes will be accounted for under the rules
applicable to VRDIs described above.
The OID Regulations contain provisions (the "Contingent Payment Regulations")
that address the federal income tax treatment of debt obligations with one or
more contingent payments ("Contingent Payment Obligations"). Under the
Contingent Payment Regulations, any variable rate debt instrument that is not a
VRDI is classified as a Contingent Payment Obligation. However, the Contingent
Payment Regulations, by their terms, do not apply to debt instruments that are
subject to Section 1272(a)(6) of the Code. In the absence of further guidance,
the Tax Administrator will account for Notes that are Contingent Payment
Obligations in accordance with Code Section 1272(a)(6). Income will be accrued
on such Notes based on a constant yield that is derived from a projected payment
schedule as of the Closing Date. The projected payment schedule will take into
account the Pricing Payment Assumptions and the interest payments that are
expected to be made based on the value of any relevant indices on the issue
date. To the extent that actual payments differ from projected payments for a
particular taxable year, appropriate adjustments to interest income and expense
accruals will be made for that year.
The method described in the foregoing paragraph for accounting for Notes that
are Contingent Payment Obligations is consistent with Code section 1272(a)(6)
and the legislative history thereto. Because of the uncertainty with respect to
the treatment of such Notes under the OID Regulations, however, there can be no
assurance that the Service will not assert successfully that a method less
favorable to Noteholders will apply. In view of the complexities and the current
uncertainties as to income inclusions with respect to Notes that are Contingent
Payment Obligations, each investor should consult his own tax advisor to
determine the appropriate amount and method of income inclusion on such Notes
for federal income tax purposes.
ANTI-ABUSE RULE
Concerned that taxpayers might be able to structure debt instruments or
transactions, or to apply the bright-line or mechanical rules of the OID
Regulations in a way that produces unreasonable tax results, the Treasury issued
regulations containing an anti-abuse rule. Those regulations provide that if a
principal purpose in structuring a debt instrument, engaging in a transaction,
or applying the OID Regulations is to achieve a result that is unreasonable in
light of the purposes of the applicable statutes, the Service can apply or
depart from the OID Regulations as necessary or appropriate to achieve a
reasonable result. A result is not considered unreasonable under regulations,
however, in the absence of a substantial effect on the present value of a
taxpayer's tax liability.
MARKET DISCOUNT
A subsequent purchaser of a Note at a discount from its outstanding principal
amount (or, in the case of a Note having original issue discount, its "adjusted
issue price") will acquire such Note with market discount. The purchaser
generally will be required to recognize the market discount (in addition to any
original issue discount remaining with respect to the Note) as ordinary income.
A person who purchases a Note at a price lower than the Note's outstanding
principal amount but higher than its adjusted issue price does not acquire the
Note with market discount, but will be required to report original issue
discount, appropriately adjusted to reflect the excess of the price paid over
the adjusted issue price. See "Original Issue Discount." A Note will not be
considered to have market discount if the amount of such market discount is de
minimis, i.e., less than the product of (i) 0.25% of the remaining principal
amount (or, in the case of a Note having original issue discount, the adjusted
issue price of such Note), multiplied by (ii) the WAM of the Note (determined as
for original issue discount) remaining after the date of purchase. Regardless of
whether the subsequent purchaser of a Note with more than a de minimis amount of
market discount is a cash-basis or accrual-basis taxpayer, market discount
generally will be taken into income as principal payments (including, in the
case of a Note having original issue discount, any Deemed Principal Payments)
are received, in an amount equal to the lesser of (i) the amount of the
principal payment received or (ii) the amount of market discount that has
"accrued" (as described below), but that has not yet been included in income.
The purchaser may make a special election, which applies to all market discount
instruments held or acquired by the purchaser in the taxable year of election or
thereafter, to recognize market discount currently on an uncapped accrual basis
(the "Current Recognition Election"). In addition, the purchaser may make an All
OID Election with respect to a Note purchased with market discount. See "--
Original Issue Discount" herein.
Until the Treasury promulgates applicable regulations, the purchaser of a Note
with market discount may elect to accrue the market discount either: (i) on the
basis of a constant interest rate; (ii) in the case of a Note not issued with
original issue discount, in the ratio of stated interest payable in the relevant
period to the total stated interest remaining to be paid from the beginning of
such period; or (iii) in the case of a Note issued with original issue discount,
in the ratio of original issue discount accrued for the relevant period to the
total remaining original issue discount at the beginning of such period.
Regardless of which computation method is elected, the Pricing Prepayment
Assumptions must be used to calculate the accrual of market discount.
A Noteholder who has acquired any Note with market discount generally will be
required to treat a portion of any gain on a sale or exchange of the Note as
ordinary income to the extent of the market discount accrued to the date of
disposition under one of the foregoing methods, less any accrued market discount
previously reported as ordinary income as partial principal payments were
received. Moreover, such Noteholder generally must defer interest deductions
attributable to any indebtedness incurred or continued to purchase or carry the
Note to the extent they exceed income on the Note. Any such deferred interest
expense, in general, is allowed as a deduction not later than the year in which
the related market discount income is recognized. If a Noteholder makes a
Current Recognition Election or an All OID Election, the interest deferral rule
will not apply. Under the Contingent Payment Regulations, a secondary market
purchaser of a Contingent Payment Obligation at a discount generally would
continue to accrue interest and determine adjustments on such Note based on the
original projected payment schedule devised by the Issuer of such Note. See "--
Original Issue Discount" herein. The holder of such a Note would be required,
however, to allocate the difference between the adjusted issue price of the Note
and its basis in the Note as positive adjustments to the accruals or projected
payments on the Note over the remaining term of the Note in a manner that is
reasonable (e.g., based on a constant yield to maturity).
Treasury regulations implementing the market discount rules have not yet been
issued, and uncertainty exists with respect to many aspects of those rules. For
example, the treatment of a Note subject to redemption at the option of the
Issuer that is acquired at a market discount is unclear. It appears likely,
however, that the market discount rules applicable in such a case would be
similar to the rules pertaining to original issue discount. Due to the
substantial lack of regulatory guidance with respect to the market discount
rules, it is unclear how those rules will affect any secondary market that
develops for a given Class of Notes. Prospective investors should consult their
own tax advisors regarding the application of the market discount rules to the
Notes.
AMORTIZABLE PREMIUM
A purchaser of a Note who purchases the Note at a premium over the total of its
Deemed Principal Payments may elect to amortize such premium under a constant
yield method that reflects compounding based on the interval between payments on
the Notes. The legislative history of the 1986 Act indicates that premium is to
be accrued in the same manner as market discount. Accordingly, it appears that
the accrual of premium on a Note will be calculated using the Pricing Prepayment
Assumptions. Amortized premium would be treated as an offset to interest income
on a Note and not as a separate deduction item. If a holder makes an election to
amortize premium on a Note, such election will apply to all taxable debt
instruments (including all Notes) held by the holder at the beginning of the
taxable year in which the election is made, and to all taxable debt instruments
acquired thereafter by such holder, and will be irrevocable without the consent
of the Service. Purchasers who pay a premium for the Notes should consult their
tax advisors regarding the election to amortize premium and the method to be
employed.
Amortizable premium on a Note that is subject to redemption at the option of the
Issuer must be amortized as if the optional redemption price and date were the
Note's principal amount and maturity date if doing so would result in a smaller
amount of premium amortization during the period ending with the optional
redemption date. Thus, a Noteholder would not be able to amortize any premium on
a Note that is subject to optional redemption at a price equal to or greater
than the Noteholder's acquisition price unless and until the redemption option
expires. In cases where premium must be amortized on the basis of the price and
date of an optional redemption, the Note will be treated as having matured on
the redemption date for the redemption price and then having been reissued on
that date for that price. Any premium remaining on the Note at the time of the
deemed reissuance will be amortized on the basis of (i) the original principal
amount and maturity date or (ii) the price and date of any succeeding optional
redemption, under the principles described above.
