AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 16, 1996
REGISTRATION STATEMENT NO. 333-07837
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
PRE-EFFECTIVE AMENDMENT NO. 2
ON FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------
ACCESS FINANCIAL LENDING CORP.
(Exact name of registrant as specified in charter)
400 HIGHWAY 169 SOUTH, SUITE 400
POST OFFICE BOX 26365
ST. LOUIS PARK, MINNESOTA 55426-0365
(Address, including zip code, and telephone number,
including area code, of agent for service)
Delaware 41-1768416
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
JAMES G. RAY
400 HIGHWAY 169 SOUTH, SUITE 400
POST OFFICE BOX 26365
ST. LOUIS PARK, MINNESOTA 55426-0365
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
COPY TO:
CHRIS DIANGELO, ESQ.
DEWEY BALLANTINE
1301 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this registration statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box.|_|
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box.|X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration number of the earlier effective
registration statement for the same offering.|_|
If this Form is filed as a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, please check the following box and list the
Securities Act registration 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
Amount Proposed maximum maximum Amount of
to be aggregate price aggregate registration
Title of each class of securities to be registered registered per unit(1) offering price(1) fee(2)
- ----------------------------------------------------------------------------------------------------------------------------------
Asset Backed Certificates
Asset Backed Notes
Asset Backed Securities $1,000,000 100% $1,000,000 $345
==================================================================================================================================
(1) Estimated solely for the purpose of calculating the registration fee.
(2) In accordance with Rule 429 under the Securities Act of 1933, the
Prospectus included herein is a combined prospectus which also relates to
the Registration Statement on Form S-3, File No. 33-96500 (the "Prior
Registration Statement"). The amount of securities eligible to be sold
under the Prior Registration Statement ($174,000,000 as of June 1, 1996)
shall be carried forward to this Registration Statement. A filing fee in
the amount of $344,827.59 was paid with the Prior Registration Statement.
__________________________
The Registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said section 8(a),
may determine.
CROSS REFERENCE SHEET
TO FORM S-3
CAPTION OR LOCATION
ITEM AND CAPTION IN FORM S-3 IN PROSPECTUS
- ---------------------------- -------------
1. Forepart of the Registration Statement
and Outside Front Cover Page of
Prospectus....................................................Forepart of Registration Statement;
Outside Front Cover Page**
2. Inside Front and Outside Back Cover Pages of
Prospectus.............................................................Inside Front Cover Page**;
Outside Back Cover Page**
3. Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges.............................................Summary of Prospectus**;
Risk Factors**;*
4. Use of Proceeds.....................................................................Use of Proceeds
5. Determination of Offering Price.............................................. *
6. Dilution..................................................................... *
7. Selling Security Holders..................................................... *
8. Plan of Distribution......................................................... Methods of
Distribution**
9. Description of Securities to be Registered..............................Outside Front Cover Page**;
Summary of Prospectus**;
Description of the Securities**;
Federal Income Tax Consequences**
10. Interests of Named Experts and Counsel....................................... *
11. Material Changes............................................................. *
12. Incorporation of Certain Information by Reference........................Inside Front Cover Page**;
Incorporation of Certain Documents by Reference
13. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities.....................................See page II-3
- ------------
* Not applicable or answer is negative.
** To be completed from time to time by Prospectus Supplement.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED AUGUST 16, 1996
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION, OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
Asset Backed Securities, issuable in Series
Access Financial Lending Corp.
Company
This Prospectus describes certain Asset Backed Securities (the " Securities")
that may be issued from time to time in series and certain classes of which may
be offered hereby from time to time as described in the related Prospectus
Supplement. Each series of Securities will be issued by a separate trust (each,
a "Trust"). The primary assets of each Trust will consist of a segregated pool
(a "Loan Pool") of (A) (i) conventional one- to four-family residential mortgage
loans, (ii) multi-family residential mortgage loans, (iii) mortgage loans
secured by mortgages on small properties used primarily for residential purposes
but also commercial purposes (the "Mixed Use Loans"), (iv) cooperative apartment
loans secured by security interests in shares issued by a cooperative housing
corporation or (v) home improvement loans each of which is secured by a
"dwelling or mixed residential and commercial structure" within the meaning of
Section 3(a)(41)(A)(i) of the Securities Exchange Act of 1934, as amended
(collectively, the "Mortgage Loans") or (B) contracts for manufactured homes
(the "Contracts") (the Mortgage Loans and the Contracts together, the "Loans"),
to be acquired by such Trust from Access Financial Lending Corp. ("AFL") or one
or more subsidiaries or other affiliated institutions of AFL (together, the
"Company"). The Company will originate the Loans or acquire the Loans from one
or more affiliated or unaffiliated dealers, brokers, or other financial
institutions (the " Originators"). See "The Loan Pools."
The Loans in each Loan Pool and certain other assets described herein and in the
related Prospectus Supplement (collectively with respect to each Trust, the
"Trust Estate") will be held by the related Trust for the benefit of the holders
of the related series of Securities (the " Securityholders") pursuant to a
Pooling and Servicing Agreement to the extent and as more fully described herein
and in the related Prospectus Supplement. Each Loan Pool will consist of one
or more of the various types of Loans described under "The Loan Pools."
Each series of Securities will include one or more classes. The Securities of
any particular class may represent beneficial ownership interests in the related
Loans held by the related Trust, or may represent debt secured by such Loans, as
described herein and in the related Prospectus Supplement. A series may include
one or more classes of Securities entitled to principal distributions, with
disproportionate, nominal or no interest distributions, or to interest
distributions, with disproportionate, nominal or no principal distributions. The
rights of one or more classes of Securities of any series may be senior or
subordinate to the rights of one or more of the other classes of Securities. A
series may include two or more classes of Securities which differ as to the
timing, sequential order, priority of payment, interest rate or amount of
distributions of principal or interest or both. Information regarding each class
of Securities of a series, and certain characteristics of the Loans to be
evidenced by such Securities, will be set forth in the related Prospectus
Supplement.
(cover continued on next page)
_____________
THE ASSETS OF THE TRUST ARE THE SOLE SOURCE OF PAYMENTS ON THE RELATED
SECURITIES. THE SECURITIES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF THE
COMPANY, THE SERVICER OR ANY OF THEIR AFFILIATES, EXCEPT AS SET FORTH HEREIN AND
IN THE RELATED PROSPECTUS SUPPLEMENT. NEITHER THE SECURITIES NOR THE UNDERLYING
LOANS WILL BE GUARANTEED OR INSURED BY ANY GOVERNMENTAL AGENCY OR
INSTRUMENTALITY OR BY THE COMPANY, THE SERVICER OR ANY OF THEIR AFFILIATES,
EXCEPT AS SET FORTH IN THE RELATED PROSPECTUS SUPPLEMENT. SEE ALSO "RISK
FACTORS" ON PAGE 15 HEREOF.
_____________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
_____________
Retain this Prospectus for future reference. This Prospectus may not be used to
consummate sales of securities offered hereby unless accompanied by a Prospectus
Supplement.
The date of this Prospectus is August ___, 1996.
(continued from previous page)
The Company's only obligations with respect to a series of Securities will be
pursuant to certain representations and warranties made by the Company, except
as otherwise described in the related Prospectus Supplement. The Prospectus
Supplement for each series of Securities will name one or more servicers (the
"Servicer(s)") which will act directly or through one or more sub-servicers (the
"Sub-Servicer(s)"). The principal obligations of the Servicer will be pursuant
to its contractual servicing obligations (which may include a limited obligation
to make certain advances in the event of delinquencies in payments on the Loans
and interest shortfalls due to prepayment of Loans). See "Description of the
Securities."
If so specified in the related Prospectus Supplement, the Trust Estate for a
series of Securities may include any combination of a mortgage pool insurance
policy, letter of credit, financial guaranty insurance policy, bankruptcy bond,
special hazard insurance policy, reserve fund or other form of credit
enhancement (collectively, "Credit Enhancement"). In addition to or in lieu of
the foregoing, Credit Enhancement with respect to certain classes of Securities
of any series may be provided by means of subordination, cross-support among
Loans or over-collateralization. See "Description of Credit Enhancement."
The rate of payment of principal of each class of Securities entitled to
principal payments will depend on the priority of payment of such class and the
rate of payment (including prepayments, defaults, liquidations and repurchases
of Loans) of the related Loans. A rate of principal payment lower or higher than
that anticipated may affect the yield on each class of Securities in the manner
described herein and in the related Prospectus Supplement. The various types of
Securities, the different classes of such Securities and certain types of Loans
in a given Loan Pool may have different prepayment risks and credit risks. The
Prospectus Supplement for a series of Securities or the related Current Report
on Form 8-K will contain information as to (i) types, maturities and certain
statistical information relating to credit risks of the Loans in the related
Loan Pool, (ii) the effect of certain rates of prepayment, based upon certain
specified assumptions for a series of Securities and (iii) priority of payment
and maturity dates of the Securities. An investor should carefully review the
information in the related Prospectus Supplement concerning the different
consequences of the risks associated with the different types and classes of
Securities. See "Yield Considerations." A Trust may be subject to early
termination under the circumstances described herein and in the related
Prospectus Supplement.
One or more separate elections may be made to treat a Trust, or one or more
segregated pools of assets held by such Trust, as a real estate mortgage
investment conduit ("REMIC") for federal income tax purposes. If applicable, the
Prospectus Supplement for a series of Securities will specify which class or
classes of the related series of Securities will be considered to be regular
interests in a REMIC and which classes of Securities or other interests will be
designated as the residual interest in a REMIC. Alternatively, a Trust may be
treated as a grantor trust or as a partnership for federal income tax purposes,
or may be treated for federal income tax purposes as a mere security device
which constitutes a collateral arrangement for the issuance of secured debt. See
" Federal Income Tax Considerations".
Offers of the Securities may be made through one or more different methods,
including offerings through underwriters, as more fully described under "Methods
of Distribution" and in the related Prospectus Supplement. There will be no
secondary market for any series of Securities prior to the offering thereof.
There can be no assurance that a secondary market for any of the Securities will
develop or, if it does develop, that it will offer sufficient liquidity of
investment or will continue.
2
No dealer, salesman, or any other person has been authorized to give any
information, or to make any representations, other than those contained in this
Prospectus or the related Prospectus Supplement, and, if given or made, such
information must not be relied upon as having been authorized by the Company or
any dealer, salesman, or any other person. Neither the delivery of this
Prospectus or the related Prospectus Supplement nor any sale made hereunder or
thereunder shall under any circumstances create an implication that there has
been no change in the information herein or therein since the date hereof. This
Prospectus and the related Prospectus Supplement are not an offer to sell or a
solicitation of an offer to buy any security in any jurisdiction in which it is
unlawful to make such offer or solicitation.
TABLE OF CONTENTS
Caption Page
- ------- ----
INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE............................................................... 5
SUMMARY OF PROSPECTUS...................................................... 6
RISK FACTORS............................................................... 15
Risks Associated with the Securities.................................... 15
Risks associated with the Loans......................................... 16
Risks associated with the Mortgage Loans................................ 16
Risks Associated with the Contracts..................................... 18
Legal Considerations.................................................... 19
THE TRUSTS................................................................. 21
THE LOAN POOLS............................................................. 27
General................................................................. 27
The Loan Pools.......................................................... 28
UNDERWRITING PROGRAM..................................................... 30
General............................................................... 30
Mortgage Loan Program................................................. 31
Manufactured Housing Contract Program................................... 32
DESCRIPTION OF THE SECURITIES.............................................. 33
General................................................................. 33
Form of Securities...................................................... 35
Assignment of Loans..................................................... 37
Forward Commitments; Pre-Funding........................................ 38
Payments on Loans; Deposits to Distribution Account..................... 39
Withdrawals from the Principal and Interest Account..................... 42
Distributions......................................................... 43
Principal and Interest on the Securities................................ 43
Advances................................................................ 44
Reports to Securityholders.............................................. 45
Collection and Other Servicing Procedures............................... 46
Realization Upon Defaulted Loans...................................... 48
Master Servicer......................................................... 48
Sub-Servicing......................................................... 49
SUBORDINATION.............................................................. 50
DESCRIPTION OF CREDIT ENHANCEMENT.......................................... 51
HAZARD INSURANCE; CLAIMS THEREUNDER........................................ 56
Hazard Insurance Policies............................................... 56
THE COMPANY................................................................ 57
THE SERVICER............................................................... 57
Caption Page
- ------- ----
THE POOLING AND SERVICING AGREEMENT........................................ 57
Servicing and Other Compensation and
Payment of Expenses............................................... 58
Evidence as to Compliance............................................... 58
Removal and Resignation of the Servicer............................... 59
Resignation of the Master Servicer.................................... 60
Amendments............................................................ 60
Termination; Retirement of Securities................................... 60
THE TRUSTEE.............................................................. 61
YIELD CONSIDERATIONS....................................................... 63
MATURITY AND PREPAYMENT
CONSIDERATIONS.......................................................... 65
CERTAIN LEGAL ASPECTS OF THE LOANS
AND RELATED MATTERS................................................... 67
Mortgage Loans........................................................ 67
Manufactured Housing Contracts.......................................... 74
FEDERAL INCOME TAX CONSIDERATIONS...................................... 80
General............................................................... 80
Grantor Trust Securities.............................................. 80
REMIC Securities...................................................... 82
Debt Securities....................................................... 88
Discount and Premium.................................................. 89
Backup Withholding.................................................... 92
Foreign Investors..................................................... 92
Taxation of the Securities Classified as
Partnership Interests.............................................. 93
STATE TAX CONSIDERATIONS................................................. 93
ERISA CONSIDERATIONS..................................................... 93
LEGAL INVESTMENT MATTERS................................................. 96
USE OF PROCEEDS.......................................................... 97
METHODS OF DISTRIBUTION.................................................. 97
LEGAL MATTERS............................................................ 98
ADDITIONAL INFORMATION................................................... 98
INDEX OF PRINCIPAL DEFINITIONS........................................... 99
3
Until 90 days after the date of each Prospectus Supplement, all dealers
effecting transactions in the related Securities, whether or not participating
in the distribution thereof, may be required to deliver this Prospectus and the
related Prospectus Supplement. This delivery requirement is in addition to the
obligation of dealers to deliver a Prospectus Supplement and Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
4
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by each respective 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 the Securities of such Trust
offered hereby shall be deemed to be incorporated by reference into this
Prospectus when delivered with respect to such Trust. Any statement contained 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 to the
extent that a statement contained herein or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this Prospectus.
Any person receiving a copy of this Prospectus may obtain, without charge,
upon written or oral request, a copy of any of the documents incorporated by
reference herein, except for the exhibits to such documents (other than the
documents expressly incorporated therein by reference). Requests should be
directed to Access Financial Lending Corp., 400 Highway 169 South, Suite 400,
Post Office Box 26365, St. Louis Park, Minnesota 55426-0365, Attention:
Corporate Compliance (telephone number 612-542-6500).
5
SUMMARY OF PROSPECTUS
The following summary of certain pertinent information is qualified in its
entirety by reference to the detailed information appearing elsewhere in this
Prospectus and by reference to the information with respect to each series of
Securities contained in the Prospectus Supplement to be prepared and delivered
in connection with the offering of such series. Capitalized terms used in this
summary that are not otherwise defined shall have the meanings ascribed thereto
in this Prospectus. An index indicating where certain terms used herein are
defined appears at the end of this Prospectus.
Securities Offered....... Asset Backed Securities (the " Securities").
Company.................. Access Financial Lending Corp., together with one or
more subsidiaries and affiliated institutions from
which any Trust may acquire Loans.
Servicer................. One or more servicers for each series of Securities
will be specified in the related Prospectus
Supplement. The Company may act as Servicer.
Master Servicer.......... A master servicer (the "Master Servicer") may be
specified in the related Prospectus Supplement for
the related series of Securities. The Company may
act as Master Servicer. See "Loan Program -- Master
Servicer."
Sub-Servicers............ The Servicer may service the Loans directly or through
one or more sub-servicers (each, a "Sub-Servicer")
(any servicer, Sub-Servicer and Master Servicer,
collectively the "Servicer") pursuant to one or more
sub-servicing agreements. See "Loan
Program--Sub-Servicers."
Trustee.................. The trustee (the "Trustee") for each series of
Securities will be specified in the related
Prospectus Supplement.
The Securities........... Issuance of Securities. Each series of Securities will
be issued at the direction of the Company by a
separate Trust (each, a "Trust"). The primary assets
of each Trust will consist of a segregated pool
(each, a "Loan Pool") of (A) (i) conventional one-
to four-family residential mortgage loans, (ii)
multi-family residential mortgage loans, (iii) mixed
use mortgage loans, (iv) cooperative apartment loans
secured by security interests in shares issued by a
cooperative housing corporation, or (v) home
improvement loans (collectively, the "Mortgage
Loans"), (B) installment loan contracts and
installment loan agreements for manufactured homes
(the "Contracts") or (C) certificates of interest or
participation therein (the Mortgage Loans and the
Contracts together, the "Loans") or certificates of
interest or participation therein, acquired by such
Trust from the Company. The Company will originate
the Loans or acquire the Loans from one or more
originators. The Securities issued by any Trust may
represent beneficial ownership interests in the
related Loans held by the related Trust, or may
represent debt secured by such Loans, as described
herein and in the related Prospectus Supplement.
Securities which represent beneficial ownership
interests in the related Trust will be referred to
as "Certificates" in the related Prospectus
Supplement; Securities which represent debt issued
by the related Trust will be referred to as "Notes"
in the related Prospectus Supplement.
Each Trust will be established pursuant to an
agreement (each, a "Trust Agreement") by and between
the Company and the Trustee named
6
therein. Each Trust Agreement will describe the
related pool of assets to be held in trust (each
such asset pool, the "Trust Estate"), which will
include the related Loans and, if so specified in
the related Prospectus Supplement, may include any
combination of a mortgage pool insurance policy,
letter of credit, financial guaranty insurance
policy, special hazard policy, reserve fund or other
form of Credit Enhancement.
The Loans held by each Trust will be serviced by the
Servicer pursuant to a servicing agreement (each, a
"Servicing Agreement") by and among the Company, the
related Servicer and the related Trustee.
With respect to Securities that represent debt
issued by the related Trust, the related Trust will
enter into an indenture (each, an "Indenture") by
and between such Trust and the trustee named on such
Indenture (the "Indenture Trustee"), as set forth in
the related Prospectus Supplement. Securities that
represent beneficial ownership interests in the
related Trust will be issued pursuant to the related
Trust Agreement.
In the case of any individual Trust, the contractual
arrangements relating to the establishment of the
Trust, the servicing of the related Loans and the
issuance of the related Securities may be contained
in a single agreement, or in several agreements
which combine certain aspects of the Trust
Agreement, the Servicing Agreement and the Indenture
described above (for example, a pooling and
servicing agreement, or a servicing and collateral
management agreement). For purposes of this
Prospectus, the term "Pooling and Servicing
Agreement" as used with respect to a Trust means,
collectively, and except as otherwise specified, any
and all agreements relating to the establishment of
the related Trust, the servicing of the related
Loans and the issuance of the related Securities.
Securities Will Be Recourse to the Assets of the
Related Trust Only. The sole source of payment for
any series of Securities will be the assets of the
related Trust (i.e., the related Trust Estate). The
Securities will not be obligations, either recourse
or non-recourse (except for certain non-recourse
debt described under " Federal Income Tax
Considerations"), of the Company, the Servicer, any
Sub-Servicer or any Person other than the related
Trust. In the case of Securities that represent
beneficial ownership interest in the related Trust
Estate, such Securities will represent the ownership
of such Trust Estate; with respect to Securities
that represent debt issued by the related Trust,
such Securities will be secured by the related Trust
Estate. Notwithstanding the foregoing, and as to be
described in the related Prospectus Supplement,
certain types of Credit Enhancement, such as a
financial guaranty insurance policy or a letter of
credit, may constitute a full recourse obligation of
the issuer of such Credit Enhancement.
General Nature of the Securities as Investments. The
Securities will consist of two basic types: (i)
Securities of the fixed-income type (" Fixed-Income
Securities") and (ii) Securities of the equity
participation type ("Equity Securities"). No Class
of Equity Securities will be offered pursuant to
this Prospectus or any Prospectus Supplement related
hereto. Fixed-Income Securities will generally be
styled as debt instruments, having a principal
balance and a specified interest rate ("Interest
Rate"). Fixed-Income Securities may be either
beneficial ownership interests in the related Loans
held by the related Trust, or may represent debt
7
secured by such Loans. Each series or class of
Fixed-Income Securities may have a different
Interest Rate, which may be a fixed or adjustable
Interest Rate. The related Prospectus Supplement
will specify the Interest Rate for each series or
class of Fixed-Income Securities, or the initial
Interest Rate and the method for determining
subsequent changes to the Interest Rate.
A series may include one or more classes of
Fixed-Income Securities ("Strip Securities")
entitled (i) to principal distributions, with
disproportionate, nominal or no interest
distributions, or (ii) to interest distributions,
with disproportionate, nominal or no principal
distributions. In addition, a series may include two
or more classes of Fixed-Income Securities that
differ as to timing, sequential order, priority of
payment, Interest Rate or amount of distributions of
principal or interest or both, or as to which
distributions of principal or interest or both on
any class may be made upon the occurrence of
specified events, in accordance with a schedule or
formula, or on the basis of collections from
designated portions of the related Loan Pool, which
series may include one or more classes of
Fixed-Income Securities ("Accrual Securities"), as
to which certain accrued interest will not be
distributed but rather will be added to the
principal balance (or nominal principal balance, in
the case of Accrual Securities which are also Strip
Securities) thereof on each Payment Date, as
hereinafter defined and in the manner described in
the related Prospectus Supplement.
If so provided in the related Prospectus Supplement,
a series of Securities may include one or more other
classes of Fixed-Income Securities (collectively,
the "Senior Securities") that are senior to one or
more other classes of Fixed-Income Securities
(collectively, the "Subordinate Securities") in
respect of certain distributions of principal and
interest and allocations of losses on Loans. In
addition, certain classes of Senior (or Subordinate)
Securities may be senior to other classes of Senior
(or Subordinate) Securities in respect of such
distributions or losses.
Equity Securities will represent the right to
receive the proceeds of the related Trust Estate
after all required payments have been made to the
Securityholders of the related Fixed-Income
Securities (both Senior Securities and Subordinate
Securities), and following any required deposits to
any reserve account which may be established for the
benefit of the Fixed-Income Securities. Equity
Securities may constitute what are commonly referred
to as the "residual interest", "seller's interest"
or the "general partnership interest", depending
upon the treatment of the related Trust for federal
income tax purposes. As distinguished from the
Fixed-Income Securities, the Equity Securities will
not be styled as having principal and interest
components. Any losses suffered by the related Trust
will first be absorbed by the related class of
Equity Securities, as described herein and in the
related Prospectus Supplement.