Under the Contingent Payment Regulations, a secondary market purchaser of a
Contingent Payment Obligation at a premium generally would continue to accrue
interest and determine adjustments on such Note based on the original projected
payment schedule devised by the Issuer of such Note. See "-- Original Issue
Discount" herein. The holder of such a Note would allocate the difference
between its basis in the Note and the adjusted issue price of the Note as
negative adjustments to the accruals or projected payments on the Note over the
remaining term of the Note in a manner that is reasonable (e.g., based on a
constant yield to maturity).
GAIN OR LOSS ON DISPOSITION
If a Note is sold, the Noteholder will recognize gain or loss equal to the
difference between the amount realized on the sale and his adjusted basis in the
Note. The adjusted basis of a Note generally will equal the cost of the Note to
the Noteholder, increased by any original issue discount or market discount
previously includible in the Noteholder's gross income with respect to the Note
and reduced by the portion of the basis of the Note allocable to payments on the
Note (other than qualified stated interest) previously received by the
Noteholder and by any amortized premium. Similarly, a Noteholder who receives a
scheduled or prepaid principal payment with respect to a Note will recognize
gain or loss equal to the difference between the amount of the payment and the
allocable portion of his adjusted basis in the Note. Except to the extent that
the market discount rules apply and except as provided below, any gain or loss
on the sale or other disposition of a Note generally will be capital gain or
loss. Such gain or loss will be long-term gain or loss if the Note is held as a
capital asset for the applicable long term holding period.
If the holder of a Note is a bank, thrift, or similar institution described in
Section 582 of the Code, any gain or loss on the sale or exchange of the Note
will be treated as ordinary income or loss. In addition, a portion of any gain
from the sale of a Note that might otherwise be capital gain may be treated as
ordinary income to the extent that such Note is held as part of a "conversion
transaction" within the meaning of Section 1258 of the Code. A conversion
transaction generally is one in which the taxpayer has taken two or more
positions in Notes or similar property that reduce or eliminate market risk, if
substantially all of the taxpayer's return is attributable to the time value of
the taxpayer's net investment in such transaction. The amount of gain realized
in a conversion transaction that is recharacterized as ordinary income generally
will not exceed the amount of interest that would have accrued on the taxpayer's
net investment at 120% of the appropriate "applicable federal rate" (which rate
is computed and published monthly by the Service) at the time the taxpayer
entered into the conversion transaction, subject to appropriate reduction for
prior inclusion of interest and other ordinary income from the transaction.
The highest marginal individual income tax bracket is 39.6%. The alternative
minimum tax rate for individuals is 26% with respect to alternative minimum tax
income up to $175,000 and 28% with respect to alternative minimum tax income
over $175,000. The recently enacted Taxpayer Relief Act of 1997 (the "Relief
Act") established a three-tier rate structure with respect to the net capital
gain of individuals. Under the Relief Act, the highest marginal federal tax rate
on net capital gains for individuals with respect to assets held for more than
one year but not more than 18 months is 28%. However, the Relief Act reduces the
highest marginal federal tax rate with respect to net capital gain on assets
held by individuals for more than 18 months from 28% to 20%, and, for taxable
years beginning after, and for assets acquired after, December 31, 2000 and with
respect to assets held for more than 5 years, to 18%. Accordingly, there can be
a significant marginal tax rate differential between net capital gains and
ordinary income for individuals. The highest marginal corporate tax rate is 35%
for corporate taxable income over $10 million, and the marginal tax rate on
corporate net capital gains is 35%, although the distinction between capital
gains and ordinary income remains relevant for other purposes. Investors should
note that the deductibility of capital losses is subject to certain limitations.
MISCELLANEOUS TAX ASPECTS
Backup Withholding. A Note may, under certain circumstances, be subject to
"backup withholding" at the rate of 31% with respect to "reportable payments,"
which include interest payments and principal payments to the extent of accrued
original issue discount as well as distributions of proceeds from a sale of
Notes. This withholding generally applies if the Noteholder of a Note (i) fails
to furnish the Trustee with its taxpayer identification number ("TIN"); (ii)
furnishes the Trustee or the Issuer an incorrect TIN; (iii) fails to report
properly interest, dividends or other "reportable payments" as defined in the
Code; or (iv) under certain circumstances, fails to provide the Trustee or the
Issuer or such Noteholder's securities broker with a certified statement, signed
under penalty of perjury, that the TIN is its correct number and that the
Noteholder is not subject to backup withholding. Backup withholding will not
apply, however, with respect to certain payments made to Noteholders, including
payments to certain exempt recipients (such as exempt organizations) and to
certain Nonresidents (as defined below) complying with requisite certification
procedures. Noteholders should consult their tax advisors as to their
qualification for exemption from backup withholding and the procedure for
obtaining the exemption.
The Trustee will report to the Noteholders and to the Internal Revenue Service
each calendar year the amount of any "reportable payments" during such year and
the amount of tax withheld, if any, with respect to payments on the Notes within
a reasonable time after the end of each calendar year.
Foreign Noteholders. Under the Code, interest and original issue discount income
(including accrued interest or original issue discount recognized on sale or
exchange) paid or accrued with respect to Notes held by Noteholders who are
nonresident alien individuals, foreign corporations, foreign partnerships or
certain foreign estates and trusts ("Nonresidents") or Noteholders holding on
behalf of a Nonresident generally will be treated as "portfolio interest" and
therefore will not be subject to any United States tax provided that (i) such
interest is not effectively connected with a trade or business in the United
States of the Noteholder and (ii) the Issuer (or other person who would
otherwise be required to withhold tax from such payments) is provided with an
appropriate statement that the beneficial owner of a Note is a Nonresident.
Interest (including original issue discount) paid on Notes to Noteholders who
are foreign persons will not be subject to withholding if such interest is
effectively connected with a United States business conducted by the Noteholder.
Such interest (including original issue discount) will, however, generally be
subject to the regular United States income tax. Effective January 1, 2000, any
foreign investor that seeks the protection of an income tax treaty with respect
to the imposition of United States withholding tax will generally be required to
obtain a TIN from the Service in advance and provide verification that such
investor is entitled to the protection of the relevant income tax treaty. In
addition, foreign tax-exempt investors will generally be required to provide
verification of their tax-exempt status. Foreign investors are urged to consult
with their tax advisors with respect to these new withholding rules.
DUE TO THE COMPLEXITY OF THE FEDERAL INCOME TAX RULES APPLICABLE TO NOTEHOLDERS
AND THE CONSIDERABLE UNCERTAINTY THAT EXISTS WITH RESPECT TO MANY ASPECTS OF
THOSE RULES, POTENTIAL INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING
THE TAX TREATMENT OF THE ACQUISITION, OWNERSHIP, AND DISPOSITION OF THE NOTES.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in "Certain Federal
Income Tax Consequences," potential investors should consider the state income
tax consequences of the acquisition, ownership, and disposition of the Notes.
State 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. Therefore, potential investors should consult their own
tax advisors with respect to the various state tax consequences of an investment
in the Notes.
ERISA CONSIDERATIONS
Fiduciaries of employee benefit plans and certain other retirement plans and
arrangements that are subject to the Employee Retirement Income Security Act of
1974, as amended ("ERISA") or corresponding provisions of the Code, including
individual retirement accounts and annuities, Keogh plans and collective
investment funds in which such plans, accounts, annuities or arrangements are
invested (any of the foregoing, a "Plan"), persons acting on behalf of a Plan,
or persons using the assets of a Plan ("Plan Investors"), should review
carefully with their legal advisors whether the purchase or holding of a Series
of Notes could either give rise to a transaction that is prohibited under ERISA
or the Code or cause the assets of the Trust to be treated as plan assets for
purposes of regulations of the Department of Labor set forth in 29 C.F.R.
2510.3-101 (the "Plan Asset Regulations"). Prospective investors should be aware
that, although certain exceptions from the application of the prohibited
transaction rules and the Plan Asset Regulations exist, there can be no
assurance that any such exception will apply with respect to the acquisition of
a Note.
Under the Plan Asset Regulations, if the Notes of a Series are treated as having
substantial equity features, the purchaser of a Note could be treated as having
acquired a direct interest in the Trust assets securing the Notes. In that
event, the purchase, holding, or resale of the Notes could result in a
transaction that is prohibited under ERISA or the Code. It is expected that each
Series of Notes will be treated as debt obligations without significant equity
features for purposes of the Plan Asset Regulations. Accordingly, a Plan that
acquires a Note should not be treated as having acquired a direct interest in
the Trust assets. However, there can be no complete assurance that the Notes of
a Series will be treated as debt obligations without significant equity features
for purposes of the Plan Asset Regulations. The Prospectus Supplement for a
Series of Notes will indicate whether, and to what extent, a Class or Classes of
Notes of a Series would be treated as debt obligations with significant equity
features for purposes of the Plan Asset Regulations. The Prospectus Supplement
for any Class or Classes of Notes so treated will indicate whether any such
Class or Classes will be restricted in their availability to Plan Investors.
Regardless whether the Notes are treated as debt or equity for purposes of
ERISA, however, the acquisition or holding of the Notes by or on behalf of a
Plan could still be considered to give rise to a prohibited transaction if the
parties to the issuance transaction, or any of their respective affiliates is or
becomes a party in interest or a disqualified person with respect to such Plan.
However, one or more exemptions may be available with respect to certain
prohibited transaction rules of ERISA and might apply in connection with the
initial purchase, holding and resale of the Notes, depending in part upon the
type of Plan fiduciary making the decision to acquire Notes and the
circumstances under which such decision is made. Those exemptions include, but
are not limited to: (i) Prohibited Transaction Class Exemption ("PTCE") 95-60,
regarding investments by insurance company pooled accounts; (ii) PTCE 91-38,
regarding investments by bank collective investment funds; (iii) PTCE 90-1,
regarding investments by insurance company pooled separate accounts; or (iv)
PTCE 84-14, regarding transactions negotiated by qualified professional asset
managers. Before purchasing Notes, a Plan subject to the fiduciary
responsibility provisions of ERISA or described in Section 4975(e)(1) (and not
exempt under Section 4975(g)) of the Code should consult with its counsel to
determine whether the conditions of any exemption would be met. A purchaser of a
Note should be aware, however, that even if the conditions specified in one or
more exemptions are met, the scope of the relief provided by an exemption might
not cover all acts that might be construed as prohibited transactions.
AVAILABLE INFORMATION
The Depositor has filed with the Commission a registration statement (together
with all amendments and exhibits thereto, the "Registration Statement") under
the Securities Act with respect to the Notes offered hereby. This Prospectus and
the accompanying Prospectus Supplement, which forms part of the Registration
Statement, does not contain all the information contained therein. For further
information, reference is made to the Registration Statement which may be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington D.C. 20549; and at the
Commission's regional offices at Seven World Trade Center, Suite 1300, New York,
New York 10048; and 500 West Madison Street, Suite 1400, Chicago, Illinois
60661, and copies of all or any part thereof may be obtained from the Public
Reference Branch of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549 upon the payment of certain fees prescribed by the Commission. In
addition, the Registration Statement may be accessed electronically through the
Commission's Electronic Data Gathering, Analysis and Retrieval system at the
Commission's site on the World Wide Web located at http:/ /www.sec.gov.
REPORTS TO NOTEHOLDERS
Unless Definitive Notes are issued for any Series of Notes, monthly unaudited
reports and annual unaudited reports containing information concerning the
Financed Student Loans will be prepared by the Administrator and sent on behalf
of each Trust only to Cede, as nominee of DTC and registered holder of the Notes
but will not be sent to any beneficial holder of the Notes. Such reports will
not constitute financial statements prepared in accordance with generally
accepted accounting principles. See "Description of the Notes -- Book-Entry
Registration" and "-- Reports to Noteholders" herein Each Trust will file with
the Commission such periodic reports as are required under the Exchange ACT and
the rules and regulations of the Commission thereunder. Each Trust intends to
suspend the filing of such reports under the Exchange Act when and if the filing
of such reports is no longer statutorily required.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All reports and other documents filed by the Administrator, on behalf of the
Trust, pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act
subsequent to the date of this Prospectus and prior to the termination of the
offering of any Series of Notes shall be deemed to be incorporated by reference
into this Prospectus and the accompanying Prospectus Supplement and to be a part
hereof. After the initial distribution of the Notes by the Underwriters and in
connection with market making transactions by Crestar Securities Corporation,
this Prospectus will be distributed together with, and should be read in
conjunction with, an accompanying supplement to the Prospectus. Such supplement
will contain the reports described above and generally will include the
information contained in the quarterly statements furnished to Noteholders. See
"Description of the Notes -- Reports to Noteholders" and "Description of the
Agreements -- Statements to Indenture Trustee" herein. Any statement contained
herein or in a document incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for purposes of this
Prospectus and the accompanying Prospectus Supplement to the extent that a
statement contained herein or therein or in any subsequently filed document that
also is or is deemed to be incorporated by reference herein or therein modifies
or supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Prospectus and the accompanying Prospectus Supplement.
The Administrator will provide without charge to each person to whom a copy of
this Prospectus and the accompanying Prospectus Supplement are delivered, on the
written or oral request of any such person, a copy of any or all of the
documents incorporated herein by reference, except the exhibits to such
documents (unless such exhibits are specifically incorporated by reference in
such documents). Written requests for such copies should be directed to Mr.
Eugene S. Putnam, Jr., Senior Vice President - Investor Relations, Crestar
Financial Corporation, 919 East Main Street, P.O. Box 26665, Richmond, VA
23261-6665 or "eugene.putnam@crestar.com" on the Internet. Telephone requests
for such copies should be directed to (804) 782-7821.
PLAN OF DISTRIBUTION
The Notes will be offered in one or more Series and one or more Classes through
one or more underwriters or underwriting syndicates ("Underwriters"), which may
include Crestar Securities Corporation, an affiliate of the Transferor. The
Prospectus Supplement for each Series of Notes will set forth the terms of the
offering of such Series and of each Class within such Series, including the name
or names of the Underwriters, the proceeds to the Depositor, and either the
initial public offering price, the discounts and commissions to the Underwriters
and any discounts or concessions allowed or reallowed to certain dealers, or the
method by which the price at which the Underwriters will sell the Notes will be
determined.
The Notes may be acquired by Underwriters for their own account and may be
resold from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices determined
at the time of sale. The obligations of any Underwriters will be subject to
certain conditions precedent, and such Underwriters will be severally obligated
to purchase all of a Series of Notes described in the related Prospectus
Supplement, if any are purchased. If Notes of a Series are offered other than
through Underwriters, the related Prospectus Supplement will contain information
regarding the nature of such offering and any agreements to be entered into
between the seller and purchasers of Notes of such Series.
The time of delivery for the Notes of a Series in respect of which this
Prospectus is delivered will be set forth in the related Prospectus Supplement.
FINANCIAL INFORMATION
The Depositor has determined that its financial statements are not material to
the offering made hereby. A Trust will engage in no activities other than as
described herein. Accordingly, no financial statements with respect to any Trust
are included in this Prospectus.