No Class of Equity Securities will be offered
pursuant to this Prospectus or any Prospectus
Supplement related hereto. Equity Securities may be
offered on a private placement basis or pursuant to
a separate Registration Statement to be filed by the
Company. In addition, the Company may initially or
permanently hold any Equity Securities issued by any
Trust.
8
General Payment Terms of Securities. As provided in
the related Pooling and Servicing Agreement and as
described in the related Prospectus Supplement,
Securityholders will be entitled to receive payments
on their Securities on specified dates (each, a
"Payment Date"). Payment Dates with respect to
Fixed-Income Securities will occur monthly,
quarterly or semi-annually, as described in the
related Prospectus Supplement; Payment Dates with
respect to Equity Securities will occur as described
in the related Prospectus Supplement.
The related Prospectus Supplement will describe a
date (the "Record Date") preceding such Payment
Date, as of which the Trustee or its paying agent
will fix the identity of the Securityholders for the
purpose of receiving payments on the next succeeding
Payment Date.
Each Pooling and Servicing Agreement will describe a
period (each, a " Remittance Period") antecedent to
each Payment Date (for example, in the case of
monthly-pay Securities, the calendar month preceding
the month in which a Payment Date occurs or such
other specified period). Collections received on
or with respect to the related Loans during a
Remittance Period will be required to be
remitted by the Servicer to the related Trustee
prior to the related Payment Date and will be used
to fund payments to Securityholders on such Payment
Date. As may be described in the related Prospectus
Supplement, the related Pooling and Servicing
Agreement may provide that all or a portion of the
principal collected on or with respect to the
related Loans may be applied by the related Trustee
to the acquisition of additional Loans during a
specified period (rather than be used to fund
payments of principal to Securityholders during such
period) with the result that the related securities
will possess an interest-only period, also commonly
referred to as a revolving period, which will be
followed by an amortization period. Any such
interest-only or revolving period may, upon the
occurrence of certain events to be described in the
related Prospectus Supplement, terminate prior to
the end of the specified period and result in the
earlier than expected amortization of the related
Securities.
In addition, and as may be described in the related
Prospectus Supplement, the related Pooling and
Servicing Agreement may provide that all or a
portion of such collected principal may be retained
by the Trustee (and held in certain temporary
investments, including Loans) for a specified period
prior to being used to fund payments of principal to
Securityholders.
The result of such retention and temporary
investment by the Trustee of such principal would be
to slow the amortization rate of the related
Securities relative to the amortization rate of the
related Loans, or to attempt to match the
amortization rate of the related Securities to an
amortization schedule established at the time such
Securities are issued. Any such feature applicable
to any Securities may terminate upon the occurrence
of events to be described in the related Prospectus
Supplement, resulting in the current distribution of
principal payments to the specified Securityholders
and an acceleration of the amortization of such
Securities.
Neither the Securities nor the underlying Loans
will be guaranteed or insured by any governmental
agency or instrumentality or the Company,
9
the Servicer, any Master Servicer, any Sub-Servicer
or any of their affiliates.
No Investment Companies.. Neither the Company nor any Trust will register as
an "investment company" under the Investment Company
Act of 1940, as amended (the "Investment Company
Act").
Cross-Collateralization.. The source of payment for Securities of each
series will be the assets of the related Trust
Estate only. However, as may be described in the
related Prospectus Supplement, a Trust Estate may
include the right to receive moneys from a common
pool of Credit Enhancement which may be available
for more than one series of Securities, such as a
master reserve account or a master insurance policy.
Notwithstanding the foregoing, no collections on
any Loans held by any Trust may be applied to the
payment of Securities issued by any other Trust
(except to the limited extent that certain
collections in excess of amounts needed to pay the
related Securities may be deposited in a common,
master reserve account that provides Credit
Enhancement for more than one series of Securities).
The Loan Pools........... Each Trust Estate will consist primarily of Loans
secured by liens on one-to four-family residential
properties, multi-family residential properties,
mixed use properties, cooperative apartments or
installment loan contracts and installment loan
agreements for manufactured homes (such liens, the
"Mortgages", and such property, the "Property"),
located in any one of the fifty states, the District
of Columbia, Puerto Rico or any other Territories of
the United States. All Loans will have been acquired
by the related Trust from the Company or at the
Company's direction from one or more originators.
All Loans will have been originated either by (i)
one or more institutions affiliated with the
Company, (ii) one or more institutions unaffiliated
with the Company or (iii) the Company. In addition,
the Loans may be purchased by the Company as bulk
acquisitions ("Bulk Acquisitions") or on a "spot" or
negotiated basis ("Negotiated Transactions"). The
Loans generally will have been originated pursuant
to the Company's underwriting guidelines in effect
as of the date on which the Loan was submitted to
the Company pursuant to the Company's Loan Program
(as defined herein). See "Loan Program." For a
description of the types of Loans that may be
included in the Loan Pools, see "The Loan Pools--The
Loans."
If specified in the related Prospectus Supplement,
Loans that are converted from an adjustable rate to
a fixed rate will be repurchased by the Company or
purchased by the applicable Sub-Servicer, Servicer
or another party, or a designated remarketing agent
will use its best efforts to arrange the sale
thereof as further described herein.
A Current Report on Form 8-K will be available to
purchasers or underwriters of the related series of
Securities and will generally be filed, together
with the related Pooling and Servicing Agreement,
with the Securities and Exchange Commission within
fifteen days after the initial issuance of such
series.
10
Forward Commitments;
Pre-Funding............ A Trust may enter into an agreement (each, a
"Forward Purchase Agreement") with the Company
whereby the Company will agree to transfer
additional Loans (the " Subsequent Loans") to such
Trust from time to time during the time period
specified in the related Prospectus Supplement
(the "Funding Period"). Any Forward Purchase
Agreement will require that any Loans so transferred
to a Trust conform to the requirements specified in
such Forward Purchase Agreement, this Prospectus and
the related Prospectus Supplement. In addition, the
Forward Purchase Agreement will state that the
Company shall only transfer the Subsequent Loans
upon the satisfaction of certain conditions,
including that the Company shall have delivered
opinions of counsel (including bankruptcy, corporate
and tax opinions) with respect to the transfer of
the Subsequent Loans to the Certificate Insurer, the
Rating Agencies and the Trustee. If a Forward
Purchase Agreement is to be utilized, the related
Trustee will be required to deposit in a segregated
account (each, a "Pre-Funding Account") a portion
of the proceeds received by the Trustee in
connection with the sale of one or more classes of
Securities of the related series (such amount, the
"Pre-Funded Amount"). Prior to the investment of the
Pre-Funded Amount in additional Loans, such
Pre-Funded Amount will be invested in one or more
Eligible Investments. Any Eligible Investment must
mature no later than the Business Day prior to the
next Distribution Date.
During any Funding Period, the Company will be
obligated (subject only to the availability thereof)
to transfer to the related Trust Fund, additional
Loans from time to time during such Funding
Period. Such additional Loans will be required to
satisfy certain eligibility criteria more fully set
forth in the related Prospectus Supplement which
eligibility criteria will be consistent with the
eligibility criteria of the Loans included in the
Trust Fund as of the Closing Date subject to such
exceptions as are expressly stated in such
Prospectus Supplement.
Although the specific parameters of the Pre-Funding
Account with respect to any issuance of Securities
will be specified in the related Prospectus
Supplement, it is anticipated that: (a) the Funding
Period will not exceed 120 days from the related
Closing Date, (b) that the additional Loans to be
acquired during the Funding Period will be subject
to the same representations and warranties as the
Loans included in the related Trust Fund on the
Closing Date (although additional criteria may also
be required to be satisfied, as described in the
related Prospectus Supplement) and (c) that the
Pre-Funded Amount will not exceed 25% of the
principal amount of the Securities issued pursuant
to a particular offering .
Credit Enhancement....... If so specified in the Prospectus Supplement, the
Trust Estate with respect to any series of
Securities may include any one or any combination of
a letter of credit, mortgage pool insurance policy,
special hazard insurance policy, bankruptcy bond,
financial guaranty insurance policy, reserve fund or
other type of Credit Enhancement to provide full or
partial coverage for certain defaults and losses
relating to the Loans. Credit support also may be
provided in the form of the related class of Equity
Securities, and/or by subordination of one or more
classes of
11
Fixed-Income Securities in a series under which
losses in excess of those absorbed by any related
class of Equity Securities are first allocated to
any Subordinate Securities up to a specified limit,
cross-support among groups of Loans or
overcollateralization. Any mortgage pool insurance
policy will have certain exclusions from coverage
thereunder, which will be described in the related
Prospectus Supplement, which may be accompanied by
one or more separate Credit Enhancements that may be
obtained to cover certain of such exclusions. To the
extent not set forth herein, the amount and types of
coverage, the identification of any entity providing
the coverage, the terms of any subordination and
related information will be set forth in the
Prospectus Supplement relating to a series of
Securities. See "Description of Credit Enhancement"
and "Subordination."
Advances................. As to be described in the related Prospectus
Supplement, the Servicer may be obligated to make
certain advances with respect to payments of
delinquent scheduled interest and/or principal on
the Loans, but only to the extent that the Servicer
believes that such amounts will be recoverable by
it. Any such advance made by the Servicer with
respect to a Loan is recoverable by it as provided
herein under "Description of the
Securities--Advances" either from recoveries on the
specific Loan or, with respect to any such advance
subsequently determined to be nonrecoverable, out of
funds otherwise distributable to the holders of the
related series of Securities, which may include the
holders of any Senior Securities of such series.
As to be described in the related Prospectus
Supplement, the Servicer may be required to advance
Compensating Interest as defined hereafter under
"Description of the Securities--Advances."
In addition, the Servicer will be required to pay
all "out of pocket" costs and expenses incurred in
the performance of its servicing obligations, but
only to the extent that the Servicer reasonably
believes that such amounts will increase Net
Liquidation Proceeds on the related Loan. See
"Description of the Securities--Advances."
Optional Termination..... The Servicer, the Company, or, if specified in the
related Prospectus Supplement, the holders of the
related class of Equity Securities or the Credit
Enhancer may at their respective option effect early
retirement of a series of Securities through the
purchase of the Loans and other assets in the
related Trust Estate under the circumstances and in
the manner set forth herein under "The Pooling and
Servicing Agreement--Termination; Retirement of
Securities" and in the related Prospectus
Supplement. Generally such parties will have the
repurchase option only after the aggregate Pool
principal balance has declined to ten percent or a
percentage to be set forth in the related Prospectus
Supplement of the initial Pool principal balance.
Mandatory Termination;
Auction Sale........... The Trustee, the Servicer or certain other entities
specified in the related Prospectus Supplement may
be required to effect early retirement of a series
of Securities by soliciting competitive bids for the
purchase of the related Trust Estate or otherwise,
under other circumstances and in the manner
specified in "The Pooling and Servicing
12
Agreement--Termination; Retirement of Securities"
and in the related Prospectus Supplement.
If set forth in the related Prospectus Supplement,
the mandatory termination may take the form of an
auction sale. Within a certain period following the
first Remittance Date as of which the aggregate Pool
principal balance is less than 10% or a
percentage set forth in the related Prospectus
Supplement of the initial aggregate
Pool principal balance, if the optional
termination right has not been exercised by the
parties having such right by such date, the Trustee
shall solicit bids for the purchase of all Loans
remaining in the Trust. In the event that
satisfactory bids are received as described in the
related Pooling and Servicing Agreement, the net
sale proceeds will be distributed to
Certificateholders, in the same order of priority as
collections received in respect of the Loans. If
satisfactory bids are not received, the Trustee
shall decline to sell the Loans and shall not be
under any obligation to solicit any further bids or
otherwise negotiate any further sale of the Loans.
Such sale and consequent termination of the Trust
must constitute a "qualified liquidation" of each
REMIC established by the Trust under Section 860F of
the Internal Revenue Code of 1986, as amended,
including, without limitation, the requirement that
the qualified liquidation takes place over a period
not to exceed 90 days.
Legal Investment......... Not all of the Loans in a particular Loan Pool may
represent first liens. Accordingly, as disclosed in
the related Prospectus Supplement, certain classes
of Securities offered hereby and by the related
Prospectus Supplement may not constitute "mortgage
related securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984 ("SMMEA")
and, if so, will not be legal investments for
certain types of institutional investors under
SMMEA.
Institutions whose investment activities are subject
to legal investment laws and regulations or to
review by certain regulatory authorities may be
subject to additional restrictions on investment in
certain classes of Securities. Any such institution
should consult its own legal advisors in determining
whether and to what extent a class of Securities
constitutes legal investments for such investors.
See "Legal Investment" herein.
ERISA Considerations..... A fiduciary of an employee benefit plan and certain
other retirement plans and arrangements, including
individual retirement accounts and annuities, Keogh
plans, and collective investment funds and separate
accounts in which such plans, accounts, annuities or
arrangements are invested, that is subject to the
Employee Retirement Income Security Act of 1974, as
amended (" ERISA"), or Section 4975 of the Code
(each such entity, a "Plan") should carefully review
with its legal advisors whether the purchase or
holding of Securities could give rise to a
transaction that is prohibited or is not otherwise
permissible either under ERISA or Section 4975 of
the Code. Investors are advised to consult their
counsel and to review "ERISA Considerations" herein
and in the Prospectus Supplement.
13
Federal Income Tax
Considerations......... Securities of each series offered hereby will, for
federal income tax purposes, constitute either (i)
interests ("Grantor Trust Securities") in a Trust
treated as a grantor trust under applicable
provisions of the Code, (ii) "regular interests"
("REMIC Regular Securities") or "residual interests"
("REMIC Residual Securities") in a Trust treated as
a REMIC (or, in certain instances, containing one or
more REMIC's) under Sections 860A through 860G of
the Code, (iii) debt issued by a Trust ("Debt
Securities") or (iv) interests in a Trust which is
treated as a partnership (" Partnership Interests").
The Securities offered hereby generally will be
treated as debt instruments in the hands of the
Securityholders, regardless of which technical type
of securities are being offered.
Investors are advised to consult their tax advisors
and to review " Federal Income Tax Considerations"
herein and in the related Prospectus Supplement.
Registration of
Securities............. Securities may be represented by global securities
registered in the name of Cede & Co. ("Cede"), as
nominee of The Depository Trust Company ("DTC"), or
another nominee as specified in the related
Prospectus Supplement. In such case, Securityholders
will not be entitled to receive definitive
securities representing such Securityholders'
interests, except in certain circumstances described
in the related Prospectus Supplement. See
"Description of the Securities--Form of Securities"
herein.
Ratings.................. Each class of Fixed-Income Securities offered
pursuant to the related Prospectus Supplement will
be rated in one of the four highest rating
categories by one or more "national statistical
rating organizations", as defined in the Securities
Exchange Act of 1934, as amended (the "Exchange
Act"), and commonly referred to as "Rating
Agencies". Such ratings will address, in the opinion
of such Rating Agencies, the likelihood that the
related Trust will be able to make timely payment of
all amounts due on the related Fixed-Income
Securities in accordance with the terms thereof.
Such ratings will neither address any prepayment or
yield considerations applicable to any Securities
nor constitute a recommendation to buy, sell or hold
any Securities.
Equity Securities generally will not be rated, but
if such Securities are rated, they likely will be
rated below investment grade.
The ratings expected to be received with respect to
any Securities will be set forth in the related
Prospectus Supplement.
Risk Factors............. For a discussion of certain factors that should be
considered by prospective investors in the
Securities, see "Risk Factors" herein and in the
related Prospectus Supplement.
14
RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Securities.
Risks Associated with the Securities
The assets of the Trust Fund, as well as any applicable Credit
Enhancement, will be limited and, if such assets and/or Credit Enhancement
becomes insufficient to service the related Securities, losses may result . The
Securities will not represent an interest in or obligation, either recourse or
non-recourse (except for certain non-recourse debt described under " Federal
Income Tax Considerations"), of the Company, the Servicer, the Master Servicer,
if any, or any person other than the related Trust. The only obligations of the
foregoing entities with respect to the Securities or the Loans will be the
obligations (if any) of the Company, the Servicer and the Master Servicer, if
any, pursuant to certain limited representations and warranties made with
respect to the Loans, the Servicer's servicing obligations under the related
Pooling and Servicing Agreement (including its limited obligation, if any, to
make certain advances in the event of delinquencies on the Loans, but only to
the extent deemed recoverable) and, if and to the extent expressly described in
the related Prospectus Supplement, certain limited obligations of the Company,
Servicer, applicable Sub-Servicer, or another party in connection with a
purchase obligation ("Purchase Obligation") or an agreement to purchase or act
as remarketing agent with respect to a Convertible Loan (as defined herein) upon
conversion to a fixed rate. Notwithstanding the foregoing, and as to be
described in the related Prospectus Supplement, certain types of Credit
Enhancement, such as a financial guaranty insurance policy or a letter of
credit, may constitute a full recourse obligation of the issuer of such Credit
Enhancement. Except as described in the related Prospectus Supplement, neither
the Securities nor the underlying Loans will be guaranteed or insured by any
governmental agency or instrumentality, or by the Company, the Trustee, the
Servicer, the Master Servicer, if any, any Sub-Servicer or any of their
affiliates. Proceeds of the assets included in the related Trust Estate for each
series of Securities (including the Loans and any form of Credit Enhancement)
will be the sole source of payments on the Securities, and there will be no
recourse to the Company or any other entity in the event that such proceeds are
insufficient or otherwise unavailable to make all payments provided for under
the Securities.
An investment in any Security may be an Illiquid Investment, which may
result in the Securityholder holding such investment to maturity. There can be
no assurance that a secondary market for the Securities of any series or class
will develop or, if it does develop, that it will provide Securityholders with
liquidity of investment or that it will continue for the life of the Securities
of any series. The Prospectus Supplement for any series of Securities may
indicate that an underwriter specified therein intends to establish a secondary
market in such Securities; however, no underwriter will be obligated to do so.
The Securities will not be listed on any securities exchange.
Credit Enhancement will be limited in amount and scope of coverage and may
not be sufficient to cover losses. With respect to each series of Securities,
Credit Enhancement will be provided in limited amounts to cover certain types of
losses on the underlying Loans. Credit Enhancement will be provided in one or
more of the forms referred to herein, including, but not limited to: a letter of
credit; a Purchase Obligation; a mortgage pool insurance policy; a special
hazard insurance policy; a bankruptcy bond; a reserve fund; a financial guaranty
insurance policy or other type of Credit Enhancement to provide partial coverage
for certain defaults and losses relating to the Loans. Credit Enhancement also
may be provided in the form of the related class of Equity Securities,
subordination of one or more classes of Fixed-Income Securities in a series
under which losses in excess of those absorbed by any related class of Equity
Securities are first allocated to any Subordinate Securities up to a specified
limit, cross-support among groups of Loans and/or overcollateralization. In
addition, Credit Enhancement may take the form of a master reserve account, into
which certain collections in excess of amounts needed to pay the related
Securities may be deposited, which provides support for more than one series of
Securities. See "Subordination" and "Description of Credit Enhancement" herein.
Regardless of the form of Credit Enhancement provided, the coverage will be
limited in amount and in most cases will be subject to periodic reduction in
accordance with a schedule or formula. Furthermore, such Credit Enhancements may
provide only very limited coverage as to certain types of losses, and may
provide no coverage as to certain other
15
types of losses. Generally, Credit Enhancements do not directly or indirectly
guarantee to the investors any specified rate of prepayments. To the extent not
set forth herein, the amount and types of coverage, the identification of any
entity providing the coverage, the terms of any subordination and related
information will be set forth in the Prospectus Supplement relating to a series
of Securities. See "Description of Credit Enhancement" and "Subordination."
Risks associated with the Loans
Bankruptcy of Obligors may cause losses. General economic conditions have
an impact on the ability of an obligor of a Loan (an "Obligor") to repay the
Loan. Loss of earnings, illness and other similar factors also may lead to an
increase in delinquencies and bankruptcy filings by Obligors. In the event of
personal bankruptcy of an Obligor, it is possible that a Trust could experience
a loss with respect to such Obligor's Loan. In conjunction with an Obligor's
bankruptcy, a bankruptcy court may suspend or reduce the payments of principal
and interest to be paid with respect to such Loan or permanently reduce the
principal balance of such Loan thereby either delaying or permanently limiting
the amount received by the Trust with respect to such Loan. Moreover, in the
event a bankruptcy court prevents the transfer of the related Property to a
Trust, any remaining balance on such Loan may not be recoverable.
Certain Loans may be originated or structured in "non-traditional"
ways, which could increase risk. The Company's underwriting standards consider,
among other things, an obligor's credit history, repayment ability and debt
service-to-income ratio, as well as the value of the property; however, the
Company's Loan Program (as hereinafter defined) generally provides for the
origination of Loans relating to non-conforming credits. Certain of the types of
loans that may be included in the Loan Pools may involve additional
uncertainties not present in traditional types of loans. For example, certain of
the Loans may provide for escalating or variable payments by the borrower under
the Loan, as to which the Obligor is generally qualified on the basis of the
initial payment amount. In some instances the Obligors' income may not be
sufficient to enable them to continue to make their loan payments as such
payments increase and thus the likelihood of default will increase. For a more
detailed discussion, see "Loan Program."
Certain risks relating to differing underwriting criteria. The Loans used
in a particular Trust Fund may have been purchased by the Company from one or
more originators, and may, to the extent described in the related Prospectus
Supplement, have been originated using underwriting criteria different from that
of the Company. However, the Loans included in a particular Trust Fund will
satisfy the criteria set forth in the related Prospectus Supplement.
Risks associated with the Mortgage Loans
Junior Liens may experience higher rates of delinquencies and losses.
Certain of the Mortgage Loans will be secured by junior liens subordinate to the
rights of the mortgagee or beneficiary under each related senior mortgage or
deed of trust. As a result, the proceeds from any liquidation, insurance or
condemnation proceedings will be available to satisfy the principal balance of a
mortgage loan only to the extent that the claims, if any, of each such senior
mortgagee or beneficiary are satisfied in full, including any related
foreclosure costs. In addition, a mortgagee secured by a junior lien may not
foreclose on the related mortgaged property unless it forecloses subject to the
related senior mortgage or mortgages, in which case it must either pay the
entire amount of each senior mortgage to the applicable mortgagee at or prior to
the foreclosure sale or undertake the obligation to make payments on each senior
mortgage in the event of default thereunder. In servicing junior lien loans, a
Servicer generally would satisfy each such senior mortgage at or prior to the
foreclosure sale only to the extent that it determines any amounts so paid will
be recoverable from future payments and collections on such junior lien loans or
otherwise. The Trusts will not have any source of funds to satisfy any such
senior mortgage or make payments due to any senior mortgagee. See "Certain Legal
Aspects of the Loans and Related Matters--Foreclosure."