RATING
It is a condition to the issuance and sale of each Series and Class of Notes
that they each be rated by at least one nationally recognized statistical rating
organization in one its four highest applicable rating categories. 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 Agency.
See "Rating" in the accompanying Prospectus Supplement.
APPENDIX I
GLOSSARY OF PRINCIPAL DEFINITIONS
Set forth below is a glossary of the principal defined terms used in this
Prospectus.
"Additional FINANCED Student Loans" means additional Financed Student
Loans conveyed by the Depositor to the related Trust during the Pre-Funding
Period.
"Adjustment Payment" means an amount equal to the difference between
the aggregate principal balance of any Subsequent Financed Student Loans that
are being exchanged into the related Trust and the aggregate principal balance
of the Financed Student Loans they are replacing.
"Administration Fee" means the fee to be payable to the Administrator.
"Administrator" means one who performs administrative duties concerning
the Trust and the Financed Student Loans under the Administration Agreement.
"Administrator Default" means any failure by the Administrator to
perform in any material respect its duties under an Administration Agreement.
"Accrual Notes" means any Class of Notes on which all or a portion of
the interest thereon accrues and is capitalized and not payable until a date
certain or until one or more other Classes are paid in full.
"Accrual Period" means the period of time during which interest accrues
but is not payable with respect to a Class of Accrual Notes.
"Advance Account" means the account maintained by the Indenture Trustee
into which Advances from the Master Servicer are to be deposited.
"Advances" means deposits made by the Master Servicer with respect to
anticipated future collections on the Financed Student Loans.
"Auction Agent" is the party identified as such in the Prospectus
Supplement.
"Auction Period" means, with respect to each AUCTION RATE Note, the
Interest Accrual Period applicable to such Note during which time the applicable
Class Interest Rate is determined pursuant to the related Indenture.
"Auction Period Adjustment" means, with respect to ANY Auction Rate
Notes, the ability of the Administrator to change the length of one or more
Auction Periods to conform with then current market practice or accommodate
other economic or financial factors that may affect or be relevant to the length
of the Auction Period or any Class Interest Rate.
"Auction Procedures" shall mean the auction procedures that will be
used in determining the interest rates on the Auction Rate Notes, as set forth
in this Prospectus and in an Appendix to any Prospectus Supplement relating to a
Class of Auction Rate Notes.
"Auction Rate Notes" means any Class of Notes bearing interest at an
Auction Rate, as identified in the Prospectus Supplement.
"Available Funds" means the sum, without duplication, of the following
amounts with respect to the related Collection Period: (i) all collections
received by the Master Servicer or any Servicer on the Financed Student Loans
(including any Guarantee Payments (including payments received from any
guarantor under any Private Loan Program) and Insurance Payments received with
respect to the Financed Student Loans during such Collection Period); (ii) any
payments, including without limitation, Interest Subsidy Payments and Special
Allowance Payments received by the Eligible Lender Trustee during such
Collection Period with respect to the Financed Student Loans; (iii) all proceeds
from any sales of Financed Student Loans by the Trust during such Collection
Period; (iv) any payments of or with respect to interest received by the Master
Servicer or a Servicer during such Collection Period with respect to a Financed
Student Loan for which a Realized Loss was previously allocated; (v) the
aggregate Purchase Amounts received for those Financed Student Loans purchased
by the Depositor or the Master Servicer during the related Collection Period;
(vi) the aggregate amounts, if any, received from the Depositor or the Master
Servicer as reimbursement of non-guaranteed or uninsured interest amounts (which
shall not include, with respect to Financed FFELP Loans, the portion of such
interest amounts (i.e., 2%) for which the Guarantee Agency did not have an
obligation to make a Guarantee Payment), or lost Interest Subsidy Payments and
Special Allowance Payments with respect to the Financed Student Loans pursuant
to the Transfer and Servicing Agreement; (vii) net Adjustment Payments, if any,
during such Collection Period; (viii) investment earnings for such Collection
Period; and (ix) any other sums identified in the related Prospectus Supplement;
provided, however, that Available Funds will exclude all payments and proceeds
of any Financed Student Loans the Purchase Amount of which has been included in
Available Funds for a prior Collection Period (which payments and proceeds shall
be paid to the Depositor), and amounts used to reimburse the Master Servicer for
Advances pursuant to the terms of the applicable Transfer and Servicing
Agreement.
"BHCA" means the Bank Holding Company Act of 1956, as amended.
"Carryover Interest" means the difference between the interest that
would accrue on any Class of Notes or Certificates at the Formula Rate and the
interest that accrues at the Net Loan Rate, together with interest thereon AT
THE FORMULA RATE from the Payment Date or Quarterly Payment Date on which it is
due until paid.
"Cede" means Cede & Co., the Depository Trust Company's nominee with
respect to book-entry Notes.
"Cedel" means a professional depository incorporated under the laws of
Luxembourg which holds securities for its participating organizations and
facilitates the clearance and settlement of securities transactions between
Cedel Participants through electronic book-entry.
"Cedel Participants" means recognized financial institutions around the
world that utilize the services of Cedel, including underwriters, securities
brokers and dealers, banks, trust companies, clearing corporations and certain
other organizations and may include the underwriters of any Series of Notes.
"Certificates" means the certificated equity interest in any Trust.
"Claims Rates" means those rates determined by dividing total default
claims since the previous September 30 by the total original principal amount
of the Guarantee Agency's guaranteed loans in repayment on such September 30.
"Class" means any class of the Notes of a Series as specified in the
related Prospectus Supplement.
"CLASS INTEREST AMOUNT" MEANS THE INTEREST PAYABLE IN A CLASS OF NOTES
ON ANY PAYMENT DATE OR QUARTERLY PAYMENT DATE.
"Class Interest Rate" means with respect to any Class of Notes the
annual rate at which interest accrues on the Notes of such Class, as
specified in the related Prospectus Supplement.
"Closing Date" means, for any Series, the date on which such Series is
issued, which will be specified in the related Prospectus Supplement.
"Code" means the Internal Revenue Code of 1986, as amended.
"Collection Account" means the account maintained by the Indenture
Trustee into which all collections on the Financed Student Loans are to be
deposited.
"Collection Period" means, unless otherwise provided in a related
Prospectus Supplement, any calendar month.
"Commission" means the United States Securities and Exchange
Commission.
"Consolidation Loan Fees" means, as to any Collection Period, an amount
equal to the per annum rate identified in the related Prospectus Supplement of
the outstanding principal balances of and accrued interest on the Consolidation
Loans owned by the related Trust as of the last day of such Collection Period.
"Cooperative" means Societe Cooperative, a Belgian cooperative
corporation.
"Credit Enhancement" means the credit support available to one or more
Classes of a Series of Notes, including overcollateralization, letters of
credit, liquidity facilities, insurance policies, spread accounts, one or more
Classes of subordinate securities, derivative products or other forms of credit
enhancement including but not limited to third party guarantees.
"Crestar Subsidiary" means Crestar Bank and certain other subsidiaries
of Crestar Financial Corporation.
"Cut-off Date" means, for any Series, the date specified in the related
Prospectus Supplement as the date on or after which principal and interest
payments on the related Financed Student Loans are to be included in the related
Trust Estate.
"Default" means with respect to a HEAL Loan, the persistent failure of
the borrower of a HEAL Loan to make a payment when due, or to comply with other
terms of the note or other written agreement evidencing a loan under
circumstances where the Secretary of HHS finds it reasonable to conclude that
the borrower no longer intends to honor the obligation to repay. In the case of
a loan repayable (or on which interest is payable) in monthly installments, this
failure must have persisted for 120 days. In the case of a loan repayable (or on
which interest is payable) in less frequent installments, this failure must have
persisted for 180 days.
"Deferment Period" means certain periods when no principal repayments
need be made on certain Financed Student Loans.