Property values may decline, leading to higher losses . An investment in
securities such as the Securities that generally represent beneficial ownership
interests in the Mortgage Loans or debt secured by
16
such Mortgage Loans may be affected by, among other things, a decline in real
estate values and changes in the borrowers' financial condition. No assurance
can be given that values of the Properties have remained or will remain at their
levels on the dates of origination of the related Mortgage Loans. If the
residential real estate market should experience an overall decline in property
values such that the outstanding balances of any senior liens, the Mortgage
Loans and any secondary financing on the Properties in a particular Loan Pool
become equal to or greater than the value of the Properties, the actual rates of
delinquencies, foreclosures and losses could be higher than those now generally
experienced in the nonconforming credit mortgage lending industry. Such a
decline could extinguish the interest of the related Trust in the Properties
before having any effect on the interest of the related senior mortgagee. In
addition, in the case of Mortgage Loans that are subject to negative
amortization, due to the addition to principal balance of deferred interest
("Deferred Interest"), the principal balances of such Mortgage Loans could be
increased to an amount equal to or in excess of the value of the underlying
Properties, thereby increasing the likelihood of default. To the extent that
such losses are not covered by the applicable Credit Enhancement, holders of
Securities of the series evidencing interests in the related Loan Pool will bear
all risk of loss resulting from default by Obligors and will have to look
primarily to the value of the Properties for recovery of the outstanding
principal and unpaid interest on the defaulted Mortgage Loans.
Balloon Loans may experience higher rates of delinquencies and losses.
Certain of the Mortgage Loans may constitute " Balloon Loans." Balloon Loans are
originated with a stated maturity of less than the period of time of the
corresponding amortization schedule. Consequently, upon the maturity of a
Balloon Loan, the Obligor will be required to make a "balloon" payment that will
be significantly larger than such Obligor's previous monthly payments. The
ability of such a Obligor to repay a Balloon Loan at maturity frequently will
depend on such Obligor's ability to refinance the Mortgage Loan. The ability of
a Obligor to refinance such a Mortgage Loan will be affected by a number of
factors, including the level of available mortgage rates at the time, the value
of the related Property, the Obligor's equity in the related Property, the
financial condition of the Obligor, the tax laws and general economic conditions
at the time.
Although a low interest rate environment may facilitate the refinancing of
a balloon payment, the receipt and reinvestment by Securityholders of the
proceeds in such an environment may produce a lower return than that previously
received in respect of the related Mortgage Loan. Conversely, a high interest
rate environment may make it more difficult for the Obligor to accomplish a
refinancing and may result in delinquencies or defaults. None of the Company,
the Servicer, the Master Servicer, if any, any Sub-Servicer or the Trustee will
be obligated to provide funds to refinance any Mortgage Loan, including Balloon
Loans.
Foreclosure of Properties may be subject to substantial delay, resulting
in longer maturity securities as well as higher losses. Even assuming that the
Properties provide adequate security for the Mortgage Loans, substantial delays
could be encountered in connection with the liquidation of defaulted Mortgage
Loans and corresponding delays in the receipt of related proceeds by the
Securityholders could occur. An action to foreclose on a Property securing a
Mortgage Loan is regulated by state statutes, rules and judicial decisions and
is subject to many of the delays and expenses of other lawsuits if defenses or
counterclaims are interposed, sometimes requiring several years to complete.
Furthermore, in some states an action to obtain a deficiency judgment is not
permitted following a nonjudicial sale of a Property. In the event of a default
by a Obligor, these restrictions, among other things, may impede the ability of
the Servicer to foreclose on or sell the Property or to obtain liquidation
proceeds (net of expenses) ("Liquidation Proceeds") sufficient to repay all
amounts due on the related Mortgage Loan. The Servicer will be entitled to
deduct from Liquidation Proceeds all expenses reasonably incurred in attempting
to recover amounts due on the related liquidated Mortgage Loan (" Liquidated
Mortgage Loan") and not yet repaid, including payments to prior lienholders,
accrued Servicing Fees, legal fees and costs of legal action, real estate taxes,
and maintenance and preservation expenses. In the event that any Properties fail
to provide adequate security for the related Mortgage Loans and insufficient
funds are available from any applicable Credit Enhancement, Securityholders
could experience a loss on their investment.
Liquidation expenses with respect to defaulted Mortgage Loans do not vary
directly with the outstanding principal balance of the Mortgage Loan at the time
of default. Therefore, assuming that a servicer takes the same steps in
realizing upon a defaulted Mortgage Loan having a small remaining principal
balance as it would in the case of a defaulted Mortgage Loan having a larger
principal balance, the amount realized after expenses of
17
liquidation would be less as a percentage of the outstanding principal balance
of the smaller principal balance Mortgage Loan than would be the case with a
larger principal balance Mortgage Loan.
Under environmental legislation and judicial decisions applicable in
various states, a secured party that takes a deed in lieu of foreclosure, or
acquires at a foreclosure sale a Property that, prior to foreclosure, has been
involved in decisions or actions which may lead to contamination of a Property,
may be liable for the costs of cleaning up the purportedly contaminated site.
Although such costs could be substantial, it is unclear whether they would be
imposed on a holder of a mortgage Note (such as a Trust) which, under the terms
of the Pooling and Servicing Agreement, is not required to take an active role
in operating the Properties. See "Certain Legal Aspects of Loans and Related
Matters--Environmental Legislation."
Certain of the Properties relating to Mortgage Loans may not be owner
occupied. It is possible that the rate of delinquencies, foreclosures and losses
on Mortgage Loans secured by non-owner occupied properties could be higher than
for loans secured by the primary residence of the Obligor.
Geographic Concentration of Properties may result in higher losses, if
particular regions experience downturns. Certain geographic regions from time to
time will experience weaker regional economic conditions and housing markets
than will other regions, and, consequently, will experience higher rates of loss
and delinquency on mortgage loans generally. The Mortgage Loans underlying
certain series of Securities may be concentrated in such regions, and such
concentrations may present risk considerations in addition to those generally
present for similar mortgage loan asset-backed securities without such
concentrations. Information with respect to geographic concentration of
Properties will be specified in the related Prospectus Supplement or related
Current Report on Form 8-K.
Risks Associated with the Contracts
Security Interests in the Manufactured Homes may not be perfected and the
Trust may not realize upon the full amount due under the related Contract. Each
Contract is secured by a security interest in a Manufactured Home together with,
in the case of land secured contracts, the real estate on which the related
Manufactured home is located (such Contracts, the "Land Secured Contracts").
Perfection of security interests in the Manufactured Homes and enforcement of
rights to realize upon the value of the Manufactured Homes as collateral for the
Contracts are subject to a number of federal and state laws, including the
Uniform Commercial Code (the "UCC") as adopted in the states in which the
Manufactured Homes are located and such states' certificate of title statutes,
but generally not their real estate laws. Under such federal and state laws, a
number of factors may limit the ability of a holder of a perfected security
interest in Manufactured Homes to realize upon such Manufactured Homes or may
limit the amount realized to less than the amount due under the related
Contract. See "Certain Legal Aspects of the Loans -- Contracts."
In addition, because of the expense and administrative inconvenience
involved, the Company will not amend any certificates of title related to any
Manufactured Home to change the lienholder specified therein to the Trustee, and
will not execute any transfer instrument (including, among other instruments,
UCC-3 assignments) relating to any Manufactured Home in favor of the Trustee or
note thereon the Trustee's interest. Such amendment would require, consistent
with the law of the related State, filings at the state or county level for each
Contract. The Company believes it is industry practice not to make such
amendments, and does not do so for its own benefit. As a result, the Company
will remain the lienholder on the certificate of title relating to the
Manufactured Home. In some states, in the absence of such an amendment,
execution or notation, the assignment to the Trustee of the security interest in
the Manufactured Homes located therein may not be effective or such security
interest may not be perfected. If any otherwise effectively assigned security
interest in favor of the Trustee is not perfected, such assignment of the
security interest to the Trustee may not be effective against creditors of the
Company to the extent it continues to be specified as lienholder on any
certificate of title or as secured party on any UCC filing, or against a trustee
in bankruptcy of the Company.
Each Contract (other than a Land Secured Contract) will be "chattel paper"
as defined in the UCC in effect in Minnesota (where the Company's executive
office is currently located), and the jurisdiction in which
18
the related Manufactured Home was located at origination. Under the UCC as in
effect in each such jurisdiction, the sale of chattel paper is treated in a
manner similar to perfection of a security interest in chattel paper. Under the
Pooling and Servicing Agreement, the Trustee will have possession of the
Contracts. In addition, the Company will make appropriate filings of UCC-1
financing statements in the office of the Secretary of State of the state where
its principal place of business is located to give notice of the Trustee's
ownership of the Contracts. The Trustee's interest in the Contracts could,
through the fraud or negligence of the Trustee, be defeated if a subsequent
purchaser were able to take physical possession of the Contracts without notice
of such assignment.
Further, because of the expenses and administrative inconvenience involved,
the assignment of mortgages or deeds of trust to the Trustee will not be
recorded with respect to the mortgages or deeds of trust (each, a "Mortgage")
securing each Land Secured Contract. Recordation of such assignments would
require the Company to retain counsel in the respective state, and make the
appropriate filing at the local level. The Company believes the industry
practice not to make such filings, and does not do so for its own benefit. The
failure to record the assignments to the Trustee of the Mortgage securing Land
Secured Contracts may result in the sale of such Contracts or the Trustee's
rights in the land secured by the Mortgage being ineffective against creditors
of the Company or against a trustee in bankruptcy of the Company or against a
subsequent purchaser of such Contracts from the Company, without notice of the
sale to the Trustee. See "The Loan Pool" herein for a description of the
programs under which Contracts are originated or purchased by the Company.
Legal Considerations
Bankruptcy of the Company could prevent timely payment of amounts due
to the Trust. In the event of the bankruptcy of the Company at a time when it
holds an Equity Security, a trustee in bankruptcy of the Company, or its
creditors could attempt to recharacterize the sale of the Loans to the related
Trust as a borrowing by the Company, with the result, if such recharacterization
is upheld, that the Securityholders would be deemed creditors of the Company,
secured by a pledge of the Loans. In such a case, a bankruptcy court may suspend
or reduce the payment of principal and interest to the Securityholders or
permanently reduce the principal balance of the Securities, thereby delaying or
permanently limiting the amounts received by the Securityholders. In addition,
if the Company is the Servicer, a bankruptcy of the Company may disrupt
servicing of the Loans, causing losses or a delay in timely payment of amounts
due the Securityholders. The Pooling and Servicing Agreement will provide that
bankruptcy of the Servicer is an event of default and the Back-up Servicer may
take over servicing in such a case. However, a bankruptcy court may hold that
such provision is unenforceable as an executory contract triggered only by the
bankruptcy of the contracting party.
Prepayments and repurchases may adversely affect the yield to maturity of
the Securities. The yield to maturity of the Securities of each series will
depend on the rate of payment of principal (including prepayments, liquidations
due to defaults, and repurchases due to conversion of adjustable-rate mortgage
loans ("ARM Loans") to fixed-rate loans or breaches of representations and
warranties) on the Loans and the price paid by Securityholders. Such yield may
be adversely affected by a higher or lower than anticipated rate of prepayments
on the related Loans. The yield to maturity on Strip Securities or Securities
purchased at premiums or discounted to par will be extremely sensitive to the
rate of prepayments on the related Loans. In addition, the yield to maturity on
certain other types of classes of Securities, including Accrual Securities or
certain other classes in a series including more than one class of Securities,
may be relatively more sensitive to the rate of prepayment on the related Loans
than other classes of Securities.
The Loans may be prepaid in full or in part at any time; however, a
prepayment penalty or premium may be imposed in connection therewith. Such
penalties will not be property of the related Trust. The rate of prepayments of
the Loans cannot be predicted and is influenced by a wide variety of economic,
social, and other factors, including prevailing mortgage market interest rates,
the availability of alternative financing, local and regional economic
conditions and homeowner mobility. Therefore, no assurance can be given as to
the level of prepayments that a Trust will experience.
19
Prepayments may result from mandatory prepayments relating to unused moneys
held in Pre-Funding Accounts, if any, voluntary early payments by Obligors
(including payments in connection with refinancings of the related senior Loan
or Loans), sales of Properties subject to "due-on-sale" provisions and
liquidations due to default, as well as the receipt of proceeds from physical
damage, credit life and disability insurance policies. In addition, repurchases
or purchases from a Trust of Loans or substitution adjustments required to be
made under the Pooling and Servicing Agreement will have the same effect on the
Securityholders as a prepayment of such Loans. All of the Loans contain
"due-on-sale" provisions, and the Servicer will be required to enforce such
provisions unless (i) the "due-on-sale" clause, in the reasonable belief of the
Servicer, is not enforceable under applicable law or (ii) the Servicer
reasonably believes that to permit an assumption of the Loan would not
materially and adversely affect the interests of the Securityholders or of the
related Credit Enhancer, if any. See "The Pooling and Servicing Agreement" in
the related Prospectus Supplement.
Collections on the Loans may vary due to the level of incidence of
delinquent payments and of prepayments. Collections on the Loans may also vary
due to seasonal purchasing and payment habits of Obligors.
Co-mingling of collections with the Servicer's general funds could cause
losses to the Trust. To the extent that the ratings, if any, then assigned to
the unsecured debt of the Servicer or of the Servicer's corporate parent are
satisfactory to the Rating Agencies, the Servicer may be permitted to co-mingle
Loan payments and collections with the Servicer's general funds rather than be
required to deposit such amounts in a segregated Principal and Interest Account.
In the event of fraud or mistake, the Servicer may utilize amounts due the Trust
for its own purposes, resulting in a delay in payment or losses to the
Securityholders.
State Credit Protection Laws May Limit Collection of Principal and Interest
on the Loans. Applicable state laws generally regulate interest rates and other
charges, require certain disclosures, and require licensing of the originators,
the Trustee, the Servicer and Sub-Servicers. In addition, most states have other
laws, public policy and general principles of equity relating to the protection
of consumers, unfair and deceptive practices and practices that may apply to the
origination, servicing and collection of the Loans. Depending on the provisions
of the applicable law and the specific facts and circumstances involved,
violations of these laws, policies and principles may limit the ability of the
Servicer to collect all or part of the principal of or interest on the Loans,
may entitle the Obligor to a refund of amounts previously paid and, in addition,
could subject the Servicer to damages and administrative sanctions. See "Certain
Legal Aspects of Loans and Related Matters."
Federal Credit Protection Laws May Limit Collection of Principal and
Interest on the Loans. The Loans may also be subject to federal laws, including:
(i) the Federal Truth-in-Lending Act and Regulation Z promulgated thereunder and
the Real Estate Settlement Procedures Act and Regulation X promulgated
thereunder, which require certain disclosures to the borrowers regarding the
terms of the Loans; (ii) the Equal Credit Opportunity Act and Regulation B
promulgated thereunder, which prohibit discrimination on the basis of age, race,
color, sex, religion, marital status, national origin, receipt of public
assistance or the exercise of any right under the Consumer Credit Protection
Act, in the extension of credit; and (iii) the Fair Credit Reporting Act, which
regulates the use and reporting of information related to the Obligor's credit
experience. Depending on the provisions of the applicable law and the specific
facts and circumstances involved, violations of these laws, policies and general
principles of equity may limit the ability of the Servicer to collect all or
part of the principal of or interest on the Loans, may entitle the Obligor to
rescind the loan or to a refund of amounts previously paid and, in addition,
could subject the Servicer to damages and administrative sanctions. If the
Servicer is unable to collect all or part of the principal or interest on the
Loans because of a violation of the aforementioned laws, public policies or
general principles of equity then the Trust may be delayed or unable to repay
all amounts owed to the Securityholders. Furthermore, depending upon whether
damages and sanctions are assessed against the Servicer or the Company, such
violations may materially impact the financial ability of the Servicer to
continue to act as Servicer or the ability of the Company to repurchase or
replace Loans if such violation breaches a representation or warranty contained
in a Pooling and Servicing Agreement.
20
Certain additional provisions under the Federal Truth-in-Lending Act become
effective on October 1, 1995. These provisions apply to certain types of
mortgage loans, generally as a result of such loan's coupon rate being 10% or
more greater than the yield on United States Treasury Securities of comparable
maturity, or if the "total points and fees" payable by the obligor exceed a
specified level. If the requirements are triggered, certain additional
disclosures are required to be made to the obligor and certain other
restrictions on the loan and its terms apply (e.g., restrictions relating to
prepayment penalties and balloon maturities.)
These provisions further require persons who sell or assign mortgages which
are subject to these requirements to furnish a notice to such effect to the
purchaser or assignee. Such purchasers or assignees may under certain
circumstances be liable for the failure of the originating lender to provide the
required disclosures or for the inclusion in the loan of any prohibited terms.
Book-Entry registration may limit the liquidity of the Securities, the
ability of Securityholders to pledge the Securities, and may delay
Securityholders' receipt of distributions. Issuance of the Securities in
book-entry form may reduce the liquidity of such Securities in the secondary
trading market since investors may be unwilling to purchase Securities for which
they cannot obtain definitive physical securities representing such
Securityholders' interests, except in certain circumstances described in the
related Prospectus Supplement.
Since transactions in Securities will, in most cases, be able to be
effected only through DTC, direct or indirect participants in DTC's book-entry
system ("Direct or Indirect Participants") and certain banks, the ability of a
Securityholder to pledge a Security to persons or entities that do not
participate in the DTC system, or otherwise to take actions in respect of such
Securities, may be limited due to lack of a physical security representing the
Securities.
Securityholders may experience some delay in their receipt of distributions
of interest on and principal of the Securities since distributions may be
required to be forwarded by the Trustee to DTC and, in such a case, DTC will be
required to credit such distributions to the accounts of its Participants which
thereafter will be required to credit them to the accounts of the applicable
class of Securityholders either directly or indirectly through Indirect
Participants. See "Description of the Securities--Form of Securities."
The Soldiers' and Sailors' Civil Relief Act of 1940 could limit or delay
collection of amounts due under certain Loans . Generally, under the terms of
the Soldiers' and Sailors' Civil Relief Act of 1940, as amended (the "Relief
Act"), or similar state legislation, an Obligor who enters military service
after the origination of the related Loan (including an Obligor who is a member
of the National Guard or is in reserve status at the time of the origination of
the Loan and is later called to active duty) may not be charged interest
(including fees and charges) above an annual rate of 6% during the period of
such Obligor's active duty status, unless a court orders otherwise upon
application of the lender. It is possible that such action could have an effect,
for an indeterminate period of time, on the ability of the Servicer to collect
full amounts of interest on certain of the Loans. In addition, the Relief Act
imposes limitations that would impair the ability of the Servicer to foreclose
on an affected Loan during the Obligor's period of active duty status. Thus, in
the event that such a Loan goes into default, there may be delays and losses
occasioned by the inability of the Servicer to realize upon the Property in a
timely fashion.
Reduction in the rating of any credit enhancer would likely cause the
reduction in the rating of the Securities. The rating of Securities credit
enhanced through external Credit Enhancement such as a letter of credit,
financial guaranty insurance policy or mortgage pool insurance will depend
primarily on the creditworthiness of the issuer of such external Credit
Enhancement device (a "Credit Enhancer"). Any reduction in the rating assigned
to the claims-paying ability of the related Credit Enhancer below the rating
initially given to the Securities would likely result in a reduction in the
rating of the Securities. See "Ratings" in the Prospectus Supplement.
21
THE TRUSTS
A Trust for any series of Securities will consist of a segregated pool (a
"Loan Pool") comprised of (A) (i) conventional one-to-four-family residential
mortgage loans (" Single Family Loans"), (ii) multi-family residential mortgage
loans ("Multi-family Loans"), (iii) mortgage loans secured by mortgages on
small properties used primarily for residential purposes but also used for
commercial purposes (the "Mixed Use Loans"), (iv) cooperative apartment loans
secured by security interests in shares issued by a cooperative housing
corporation ("Cooperative Loans") or (v) home improvement loans ("Home
Improvement Loans") each of which is secured by a mortgage on a "dwelling or
mixed residential and commercial structure" within the meaning of Section
3(a)(41)(A)(i) of the Securities Exchange Act of 1934, as amended (collectively,
the "Mortgage Loans") or (B) contracts for manufactured homes ("Contracts") ,
in each case, as specified in the related Prospectus Supplement (the Mortgage
Loans and the Contracts together, the "Loans"), together with payments with
respect to the Loans and certain other accounts, obligations or agreements, in
each case, as specified in the related Prospectus Supplement.
The Securities will be entitled to payment only from the assets of the
related Trust (i.e. the related Trust Estate) and will not be entitled to
payments in respect of the assets of any other related Trust Estate established
by the Company. If specified in the related Prospectus Supplement, certain
Securities will evidence the entire fractional undivided ownership interest in
the related Loans held by the related Trust or may represent debt secured by the
related Loans.
The following is a brief description of the Loans expected to be included
in the related Trusts. If specific information respecting the Loans is not known
at the time the related series of Securities initially is offered, information
of the nature described below will be provided in the Prospectus Supplement, and
specific information will be set forth in a report on Form 8-K to be filed with
the Commission within fifteen days after the initial issuance of such Securities
(the "Detailed Description"). A copy of the Pooling and Servicing Agreement with
respect to each Series of Securities will be attached to the Form 8-K and will
be available for inspection at the corporate trust office of the Trustee
specified in the related Prospectus Supplement. A schedule of the Loans relating
to such Series (the "Loan Schedule") will be attached to the Pooling and
Servicing Agreement delivered to the Trustee upon delivery of the Securities.
The Loans--General
The real properties, interests in a Cooperative (as defined herein) and
Manufactured Homes (as defined herein), as the case may be, that secure
repayment of the Loans (the "Properties") may be located in any one of the fifty
states, the District of Columbia, Puerto Rico or any other Territories of the
United States. The Mortgage Loans will be "Conventional Loans" (i.e., loans
that are not insured or guaranteed by any governmental agency). Loans will not
be covered wholly or partially by primary mortgage insurance policies. All of
the Loans will be covered by standard hazard insurance policies providing for
fire and extended coverage with a generally acceptable carrier (which may be in
the form of a blanket or forced placed hazard insurance policy) generally in an
amount not less than the lesser of (i) the outstanding principal loan balance,
(ii) the minimum amount required to compensate for losses on a replacement cost
basis and (iii) the insurable value of the Property. The existence, extent and
duration of any such coverage will be described in the applicable Prospectus
Supplement. The Loans will not be guaranteed or insured by any government
agency or other insurer.
All of the Loans in a Loan Pool will provide for payments to be made
monthly ("monthly pay") or bi-weekly. The payment terms of the Loans to be
included in a Trust will be described in the related Prospectus Supplement and
may include any of the following features or combination thereof or other
features described in the related Prospectus Supplement:
(a) Interest may be payable at a Fixed Rate, or an Adjustable Rate
(i.e., a rate that is adjustable from time to time in relation to an index,
a rate that is fixed for period of time and under certain circumstances is
followed by an adjustable rate, a rate that otherwise varies from time to
time,
22
or a rate that is convertible from an adjustable rate to a fixed rate). The
specified rate of interest on a Loan is its "Loan Rate." Changes to an
Adjustable Rate may be subject to periodic limitations, maximum rates,
minimum rates or a combination of such limitations. Accrued interest may be
deferred and added to the principal of a Loan for such periods and under
such circumstances as may be specified in the related Prospectus
Supplement. If provided for in the Prospectus Supplement, certain Loans may
be subject to temporary buydown plans (" Buydown Loans") pursuant to which
the monthly payments made by the Obligor during the early years of the Loan
(the " Buydown Period") will be less than the scheduled monthly payments on
the Loan, and the amount of any difference may be contributed from (i) an
amount (such amount, exclusive of investment earnings thereon, being
hereinafter referred to as "Buydown Funds") funded by the originator of the
Loan or another source (including the Servicer or the builder of the
Property) and placed in a custodial account (the "Buydown Account") and
(ii) if the Buydown Funds are contributed on a present value basis,
investment earnings on such Buydown Funds.
(b) Principal may be payable on a level debt service basis to fully
amortize the Loan over its term, may be calculated on the basis of an
assumed amortization schedule that is significantly longer than the
original term to maturity or on an interest rate that is different from the
Loan Rate, or may not be amortized during all or a portion of the original
term. Payment of all or a substantial portion of the principal may be due
on maturity ("balloon" payments). Principal may include interest that has
been deferred and added to the principal balance of the Loan.
(c) Monthly payments of principal and interest may be fixed for the
life of the Loan, may increase over a specified period of time ("graduated
payments") or may change from period to period. Loans may include limits on
periodic increases or decreases in the amount of monthly payments and may
include maximum or minimum amounts of monthly payments. Loans having
graduated payment provisions may provide for deferred payment of a portion
of the interest due monthly during a specified period, and recoup the
deferred interest through negative amortization during such period whereby
the difference between the interest paid during such period and interest
accrued during such period is added monthly to the outstanding principal
balance. Other Loans sometimes referred to as "growing equity" loans may
provide for periodic scheduled payment increases for a specified period
with the full amount of such increases being applied to principal.
(d) Prepayments of principal may be subject to a prepayment fee, if
allowed by state or applicable law, which may be fixed for the life of the
Loan or may decline over time, and may be prohibited for the life of the
Loan or for certain periods ("lockout periods"). Certain Loans may permit
prepayments after expiration of the applicable lockout period and may
require the payment of a prepayment fee in connection therewith. Other
Loans may permit prepayments without payment of a fee unless the prepayment
occurs during specified time periods. The Loans may include due-on-sale
clauses which permit the mortgagee to demand payment of the entire Loan in
connection with the sale or certain transfers of the related Property.
Other Loans may be assumable by persons meeting the then applicable
underwriting standards of the Servicer and/or the Company.
Except as otherwise described in the related Prospectus Supplement or in
the related Current Report on Form 8-K, interest will be calculated on each Loan
pursuant to one of three methods:
Date of Payment Loans. Date of Payment Loans provide that interest is
charged to the Obligor at the applicable Loan Rate on the outstanding principal
balance of such Note and calculated based on the number of days elapsed between
receipt of the Obligor's last payment through receipt of the Obligor's most
current payment. Such interest is deducted from the Obligor's payment amount and
the remainder, if any, of the payment is applied as a reduction to the
outstanding principal balance of such Note. Although the Obligor is required to
remit equal monthly payments on a specified monthly payment date that would
reduce the outstanding principal balance of such Note to zero at such Note's
maturity date, payments that are made by the Obligor after the due date therefor
would cause the outstanding principal balance of such Note not to be reduced to
zero. In such a case, the Obligor would be required to make an additional
principal payment at the maturity date for such Note. On the other hand, if an
Obligor makes a payment (other than a prepayment) before the due date therefor,
the reduction in the
23
outstanding principal balance of such Note would occur over a shorter period of
time than it would have occurred had it been based on the original amortization
schedule of such Note.
Actuarial Loans. Actuarial Loans provide that interest is charged to the
Obligor thereunder, and payments are due from such Obligor, as of a scheduled
day of each month which is fixed at the time of origination. Scheduled monthly
payments made by the Obligors on the Actuarial Loans either earlier or later
than the scheduled due dates thereof will not affect the amortization schedule
or the relative application of such payments to principal and interest.
Rule of 78's Loans. A Rule of 78's Loan provides for the payment by the
related Obligor of a specified total amount of payments, payable in equal
monthly installments on each due date, which total represents the principal
amount financed and add-on interest in an amount calculated on the basis of the
stated Loan Rate for the term of the Loan. The rate at which such amount of
add-on interest is earned and, correspondingly, the amount of each fixed monthly
payment allocated to reduction of the outstanding principal are calculated in
accordance with the "Rule of 78's". Under a Rule of 78's Loan, the amount of a
payment allocable to interest is determined by multiplying the total amount of
add-on interest payable over the term of the loan by a fraction derived as
described below.
The fraction used in the calculation of add-on interest earned each month
under a Rule of 78's Loan has as it denominator a number equal to the sum of a
series of numbers. The series of numbers begins with one and ends with the
number of monthly payments due under the loan. For example, with a loan
providing for 12 payments, the denominator of each month's fraction will be 78,
the sum of the series of numbers from 1 to 12. The numerator of the fraction for
a given month is the number of original payments to stated maturity less the
number of payments made up to but not including the current month. Accordingly,
in the example of a twelve-month loan, the fraction for the first payment is
12/78, for the second payment 11/78, for the third party 10/78, and so on
through the final payment, for which the fraction is 1/78. The applicable
fraction is then multiplied by the total add-on interest payable over the entire
term of the loan, and the resulting amount is the amount of add-on interest
"earned" that month. The difference between the amount of the monthly payment by
the obligor and the amount of earned add-on interest calculated for the month is
applied to principal reduction. Rule of 78's Loans are non-level yield
instruments. The yield in the initial months of a Rule of 78's Loans is somewhat
higher than the stated Loan Rate (computed on an actuarial basis) and the yield
in the later months of the loan is somewhat less than such stated Loan Rate.
The Prospectus Supplement for each series of Securities or the Current
Report on Form 8-K will contain certain information with respect to the Loans
(or a sample thereof) contained in the related Loan Pool; such information,
insofar as it may relate to statistical information relating to such Loans will
be presented as of a date certain (the "Statistic Calculation Date") which may
also be the related cut-off date (the "Cut-Off Date"). Such information will
include to the extent applicable to the particular Loan Pool (in all cases as of
the Cut-Off Date) (i) the aggregate outstanding principal balance and the
average outstanding principal balance of the Loans, (ii) the largest principal
balance and the smallest principal balance of any of the Loans, (iii) the types
of Property securing the Loans (e.g., one- to four-family houses, vacation and
second homes, Manufactured Homes, multifamily apartments or other real
property), (iv) the original terms to stated maturity of the Loans, (v) the
weighted average remaining term to maturity of the Loans and the range of the
remaining terms to maturity; (vi) the earliest origination date and latest
maturity date of any of the Loans, (vii) the weighted average CLTV and the range
of CLTV's of the Loans at origination, (viii) the weighted average Loan Rate or
annual percentage rate (as determined under Regulation Z) (the "APR") and ranges
of Loan Rates or APRs borne by the Loans, (ix) in the case of Loans having
adjustable rates, the weighted average of the adjustable rates and indices, if
any; (x) the aggregate outstanding principal balance, if any, of Buy-Down Loans
and Loans having graduated payment provisions; (xi) the amount of any mortgage
pool insurance policy, special hazard insurance policy or bankruptcy bond to be
maintained with respect to such Loan Pool; (xii) a description of any standard
hazard insurance required to be maintained with respect to each Loan; (xiii) a
description of any Credit Enhancement to be provided with respect to all or any
Loans or the Loan Pool; and (xiv) the geographical distribution of the Loans on
a state-by-state basis. In addition, preliminary or more general information of
the nature described above may be provided in the Prospectus Supplement, and
specific or final information may be set forth in a Current Report
24
on Form 8-K, together with the related Pooling and Servicing Agreement, which
will be filed with the Securities and Exchange Commission and will be made
available to holders of the related series of Securities within fifteen days
after the initial issuance of such Securities.
The loan-to-value ratio (the "LTV") of a Loan is equal to the ratio
(expressed as a percentage) of the original principal balance of such Loan to
appraised value of the related Property (less the amount, if any, of the
premium for any credit life insurance) at the time of origination of the Loan
or, in the case where the Loan represents a purchase money instrument, the
lesser of (a) the appraised value or (b) the purchase price. The combined
loan-to-value ratio (the "CLTV") of a Loan at any given time is the ratio,
expressed as a percentage, determined by dividing (x) the sum of the original
principal balance of such Loan (less the amount,if any, of the premium for any
credit life insurance) plus the then-current principal balance of all mortgage
loans (each, a "Senior Lien") secured by liens on the related Property having
priorities senior to that of the lien which secures such Loan, by (y) the value
of the related Property, based upon the appraisal or valuation (which may in
certain instances include estimated increases in value as a result of certain
home improvements to be financed with the proceeds of such Loan) made at the
time of origination of the Loan. If the related Obligor will use the proceeds of
the Loan to refinance an existing Loan which is being serviced directly or
indirectly by the Servicer, the requirement of an appraisal or other valuation
at the time the new Loan is made may be waived. For purposes of calculating
the CLTV of a Contract relating to a new Manufactured Home, the value of such
Manufactured Home will be no greater than the sum of a fixed percentage of the
list price of the unit actually billed by the manufacturer to the dealer
(exclusive of freight to the dealer site) including "accessories" identified in
the invoice (the " Manufacturer's Invoice Price"), plus the actual cost of any
accessories purchased from the dealer, a delivery and set-up allowance,
depending on the size of the unit, and the cost of state and local taxes, filing
fees and up to three years prepaid hazard insurance premiums. The value of a
used Manufactured Home will be the least of the sales price, appraised value,
and National Automobile Dealer's Association book value plus prepaid taxes and
hazard insurance premiums. The appraised value of a Manufactured Home will be
based upon the age and condition of the manufactured housing unit and the
quality and condition of the mobile home park in which it is situated, if
applicable.
No assurance can be given that values of the Properties have remained or
will remain at their levels on the dates of origination of the related Mortgage
Loans. If the residential real estate market should experience an overall
decline in property values such that the outstanding principal balances of the
Mortgage Loans (plus any additional financing by other lenders on the same
Properties) in a particular Pool become equal to or greater than the value of
such Properties, the actual rates of delinquencies, foreclosures and losses
could be higher than those now generally experienced in the non-conforming
credit mortgage lending industry. An overall decline in the market value of
residential real estate, the general condition of a Property, or other factors,
could adversely affect the values of the Properties such that the outstanding
balances of the Mortgage Loans, together with any additional liens on the
Properties, equal or exceed the value of the Properties. Under such
circumstances, the actual rates of delinquencies, foreclosures and losses could
be higher than those now generally experienced in the non-conforming credit
mortgage lending industry.
Certain Loans may be secured by junior liens ("Junior Lien Loans")
subordinate to the rights of the obligee under any related Senior Liens. The
proceeds from any liquidation, insurance or condemnation of Properties relating
to Junior Lien Loans in a Loan Pool will be available to satisfy the principal
balance of such Junior Lien Loans only to the extent that the claims, if any, of
all related senior obligees, including any related foreclosure costs, are
satisfied in full. In addition, the Servicer may not foreclose on a Property
relating to a Junior Lien Loan unless it forecloses subject to the related
senior lien or liens, in which case it must either pay the entire amount of each
senior lien to the applicable obligee at or prior to the foreclosure sale or
undertake the obligation to make payments on each Senior Lien in the event of
default thereunder. Generally, in servicing Junior Lien Loans, it is standard
practice for a Servicer to satisfy each Senior Lien at or prior to a foreclosure
sale only to the extent that it determines any amounts so paid will be
recoverable from future payments and collections on the Loans or otherwise. The
Trusts will not have any source of funds to satisfy any such senior lien or make
payments due to any senior obligee. See "Certain Legal Aspects of Loans and
Related Matters--Foreclosure."
25
Other factors affecting obligors' ability to repay Loans include excessive
building resulting in an oversupply of housing stock or a decrease in employment
reducing the demand for units in an area; federal, state or local regulations
and controls affecting rents; prices of goods and energy; environmental
restrictions; increasing labor and material costs; and the relative
attractiveness of the Properties. To the extent that losses on the Loans are not
covered by Credit Enhancements, such losses will be borne, at least in part, by
the Securityholders of the related series.
The Company will cause the Loans comprising each Loan Pool to be assigned
to the Trustee named in the related Prospectus Supplement for the benefit of the
Securityholders of the related series. The Servicer will service the Loans,
either directly or through Sub-Servicers, pursuant to the Pooling and Servicing
Agreement and will receive a fee for such services. See "Loan Program" and "The
Pooling and Servicing Agreement." With respect to Loans serviced through a
Sub-Servicer, the Servicer will remain liable for its servicing obligations
under the related Pooling and Servicing Agreement as if the Servicer alone were
servicing such Loans.
The only obligations of the Company with respect to a series of
Securities will be to provide (or, where the Company acquired a Loan from
another originator, obtain from such originator) certain representations and
warranties concerning the Loans and to assign to the Trustee for such series of
Securities such Company's rights with respect to such representations and
warranties. See "The Pooling and Servicing Agreement." The obligations of the
Servicer with respect to the Loans will consist principally of its contractual
servicing obligations under the related Pooling and Servicing Agreement and its
obligation, as described in the related Prospectus Supplement, to make certain
cash advances in the event of delinquencies in payments on, or prepayments
received with respect to, the Loans in the amounts described herein under
"Description of the Securities--Advances." The obligations of a Servicer to make
advances may be subject to limitations, to the extent provided herein and in the
related Prospectus Supplement.
Single Family and Mixed Use Loans
Single Family Loans will consist of mortgage loans, deeds of trust or
participation or other beneficial interests therein, secured by first or junior
liens on one-to four-family properties. The Properties relating to Single Family
Loans will consist of detached or semi-detached one-family dwelling units, two-
to four-family dwelling units, townhouses, rowhouses, individual condominium
units in condominium developments, individual units in planned unit
developments, and certain other dwelling units. Such Mortgage Properties may
include owner-occupied (which includes vacation and second homes) and non-owner
occupied investment properties.
If so specified, the Single Family Loans may include loans or
participations therein secured by mortgages or deeds of trust on condominium
units in low- or high-rise condominium developments together with such
condominium units' appurtenant interests in the common elements of such
condominium developments.
Mixed Use Loans will consist of mortgage loans, deeds of trust or
participation or other beneficial interests therein, secured by first or junior
mortgages on small properties used primarily for residential purposes but also
for commercial purposes.
Multi-family and Cooperative Loans
Multi-family Loans will consist of mortgage loans, deeds of trust or
participation or other beneficial interests therein, secured by first or junior
liens on rental apartment buildings or projects containing five or more
residential units.
Cooperative Loans will be secured by security interests in or similar
liens on stock, shares or membership certificates issued by private cooperative
housing corporations (" Cooperative") in the related proprietary leases or
occupancy agreements granting exclusive rights to occupy specific dwelling units
in such Cooperatives' buildings.
Properties that secure Multi-family Loans may include high-rise, mid-rise
and garden apartments. Certain of the Multi-family Loans may be secured by
apartment buildings owned by Cooperatives. In such cases,
26
the Cooperative owns all the apartment units in the building and all common
areas. The Cooperative is owned by tenant-stockholders who, through ownership of
stock, shares or membership certificates in the corporation, receive proprietary
leases or occupancy agreements that confer exclusive rights to occupy specific
apartments or units. Generally, a tenant-stockholder of a Cooperative must make
a monthly payment to the Cooperative representing such tenant-stockholder's pro
rata share of the Cooperative's payments for its mortgage loan, real property
taxes, maintenance expenses and other capital or ordinary expenses. Those
payments are in addition to any payments of principal and interest the
tenant-stockholder must make on any loans to the tenant-stockholder secured by
its shares in the Cooperative. The Cooperative will be directly responsible for
building management and, in most cases, payment of real estate taxes and hazard
and liability insurance. A Cooperative's ability to meet debt service
obligations on a Multi-family Loan, as well as all other operating expenses,
will be dependent in large part on the receipt of maintenance payments from the
tenant-stockholders, as well as any rental income from units or commercial areas
the Cooperative might control. Unanticipated expenditures may in some cases have
to be paid by special assessments on the tenant-stockholders.
Home Improvement Loans
Home Improvement Loans may be secured by first or junior liens on
conventional one-to four-family residential properties and multi-family
residential properties. Home Improvement Loans generally will be conventional,
or if specified in the related Prospectus Supplement, may be partially insured
by the Federal Housing Administration ("FHA") or another federal or state
agency. The loan proceeds from such Home Improvement Loans are typically
disbursed to an escrow agent which, according to the Company's Guidelines,
Approved Guidelines or Bulk Guidelines, releases such proceeds to the contractor
upon completion of the improvements or in draws as the work on the improvements
progresses. Costs incurred by the Obligor for loan origination including
origination points and appraisal, legal and title fees, are often included in
the amount financed. In addition, Home Improvement Loans generally provide
additional security to a first or junior mortgage loan because home improvements
typically retain or increase the value of a property.
Contracts
Contracts will consist of manufactured housing conditional sales contracts
and installment sales or loan agreements each secured by a Manufactured Home.
Contracts may be conventional, insured partially by the FHA or partially
guaranteed by the Veterans Administration, as specified in the related
Prospectus Supplement. Each Contract will be fully amortizing and will bear
interest at its APR.
The "Manufactured Homes" securing the Contracts will consist of
manufactured homes within the meaning of 42 United States Code, Section 5402(6),
which defines a "manufactured home" as "a structure, transportable in one or
more sections, which in the traveling mode, is eight body feet or more in width
or forty body feet or more in length, or, when erected on site, is three hundred
twenty or more square feet, and which is built on a permanent chassis and
designed to be used as a dwelling with or without a permanent foundation when
connected to the required utilities, and includes the plumbing, heating, air
conditioning, and electrical systems contained therein; except that such term
shall include any structure which meets all the requirements of [this] paragraph
except the size requirements and with respect to which the manufacturer
voluntarily files a certification required by the Secretary of Housing and Urban
Development and complies with the standards established under [this] chapter."
The related Prospectus Supplement will specify for the Contracts contained
in the related Trust, among other things, the date of origination of the
Contracts; the APRs on the Contracts; the Contract Loan-to-Value Ratios; the
minimum and maximum outstanding principal balances as of the Cut-Off Date and
the average outstanding principal balance; the outstanding principal balances of
the Contracts included in the related Trust; and the original maturities of the
Contracts and the last maturity date of any Contract.
27
THE LOAN POOLS
General
Each Loan Pool will consist primarily of (i) Loans, minus any other
interest retained by the Company evidenced by promissory notes (the "Notes")
secured by mortgages or deeds of trust or other similar security instruments
creating a lien on, or security interest in, (a) one- to four-family residential
properties, (b) multi-family residential properties, (c) mixed use properties,
(d) apartment units in a Cooperative or (e) Manufactured Homes or (ii)
certificates of interest or participations in such Mortgage Notes. The
Properties will consist primarily of attached or detached one-family dwelling
units, two- to four-family dwelling units, condominiums, townhouses, row houses,
individual units in planned-unit developments, mixed use properties and certain
other dwelling units, and the fee, leasehold or other interests in the
underlying real property. The Properties may also consist of apartment units in
Cooperatives and Manufactured Homes. The Properties may be owner-occupied (which
includes second and vacation homes) and non-owner occupied investment
properties. If specified in the related Prospectus Supplement relating to a
series of Securities, a Loan Pool may contain Cooperative Loans evidenced by
promissory notes ("Cooperative Notes") secured by security interests in shares
issued by Cooperatives and in the related proprietary leases or occupancy
agreements granting exclusive rights to occupy specific dwelling units in the
related buildings. As used herein, unless the context indicates otherwise,
"Loans" include Cooperative Loans, "Properties" include shares in the related
cooperative and the related proprietary leases or occupancy agreements securing
Cooperative Notes, "Notes" include Cooperative Notes and "Loans" include
security agreements with respect to Cooperative Notes.
Each Loan will be selected by the Company for inclusion in a Loan Pool from
among loans originated by the Company or one or more originators, including
banks, savings and loan associations, mortgage bankers, mortgage brokers,
investment banking firms, the FDIC and other mortgage loan originators or
purchasers not affiliated with the Company, all as described below under "Loan
Program." The characteristics of the Loans will be described in the related
Prospectus Supplement. Other loans available for acquisition by a Trust may have
characteristics that would make them eligible for inclusion in a Loan Pool but
may not be selected by the Company for inclusion in such Loan Pool.
Each Security will evidence an interest in only the related Loan Pool and
corresponding Trust Estate, and not in any other Loan Pool or any other Trust
Estate (except in those situations whereby certain collections on any Loans in
a related Loan Pool in excess of amounts needed to pay the related securities
may be deposited in a common, master reserve account that provides Credit
Enhancement for more than one series of Securities).
The Loan Pools
All of the Loans in a Loan Pool will (i) have payments that are due
monthly or bi-weekly, (ii) be secured by Properties located in any of the fifty
states, the District of Columbia, Puerto Rico or any other Territories of the
United States and (iii) consist of one or more of the following types of loans:
(1) Fixed-rate, fully-amortizing loans (which may include loans
converted from adjustable-rate loans or otherwise modified) providing for
level monthly payments of principal and interest and terms at origination
or modification of generally not more than 30 years;
(2) ARM Loans having original or modified terms to maturity of
generally not more than 30 years with a related Loan Rate that adjusts
periodically, at the intervals described in the related Prospectus
Supplement (which may have adjustments in the amount of monthly payments at
periodic intervals) over the term of the loan to equal the sum of a fixed
percentage set forth in the related Mortgage Note (the "Note Margin") and
an index (the "Index") to be specified in the related Prospectus
Supplement, such as, by way of example: (i) U.S. Treasury securities of a
specified constant maturity, (ii) weekly auction average investment yield
of U.S. Treasury bills of specified maturities, (iii) the daily Bank Prime
Loan rate made available by the Federal Reserve Board or as quoted by one
or more specified lending institutions, (iv) the cost of funds of member
institutions for the Federal Home Loan
28
Bank of San Francisco, or (v) the interbank offered rates for U.S. dollar
deposits in the London Markets, each calculated as of a date prior to each
scheduled interest rate adjustment date that will be specified in the
related Prospectus Supplement. The related Prospectus Supplement will set
forth the relevant Index, and the related Prospectus Supplement or the
related Current Report on Form 8-K will indicate the highest, lowest and
weighted-average Note Margin with respect to the ARM Loans in the related
Loan Pool. If specified in the related Prospectus Supplement, an ARM Loan
may include a provision that allows the Obligor to convert the adjustable
Loan Rate to a fixed rate at some point during the term of such ARM Loan
subsequent to the initial payment date;
(3) Fixed-rate, graduated payment loans having original or modified
terms to maturity of generally not more than 30 years with monthly payments
during the first year calculated on the basis of an assumed interest rate
that will be lower than the Loan Rate applicable to such loan in subsequent
years. Deferred Interest, if any, will be added to the principal balance of
such loans;
(4) Balloon loans ("Balloon Loans"), which are loans having original
or modified terms to maturity of generally 5 to 15 years as described in
the related Prospectus Supplement, which may have level monthly payments of
principal and interest based generally on a 10- to 30-year amortization
schedule. The amount of the monthly payment may remain constant until the
maturity date, upon which date the full outstanding principal balance on
such Balloon Loan will be due and payable (such amount, the "Balloon
Amount"); or
(5) Modified loans ("Modified Loans"), which are fixed or
adjustable-rate loans providing for terms at the time of modification of
generally not more than 30 years. Modified Loans may be loans which have
been consolidated and/or have had various terms changed, loans which have
been converted from adjustable rate loans to fixed rate loans, or
construction loans which have been converted to permanent loans.