"Definitive Notes" means Notes to be issued in fully registered,
certificated form to Note Owners or their nominees rather than to DTC or its
nominee.
"Delaware Trustee" means the entity so specified in the related
Prospectus Supplement serving as Delaware Trustee of the Trust offering the
Notes.
"Delaware Trustee Fee" means the fees payable to the Delaware Trustee.
"Department of Education" means the U.S. Department of Education.
"Department of HHS" means the U.S. Department of Health and Human
Services.
"Depositor" means Crestar Securitization, LLC, a Virginia limited
liability company.
"Depositories" means DTC, Cedel and Euroclear, collectively.
"Depository" means DTC or any successor or other Clearing Agency
selected by the Company as depository for any Book-Entry Certificates.
"Directing Notes" means those Notes entitled to direct the action of
the Indenture Trustee under certain specified conditions.
"DTC" means the Depository Trust Company.
"DTC Participants" means the participating organizations that utilize
the services of DTC, including securities brokers and dealers, banks, trust
companies, clearing corporations and certain other organizations.
"Effective Interest Rate" means, with respect to any Financed Student
Loan, the interest rate on such Loan after giving effect to all applicable
Interest Subsidy Payments, Special Allowance Payments, rebate fees on
Consolidation Loans and reductions pursuant to borrower incentives. For this
purpose, the Special Allowance Payment rate will be computed based upon the
average of the bond equivalent rates of 91-day Treasury bills auctioned during
that portion of the current calendar quarter that ends on the date as of which
the Effective Interest Rate is determined, or some other method as described in
the Prospectus Supplement.
"Eligible Deposit Account" means either (a) a segregated account with
an Eligible Institution or (b) a segregated trust account with the corporate
trust department of a depository institution organized under the laws of the
United States of America or any one of the states thereof or the District of
Columbia (or any domestic branch of a foreign bank), having corporate trust
powers and acting as trustee for funds deposited in such account, so long as any
of the securities of such depository institution have a credit rating from each
Rating Agency in one of its generic rating categories which signifies investment
grade.
"Eligible Institution" is generally a depository institution organized
under the federal or any state banking laws whose deposits are insured by the
Federal Deposit Insurance Corporation and whose unsecured long-term debt
obligations or short-term debt ratings are acceptable to the Rating Agencies.
"Eligible Investments" means one or more of the investments specified
in the Transfer and Servicing Agreement in which moneys in the related Payment
Account and certain other accounts are permitted to be invested.
"Eligible Lender Trustee" means the trustee under the related Trust
Agreement, so specified in the related Prospectus Supplement serving as eligible
lender trustee of the Trust offering the Notes.
"Eligible Lender Trustee Fee" means the fee payable to the Eligible
Lender Trustee.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Euroclear Operator" means Morgan Guaranty Trust Company of New York,
Brussels, Belgium office.
"Euroclear Participants" means the participating organizations that
utilize the services of Euroclear, including banks, securities brokers and
dealers and other professional financial intermediaries and may include the
underwriters of any Series of Notes.
"Event of Default" with respect to the Notes of a Series, as defined in
the Indenture, consists of: (i) a default for five business days or more in the
payment of any Class Interest Rate or Principal Payment Amount on the Notes
after the same becomes due and payable; (ii) a default in the observance or
performance of any covenant or agreement of the applicable Trust made in the
Indenture or the Transfer and Servicing Agreement and the continuation of any
such default for a period of 30 days after notice thereof is given to such Trust
by the Indenture Trustee or to such Trust and the Indenture Trustee by the
holders of at least 25% in aggregate principal amount of the Directing Notes
then outstanding; (iii) any representation or warranty made by a Trust in the
Indenture or in any certificate delivered pursuant thereto or in connection
therewith having been incorrect in a material respect as of the time made, and
such breach not having been cured within 30 days after notice thereof is given
to the Trust by the Indenture Trustee or to the Trust and the Indenture Trustee
by the holders of at least 25% in aggregate principal amount of the Directing
Notes then outstanding; or (iv) certain events of bankruptcy, insolvency,
receivership or liquidation of a Trust.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Expense Account" means an account established and maintained by the
Indenture Trustee to pay Consolidation Loan Fees and Transaction Fees.
"FDIA" means the Federal Deposit Insurance Act, as amended.
"FDIC" means the Federal Deposit Insurance Corporation.
"FFEL Program" means the Federal Family Education Loan Program
established by the Higher Education Act pursuant to which loans are made to
borrowers pursuant to certain guidelines, and the repayment of such loans is
guaranteed by a Guarantee Agency, and any predecessor or successor program.
"FFELP Loans" means student loans made under the FFEL Program.
"Financed FFELP Loans" means those FFELP Loans that secure one or more
Series of Notes.
"Financed HEAL Loans" means those HEAL Loans that secure one or more
Series of Notes.
"Financed Private Loans" means those Private Loans that secure one or
more Series of Notes.
"Financed Student Loans" means Financed FFELP Loans, Financed HEAL
Loans and Financed Private Loans, as applicable.
"FIRREA" means Financial Institutions Reform, Recovery and Enforcement
Act of 1989, as amended.
"Fitch" means Fitch IBCA, Inc.
"Forbearance Period" means a period of time during which a borrower, in
case of temporary financial hardship, may defer the repayment of principal.
"Formula Rate" means, with respect to any Class of a Series of Notes,
the lesser of (a) the rate established pursuant to an index or market (LIBOR,
T-Bill or Auction), and (b) a cap, if any, all as specified in the related
Prospectus Supplement for such Series.
"Grace Period" means a period of time, following a borrower's ceasing
to pursue at least a half-time course of study and prior to the commencement of
a repayment period, during which principal need not be paid on certain Financed
Student Loans.
"Guarantee Agency" means a state agency or private nonprofit
corporation which guarantees certain payments of principal and interest on
Financed FFELP Loans pursuant to a Guarantee Agreement.
"Guarantee Agreements" means agreements between a Guarantee Agency and
a financial institution.
"Guarantee Fund" means cash and reserves used for the purchase of
defaulted student loans by a Guarantee Agency.
"Guarantee Payments" means those payments made by a Guarantee Agency
with respect to a Financed Student Loan.
"HEAL Act" means TITLE VII, Section 700-721 OF THE PUBLIC HEALTH
SERVICES ACT, as amended, together with ANY rules and regulations promulgated
thereunder BY THE DEPARTMENT OF HHS.
"HEAL Consolidation Loan" means a loan that combines two or more HEAL
Loans made to the same borrower.
"HEAL Insurance Contract" means an insurance contract with the
Department of HHS with respect to Financed HEAL Loans.
"HEAL Loans" means loans made under the HEAL Program.
"HEAL Program" is a loan program established under the HEAL Act.
"Higher Education Act" means TITLE IV, PART B OF the Higher Education
Act of 1965, as amended, TOGETHER WITH ANY RULES AND REGULATIONS PROMULGATED BY
THE DEPARTMENT OF EDUCATION OR THE GUARANTEE AGENCIES.
"Indenture" means the indenture between the Issuer and the Indenture
Trustee, pursuant to which a Series of Notes is issued, as such indenture may be
supplemented or amended from time to time by a Series Supplement.
"Indenture Trustee" means the trustee under the related Indenture.
"Indenture Trustee Fee" means the amount allocated to the Indenture
Trustee, as specified in the related Indenture.
"Index Maturity" means, with respect to a LIBOR Rate Class of Notes,
the offered rate for deposits having a maturity equal to the related Interest
Accrual Period.
"Indirect Participants" means organizations which have indirect access
to a Clearing Agency, such as securities brokers and dealers, banks, and trust
companies that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly.