If provided for in the related Prospectus Supplement, a Loan Pool may
contain ARM Loans which allow the Obligors to convert the adjustable rates on
such Loans to a fixed rate at some point during the life of such Loans (each
such Loan, a " Convertible Loan"). If specified in the related Prospectus
Supplement, upon any conversion, the Company will repurchase or the Servicer,
the applicable Sub-Servicer, or a third party will purchase the converted Loan
as and to the extent set forth in the related Prospectus Supplement.
Alternatively, if specified in the related Prospectus Supplement, the Company or
the Servicer (or another party specified therein) may agree to act as
remarketing agent with respect to such converted Loans and, in such capacity, to
use its best efforts to arrange for the sale of converted Loans under specific
conditions. Upon the failure of any party so obligated to purchase any such
converted Loan, the inability of any remarketing agent to so arrange for the
sale of the converted Loan and the unwillingness of the remarketing agent to
exercise any election to purchase the converted Loan for its own account, the
related Loan Pool will thereafter include both fixed rate and adjustable rate
Loans.
If provided for in the related Prospectus Supplement, certain of the Loans
may be Buydown Loans pursuant to which the monthly payments made by the Obligor
during the Buydown Period will be less than the scheduled monthly payments on
the Loan, the resulting difference to be made up from (i) Buydown Funds funded
by the originator of the Loan or another source (including the Servicer, the
Company or the related originator) and placed in the Buydown Account and (ii) if
the Buydown Funds are contributed on a present value basis, investment earnings
on such Buydown Funds. See "Description of the Securities--Payments on Loans;
Deposits to Distribution Account." The terms of the Buydown Loans, if such loans
are included in a Trust, will be as set forth in the related Prospectus
Supplement.
The Company will cause the Loans constituting each Loan Pool to be assigned
to the Trustee named in the related Prospectus Supplement, for the benefit of
the holders of all of the Securities of a series and such Trustee will receive a
fee for its services. The Servicer named in the related Prospectus Supplement
will service the Loans, either directly or through other mortgage servicing
institutions (Sub-Servicers), pursuant to a Pooling and Servicing Agreement and
will receive a fee for such services. See "Loan Program" and "Description of the
29
Securities." With respect to those Loans serviced by the Servicer through a
Sub-Servicer, the Servicer will remain liable for its servicing obligations
under the related Pooling and Servicing Agreement as if the Servicer alone were
servicing such Loans.
As described in the related Prospectus Supplement, the Company may make
certain representations and warranties regarding the Loans, but the assignment
of the Loans to the Trustee will be without recourse. See "Description of the
Securities--Assignment of Loans." The Servicer's obligations with respect to the
Loans will consist principally of its contractual servicing obligations under
the related Pooling and Servicing Agreement (including its obligation to enforce
certain purchase and other obligations of the Company, as more fully described
herein under "Loan Program--Representations" and "Description of the
Securities--Assignment of Loans," and its obligation, if any, to make certain
cash advances in the event of delinquencies in payments on or with respect to
the Loans and interest shortfalls due to prepayment of Loans, in amounts
described herein under "Description of the Securities--Advances"). Generally,
the obligation of the Servicer to make delinquency advances will be limited to
amounts which the Servicer believes ultimately would be reimbursable out of the
proceeds of liquidation of the Loans. See "Description of the
Securities--Advances."
UNDERWRITING PROGRAM
General
The Company's finance programs consist of a Mortgage Loan Program and a
Manufactured Housing Program, each of which is described below.
Loans originated or purchased by originators and acquired by the Company
generally will have been originated in accordance with the Company's guidelines
(the "Guidelines"). Management permits deviations from the specific criteria of
the Company's Guidelines to reflect local economic trends, real estate
valuations, and credit factors specific to each Loan. The Company generally will
review or cause to be reviewed all of the Loans in any delivery of Loans from
originators for conformity with the Company's Guidelines.
The Company will make representations and warranties with respect to the
Loans sold to the Trust pursuant to the Pooling and Servicing Agreement. The
Company may be obligated to repurchase the Loans in respect of which a breach of
representation or warranty has occurred.
Representations. The Company will make representations and warranties in
respect of the Loans sold by the Company to the Trust and evidenced by a series
of Securities. Such representations and warranties generally include, among
other things, that at the time of the sale to the Trust of each Loan: (i) the
information with respect to each Loan set forth in the Schedule of Loans is true
and correct; (ii) all real estate appraisals have been performed in accordance
with industry standards; (iii) no Loan is in violation of any applicable state
or federal law or regulation; (iv) each Loan had, at the time of origination,
either an attorney's certification of title or a title search or title policy;
(v) as of the related settlement date, each Loan is secured by a valid and
subsisting lien of record on the Property having the priority indicated in the
related Loan file subject in all cases to exceptions to title set forth in the
title insurance policy, if any, with respect to the related Loan; (vi) the
Company held good and indefeasible title to, and was the sole owner of, each
Loan conveyed by it; and (vii) each Loan was originated in accordance with law
and is the valid, legal and binding obligation of the related Obligor.
If the Company cannot cure a breach of any representation or warranty made
by it in respect of a Loan that materially and adversely affects the interests
of the Securityholders in such Loan within a time period specified in the
related Pooling and Servicing Agreement, the Company will be obligated to
purchase from the related Trust such Loan at a price (the "Loan Purchase Price")
set forth in the related Pooling and Servicing Agreement which Loan Purchase
Price will be equal to the principal balance thereof as of the date of purchase
plus one month's interest at the Loan Rate less the amount, expressed as a
percentage per annum, payable in respect of servicing compensation, Trustee
compensation and REMIC reporting compensation, as applicable, together with,
without duplication, the aggregate amount of all delinquent interest, if any.
30
As to any such Loan required to be purchased by the Company, as provided
above, rather than repurchase the Loan, the Servicer may, at its sole option,
remove such Loan (a " Deleted Loan") from the related Trust and cause the
Company to substitute in its place another Loan of like kind (a "Qualified
Replacement Loan" as such term is defined in the related Pooling and Servicing
Agreement). With respect to a Trust for which a REMIC election is to be made,
except as otherwise provided in the Prospectus Supplement relating to a series
of Securities, such substitution of a defective Loan must be effected within two
years of the date of the initial issuance of the Securities, and may not be made
if such substitution would cause the Trust to not qualify as a REMIC or result
in a prohibited transaction tax under the Code. The Company generally will
have no option to substitute for a Loan that it is obligated to repurchase in
connection with a breach of a representation and warranty.
The Servicer will be required under the applicable Pooling and Servicing
Agreement to enforce such purchase or substitution obligations for the benefit
of the Trustee and the Securityholders, following the practices it would employ
in its good faith business judgment if it were the owner of such Mortgage Loan;
provided, however, that this purchase or substitution obligation will in no
event become an obligation of the Servicer in the event the Company fails to
honor such obligation. The foregoing will constitute the sole remedy available
to Securityholders or the Trustee for a breach of representation by the Company.
Mortgage Loan Program
The Mortgage Loans will be originated by the Company or acquired by the
Company from originators. All of the Mortgage Loans will be originated or
acquired by originators generally in accordance with underwriting criteria
satisfactory to the Company.
As more fully described below and as may also be described in greater
detail in the related Prospectus Supplement, under the Company's Loan Program,
the Company will originate Loans or purchase Loans from originators: (1) in
accordance with its loan program (the "Company's Loan Program") described in the
Company's Seller's Guide, as modified from time to time (the " Company's
Seller's Guide"), (2) on a "spot" or negotiated basis ("Negotiated
Transactions"), and (3) as bulk acquisitions ("Bulk Acquisitions"). The
Company's Loan Program, Negotiated Transactions, Bulk Acquisitions and the
respective underwriting guidelines relating thereto are described below.
The Company's Guidelines provide that each borrower is required to provide,
and any originator is generally required to verify, personal financial
information. The borrower's total monthly obligations (including principal and
interest on each mortgage, tax assessments, other loans, charge accounts and all
other scheduled indebtedness) should not exceed 60% of the borrower's monthly
income. Borrowers who are salaried employees must provide current employment
information, in addition to recent employment history. The Originator verifies
this information for salaried borrowers based on a current pay stub and either
(i) a written verification of income signed by their employer or (ii) two years'
W-2 forms. A self-employed applicant is generally required to be successfully
self-employed in the same field for a minimum of two years. A self-employed
borrower is generally required to provide financial statements and signed copies
of federal income tax returns (including schedules) filed for the most recent
two years. The borrower's debt-to-income ratio is calculated based on income as
generally verified by the Originator and must be reasonable.
The Mortgage Loans will be underwritten pursuant to the Company's "Full
Documentation Program," "Alternative Income Documentation Program" and "Stated
Income Program," as set forth in the Company's Guidelines. Under each of the
programs, the originator reviews the loan applicant's source of income,
calculates the amount of income from sources indicated on the loan application
or similar documentation, reviews the credit history of the applicant,
calculates the debt service-to-income ratio to determine the applicant's ability
to repay the loan, reviews the type and use of the property being financed and
reviews the property for compliance with its standards. In determining the
ability of the applicant to repay an adjustable rate Mortgage Loan, the
originators use a rate (the "Qualifying Rate") that generally is a rate equal to
the fully-indexed Mortgage interest rate for such adjustable rate Mortgage Loan.
The Company's Guidelines are applied in a standardized procedure that complies
with applicable federal and state laws and regulations.
31
Under the Full Documentation Program, the income of each applicant and the
source of funds (if any) required to be deposited by an applicant into a bank
account will be verified by the Originators. Applicants are generally required
to submit a current pay stub and either (i) a written verification of income
signed by their employer or (ii) two years' W-2 forms. Under the Alternative
Income Documentation Program, a self-employed applicant is required to provide
the applicant's business' profit and loss statement, and bank account statements
supporting such statement for the prior calendar year and any completed calendar
quarter of the current year and a current copy of a business license. Both the
Alternative Income Program and the Stated Income Program generally require (i)
that the applicant's income be reasonable for its business/profession, (ii) that
the business has been in existence for three years or more and (iii) that the
loan-to-value ratio be reduced. In addition, the Mortgage Loan will generally
improve the applicant's cash flow. Verification of the source of funds (if any)
required to be deposited by the applicant into a bank account is generally
required under all documentation programs in the form of a standard verification
of deposit or two months' consecutive bank statements or other acceptable
documentation. Twelve months' mortgage payment or rental history is generally
required to be verified by the applicant's current lender or landlord. If
appropriate compensating factors exist, the originators and the Company may
waive certain documentation requirements for individual applicants.
Negotiated Transactions. The Company may acquire or may cause a Trust to
acquire Mortgage Loans from originators on a "spot" basis or in Negotiated
Transactions, and such Negotiated Transactions may be governed by agreements
("Master Commitments") relating to ongoing acquisitions of Mortgage Loans by the
Company, from originators who will represent that the Mortgage Loans have been
originated in accordance with underwriting guidelines agreed to by the Company.
Certain other Mortgage Loans will be acquired from originators that will
represent that the Mortgage Loans were originated pursuant to underwriting
guidelines determined by a mortgage insurance company acceptable to the Company.
The Company will accept a certification from such insurance company as to a
Mortgage Loan's insurability in a Loan Pool as of the date of certification as
evidence of a Mortgage Loan conforming to applicable underwriting standards.
Such certifications likely will have been issued before the purchase of the
Mortgage Loan by the Company. The Company only will perform random quality
assurance reviews on Mortgage Loans delivered with such certifications.
The underwriting standards utilized in Negotiated Transactions and the
underwriting standards of insurance companies may vary substantially from the
Company's Guidelines described herein. All of the underwriting guidelines will
provide an underwriter with information to evaluate either the security for the
related Mortgage Loan, which security consists primarily of the borrower's
repayment ability or the adequacy of the Property as collateral, or a
combination of both. Due to the variety of underwriting guidelines and review
procedures that may be applicable to the Mortgage Loans included in any Loan
Pool, the related Prospectus Supplement will not distinguish among the various
underwriting guidelines applicable to the Mortgage Loans nor describe any review
for compliance with applicable underwriting guidelines performed by the Company.
Moreover, there can be no assurance that every Mortgage Loan was originated in
conformity with the underwriting guidelines related thereto in all material
respects, or that the quality or performance of Mortgage Loans underwritten
pursuant to varying guidelines as described above will be equivalent under all
circumstances.
Bulk Acquisitions. Bulk portfolios of Mortgage Loans may be originated by a
variety of originators under several different underwriting guidelines. Mortgage
Loans that conform to the related underwriting guidelines of the originator of
the portfolio of such Mortgage Loans acquired by the Company in a Bulk
Acquisition may not conform to the requirements of the Company's Guidelines.
Bulk Acquisition portfolios may be purchased servicing released or retained. If
servicing is retained, the Company may require the Originator to meet certain
minimum requirements with respect to the servicing of such Mortgage Loans. The
Company generally will cause the Mortgage Loans acquired in a Bulk Acquisition
to be re-underwritten on a sample basis. Such re-underwriting may be performed
by the Company or by a third party acting at the direction of the Company.
32
Manufactured Housing Contract Program
General. All manufactured housing contracts that are purchased by the
Company from dealers or originated by the Company through a broker are written
on forms provided by the Company and are purchased or underwritten, as the case
may be, on an individually approved basis. With respect to each retail
manufactured housing contract to be purchased from a dealer or submitted by a
broker and underwritten, as the case be, the Company's general practice is to
have the dealer or broker submit the customer's credit application,
manufacturer's invoice (if the contract is for a new home) and certain other
information relating to the contract to the applicable regional office of the
Company. Personnel at the regional office make an analysis of the
creditworthiness of the obligor and of other aspects of the proposed
transaction. If the credit worthiness of the obligor and other aspects of the
transaction are approved by the regional office, the Company purchases the
contract after the manufactured home is delivered and set up.
Because manufactured homes generally depreciate in value, the Company's
management believes that the creditworthiness of a potential obligor under a
manufactured housing contract should be the most important criterion in
determining whether to approve the purchase or origination of such manufactured
housing contract. In this regard, the Company uses an underwriting guideline
matrix based upon each applicant's credit history, residence history, employment
history, debt-to-income ratio and down payment percentage. Although, with
respect to certain of these criteria, the Company has minimum requirements, the
Company management does not believe that these minimum requirements are
themselves generally sufficient to warrant a credit approval of an applicant.
Thus, there were and are no requirements on the basis of which, if they are met,
credit is routinely approved, and if they are not met, credit is routinely
denied. Rather, if an applicant has a low rating with respect to one of the
criteria mentioned above, there generally must be a compensating higher rating
with respect to other items in order for such applicant to be approved. In
addition, in certain cases, credit applications are approved even if certain of
the minimum criteria are not met. The ultimate decision to approve or reject a
credit application is thus the result of a judgment made by either regional
management or the Company's senior management.
The Company's policy is to approve or reject each credit application within
72 hours of receipt. Thus, there is generally less time for credit investigation
than is the case, for instance, with loans for site-built homes. Although the
Company's management believes that the 72 hour period for approval or rejection
of each credit application is in line with industry practice, no assurance can
be given that any credit application that was approved in 72 hours would have
been approved if a longer period had been provided for credit investigation.
The qualifications of all regional office personnel authorized to approve
or reject credit applications are reviewed by the President and/or the Chief
Executive Office of the Company. All such personnel have certain lending limits
applicable to their approval authority. The Company has no set qualifications
for any employees to whom authority to approve or reject credit applications may
be delegated.
The credit review and approval practices of each regional office are
subject to internal reviews and audits that, through sampling, examine the
nature of the verification of credit histories, residence histories, employment
histories and debt-to-income ratios of the applicants and evaluate the credit
risks associated with the contracts purchased through such regional office by
rating the obligors on such contracts according to their credit histories,
residence histories, employment histories, debt-to-income ratios and down
payment percentages. Selection of underwriting files for review is generally
made by the personnel performing the examination, without prior knowledge on the
part of the regional office personnel of the files to be selected for review.
However, the Company has no requirement that any specific random selection
procedures be followed, and no assurance can be given that the files reviewed in
any examination process are representative of the contract originations in the
related regional office. In addition, no statistical analysis is performed on
the results of any such examination of underwriting files.
Underwriting policies for the Company's origination or purchase on an
individual basis of manufactured housing contracts are established by the
Company's senior management and are applicable to all regional offices in the
Company's manufactured housing regional office system.
33
DESCRIPTION OF THE SECURITIES
General
The Securities will be issued in series. Each series of Securities (or, in
certain instances, two or more series of Securities) will be issued pursuant to
a Pooling and Servicing Agreement. The following (together with additional
summaries under "The Pooling and Servicing Agreement" below) describes all
material terms and provisions relating to the Securities common to each Pooling
and Servicing Agreement. The following does not purport to be complete and are
subject to, and is qualified in their entirety by reference to, all of the
provisions of the Pooling and Servicing Agreement for the related Trust and the
related Prospectus Supplement.
The Securities will consist of two basic types: (i) Securities of the
fixed-income type ("Fixed-Income Securities") and (ii) Securities of the equity
participation type ("Equity Securities"). No Class of Equity Securities will be
offered pursuant to this Prospectus or any Prospectus Supplement related hereto.
Fixed-Income Securities generally will be styled as debt instruments, having a
principal balance and a specified interest rate ("Interest Rate"). Fixed-Income
Securities may be either beneficial ownership interests in the related Loans
held by the related Trust, or may represent debt secured by such Loans. Each
series or class of Fixed-Income Securities may have a different Interest Rate,
which may be a fixed, variable or adjustable Interest Rate. The related
Prospectus Supplement will specify the Interest Rate for each series or class of
Fixed-Income Securities, or the initial Interest Rate and the method for
determining subsequent changes to the Interest Rate.
A series may include one or more classes of Fixed-Income Securities ("Strip
Securities") entitled to (i) principal distributions, with disproportionate,
nominal or no interest distributions, or (ii) interest distributions, with
disproportionate, nominal or no principal distributions. In addition, a series
may include two or more classes of Fixed-Income Securities that differ as to
timing, sequential order, priority of payment, Interest Rate or amount of
distributions of principal or interest or both, or as to which distributions of
principal or interest or both on any class may be made upon the occurrence of
specified events, in accordance with a schedule or formula, or on the basis of
collections from designated portions of the related Loan Pool, which series may
include one or more classes of Fixed-Income Securities ("Accrual Securities"),
as to which certain accrued interest will not be distributed but rather will be
added to the principal balance (or nominal principal balance in the case of
Accrual Securities which are also Strip Securities) thereof on each Payment
Date, as hereinafter defined and in the manner described in the related
Prospectus Supplement.
If so provided in the related Prospectus Supplement, a series of Securities
may include one or more classes of Fixed-Income Securities (collectively, the
"Senior Securities") that are senior to one or more classes of Fixed-Income
Securities (collectively, the "Subordinate Securities") in respect of certain
distributions of principal and interest and allocations of losses on Loans. In
addition, certain classes of Senior (or Subordinate) Securities may be senior to
other classes of Senior (or Subordinate) Securities in respect of such
distributions or losses.
Equity Securities will represent the right to receive the proceeds of the
related Trust Estate after all required payments have been made to the
Securityholders of the related Fixed-Income Securities (both Senior Securities
and Subordinate Securities), and following any required deposits to any reserve
account that may be established for the benefit of the Fixed-Income Securities.
Equity Securities may constitute what are commonly referred to as the "residual
interest", "seller's interest" or the "general partnership interest", depending
upon the treatment of the related Trust for federal income tax purposes. As
distinguished from the Fixed-Income Securities, the Equity Securities will not
be styled as having principal and interest components. Any losses suffered by
the related Trust first will be absorbed by the related class of Equity
Securities, as described herein and in the related Prospectus Supplement.
No Class of Equity Securities will be offered pursuant to this Prospectus
or any Prospectus Supplement related hereto. Equity Securities may be offered on
a private placement basis or pursuant to a separate
34
Registration Statement to be filed by the Company. In addition, the Company and
its affiliates may initially or permanently hold any Equity Securities issued by
any Trust.
General Payment Terms of Securities. As provided in the related Pooling and
Servicing Agreement and as described in the related Prospectus Supplement,
Securityholders will be entitled to receive payments on their Securities on
specified dates ("Payment Dates"). Payment Dates with respect to Fixed-Income
Securities will occur monthly, quarterly or semi-annually, as described in the
related Prospectus Supplement; Payment Dates with respect to Equity Securities
will occur as described in the related Prospectus Supplement.
The related Prospectus Supplement will describe a date (the "Record Date")
preceding such Payment Date, as of which the Trustee or its paying agent will
fix the identity of the Securityholders for the purpose of receiving payments on
the next succeeding Payment Date.
The related Prospectus Supplement and the Pooling and Servicing Agreement
will describe a period (a "Remittance Period") antecedent to each Payment Date
(for example, in the case of monthly-pay Securities, the calendar month
preceding the month in which a Payment Date occurs or such other specified
period). Collections received on or with respect to the related Loans during a
Remittance Period will be required to be remitted by the Servicer to the related
Trustee prior to the related Payment Date and will be used to distribute
payments to Securityholders on such Payment Date. As may be described in the
related Prospectus Supplement, the related Pooling and Servicing Agreement may
provide that all or a portion of the principal collected on or with respect to
the related Loans may be applied by the related Trustee to the acquisition of
additional Loans during a specified period (rather than used to distribute
payments of principal to Securityholders during such period) with the result
that the related Securities possess an interest-only period, also commonly
referred to as a revolving period, which will be followed by an amortization
period. Any such interest-only or revolving period may, upon the occurrence of
certain events to be described in the related Prospectus Supplement, terminate
prior to the end of the specified period and result in the earlier than expected
amortization of the related Securities.
In addition, and as may be described in the related Prospectus Supplement,
the related Pooling and Servicing Agreement may provide that all or a portion of
such collected principal may be retained by the Trustee (and held in certain
temporary investments, including Loans) for a specified period prior to being
used to distribute payments of principal to Securityholders.
The result of such retention and temporary investment by the Trustee of
such principal would be to slow the amortization rate of the related Securities
relative to the amortization rate of the related Loans, or to attempt to match
the amortization rate of the related Securities to an amortization schedule
established at the time such Securities are issued. Any such feature applicable
to any Securities may terminate upon the occurrence of events to be described in
the related Prospectus Supplement, resulting in the current funding of principal
payments to the related Securityholders and an acceleration of the amortization
of such Securities.
Neither the Securities nor the underlying Loans will be guaranteed or
insured by any governmental agency or instrumentality or the Company, the
Servicer, the Master Servicer, if any, any Sub-Servicer, any Originator or any
of their affiliates.
Securities of each series covered by a particular Pooling and Servicing
Agreement will evidence specified beneficial ownership interest in a separate
Trust Estate created pursuant to such Pooling and Servicing Agreement. A Trust
Estate will consist of, to the extent provided in the Pooling and Servicing
Agreement: (i) a pool of Loans (and the related Loan documents) or certificates
of interest or participations therein underlying a particular series of
Securities as from time to time are subject to the Pooling and Servicing
Agreement, exclusive of, if specified in the related Prospectus Supplement, any
interest retained by the related Originator, the Company or any of their
affiliates with respect to each such Loan; (ii) payments and collections in
respect of the Loans due, accrued or received, as described in the related
Prospectus Supplement, on and after the related Cut-Off Date, as from time to
time are identified as deposited in respect thereof in the Principal and
Interest Account and in the related Distribution Account; (iii) property
acquired by foreclosure of the Loans or deed in lieu of foreclosure; (iv) hazard
and flood insurance policies and primary mortgage insurance policies, if any,
and
35
certain proceeds thereof; and (v) any combination, as specified in the related
Prospectus Supplement, of a letter of credit, financial guaranty insurance
policy, purchase obligation, mortgage pool insurance policy, special hazard
insurance policy, bankruptcy bond, reserve fund or other type of Credit
Enhancement as described under "Description of Credit Enhancement." To the
extent that any Trust Estate includes certificates of interest or participations
in Loans, the related Prospectus Supplement will describe the material terms and
conditions of such certificates or participations.
Form of Securities
The Securities of each series will be issued as physical certificates
("Physical Certificates") in fully registered form only in the denominations
specified in the related Prospectus Supplement, and will be transferable and
exchangeable at the corporate trust office of the registrar of the Securities
(the "Security Registrar") named in the related Prospectus Supplement. No
service charge will be made for any registration of exchange or transfer of
Securities, but the Trustee may require payment of a sum sufficient to cover any
tax or other governmental charge.
If so specified in the related Prospectus Supplement, specified classes of
a series of Securities will be issued in uncertificated book-entry form
("Book-Entry Securities"), and will be registered in the name of Cede, the
nominee of DTC. DTC is a limited purpose trust company organized under the laws
of the State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the Uniform Commercial Code ("UCC") and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934, as amended. DTC was created to hold securities
for its participating organizations (" Participants") and facilitate the
clearance and settlement of securities transactions between Participants through
electronic book-entry changes in their accounts, thereby eliminating the need
for physical movement of certificates. Participants include securities brokers
and dealers, banks, trust companies and clearing corporations and may include
certain other organizations. Indirect access to the DTC system also is available
to others such as brokers, dealers, banks and trust companies that clear through
or maintain a custodial relationship with a Participant, either directly or
indirectly ("Indirect Participant").
Under a book-entry format, Securityholders that are not Participants or
Indirect Participants but desire to purchase, sell or otherwise transfer
ownership of Securities registered in the name of Cede, as nominee of DTC, may
do so only through Participants and Indirect Participants. In addition, such
Securityholders will receive all distributions of principal of and interest on
the Securities from the Trustee through DTC and its Participants. Under a
book-entry format, Securityholders will receive payments after the related
Payment Date because, while payments are required to be forwarded to Cede, as
nominee for DTC, on each such date, DTC will forward such payments to its
Participants, which thereafter will be required to forward such payments to
Indirect Participants or Securityholders. Unless and until Physical Securities
are issued, it is anticipated that the only Securityholder will be Cede, as
nominee of DTC, and that the beneficial holders of Securities will not be
recognized by the Trustee as Securityholders under the Pooling and Servicing
Agreement. The beneficial holders of such Securities will only be permitted to
exercise the rights of Securityholders under the Pooling and Servicing Agreement
indirectly through DTC and its Participants who in turn will exercise their
rights through DTC.
Under the rules, regulations and procedures creating and affecting DTC and
its operations, DTC is required to make book-entry transfers among Participants
on whose behalf it acts with respect to the Securities and is required to
receive and transmit payments of principal of and interest on the Securities.
Participants and Indirect Participants with which Securityholders have accounts
with respect to their Securities similarly are required to make book-entry
transfers and receive and transmit such payments on behalf of their respective
Securityholders. Accordingly, although Securityholders will not possess
Securities, the rules provide a mechanism by which Securityholders will receive
distributions and will be able to transfer their interests.
Unless and until Physical Certificates are issued, Securityholders who are
not Participants may transfer ownership of Securities only through Participants
by instructing such Participants to transfer Securities, by book-entry transfer,
through DTC for the account of the purchasers of such Securities, which account
is maintained with their respective Participants. Under the Rules and in
accordance with DTC's normal procedures,
36
transfers of ownership of Securities will be executed through DTC and the
accounts of the respective Participants at DTC will be debited and credited.
Similarly, the respective Participants will make debits or credits, as the case
may be, on their records on behalf of the selling and purchasing
Securityholders.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a
Securityholder to pledge Securities to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of such
Securities may be limited due to the lack of a Physical Certificate for such
Securities.
DTC in general advises that it will take any action permitted to be taken
by a Securityholder under a Pooling and Servicing Agreement only at the
direction of one or more Participants to whose account with DTC the related
Securities are credited. Additionally, DTC in general advises that it will take
such actions with respect to specified percentages of the Securityholders only
at the direction of and on behalf of Participants whose holdings include current
principal amounts of outstanding Securities that satisfy such specified
percentages. DTC may take conflicting actions with respect to other current
principal amounts of outstanding Securities to the extent that such actions are
taken on behalf of Participants whose holdings include such current principal
amounts of outstanding Securities.
Any Securities initially registered in the name of Cede, as nominee of DTC,
will be issued in fully registered, certificated form to Securityholders or
their nominees ("Physical Certificates"), rather than to DTC or its nominee only
under the events specified in the related Pooling and Servicing Agreement and
described in the related Prospectus Supplement. Upon the occurrence of any of
the events specified in the related Pooling and Servicing Agreement and the
Prospectus Supplement, DTC will be required to notify all Participants of the
availability through DTC of Physical Certificates. Upon surrender by DTC of the
securities representing the Securities and instruction for re-registration, the
Trustee will issue the Securities in the form of Physical Certificates, and
thereafter the Trustee will recognize the holders of such Physical Certificates
as Securityholders. Thereafter, payments of principal of and interest on the
Securities will be made by the Trustee directly to Securityholders in accordance
with the procedures set forth herein and in the Pooling and Servicing Agreement.
The final distribution of any Security (whether Physical Certificates or
Securities registered in the name of Cede), however, will be made only upon
presentation and surrender of such Securities on the final Payment Date at such
office or agency as is specified in the notice of final payment to
Securityholders.
Assignment of Loans
At the time of issuance of a series of Securities, the Company will cause
the Loans being included in the related Trust Estate to be assigned to the
Trustee together with all payments and collections in respect of the Loans
due, accrued or received, as described in the related Prospectus Supplement on
or after the related Cut-Off Date. The Trustee will, concurrently with such
assignment, deliver a series of Securities to the Company in exchange for the
Loans. Each Loan will be identified in a schedule appearing as an exhibit to the
related Pooling and Servicing Agreement. Such schedule will include, among other
things, information as to the principal balance of each Loan as of the Cut-Off
Date, as well as information regarding the Loan Rate, the currently scheduled
monthly payment of principal and interest and the maturity of the Note.
A typical provision relating to document delivery requirements would
provide that the Company deliver to the Trustee a file consisting of (i) the
original Notes or certified copies thereof, endorsed in blank or to the order of
the holder, (ii) originals of all intervening assignments, showing a complete
chain of title from origination to the applicable Originators, if any, including
warehousing assignments, with evidence of recording thereon, (iii) originals of
all assumption and modification agreements, if any, and, unless such Loan is
covered by a counsel's opinion as described in the next paragraph, (iv) either:
(a) the original Loan, with evidence of recording thereon, (b) a true and
accurate copy of the Loan where the original has been transmitted for recording,
until such time as the original is returned by the public recording office or
(c) a copy of the Loan certified by the public recording office in those
instances where the original recorded Loan has been lost. To the extent that
such a file containing all or a portion of such items has been delivered to the
Trustee, the Trustee will generally be required, for the benefit of the
Securityholders, to review each such file within a specified period, generally
37
not exceeding 90 days, to ascertain that all required documents (or certified
copies of documents) have been executed and received.
Generally, transfer documentation from the Originators to the Company will
have been prepared and filed prior to the execution and delivery of the Pooling
and Servicing Agreement. A typical provision relating to the preparation and
filing of transfer documentation will require the Company to cause to be
prepared and recorded, within a specified period, generally not exceeding 75
business days of the execution and delivery of the applicable Pooling and
Servicing Agreement (or, if original recording information is unavailable,
within such later period as is permitted by the Pooling and Servicing Agreement)
assignments of the Mortgages from the Company to the Trustee, in the appropriate
jurisdictions in which such recordation is necessary to perfect the lien thereof
as against creditors of or purchasers from the Company, to the Trustee;
provided, however, that if the Company furnishes to the Trustee an opinion of
counsel to the effect that no such recording is necessary to perfect the
Trustee's interests in the Mortgages with respect to one or more jurisdictions,
then such recording will not be required with respect to such jurisdictions.
If any such document is found to be missing or defective in any material
respect, the Trustee (or such custodian) shall promptly so notify the Company,
which may notify the related Sub-Servicer or Originator, as the case may be. If
the Company or the Originator does not cure the omission or defect within a
specified period, generally not exceeding 60 days after notice is given to the
Company or Originator, as the case may be, the Company or such Originator will
be obligated to purchase on the next succeeding Remittance Date the related Loan
from the Trustee at its Loan Purchase Price (or, if specified in the related
Prospectus Supplement, will be permitted to substitute for such Loan under the
conditions specified in the related Prospectus Supplement). The Servicer will be
obligated to enforce this obligation of the Originator, as the case may be, to
the extent described above under "Underwriting Program--Representations."
Neither the Servicer nor the Company will, however, be obligated to purchase or
substitute for such Loan if the Originator defaults on its obligation to do so,
and there can be no assurance that an Originator, as the case may be, will carry
out any such obligation. Such purchase obligation constitutes the sole remedy
available to the Securityholders or the Trustee for omission of, or a material
defect in, a constituent document.
The Trustee will be authorized at any time to appoint a custodian pursuant
to a custodial agreement to maintain possession of and, if applicable, to review
the documents relating to the Loans as the agent of the Trustee. The identity of
any such custodian to be appointed on the date of initial issuance of the
Securities will be set forth in the related Prospectus Supplement.
Pursuant to each Pooling and Servicing Agreement, the Servicer, either
directly or through Sub-Servicers, will service and administer the Loans
assigned to the Trustee as more fully set forth below.
Forward Commitments; Pre-Funding
A Trust may enter into an agreement (each, a "Forward Purchase Agreement")
with the Company whereby the Company will agree to transfer additional Loans to
such Trust following the date on which such Trust is established and the related
Securities are issued. The Trust may enter into Forward Purchase Agreements to
permit the acquisition of additional Loans (the "Subsequent Loans") that could
not be delivered by the Company or have not formally completed the origination
process, in each case prior to the date on which the Securities are delivered to
the Securityholders (the "Closing Date"). Any Forward Purchase Agreement will
require that any Loans so transferred to a Trust conform to the requirements
specified in such Forward Purchase Agreement, this Prospectus and the related
Prospectus Supplement. In addition, the Forward Purchase Agreement will state
that the Company shall only transfer the Subsequent Loans upon the satisfaction
of certain conditions, including that the Company shall have delivered opinions
of counsel (including bankruptcy, corporate and tax opinions) with respect to
the transfer of the Subsequent Loans to the Certificate Insurer, if any, the
Rating Agencies, the Servicer and the Trustee.
If a Forward Purchase Agreement is to be utilized, the related Trustee
will be required to deposit in a segregated account (each, a "Pre-Funding
Account") a portion of the net proceeds received by the Trustee
38
in connection with the sale of one or more classes of Securities of the related
series (such amount, the "Pre-Funded Amount"); the additional Loans will be
transferred to the related Trust in exchange for money released to the Company
from the related Pre-Funding Account. Each Forward Purchase Agreement will set a
specified period (the " Funding Period") during which any such transfers must
occur The Forward Purchase Agreement or the related Pooling and Servicing
Agreement will require that if all moneys originally deposited to such
Pre-Funding Account are not so used by the end of the related Funding Period,
then any remaining moneys will be applied as a mandatory prepayment of the
related class or classes of Securities as specified in the related Prospectus
Supplement.
During the Funding Period, the moneys deposited to the Pre-Funding Account
will either (i) be held uninvested or (ii) will be invested in one or more
Eligible Investments. On payment dates that occur during the Funding Period, the
Trustee will transfer any earnings on the moneys in the Pre-Funding Account to
the Certificate Account for distribution to the Securityholders.
Although the specific parameters of the Pre-Funding Account with respect to
any issuance of Securities will be specified in the related Prospectus
Supplement, it is anticipated that: (a) the Funding Period will not exceed 120
days from the related Closing Date, (b) that the Additional Loans to be acquired
during the Funding Period will be subject to the same representations and
warranties as the Loans included in the related Trust Fund on the Closing Date
(although additional criteria may also be required to be satisfied, as described
in the related Prospectus Supplement) and (c) that the Pre-Funded Amount will
not exceed 25% of the principal amount of the Securities issued pursuant to a
particular offering.
The Pre-Funding Account will be maintained by a Trustee, which must be a
bank having combined capital and surplus, generally, of a least $100,000,000,
long-term, unsecured debt rated at least investment grade and a long-term
deposit rating of at least investment grade.
Payments on Loans; Deposits to Distribution Account
Each Sub-Servicer servicing a Loan pursuant to a Sub-Servicing Agreement
will establish and maintain an account (the "Sub-Servicing Account") that is
acceptable to the Servicer. A Sub-Servicing Account must be established with a
Federal Home Loan Bank or with a depository institution (including the
Sub-Servicer itself) whose accounts are insured by the National Credit Union
Share Insurance Fund or the FDIC. Except as otherwise permitted by the
applicable Rating Agencies, a Sub-Servicing Account must be segregated and may
not be established as a general ledger account.
A Sub-Servicer is required to deposit into its Sub-Servicing Account on a
daily basis all amounts that are received by it in respect of the Loans, less
its servicing or other compensation. On or before the date specified in the
Sub-Servicing Agreement (which date may be no later than the business day prior
to the Determination Date referred to below or, if such day is not a business
day, the preceding business day), the Sub-Servicer must remit or cause to be
remitted to the Servicer all funds held in the Sub-Servicing Account with
respect to Loans that are required to be so remitted. A Sub-Servicer may also be
required to make such Servicing Advances and Delinquency Advances and to pay
Compensating Interest as set forth in the related Sub-Servicing Agreement.
The Servicer will deposit or will cause to be deposited into the Principal
and Interest Account on a daily basis certain payments and collections due,
accrued or received, as described in the related Prospectus Supplement on or
after to the Cut-Off Date, as specifically set forth in the related Pooling and
Servicing Agreement, such as the following except as otherwise provided therein:
(i) all payments on account of principal, including principal payments
received in advance of the date on which the related monthly payment is due
(the "Due Date") (" Principal Prepayments"), on the Loans comprising a
Trust Estate;
39
(ii) all payments on account of interest on the Loans comprising such
Trust Estate, net of the portion of each payment thereof retained by the
Sub-Servicer, if any, as its servicing or other compensation;
(iii) all amounts (net of unreimbursed liquidation expenses and
insured expenses incurred, and unreimbursed advances made, by the related
Sub-Servicer) received and retained, if any, in connection with the
liquidation of any defaulted Loan, by foreclosure, deed in lieu of
foreclosure or otherwise ("Liquidation Proceeds"), including all proceeds
of any special hazard insurance policy, bankruptcy bond, mortgage pool
insurance policy, financial guaranty insurance policy and any title, hazard
or other insurance policy covering any Loan in such Loan Pool (together
with any payments under any letter of credit, "Insurance Proceeds") or
proceeds from any alternative arrangements established in lieu of any such
insurance and described in the applicable Prospectus Supplement, other than
proceeds to be applied to the restoration of the related property or
released to the Obligor in accordance with the Servicer's normal servicing
procedures (such amounts, net of related unreimbursed expenses and advances
of the Servicer, "Net Liquidation Proceeds");
(iv) any Buydown Funds (and, if applicable, investment earnings
thereon) required to be paid to Securityholders, as described below;
(v) all proceeds of any Loan in such Trust Estate purchased (or, in
the case of a substitution, certain amounts representing a principal
adjustment) by the Servicer, the Company, any Sub-Servicer or Originator or
any other person pursuant to the terms of the Pooling and Servicing
Agreement. See "Underwriting Program--Representations," "--Assignment of
Loans" above;
(vi) any amounts required to be deposited by the Servicer in
connection with losses realized on investments of funds held in the
Principal and Interest Account, as described below;
(vii) any amounts required to be deposited in connection with the
liquidation of the related Trust; and
(viii) any amounts required to be transferred from the Distribution
Account to the Principal and Interest Account.
In addition to the Principal and Interest Account, the Trustee will
establish and maintain, at the corporate trust office of the Trustee, in
the name of the Trust for the benefit of the holders of each series of
Securities, an account for the disbursement of payments on the Loans
evidenced by each series of Securities (the "Distribution Account"). The
Principal and Interest Account and the Distribution Account each must be
maintained with a Designated Depository Institution. A " Designated
Depository Institution" is an institution whose deposits are insured by the
Bank Insurance Fund or the Savings Association Insurance Fund of the FDIC,
the long-term deposits of which have a rating satisfactory to the Rating
Agencies and the related Credit Enhancer, if any, and which is any of the
following: (i) a federal savings and loan association duly organized,
validly existing and in good standing under the federal banking laws, (ii)
an institution duly organized, validly existing and in good standing under
the applicable banking laws of any state, (iii) a national banking
association duly organized, validly existing and in good standing under the
federal banking laws, (iv) a principal subsidiary of a bank holding
company, or (v) approved in writing by the related Credit Enhancer, if any,
each Rating Agency and, in each case acting or designated by the Servicer
as the depository institution for the Principal and Interest Account;
provided, however, that any such institution or association will generally
be required to have combined capital, surplus and undivided profits of at
least $100,000,000. Notwithstanding the foregoing, the Principal and
Interest Account may be held by an institution otherwise meeting the
preceding requirements except that the only applicable rating requirement
shall be that the unsecured and uncollateralized debt obligations thereof
shall be rated at a level satisfactory to one or more Rating Agencies if
such institution has trust powers and the Principal and Interest Account is
held by such institution in its trust capacity and not in its commercial
capacity. The Distribution Account, the Principal and Interest Account and
other accounts described in the related Prospectus Supplement are
collectively referred to as "Accounts." All funds in the Distribution
Account shall be invested and reinvested
40
by the Trustee for the benefit of the Securityholders and the related Credit
Enhancer, if any, as directed by the Servicer, in one or more Eligible
Investments. An "Eligible Investment" is any of the following, in each case as
determined at the time of the investment or contractual commitment to invest
therein (to the extent such investments would not require registration of the
Trust Fund as an investment company pursuant to the Investment Company Act of
1940): (a) negotiable instruments or securities represented by instruments in
bearer or registered or book-entry form which evidence: (i) obligations which
have the benefit of the full faith and credit of the United States of America,
including depository receipts issued by a bank as custodian with respect to any
such instrument or security held by the custodian for the benefit of the holder
of such depository receipt, (ii) demand deposits or time deposits in, or
bankers' acceptances issued by, any depository institution or trust company
incorporated under the laws of the United States of America or any state thereof
and subject to supervision and examination by Federal or state banking or
depository institution authorities; provided that at the time of the Trustee's
investment or contractual commitment to invest therein, the certificates of
deposit or short-term depositors (if any) or long-term unsecured debt
obligations (other than such obligations whose rating is based on collateral or
on the credit of a Person other than such institution or trust company) of such
depository institution or trust company has a credit rating in the highest
category from each Rating Agency, (iii) certificates of deposit having a rating
in the highest rating category by the Rating Agencies, or (iv) investments in
money market funds which are (or which are composed of instruments or other
investments which are) rated in the highest rating category from each Rating
Agency; (b) demand deposits in the name of the Trustee in any depository
institution or trust company referred to in clause (a)(ii) above; (c) commercial
paper (having original or remaining maturities of no more than 270 days) having
a credit rating in the highest rating category from each Rating Agency; (d)
Eurodollar time deposits that are obligations of institutions whose time
deposits carry a credit rating in the highest rating category from each Rating
Agency; (e) repurchase agreements involving any Eligible Investment described
in any of clauses (a)(i), (a)(iii) or (d) above, so long as the other party to
the repurchase agreement has its long-term unsecured debt obligations rated in
the highest rating category from each Rating Agency; and (f) any other
investment with respect to which each Rating Agency rating such Securities
indicates will not result in the reduction or withdrawal of its then-existing
rating of the Securities. Any Eligible Investment must mature not later than the
Business Day prior to the next Distribution Date. The Principal and Interest
Account may contain funds relating to more than one series of Securities as well
as payments received on other loans serviced or master serviced by it that have
been deposited into the Principal and Interest Account. All funds in the
Principal and Interest Account will be required to be held (i) uninvested, up to
limits insured by the FDIC or (ii) invested in Eligible Investments. The
Servicer will be entitled to any interest or other income or gain realized with
respect to the funds on deposit in the Principal and Interest Account.
To the extent that the ratings, if any, then assigned to the unsecured debt
of the Servicer or of the Servicer's corporate parent are satisfactory to the
Rating Agencies, the Servicer may be permitted to co-mingle Loan payments and
collections with the Servicer's general funds rather than be required to deposit
such amounts into a segregated Principal and Interest Account.