"Initial Pool Balance" generally will mean the Pool Balance of the
Financed Student Loans as of the Cut-off Date.
"Insurance Payments" means with respect to any Financed HEAL Loans,
payments of insurance with respect thereto.
"Interest Accrual Period" means, with respect to a Class of Notes, the
period of time in which Interest may accrue, as set forth in the related
Prospectus Supplement.
"Interest Determination Date" means the date preceding the commencement
of each Interest Accrual Period on which the Class Interest Rate is determined.
"Interest Payment Period" means, with respect to any Class of Notes,
the period set forth in the related Prospectus Supplement.
"Interest Subsidy Agreement" means, with respect to any Financed
Student Loans, the agreement between a Guarantee Agency and the Secretary of
Education pursuant to Section 428(b) of the Higher Education Act, as amended,
which entitles the holders of eligible loans guaranteed by the Guarantee Agency
to receive Interest Subsidy Payments from the Secretary of Education on behalf
of certain students while the student is in school, during a six to twelve month
Grace Period after the student leaves school, and during certain Deferment
Periods, subject to the holders' compliance with all requirements of the Higher
Education Act.
"Interest Subsidy Payments" are interest payments paid with respect to
an eligible loan during the period prior to the time that the loan enters
repayment and during Grace and Deferment Periods.
"Issuer" means the particular Trust issuing the Notes.
"Legal Final Maturity" means the Payment Date on which the aggregate
outstanding principal amount of each Class of Notes will be payable in full, as
identified in the related Prospectus Supplement.
"LIBOR" means the London Interbank Offered Rate that the most
creditworthy international banks dealing in Eurodollars charge each other for
large loans.
"LIBOR Rate Notes" means any Class of Notes the Class Interest Rate of
which is based upon LIBOR.
"London Banking Day" means a business day on which dealings in deposits
in United States dollars are transacted in the London interbank market.
"Manager" means Crestar SP Corporation, a Virginia corporation.
"Master Servicer" means Crestar Bank or the entity specified in the
Prospectus Supplement for a Series that will administer and supervise the
performance by the Servicers of their duties and responsibilities under
Servicing Agreements in respect to Notes securing a Series.
"Master Servicer Default" under a Transfer and Servicing Agreement will
consist of: (i) any failure by the Master Servicer to deliver to the Indenture
Trustee for deposit in any of the Trust Accounts at the time required for such
deposit any collections, Guarantee Payments, Insurance Payments, any payments by
a guarantor under a guarantee agreement for a Private Loan or other amounts
received by the Master Servicer with respect to the Financed Student Loans,
which failure continues unremedied for three Business Days after written notice
from the Indenture Trustee, the Administrator or the Eligible Lender Trustee is
received by the Master Servicer or after discovery by the Master Servicer; (ii)
any failure by the Master Servicer duly to observe or perform in any material
respect any other covenant or agreement of the Master Servicer in the Transfer
and Servicing Agreement which failure materially and adversely affects the
rights of Noteholders and which continues unremedied for 60 days after the
giving of written notice of such failure (A) to the Master Servicer by the
Indenture Trustee, the Eligible Lender Trustee or the Administrator or (B) to
the Master Servicer and to the Indenture Trustee and the Eligible Lender Trustee
by holders of Directing Notes evidencing not less than 25% in principal amount
of the outstanding Directing Notes; (iii) certain events of insolvency,
readjustment of debt, marshaling of assets and liabilities, or similar
proceedings with respect to the Master Servicer and certain actions by the
Master Servicer indicating its Insolvency, reorganization pursuant to bankruptcy
proceedings or inability to pay its obligations; and (iv) any limitation,
suspension or termination by the Department of Education or the Department of
HHS or by a guarantor of Financed Private Loans of the Master Servicer's
eligibility to service Student Loans which materially and adversely affects the
Master Servicer's ability to service Financed Student Loans.
"Net Loan Rate" for any Interest Accrual Period will equal the weighted
average Effective Interest Rate as of the last day of the Collection Period
immediately preceding such Interest Accrual Period less the Operating Expense
Percentage.
"New Borrower" means a borrower who, on the date the promissory note
was signed, did not have an outstanding balance on a previous loan which was
made, insured or guaranteed under the FFEL Program.
"Nonresidents" means holders who are nonresident alien individuals,
foreign corporations, foreign partnerships or certain foreign estates and
trusts.
"Noteholder" means a holder of a Note.
"Notes" means a manually executed written instrument evidencing the
Borrower's promise to repay a stated sum of money, plus interest, to the
Noteholder by a specific date.
"Note Owner" means the registered owner of a Note.
"Note Payment Account" means the account maintained by the Indenture
Trustee from which distributions of principal and interest are made to the
Noteholders.
"Obligor" means a person who is indebted under a Financed Student Loan.
"Parity Percentage" means with respect to any Series of Notes, the
percentage set forth in the related Prospectus Supplement, which percentage for
any Payment Date or Quarterly Payment Date is determined by dividing (i) the
applicable Pool Balance as of the end of the preceding Collection Period, plus
accrued interest thereon, accrued Special Allowance Payments and Interest
Subsidy Payments as of the end of such Collection Period and all amounts
(INCLUDING ACCRUED INTEREST THEREON) in the Collection Account and Reserve
Account as of the end of the Collection Period (adjusted for payments made on
such Payment Date or Quarterly Payment), by (ii) the sum of the principal
balance of the Notes (after payment thereon on such Payment Date or Quarterly
Payment Date), accrued interest thereon, and accrued and unpaid Transaction Fees
and Consolidation Loan Fees.
"Parity Payment" means those principal amounts required to be paid on
the Notes until the Parity Percentage is achieved, as specified in the
Prospectus Supplement.
"Participants" means the participating organizations that utilize the
services of the Depository.
"Payment Date" means with respect to any Class of Notes of a Series,
the date specified in the related Prospectus Supplement for payment on the
Notes of such Series.
"Payment Determination Date" means with respect to any Payment Date,
the date set forth in the related Prospectus Supplement when the Administrator
is obligated to determine the amounts to be distributed to the Noteholders on
such Payment Date.
"Plan" means any employee benefit plan or retirement arrangement,
including individual retirement accounts and annuities, Keogh plans, and
collective investment funds in which such plans, accounts, annuities or
arrangements are invested, that are described in or subject to the Plan Asset
Regulations, ERISA, or corresponding provisions of the Code.
"Plan Asset Regulations" means the Department of Labor regulations set
forth in 29 C.F.R. ss. 2510.3-101, as amended from time to time.
"Plan Investors" are persons acting on behalf of a Plan, or persons
using the assets of a Plan.
"PLUS Loans" are loans made only to borrowers who are parents (and,
under certain circumstances, spouses of remarried parents) of dependent
undergraduate students.
"Pool Balance" means, with respect to the end of any Collection Period
with respect to Financed Student Loans, an amount equal to the aggregate
principal balance of the Financed Student Loans (including accrued interest
thereon capitalized through such date) as of the end of the Collection Period,
after giving effect to all payments in respect of principal received by the
Trust during such Collection Period.
"Pre-Funding Account" means an account established for the purpose of
enabling a Trust to purchase Additional FINANCED Student Loans during the
Pre-Funding Period.
** 2 "Pre-Funding Account Deposit" means for any Series of Notes, the
amount specified in the related Prospectus Supplement.
"Pre-Funding Period" means any period specified as such in a Prospectus
Supplement during which the related Trust may acquire ADDITIONAL FINANCED
STUDENT LOANS using funds on deposit in the related Pre-Funding Account.
"Principal Factor" means the seven digit number that, when multiplied
by the initial principal amount of a Note, produces its outstanding principal
balance.
"Principal Payment Amount" means the amount required to be paid on a
Series of Notes on any Payment Date, as set forth in the related Prospectus
Supplement.