On the day seven days preceding each Payment Date (the " Remittance
Date"), the Servicer will withdraw from the Principal and Interest Account and
remit to the Trustee for deposit in the applicable Distribution Account, in
immediately available funds, the amount to be distributed therefrom to
Securityholders on such Payment Date. The Servicer will remit to the Trustee for
deposit into the Distribution Account the amount of any advances made by the
Servicer as described herein under "--Advances," any amounts required to be
transferred to the Distribution Account from a Reserve Fund, as described under
"Credit Enhancement" below, any amounts required to be paid by the Servicer out
of its own funds due to the operation of a deductible clause in any blanket
policy maintained by the Servicer to cover hazard losses on the Loans as
described under "Hazard Insurance; Claims Thereunder--Hazard Insurance Policies"
below and any other amounts as specifically set forth in the related Pooling and
Servicing Agreement. The Trustee will cause all payments received by it from any
Credit Enhancer to be deposited in the Distribution Account not later than the
related Payment Date.
Funds on deposit in the Principal and Interest Account attributable to
Loans underlying a series of Securities may be invested in Eligible Investments
maturing in general not later than the business day preceding
41
the next Payment Date. All income and gain realized from any such investment
will be for the account of the Servicer. Funds on deposit in the related
Distribution Account may be invested in Eligible Investments maturing, in
general, no later than the business day preceding the next Payment Date.
With respect to each Buydown Loan, the Servicer will deposit the related
Buydown Funds provided to it in a Buydown Account. The terms of all Buydown
Loans provide for the contribution of Buydown Funds in an amount equal to or
exceeding either (i) the total payments to be made from such funds pursuant to
the related buydown plan or (ii) if such Buydown Funds are to be deposited on a
discounted basis, that amount of Buydown Funds which, together with investment
earnings thereon at a rate as set forth by the Company from time to time, will
support the scheduled level of payments due under the Buydown Loan. Neither the
Servicer nor the Company will be obligated to add to any such discounted Buydown
Funds any of its own funds should investment earnings prove insufficient to
maintain the scheduled level of payments. To the extent that any such
insufficiency is not recoverable from the Obligor or, in an appropriate case,
from the related Originator or the related Servicer, distributions to
Securityholders may be affected. With respect to each Buydown Loan, the Servicer
will withdraw from the Buydown Account and deposit into the Principal and
Interest Account on or before the date specified in the Pooling and Servicing
Agreement the amount, if any, of the Buydown Funds (and, if applicable,
investment earnings thereon) for each Buydown Loan that, when added to the
amount due from the Obligor on such Buydown Loan, equals the full monthly
payment which would be due on the Buydown Loan if it were not subject to the
buydown plan.
If the Obligor on a Buydown Loan prepays such Loan in its entirety during
the Buydown Period, the Servicer will withdraw from the Buydown Account and
remit to the Obligor or such other designated party in accordance with the
related buydown plan any Buydown Funds remaining in the Buydown Account. If a
prepayment by an Obligor during the Buydown Period together with Buydown Funds
will result in full prepayment of a Buydown Loan, the Servicer will generally be
required to withdraw from the Buydown Account and deposit into the Principal and
Interest Account the Buydown Funds and investment earnings thereon, if any,
which together with such prepayment will result in a prepayment in full;
provided that Buydown Funds may not be available to cover a prepayment under
certain Loan programs. Any Buydown Funds relating to a prepayment described in
the preceding sentence will be deemed to reduce the amount that would be
required to be paid by the Obligor to repay fully the related Loan if the Loan
were not subject to the buydown plan. Any investment earnings remaining in the
Buydown Account after prepayment or after termination of the Buydown Period will
be remitted to the related Obligor or such other designated party pursuant to
the agreement relating to each Buydown Loan (the "Buydown Agreement"). If the
Obligor defaults during the Buydown Period with respect to a Buydown Loan and
the property securing such Buydown Loan is sold in liquidation (either by the
Servicer, the primary insurer, the insurer under the mortgage pool insurance
policy (the "Credit Enhancer") or any other insurer), the Servicer will be
required to withdraw from the Buydown Account the Buydown Funds and all
investment earnings thereon, if any, and pay the same to the primary insurer or
the Credit Enhancer, as the case may be, if the Property is transferred to such
insurer and such insurer pays all of the loss incurred in respect of such
default.
Withdrawals from the Principal and Interest Account
The Servicer may, from time to time, make withdrawals from the Principal
and Interest Account for certain purposes, as specifically set forth in the
related Pooling and Servicing Agreement, which generally will include the
following except as otherwise provided therein:
(i) to effect the timely remittance to the Trustee for deposit to the
Distribution Account in the amounts and in the manner provided in the
Pooling and Servicing Agreement and described in "--Payments on Loans;
Deposits to Distribution Account" above;
(ii) to reimburse itself or any Sub-Servicer for Delinquency Advances
and Servicing Advances as to any Property, out of late payments or
collections on the related Loan with respect to which such Delinquency
Advances or Servicing Advances were made;
42
(iii) to withdraw investment earnings on amounts on deposit in the
Principal and Interest Account;
(iv) to withdraw amounts that have been deposited in the Principal and
Interest Account in error;
(v) to clear and terminate the Principal and Interest Account in
connection with the termination of the Trust Estate pursuant to the Pooling
and Servicing Agreement, as described in "The Pooling and Servicing
Agreement--Termination, Retirement of Securities;" and
(vi) to invest in Eligible Investments.
Distributions
Beginning on the Payment Date in the month following the month (or, in the
case of quarterly-pay Securities, the third month following such month and each
third month thereafter or, in the case of semi-annually-pay Securities, the
sixth month following such month and each sixth month thereafter) in which the
Cut-Off Date occurs (or such other date as may be set forth in the related
Prospectus Supplement) for a series of Securities, distributions of principal
and interest (or, where applicable, of principal only or interest only) on each
class of Securities entitled thereto will be made either by the Trustee or a
paying agent appointed by the Trustee (the "Paying Agent"), to the persons who
are registered as Securityholders at the close of business on the Record Date in
proportion to their respective Percentage Interests. Interest that accrues and
is not payable on a class of Securities will be added to the principal balance
of each Security of such class in proportion to its Percentage Interest. The
undivided percentage interest (the "Percentage Interest") represented by a
Security of a particular class will be equal to the percentage obtained by
dividing the initial principal balance or notional amount of such Security by
the aggregate initial amount or notional balance of all the Securities of such
class. Distributions will be made in immediately available funds (by wire
transfer or otherwise) to the account of a Securityholder at a bank or other
entity having appropriate facilities therefor, if such Securityholder has so
notified the Trustee or the Paying Agent, as the case may be, and the applicable
Pooling and Servicing Agreement provides for such form of payment, or by check
mailed to the address of the person entitled thereto as it appears on the
Security Register; provided, however, that the final distribution in retirement
of the Securities (other than any Book-Entry Securities) will be made only upon
presentation and surrender of the Securities at the office or agency of the
Trustee specified in the notice to Securityholders of such final distribution.
Principal and Interest on the Securities
The method of determining, and the amount of, distributions of principal
and interest (or, where applicable, of principal only or interest only) on a
particular series of Securities will be described in the related Prospectus
Supplement. Each class of Securities (other than certain classes of Strip
Securities) may bear interest at a different interest rate (the "Pass-Through
Rate"), which may be a fixed or adjustable Pass-Through Rate. The related
Prospectus Supplement will specify the Pass-Through Rate for each class, or in
the case of an adjustable Pass-Through Rate, the initial Pass-Through Rate and
the method for determining the Pass-Through Rate. Interest on the Securities
will be calculated on the basis of a 360-day year consisting of twelve 30-day
months.
On each Payment Date for a series of Securities, the Trustee will
distribute or cause the Paying Agent to distribute, as the case may be, to each
holder of record on the Record Date of a class of Securities, an amount equal to
the Percentage Interest represented by the Security held by such holder
multiplied by such class' Distribution Amount. The Distribution Amount for a
class of Securities for any Payment Date will be the portion, if any, of the
principal distribution amount (as defined in the related Prospectus Supplement)
allocable to such class for such Payment Date, as described in the related
Prospectus Supplement, plus, if such class is entitled to payments of interest
on such Payment Date, the interest accrued at the applicable Pass-Through Rate
on the principal balance or notional amount of such class, as specified in the
applicable Prospectus Supplement, less the amount of any Deferred Interest
added to the principal balance of the Loans and/or the outstanding
43
balance of one or more classes of Securities on the related Due Date and any
other interest shortfalls allocable to Securityholders which are not covered by
advances or the applicable Credit Enhancement, in each case in such amount that
is allocated to such class on the basis set forth in the Prospectus Supplement.
As may be described in the related Prospectus Supplement, the related
Pooling and Servicing Agreement may provide that all or a portion of the
principal collected on or with respect to the related Loans may be applied by
the related Trustee to the acquisition of additional Loans during a specified
period (rather than used to fund payments of principal to Securityholders during
such period) with the result that the related securities will possess an
interest-only period, also commonly referred to as a revolving period, which
will be followed by an amortization period. Any such interest-only or revolving
period may, upon the occurrence of certain events to be described in the related
Prospectus Supplement, terminate prior to the end of the specified period and
result in the earlier than expected amortization of the related Securities.
In addition, and as may be described in the related Prospectus Supplement,
the related Pooling and Servicing Agreement may provide that all or a portion of
such collected principal may be retained by the Trustee (and held in certain
temporary investments, including Loans) for a specified period prior to being
used to fund payments of principal to Securityholders.
In the case of a series of Securities that includes two or more classes of
Securities, the timing, sequential order, priority of payment or amount of
distributions in respect of principal, and any schedule or formula or other
provisions applicable to the determination thereof (including distributions
among multiple classes of Senior Securities or Subordinate Securities) of each
such class shall be as provided in the related Prospectus Supplement.
Distributions in respect of principal of any class of Securities will be made on
a pro rata basis among all of the Securities of such class.
Except as otherwise provided in the related Pooling and Servicing
Agreement, on or prior to the third business day next preceding the Payment Date
(or such earlier day as shall be agreed by the related Credit Enhancer, if any,
and the Trustee) of the month of distribution (the "Determination Date"), the
Trustee will determine the amounts of principal and interest which will be
passed through to Securityholders on the immediately succeeding Payment Date. If
the amount in the Distribution Account is insufficient to cover the amount to be
passed through to Securityholders, the Trustee will be required to notify the
related Credit Enhancer, if any, pursuant to the related Pooling and Servicing
Agreement for the purpose of funding such deficiency.
Advances
The Servicer will be required, not later than each Remittance Date, to
deposit into the Principal and Interest Account an amount equal to the sum of
the principal and interest portions (net of the Servicing Fees) due, but not
collected, with respect to delinquent Loans directly serviced by the Servicer
during the prior Remittance Period, but only if, in its good faith business
judgment, the Servicer believes that such amount will ultimately be recovered
from the related Loan. As may be described in the related Prospectus Supplement,
the Servicer may also be required to advance delinquent payments of principal.
Any such amounts so advanced are "Delinquency Advances". The Servicer will be
permitted to fund its payment of Delinquency Advances on any Remittance Date
from collections on any Loan deposited to the Principal and Interest Account
subsequent to the related Remittance Period, and will be required to deposit
into the Principal and Interest Account with respect thereto (i) collections
from the Obligor whose delinquency gave rise to the shortfall which resulted in
such Delinquency Advance and (ii) Net Liquidation Proceeds recovered on account
of the related Loan to the extent of the amount of aggregate Delinquency
Advances related thereto. A Sub-Servicer will be permitted to fund its payment
of Delinquency Advances as set forth in the related Sub-Servicing Agreement.
A Loan is "delinquent" if any payment due thereon is not made by the close
of business on the day such payment is scheduled to be due.
44
On or prior to each Remittance Date, the Servicer will be required to
deposit in the Principal and Interest Account with respect to any full
prepayment received on a Loan directly serviced by the Servicer during the
related Remittance Period out of its own funds without any right of
reimbursement therefor, an amount equal to the difference between (x) 30 days'
interest at the Loan's Loan Rate (less the related Base Servicing Fees) on the
principal balance of such Loan as of the first day of the related Remittance
Period and (y) to the extent not previously advanced, the interest (less the
Servicing Fee) paid by the Obligor with respect to the Loan during such
Remittance Period (any such amount paid by the Servicer, "Compensating
Interest"). The Servicer shall not be required to pay Compensating Interest with
respect to any Remittance Period in an amount in excess of the aggregate related
Base Servicing Fees received by the Servicer with respect to all Loans directly
serviced by such Servicer for such Remittance Period.
The Servicer will be required to pay all "out of pocket" costs and expenses
incurred in the performance of its servicing obligations, but only to the extent
that the Servicer reasonably believes that such amounts will increase Net
Liquidation Proceeds on the related Loan. Each such amount so paid will
constitute a "Servicing Advance". The Servicer may recover Servicing Advances to
the extent permitted by the Loans or, if not theretofore recovered from the
Obligor on whose behalf such Servicing Advance was made, from Liquidation
Proceeds realized upon the liquidation of the related Loan or, in certain cases,
from excess cash flow otherwise payable to the holders of the related Equity
Securities.
Notwithstanding the foregoing, if the Servicer exercises its option, if
any, to purchase the assets of a Trust Estate as described under "The Pooling
and Servicing Agreement--Termination; Retirement of Securities" below, the
Servicer will be deemed to have been reimbursed for all related advances
previously made by it and not theretofore reimbursed to it. The Servicer's
obligation to make advances may be supported by Credit Enhancement as described
in the related Pooling and Servicing Agreement. In the event that the Credit
Enhancer is downgraded by a Rating Agency rating the related Securities or if
the collateral supporting such obligation is not performing or is removed
pursuant to the terms of any agreement described in the related Prospectus
Supplement, the Securities may also be downgraded.
Reports to Securityholders
With each distribution to Securityholders of a particular class the Trustee
will forward or cause to be forwarded to each holder of record of such class of
Securities a statement or statements with respect to the related Trust setting
forth the information specifically described in the related Pooling and
Servicing Agreement, which generally will include the following as applicable
except as otherwise provided therein:
(i) the amount of the distribution with respect to each class of
Securities;
(ii) the amount of such distribution allocable to principal,
separately identifying the aggregate amount of any prepayments or other
recoveries of principal included therein;
(iii) the amount of such distribution allocable to interest;
(iv) the aggregate unpaid Principal Balance of the Loans after giving
effect to the distribution of principal on such Payment Date;
(v) with respect to a series consisting of two or more classes, the
outstanding principal balance or notional amount of each class after giving
effect to the distribution of principal on such Payment Date;
(vi) the amount of coverage under any letter of credit, mortgage pool
insurance policy or other form of Credit Enhancement covering default risk
as of the close of business on the applicable Determination Date and a
description of any Credit Enhancement substituted therefor;
45
(vii) information furnished by the Company pursuant to section
6049(d)(7)(C) of the Code and the regulations promulgated thereunder to
assist Securityholders in computing their market discount;
(viii) the total of any substitution amounts and any Loan Purchase
Price amounts included in such distribution; and
(ix) a number with respect to each class (the "Pool Factor") computed
by dividing the principal balance of all Securities in such class (after
giving effect to any distribution of principal to be made on such Payment
Date) by the original principal balance of the Securities of such class on
the Closing Date.
Items (i) through (iii) above shall, with respect to each class of
Securities, be presented on the basis of a certificate having a $1,000
denomination. In addition, by January 31 of each calendar year during which
Securities are outstanding, the Trustee shall furnish a report to each
Securityholder at any time during each calendar year as to the aggregate amounts
reported pursuant to (i), (ii) and (iii) with respect to the Securities for such
calendar year. If a class of Securities are in book-entry form, DTC will supply
such reports to the Securityholders in accordance with its procedures.
In addition, on each Payment Date the Trustee will forward or cause to be
forwarded additional information, as of the close of business on the last day of
the prior calendar month, as more specifically described in the related Pooling
and Servicing Agreement, which generally will include the following as
applicable except as otherwise provided therein:
(i) the total number of Loans and the aggregate principal balances
thereof, together with the number, percentage (based on the
then-outstanding principal balances) and aggregate principal balances of
Loans (a) 30-59 days delinquent, (b) 60-89 days delinquent and (c) 90 or
more days delinquent;
(ii) the number, percentage (based on the then-outstanding principal
balances), aggregate Loan balances and status of all Loans in foreclosure
proceedings (and whether any such Loans are also included in any of the
statistics described in the foregoing clause (i));
(iii) the number, percentage (based on the then-outstanding principal
balances) and aggregate Loan balances of all Loans relating to Obligors in
bankruptcy proceedings (and whether any such Loans are also included in any
of the statistics described in the foregoing clause (i));
(iv) the number, percentage (based on the then-outstanding principal
balances) and aggregate Loan balances of all Loans relating to the status
of any Properties as to which title has been taken in the name of, or on
behalf of the Trustee (and whether any such Loans are also included in any
of the statistics described in the foregoing clause (i)); and
(v) the book value of any Property acquired through foreclosure or
grant of a deed in lieu of foreclosure.
Collection and Other Servicing Procedures
Acting directly or through one or more Sub-Servicers as provided in the
related Pooling and Servicing Agreement, the Servicer, is required to service
and administer the Loans in accordance with the Pooling and Servicing Agreement
and with reasonable care, and using that degree of skill and attention that the
Servicer exercises with respect to comparable mortgage loans that it services
for itself or others.
The duties of the Servicer include collecting and posting of all payments,
responding to inquiries of Obligors or by federal, state or local government
authorities with respect to the Loans, investigating delinquencies, reporting
tax information to Obligors in accordance with its customary practices and
accounting for collections and furnishing monthly and annual statements to the
Trustee with respect to distributions and making Delinquency Advances and
Servicing Advances to the extent described in the related Prospectus
46
Supplement and the related Pooling and Servicing Agreement. The Servicer is
required to follow its customary standards, policies and procedures in
performing its duties as Servicer.
The Servicer (i) is authorized and empowered to execute and deliver, on
behalf of itself, the Securityholders and the Trustee or any of them, any and
all instruments of satisfaction or cancellation, or of partial or full release
or discharge and all other comparable instruments, with respect to the Loans and
with respect to the related Properties; (ii) may consent to any modification of
the terms of any Note not expressly prohibited by the Pooling and Servicing
Agreement if the effect of any such modification (x) will not materially and
adversely affect the security afforded by the related Property or the timing of
receipt of any payments required thereunder (in each case other than as
permitted by the related Pooling and Servicing Agreement); and (y) will not
cause a Trust which is a REMIC to fail to qualify as a REMIC.
The related Pooling and Servicing Agreement will require the Servicer to
follow such collection procedures as it follows from time to time with respect
to mortgage loans in its servicing portfolio that are comparable to the Loans;
provided that the Servicer is required always at least to follow collection
procedures that are consistent with or better than standard industry practices.
The Servicer may in its discretion (i) waive any assumption fees, late payment
charges, charges for checks returned for insufficient funds, if any, or the fees
which may be collected in the ordinary course of servicing the Loans, (ii) if an
Obligor is in default or about to be in default because of an Obligor's
financial condition, arrange with the Obligor a schedule for the payment of
delinquent payments due on the related Loan; provided, however, the Servicer
shall generally not be permitted to reschedule the payment of delinquent
payments more than one time in any twelve consecutive months with respect to any
Obligor or (iii) modify payments of monthly principal and interest on any Loan
becoming subject to the terms of the Relief Act in accordance with the
Servicer's general policies of the comparable loans subject to such Relief Act.
When a Property (other than Manufactured Housing or Property subject to an
ARM Loan) has been or is about to be conveyed by the Obligor, the Servicer will
be required, to the extent it has knowledge of such conveyance or prospective
conveyance, to exercise its rights to accelerate the maturity of the related
Loan under any "due-on-sale" clause contained in the related Mortgage or Note;
provided, however, that the Servicer will not be required to exercise any such
right if (i) the "due-on-sale" clause, in the reasonable belief of the Servicer,
is not enforceable under applicable law or (ii) the Servicer reasonably believes
that to permit an assumption of the Loan would not materially and adversely
affect the interests of Securityholders or the related Credit Enhancer or
jeopardize coverage under any primary insurance policy or applicable Credit
Enhancement arrangements. In such event, the Servicer will be required to enter
into an assumption and modification agreement with the person to whom such
Property has been or is about to be conveyed, pursuant to which such person
becomes liable under the Mortgage Note and, unless prohibited by applicable law
or the related documents, the Obligor remains liable thereon. If the foregoing
is not permitted under applicable law, the Servicer will be authorized to enter
into a substitution of liability agreement with such person, pursuant to which
the original Obligor is released from liability and such person is substituted
as Obligor and becomes liable under the Mortgage Note. The assumed Loan must
conform in all respects to the requirements, representations and warranties of
the Pooling and Servicing Agreement.
An ARM Loan may be assumed if such ARM Loan is by its terms assumable and
if, in the reasonable judgment of the Servicer or the Sub-Servicer, the proposed
transferee of the related Property establishes its ability to repay the loan and
the security for such ARM Loan would not be impaired by the assumption. If a
Obligor transfers the Property subject to an ARM Loan without consent, such ARM
Loan may be declared due and payable. Any fee collected by the Servicer or
Sub-Servicer for entering into an assumption or substitution of liability
agreement will be retained by the Servicer or Sub-Servicer as additional
servicing compensation . See "Certain Legal Aspects of Loans and Related
Matters--Enforceability of Certain Provisions" herein.
The Servicer will have the right under the Pooling and Servicing Agreement
to approve applications of Obligors seeking consent for (i) partial releases of
Liens, (ii) alterations and (iii) removal, demolition or division of Properties.
No application for consent may be approved by the Servicer unless: (i) the
provisions of the related Note and Lien have been complied with; (ii) the credit
profile of the related Loan after any release is
47
consistent with the underwriting guidelines then applicable to such Loan; and
(iii) the lien priority of the related Lien is not reduced.
Realization Upon Defaulted Loans
The Servicer shall foreclose upon or otherwise comparably effect the
ownership of Properties relating to defaulted Mortgage Loans as to which no
satisfactory arrangements can be made for collection of delinquent payments and
which the Servicer has not purchased pursuant to the related Pooling and
Servicing Agreement (such Mortgage Loans, "REO Property"). In connection with
such foreclosure or other conversion, the Servicer shall exercise such of the
rights and powers vested in it, and use the same degree of care and skill in
their exercise or use, as prudent mortgage lenders would exercise or use under
the circumstances in the conduct of their own affairs, including, but not
limited to, making Servicing Advances for the payment of taxes, amounts due with
respect to Senior Liens, and insurance premiums. The Servicer shall sell any
REO Property within 23 months of its acquisition by the Trust. The Pooling and
Servicing Agreements generally will permit the Servicer to cease further
collection and foreclosure activity if the Servicer reasonably determines that
such further activity would not increase collections or recoveries to be
received by the related Trust with respect to the related Loan. In addition, any
required Delinquency Advancing may be permitted to cease at this point.