"Private Loans" means loans that are originated under Private Loan
Programs.
"Private Loan Programs" mean one or more of the Private Loan Programs
that are identified in the related Prospectus Supplement.
"Purchase Amount" means, as of the end of any Collection Period, the
principal amount of a Financed Student Loan (including any interest required to
be capitalized through such date), together with accrued and unpaid interest
thereon.
"Quarterly Payment Date" means every THIRD Payment Date as provided in
the related Prospectus Supplement.
"Rating Agency" means a nationally recognized statistical rating
organization identified in the related Prospectus Supplement that has been
requested by the Depositor to provide a credit rating with respect to one or
more Classes of a Series of Notes as of the Closing Date for such Series.
"RATING AGENCY CONDITION" MEANS, WITH RESPECT TO ANY ACTION RELATING TO
A SERIES OF NOTES, THAT EACH RATING AGENCY SHALL HAVE BEEN GIVEN 10 DAYS PRIOR
NOTICE THEREOF AND THAT EACH RATING AGENCY SHALL HAVE NOTIFIED THE DEPOSITOR,
THE MASTER SERVICER, THE ELIGIBLE LENDER TRUSTEE AND THE INDENTURE TRUSTEE IN
WRITING THAT SUCH ACTION WILL NOT RESULT IN AND OF ITSELF IN A REDUCTION OR
WITHDRAWAL OF THE THEN CURRENT RATINGS OF EACH CLASS OF NOTES OF SUCH SERIES.
"Realized Loss" means, FOR EACH FINANCED STUDENT LOAN submitted to a
Guarantee Agency for a Guarantee Payment, THE DEPARTMENT OF HHS FOR AN INSURANCE
PAYMENT OR A PRIVATE LOAN PROGRAM, THE EXCESS, IF ANY, OF (I) THE UNPAID
PRINCIPAL BALANCE OF SUCH FINANCED STUDENT LOAN ON THE DATE IT WAS FIRST
SUBMITTED TO A GUARANTEE AGENCY FOR A GUARANTEE PAYMENT, THE DEPARTMENT OF HHS
FOR AN INSURANCE PAYMENT OR A PRIVATE LOAN PROGRAM over (ii) all amounts
received on or with respect to principal on such Financed STUDENT Loan up
through the earlier to occur of (A) the date a related Guarantee Payment,
INSURANCE PAYMENT OR PRIVATE LOAN PROGRAM PAYMENT is made or (B) the last day of
the Collection Period occurring 12 months after the date the claim for such
Guarantee Payment INSURANCE PAYMENT OR PRIVATE LOAN PROGRAM PAYMENT IS FIRST
DENIED.
"Record Date" means, for any Payment Date, the date on which the
identities of the Noteholders entitled to distributions on the related Notes on
such Payment Date are fixed, as specified in the related Prospectus Supplement.
"Reference Bank" means four leading banks, selected by the Master
Servicer, or by the Trustee, as applicable, (i) engaged in transactions in
Eurodollar deposits in the international Eurocurrency market, (ii) not
controlling, controlled by or under common control with the Administrator or the
Transferor and (iii) having an established place of business in London.
"Registration Statement" means a registration statement (together with
all amendments and exhibits thereto) filed by the Depositor with the Commission
under the Securities Act with respect to the Notes offered hereby.
"Relief Act" means the Taxpayer Relief Act of 1997, as amended.
"Repayment Phase" means, with respect to any Financed Student Loan,
that period of time during which principal is repayable.
"Repeat Borrower" means a borrower who, on the date the promissory
note evidencing the loan was signed, had an outstanding balance on a previous
loan made, insured or guaranteed under the FFEL Program. "Reserve Account" means
an Eligible Account established with the Indenture Trustee for a Series, the
balance of which may be used to fund certain payments by the Trust.
"Reserve Account Deposit" means the INITIAL deposit into the Reserve
Fund on the Closing Date for a Series.
"Reuters Screen LIBOR Page" means the display designated as page
"LIBOR" on the Reuters Monitor Money Rates Service (or such other page as may
replace the LIBOR page for the purposes of displaying London interbank offered
rates of major banks).
"Sales Agreement" means any sales agreement among the Transferor, the
Depositor and the Eligible Lender Trustee, whereby the Transferor will transfer
Financed Student Loans for the benefit of the Depositor.
"Securities Act" means the Securities Act of 1933, as amended.
"Serial Loan" means a loan made to the same borrower under the same
loan program and guaranteed by the same Guarantee Agency (or a successor) or
insured by the Department of HHS.
"Service" means the Internal Revenue Service.
"Servicer" means any servicer of Financed Student Loans, as specified
in a related Prospectus Supplement.
"Servicing Fee" means the fee payable to the Master Servicer or
Servicer in respect of a Series, as specified in the related Prospectus
Supplement.
"SLS Loans" are loans that were limited to (a) graduate or professional
students, (b) independent undergraduate students, and (c) under certain
circumstances, dependent undergraduate students, if such students' parents were
unable to obtain a Plus Loan and were also unable to provide such students'
expected family contribution.
"Special Allowance Payments" means payments designated as such made
by the Department of Education with respect to certain FFELP Loans pursuant to
Section 438 of the Higher Education Act.
"Special Tax Counsel" means Hunton & Williams, in its capacity as
special tax counsel to a Trust.
"Specified Reserve Account Balance" means, with respect to any Trust or
Series of Notes, the required amount of the Reserve Fund Account.
"Stafford Loans" means loans that are generally made only to student
borrowers who meet certain needs tests, as set forth in the Higher Education
Act.
"Subsequent Cut-off Date" means the date specified in a transfer
agreement with respect to Subsequent Financed Student Loans as the date on and
after which payments on Subsequent Financed Student Loans will belong to the
Trust.
"Subsequent Finance Period" means the period from the Closing Date for
any Series to a subsequent date identified in the accompanying Prospectus
Supplement, if any, when Subsequent Financed Student Loans may be conveyed to a
Trust.
"Subsequent Financed Student Loans" means those Financed Student Loans
that are conveyed to a Trust after the Closing Date with respect to a Series of
Notes in exchange for Financed Student Loans, and do not include Additional
Student Loans.
"Surety Bond" means a bond that insures the timely payment of all
interest and ultimate payment of all principal due on a Series of Notes;
provided, however, that a Surety Bond will not insure payment of any Carryover
Interest.
"T-Bill Rate" means the average of the bond equivalent rates of the
91-day Treasury bills auctioned during the calendar quarter immediately
preceding any date of determination.
"T-BILL RATE NOTES" MEANS ANY CLASS OF NOTES THE CLASS INTEREST RATE OF
WHICH IS BASED ON THE T-BILL RATE.
"Telerate Page 5" means the display page so designated on the Dow Jones
Telerate Service (or such other page as may replace that page on that service
for the purpose of displaying comparable rates or prices).
"Terms and Conditions" means the Terms and Conditions Governing Use of
Euroclear and the related Operating Procedures of the Euroclear System.
"TIN" means taxpayer identification number assigned by the Internal
Revenue Service.
"TP Program" means the Crestar Bank Top Performer Program whereby
borrowers with satisfactory payment records receive a reduced interest rate, AND
ANY SIMILAR PROGRAM WITH RESPECT TO WHICH A RATING AGENCY CONDITION IS
SATISFIED.
"TP Loans" means those Financed Student Loans covered by the TP
Program.
"Transaction Fees" means the Servicing Fee, Administration Fee,
Eligible Lender Trustee Fee, Indenture Trustee Fee and Delaware Trustee Fee.
"Transfer Agreement" means an agreement between the Depositor and the
Eligible Lender Trustee whereby the Depositor conveys the Additional Student
Loans to the Eligible Lender Trustee on behalf of the Trust.
"Transfer and Servicing Agreement" means any transfer and servicing
agreement among the Depositor, the Trust, the Eligible Lender Trustee, and the
Master Servicer, pursuant to which the Depositor will transfer Financed Student
Loans to the Trust.
"Transferor" means Crestar Bank, a Virginia banking corporation.
"Transferor Trusts" means the separate trusts created under the Trust
Agreement and the indentures or trust agreements under which the Eligible Lender
Trustee may separately hold student loans that share the lender identification
number.
"Trust" means a trust that issues one or more Series of Notes.
"Trust Accounts" means the Collection Account, Note Payment Account,
Expense Account, Reserve Account Advance Account and Pre-Funding Account, each
established and maintained by the Indenture Trustee on behalf of the
Noteholders, and the Certificate Distribution Account and the Certificate
Advance Account, each established and maintained by the Eligible Lender Trustee
on behalf of the Certificateholders.
"Trust Agreement" means the agreement pursuant to which a trust is
formed, by and among the Depositor, Eligible Lender Trustee and Delaware
Trustee.
"U.S. Person" means (i) a citizen or resident of the United States,
(ii) a corporation or partnership organized in or under the laws of the United
States or any political subdivision thereof, (iii) an estate the income of which
is INCLUDIBLE in gross income for United States tax purposes, regardless of its
source, or (iv) a trust if a court within the United States is able to exercise
primary jurisdiction over the administration of the trust and one or more U.S.
fiduciaries have the authority to control all substantial decisions of the
trust.
"UCC" means the Uniform Commercial Code, as amended.
"Underwriters" means any firm that agrees to purchase one or more
Classes of Notes of a Series from the Depositor.
"Underwriting Agreement" means an agreement among the Transferor, the
Depositor and the Underwriter(s) for purchase of the Notes of a Series.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses in connection with
the offering of $1,000,000 of the Student Loan Asset Backed Notes being
registered under this Registration Statement, other than
underwriting discounts and commission:
SEC Registration .........................................$ 295.00
Printing and Engraving ..........................................*
Legal Fees and Expenses..........................................*
Accounting Fees and Exp..........................................*
Trustee Fees and Expens..........................................*
Blue Sky Fees and Expen..........................................*
Rating Agency Fees ..............................................*
Miscellaneous ...................................................*
TOTAL ............................................$
* To be provided by amendment
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant's Operating Agreement implements the provisions of the
Virginia Limited Liability Company Act ("VLLCA"), which permit the limitation of
liability of the Registrant's Manager (as defined below) and Members in a
variety of circumstances, which may include liabilities under the Securities Act
of 1933. Under Section 13.1-1025 of the VLLCA, a Virginia limited liability
company generally is authorized to limit the liability of its Members and
Manager if specified in writing in its Articles of Organization or Operating
Agreement. The Registrant's Operating Agreement limits the liability of its
Members and Manager to the fullest extent permitted under the VLLCA. The
liability of the Registrant's Members or Manager shall not be limited if such
persons engage in willful misconduct or a knowing violation of the criminal law
or any federal or state securities law.
The Articles of Incorporation of Crestar SP Corporation, the Registrant's
manager (the "Manager") implement the provisions of the Virginia State
Corporation Act ("VSCA"), which provide for the indemnification of the Manager's
directors and officers in a variety of circumstances, which may include
indemnification for liabilities under the Securities Act of 1933. Under Sections
13.1-697 and 13.1-702 of the VSCA, a Virginia corporation generally is
authorized to indemnify its directors and officers in civil and criminal actions
if they acted in good faith and believed their conduct to be in the best
interests of the corporation and, in the case of criminal actions, had no
reasonable cause to believe that their conduct was unlawful. The Manager's
Articles of Incorporation require indemnification of directors and officers with
respect to certain liabilities, expenses and other amounts imposed upon them by
reason of having been a director or officer, except in the case of willful
misconduct or a knowing violation of criminal law. In addition, the VSCA and the
Manager's Articles of Incorporation eliminate the liability of a director or
officer in a stockholder or derivative proceeding. This elimination of liability
will not apply in the event of willful misconduct or a knowing violation of the
criminal law or any federal or state securities law.
Reference is made to the Underwriting Agreement filed as an exhibit hereto
for provisions relating to the indemnification of directors, officers and
controlling persons of the Registrant and the Manager against certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
Crestar Financial Corporation, the parent of the Registrant and the
Manager, carries an insurance policy providing directors' and officers'
liability insurance for any liability its directors or officers or the directors
or officers of any of its subsidiaries, including the Registrant and the
Manager, may incur in their capacities as such.
ITEM 16. EXHIBITS.
All financial statements, schedules and historical financial information
have been omitted as they are not applicable.
1.1 Form of Underwriting Agreement
3.1 Articles of Organization of Registrant+
3.2 Operating Agreement of Registrant+
3.3 Form of Trust Agreement among the Registrant, the Eligible Lender
Trustee and the Delaware Trustee
4.1 Form of Master Indenture between the Trust and the Indenture Trustee
4.2 Form of Terms Supplement to Master Indenture between the Trust and the
Indenture Trustee 4.3 Form of Sales Agreement between the Transferor
and Depositor*
4.4 Form of Transfer and Servicing Agreement among the Depositor, the
Trust, the Administrator, the Master Servicer and the Eligible Lender Trustee
4.5 Form of Standard Terms to Transfer and Servicing Agreement among the
Depositor, the Trust, the Administrator, the Master Servicer and the
Eligible Lender Trustee
5.1 Opinion of Hunton & Williams
8.1 Opinion of Hunton & Williams with respect to tax matters
23.1 Consent of Hunton & Williams is contained in their opinions filed as
Exhibits 5.1 and 8.1
24.1 Power of Attorney+
25.1 T-1 Statement of Eligibility of the Trustee under the Trust Indenture
Act of 1939*
99.1 Form of Auction Procedures Appendix+
- ----------------------------
* To be filed by amendment
+ Previously filed.
ITEM 17. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or events
arising after the effective date of the Registration Statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change
in the information set forth in the Registration Statement;
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the
Registration Statement or any material change of such information
in the Registration Statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not
apply if the information required to be included in the post-effective
amendment by those paragraphs is contained in periodic reports filed by
the Registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are included by reference in the
Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof;
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering;
(b) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(c) The undersigned Registrant hereby undertakes to file an application
for the purpose of determining the eligibility of the trustee to act under
subsection (a) of Section 310 of the Trust Indenture Act in accordance with the
rules and regulations prescribed by the Commission under Section 305(b)(2) of
the Act.
(d) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements (including, without limitation, the security rating requirement at
time of sale) for filing on Form S-3 and has duly caused this Amendment No. 1 to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Richmond, Commonwealth of Virginia, on June 26, 1998.
CRESTAR SECURITIZATION, LLC
(REGISTRANT)
By: CRESTAR SP CORPORATION, as
Manager
By: /s/ Eugene S. Putnam
-------------------------
Eugene S. Putnam, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933,
this Amendment No. 1 has been signed by the following persons in the capacities
and on the dates indicated.
Signature Capacity Date
- --------- --------- -----
/s/ Eugene S. Putnam Director, Chief Executive June 26, 1998
- ------------------------ Officer and President
Eugene S. Putnam (Principal Executive Officer)
/s/ Mark Smith Chief Financial/Accounting Officer June 26, 1998
- ------------------------ (Principal Financial Offider
Mark Smith and Principal Accounting Officer)
/s/ Eugene S. Putnam* Director June 26, 1998
- ------------------------
Richard F. Katchuk
/s/ Eugene S. Putnam* Director June 26, 1998
- -------------------------
James D. Barr*
* Pursuant to a Power of Attorney
previously filed with the Securities
and Exchange Commission