Notwithstanding the generality of the foregoing provisions, the Servicer
will be required to manage, conserve, protect and operate each REO Property for
the Securityholders solely for the purpose of its prompt disposition and sale as
"foreclosure property" within the meaning of Section 860G(a)(8) of the Code or
result in the receipt by the Trust of any "income from non-permitted assets"
within the meaning of Section 860F(a)(2)(B) of the Code or any "net income from
foreclosure property" which is subject to taxation under the REMIC Provisions.
Pursuant to its efforts to sell such REO Property, the Servicer shall either
itself or through an agent selected by the Servicer protect and conserve such
REO Property in the same manner and to such extent as is customary in the
locality where such REO Property is located and may, incident to its
conservation and protection of the interests of the Securityholders, rent the
same, or any part thereof, as the Servicer deems to be in the best interest of
the Securityholders for the period prior to the sale of such REO Property. The
Servicer shall take into account the existence of any hazardous substances,
hazardous wastes or solid wastes, as such terms are defined in the Comprehensive
Environmental Response Compensation and Liability Act, the Resource Conservation
and Recovery Act of 1976, or other federal, state or local environmental
legislation, on a Property in determining whether to foreclose upon or otherwise
comparably convert the ownership of such Property.
The Servicer shall determine, with respect to each defaulted Loan, when it
has recovered, whether through trustee's sale, foreclosure sale or otherwise,
all amounts it expects to recover from or on account of such defaulted Loan,
whereupon such Loan shall become a Liquidated Loan. A Loan which is
"charged-off", i.e., as to which the Servicer ceases further collection and/or
foreclosure activity as a result of a determination that such further actions
will not increase collections or recoveries to be received by the related Trust
is also a "Liquidated Loan".
If a loss is realized on a defaulted Loan or REO Property upon the final
liquidation thereof that is not covered by any applicable form of Credit
Enhancement or other insurance, the Securityholders will bear such loss.
However, if a gain results from the final liquidation of an REO Property that is
not required by law to be remitted to the related Obligor, the Servicer will be
entitled to retain such gain as additional servicing compensation . For a
description of the Servicer's obligations to maintain and make claims under
applicable forms of Credit Enhancement and insurance relating to the Loans, see
"Description of Credit Enhancement" and "Hazard Insurance; Claims Thereunder;
Hazard Insurance Policies."
Master Servicer
A Master Servicer may be specified in the related Prospectus Supplement for
the related series of Securities. Customary servicing functions with respect to
Loans constituting the Loan Pool in the Trust Estate will be provided by the
Servicer directly or through one or more Sub-Servicers subject to supervision by
the Master Servicer. If the Master Servicer is not directly servicing the Loans,
then the Master Servicer will (i)
48
administer and supervise the performance by the Servicer of its servicing
responsibilities under the Pooling and Servicing Agreement with the Master
Servicer, (ii) review monthly servicing reports and data relating to the Loan
Pool for discrepancies and errors, and (iii) act as back-up Servicer during the
term of the transaction unless the Servicer is terminated or resigns, in such
case the Master Servicer shall assume the obligations of the Servicer.
The Master Servicer will be a party to the Pooling and Servicing Agreement
for any Series for which Loans comprise the Trust Estate. The Master Servicer
will be required to meet the requirements set forth in the related Pooling and
Servicing Agreement and, in the case of FHA Loans, approved by HUD as an FHA
mortgagee. The Master Servicer will be compensated for the performance of its
services and duties under each Pooling and Servicing Agreement as specified in
the related Prospectus Supplement.
Sub-Servicing
The Servicer may assign its servicing duties to designated Sub-Servicers
and enter into Sub-Servicing Agreements with Sub-Servicers that may include
affiliates of the Company. While such a Sub-Servicing Agreement will be a
contract solely between the Servicer and the Sub-Servicer, the Pooling and
Servicing Agreement pursuant to which a series of Securities is issued will
provide that, if for any reason the Servicer for such series of Securities is no
longer the Servicer of the related Loans, the Trustee or any successor Servicer
must recognize the Sub-Servicer's rights and obligations under such
Sub-Servicing Agreement.
With the approval of the Servicer, a Sub-Servicer may delegate its
servicing obligations to third-party servicers, but such Sub-Servicer will
remain obligated under the related Sub-Servicing Agreement. Each Sub-Servicer
will be required to perform the customary functions of a servicer, including
collection of payments from Obligors and remittance of such collections to the
Servicer; maintenance of hazard insurance and flood insurance, if applicable,
and filing and settlement of claims thereunder, subject in certain cases to the
right of the Servicer to approve in advance any such settlement; maintenance of
escrow or impound accounts of Obligors for payment of taxes, insurance and other
items required to be paid by the Obligor pursuant to the Loan; processing of
assumptions or substitutions; attempting to cure delinquencies; supervising
foreclosures; inspecting and managing Properties under certain circumstances;
and maintaining accounting records relating to the Loans. A Sub-Servicer also
may be obligated to make advances to the Servicer in respect of delinquent
installments of principal and/or interest (net of any sub-servicing or other
compensation) on Loans, as described more fully under "Description of the
Securities--Advances," and in respect of certain taxes and insurance premiums
not paid on a timely basis by Obligors. A Sub-Servicer may also be obligated to
deposit amounts in respect of Compensating Interest to the related Principal and
Interest Account in connection with prepayments of principal received and
applied to reduce the outstanding principal balance of a Loan. No assurance can
be given that the Sub-Servicers will carry out their advance or payment
obligations, if any, with respect to the Loans.
As compensation for its servicing duties, the Sub-Servicer may be entitled
to a Base Servicing Fee. The Sub-Servicer may also be entitled to collect and
retain, as part of its servicing compensation, any late charges or prepayment
penalties provided in the Note or related instruments. The Sub-Servicer will be
entitled to reimbursement for certain expenditures that it makes, generally to
the same extent that the Servicer would be reimbursed under the applicable
Pooling and Servicing Agreement. See "The Pooling and Servicing
Agreement--Servicing and Other Compensation and Payment of Expenses."
Each Sub-Servicer will be required to agree to indemnify the Servicer for
any liability or obligation sustained by the Servicer in connection with any act
or failure to act by the Sub-Servicer in its servicing capacity. Each
Sub-Servicer is required to maintain a fidelity bond and an errors and omission
policy with respect to its officers, employees and other persons acting on its
behalf or on behalf of the Servicer.
Each Sub-Servicer will be required to service each Loan pursuant to the
terms of the Sub-Servicing Agreement for the entire term of such Loan, unless
the Sub-Servicing Agreement is terminated earlier by the Servicer or unless
servicing is released to the Servicer. The Servicer generally may terminate a
Sub-Servicing Agreement immediately upon the giving of notice upon certain
stated events, including the violation of such Sub-Servicing Agreement by the
Sub-Servicer, or following a specified period after notice to the Sub-Servicer
49
without cause upon payment of an amount equal to a specified termination fee
calculated as a specified percentage of the aggregate outstanding principal
balance of all loans, including the Loans serviced by such Sub-Servicer pursuant
to a Sub-Servicing Agreement and certain transfer fees.
The Servicer may agree with a Sub-Servicer to amend a Sub-Servicing
Agreement. Upon termination of a Sub-Servicing Agreement, the Servicer may act
as servicer of the related Loans or enter into one or more new Sub-Servicing
Agreements. If the Servicer acts as servicer, it will not assume liability for
the representations and warranties of the Sub-Servicer that it replaces. If the
Servicer enters into a new Sub-Servicing Agreement, each new Sub-Servicer must
have such servicing experience that is otherwise satisfactory to the Servicer.
The Servicer may make reasonable efforts to have the new Sub-Servicer assume
liability for the representations and warranties of the terminated Sub-Servicer,
but no assurance can be given that such an assumption will occur and, in any
event, if the new Sub-Servicer is an affiliate of the Servicer, the liability
for such representations and warranties will not be assumed by such new
Sub-Servicer. In the event of such an assumption, the Servicer may in the
exercise of its business judgment release the terminated Sub-Servicer from
liability in respect of such representations and warranties. Any amendments to a
Sub-Servicing Agreement or to a new Sub-Servicing Agreement may contain
provisions different from those described above that are in effect in the
original Sub-Servicing Agreements. However, the Pooling and Servicing Agreement
for each Trust Estate will provide that any such amendment or new agreement may
not be inconsistent with such Pooling and Servicing Agreement to the extent that
it would materially and adversely affect the interests of the Securityholders.
SUBORDINATION
A Senior/Subordinate Series of Securities will consist of one or more
classes of Senior Securities and one or more classes of Subordinate Securities,
as specified in the related Prospectus Supplement. Only the Senior Securities
will be offered hereby. Subordination of the Subordinate Securities of any
Senior/Subordinate Series of Securities will be effected by the following
method. In addition, certain classes of Senior (or Subordinate) Securities may
be senior to other classes of Senior (or Subordinate) Securities, as specified
in the related Prospectus Supplement, in which case the following discussion is
qualified in its entirety by reference to the related Prospectus Supplement with
respect to the various priorities and other rights as among the various classes
of Senior Securities or Subordinate Securities, as the case may be.
With respect to any Senior/Subordinate Series of Securities, the total
amount available for distribution on each Payment Date, as well as the method
for allocating such amount among the various classes of Securities included in
such series, will be as set forth in the related Prospectus Supplement.
Generally, the amount available for contribution will be allocated first to
interest on the Senior Securities of such series, and then to principal of the
Senior Securities up to the amounts determined as specified in the related
Prospectus Supplement, prior to allocation to the Subordinate Securities of such
series.
In the event of any Realized Losses (as defined below) on Loans not in
excess of the limitations described below, other than Extraordinary Losses, the
rights of the Subordinate Securityholders to receive distributions with respect
to the Loans will be subordinate to the rights of the Senior Securityholders.
With respect to any defaulted Loan that becomes a Liquidated Loan, through
foreclosure sale, disposition of the related Property if acquired by deed in
lieu of foreclosure, "charged-off" or otherwise, the amount of loss realized, if
any (as more fully described in the related Pooling and Servicing Agreement, a
"Realized Loss"), will equal the portion of the stated principal balance
remaining, after application of all amounts recovered (net of amounts
reimbursable to the Servicer for related advances and expenses) towards interest
and principal owing on the Loan. With respect to a Loan the principal balance of
which has been reduced in connection with bankruptcy proceedings, the amount of
such reduction will be treated as a Realized Loss.
Except as noted below, all Realized Losses will be allocated to the
Subordinate Securities of the related series, until the Principal Balance (as
defined in the related Prospectus Supplement) of such Subordinate Securities
thereof has been reduced to zero. Any additional Realized Losses will be
allocated to the Senior Securities (or, if such series includes more than one
class of Senior Securities, either on a pro-rata basis among all of the Senior
50
Securities in proportion to their respective outstanding Principal Balances or
as otherwise provided in the related Prospectus Supplement).
With respect to certain Realized Losses resulting from physical damage to
Properties that are generally of the same type as are covered under a special
hazard insurance policy, the amount thereof that may be allocated to the
Subordinate Securities of the related series may be limited to an amount (the
"Special Hazard Amount") specified in the related Prospectus Supplement. See
"Description of Credit Enhancement--Special Hazard Insurance Policies." If so,
any Special Hazard Losses in excess of the Special Hazard Amount will be
allocated among all outstanding classes of Securities of the related series,
either on a pro-rata basis in proportion to their outstanding Security Principal
Balances, regardless of whether any Subordinate Securities remain outstanding,
or as otherwise provided in the related Prospectus Supplement. The respective
amounts of other specified types of losses (including Fraud Losses and
Bankruptcy Losses) that may be borne solely by the Subordinate Securities may be
similarly limited to an amount (with respect to Fraud Losses, the "Fraud Loss
Amount" and with respect to Bankruptcy Losses, the " Bankruptcy Loss Amount"),
and the Subordinate Securities may provide no coverage with respect to certain
other specified types of losses, as described in the related Prospectus
Supplement, in which case such losses would be allocated on a pro-rata basis
among all outstanding classes of Securities.
Any allocation of a Realized Loss (including a Special Hazard Loss) to a
Security in a Senior/Subordinate Series will be made by reducing the Security
Principal Balance thereof as of the Payment Date following the calendar month in
which such Realized Loss was incurred.
In lieu of the foregoing provisions, subordination may be effected in the
following manner, or in any other manner described in the related Prospectus
Supplement. The rights of the holders of Subordinate Securities to receive any
or a specified portion of distributions with respect to the Loans may be
subordinated to the extent of the amount set forth in the related Prospectus
Supplement (the "Subordinate Amount"). As specified in the related Prospectus
Supplement, the Subordinate Amount may be subject to reduction based upon the
amount of losses borne by the holders of the Subordinate Securities as a result
of such subordination, a specified schedule or such other method of reduction as
such Prospectus Supplement may specify. If so specified in the related
Prospectus Supplement, additional credit support for this form of subordination
may be provided by the establishment of a reserve fund for the benefit of the
holders of the Senior Securities (which may, if such Prospectus Supplement so
provides, initially be funded by a cash deposit by the Originator) into which
certain distributions otherwise allocable to the holders of the Subordinate
Securities may be placed; such funds would thereafter be available to cure
shortfalls in distributions to holders of the Senior Securities.
DESCRIPTION OF CREDIT ENHANCEMENT
Each series of Securities may have credit support comprised of one or
more of the following components. Each component will have a monetary limit and
will provide coverage with respect to Realized Losses that are (i) attributable
to the Obligor's failure to make any payment of principal or interest as
required under the Mortgage Note, but not including Special Hazard Losses,
Extraordinary Losses or other losses resulting from damage to a Property,
Bankruptcy Losses or Fraud Losses (any such loss, a "Defaulted Mortgage Loss");
(ii) of a type generally covered by a special hazard insurance policy (as
defined below) (any such loss, a "Special Hazard Loss"); (iii) attributable to
certain actions which may be taken by a bankruptcy court in connection with a
Loan, including a reduction by a bankruptcy court of the principal balance of or
the Loan Rate on a Loan or an extension of its maturity (any such loss, a
"Bankruptcy Loss"); and (iv) incurred on defaulted Loans as to which there was
fraud in the origination of such Loans (any such loss, a "Fraud Loss"). Losses
occasioned by war, civil insurrection, certain governmental actions, nuclear
reaction and certain other risks ("Extraordinary Losses") will not be covered .
To the extent that the Credit Enhancement for any series of Securities is
exhausted, the Securityholders will bear all further risks of loss not otherwise
insured against.
As set forth below and in the applicable Prospectus Supplement, Credit
Enhancement may be provided with respect to one or more classes of a series of
Securities or with respect to the Loans in the related Trust. Credit Enhancement
may be in the form of (i) the subordination of one or more classes of
Subordinate Securities
51
to provide credit support to one or more classes of Senior Securities as
described under "Subordination," (ii) the use of a mortgage pool insurance
policy, special hazard insurance policy, bankruptcy bond, reserve fund, letter
of credit, financial guaranty insurance policy, other third party guarantees,
another method of Credit Enhancement described in the related Prospectus
Supplement, or the use of a cross-support feature or overcollateralization, or
(iii) any combination of the foregoing. Any Credit Enhancement will not
provide protection against all risks of loss and will not guarantee repayment of
the entire principal balance of the Securities and interest thereon. If losses
occur that exceed the amount covered by Credit Enhancement or are not covered by
the Credit Enhancement, holders of one or more classes of Securities will bear
their allocable share of deficiencies. If a form of Credit Enhancement applies
to several classes of Securities, and if principal payments equal to the
aggregate principal balances of certain classes will be distributed prior to
such distributions to the classes, the classes that receive such distributions
at a later time are more likely to bear any losses that exceed the amount
covered by Credit Enhancement.
The amounts and type of Credit Enhancement arrangement as well as the
provider thereof, if applicable, with respect to each series of Securities will
be set forth in the related Prospectus Supplement. To the extent provided in the
applicable Prospectus Supplement and the Pooling and Servicing Agreement, the
Credit Enhancement arrangements may be periodically modified, reduced and
substituted for based on the aggregate outstanding principal balance of the
Loans covered thereby. See "Description of Credit Enhancement--Reduction or
Substitution of Credit Enhancement." If specified in the applicable Prospectus
Supplement, Credit Enhancement for a series of Securities may cover one or more
other series of Securities.
The descriptions of any insurance policies or bonds described in this
Prospectus or any Prospectus Supplement and the coverage thereunder do not
purport to be complete and are qualified in their entirety by reference to the
actual forms of such policies, copies of which are available upon request.
Letter of Credit. If any component of Credit Enhancement as to any series
of Securities is to be provided by a letter of credit (the "Letter of Credit"),
a bank (the "Letter of Credit Bank") will deliver to the Trustee an irrevocable
Letter of Credit. The Letter of Credit may provide direct coverage with respect
to the related Securities or, if specified in the related Prospectus Supplement,
support the Company' or any other person's obligation pursuant to a Purchase
Obligation to make certain payments to the Trustee with respect to one or more
components of Credit Enhancement. The Letter of Credit Bank, as well as the
amount available under the Letter of Credit with respect to each component of
Credit Enhancement, will be specified in the applicable Prospectus Supplement.
The Letter of Credit will expire on the expiration date set forth in the related
Prospectus Supplement, unless earlier terminated or extended in accordance with
its terms. On or before each Payment Date, either the Letter of Credit Bank or
the Trustee (or other obligor under a Purchase Obligation) will be required to
make the payments specified in the related Prospectus Supplement after
notification from the Trustee, to be deposited in the related Distribution
Account, if and to the extent covered, under the applicable Letter of Credit.
Pool Insurance Policies. Any pool insurance policy ("Pool Insurance
Policy") obtained by the Company for each related Trust Estate will be issued by
the Credit Enhancer named in the related Prospectus Supplement. Each Pool
Insurance Policy will, subject to limitations specified in the related
Prospectus Supplement described below, cover Defaulted Losses in an amount equal
to a percentage specified in the related Prospectus Supplement (or in a Current
Report on Form 8-K) of the aggregate principal balance of the Loans on the
Cut-Off Date. As set forth under "Maintenance of Credit Enhancement," the
Servicer will use reasonable efforts to maintain the Pool Insurance Policy and
to present claims thereunder to the Credit Enhancer on behalf of itself, the
Trustee and the Securityholders. The Pool Insurance Policies, however, are not
blanket policies against loss (typically, such policies do not cover Special
Hazard Losses, Fraud Losses and Bankruptcy Losses), since claims thereunder may
only be made respecting particular defaulted Loans and only upon satisfaction of
certain conditions precedent described below due to a failure to pay
irrespective of the reason therefor.
52
Special Hazard Insurance Policies. Any insurance policy covering Special
Hazard Losses (a "Special Hazard Insurance Policy") obtained by the Company for
a Trust Estate will be issued by the insurer named in the related Prospectus
Supplement. Each Special Hazard Insurance Policy will, subject to limitations
described in the related Prospectus Supplement, protect holders of the related
series of Securities from (i) losses due to direct physical damage to a Property
other than any loss of a type covered by a hazard insurance policy or a flood
insurance policy, if applicable, and (ii) losses from partial damage caused by
reason of the application of the co-insurance clauses contained in hazard
insurance policies. See "Hazard Insurance; Claims Thereunder." A Special Hazard
Insurance Policy will not cover Extraordinary Losses. Aggregate claims under a
Special Hazard Insurance Policy will be limited to a maximum amount of coverage,
as set forth in the related Prospectus Supplement or in a Current Report on Form
8-K. A Special Hazard Insurance Policy will provide that no claim may be paid
unless hazard and, if applicable, flood insurance on the Property securing the
Loan has been kept in force and other protection and preservation expenses have
been paid by the Servicer.
Subject to the foregoing limitations, in general a Special Hazard Insurance
Policy will provide that, where there has been damage to property securing a
foreclosed Loan (title to which has been acquired by the insured) and to the
extent such damage is not covered by the hazard insurance policy or flood
insurance policy, if any, maintained by the Obligor or the Servicer or the
Sub-Servicer, the insurer will pay the lesser of (i) the cost of repair or
replacement of such property or (ii) upon transfer of the property to the
insurer, the unpaid principal balance of such Mortgage Loan at the time of
acquisition of such property by foreclosure or deed in lieu of foreclosure, plus
accrued interest at the Loan Rate to the date of claim settlement and certain
expenses incurred by the Servicer or the Sub-Servicer with respect to such
property. If the property is transferred to a third party in a sale approved by
the issuer of the Special Hazard Insurance Policy (the " Special Hazard
Insurer"), the amount that the Special Hazard Insurer will pay will be the
amount under (ii) above reduced by the net proceeds of the sale of the property.
As indicated under "Description of the Securities--Assignment of Loans"
above and to the extent set forth in the related Prospectus Supplement, coverage
in respect of Special Hazard Losses for a series of Securities may be provided,
in whole or in part by a type of special hazard instrument other than a Special
Hazard Insurance Policy or by means of the special hazard representation of the
Company.
Bankruptcy Bonds. In the event of a personal bankruptcy of a Obligor, it is
possible that the bankruptcy court may establish the value of the Property of
such Obligor at an amount less than the then-outstanding, principal balance of
the Loan secured by such Property (a "Deficient Valuation"). The amount of the
secured debt then could be reduced to such value, and, thus, the holder of such
Loan would become an unsecured creditor to the extent the outstanding principal
balance of such Loan exceeds the value assigned to the Property by the
bankruptcy court. In addition, certain other modifications of the terms of a
Loan can result from a bankruptcy proceeding, including a reduction in the
amount of the monthly payment on the related Mortgage Loan or a reduction in the
mortgage interest rate (a "Debt Service Reduction"; Debt Service Reductions and
Deficient Valuations, collectively referred to herein as "Bankruptcy Losses").
See "Certain Legal Aspects of Loans and Related Matters--Anti-Deficiency
Legislation and Other Limitations on Lenders." Any bankruptcy bond (" Bankruptcy
Bond") to provide coverage for Bankruptcy Losses for proceedings under the
federal Bankruptcy Code obtained by the Company for a Trust Estate will be
issued by an insurer named in the related Prospectus Supplement. The level of
coverage under each Bankruptcy Bond will be set forth in the applicable
Prospectus Supplement or in a Current Report on Form 8-K.
Reserve Funds. If so provided in the related Prospectus Supplement, the
Company will deposit or cause to be deposited in an account (a "Reserve Fund")
any combination of cash, one or more irrevocable letters of credit or one or
more Eligible Investments in specified amounts, amounts otherwise distributable
to Subordinate Securityholders, or any other instrument satisfactory to the
Rating Agency or Agencies, which will be applied and maintained in the manner
and under the conditions specified in such Prospectus Supplement. In addition,
with respect to any series of Securities as to which Credit Enhancement includes
a Letter of Credit, if so specified in the related Prospectus Supplement, under
certain circumstances the remaining amount of the Letter of Credit may be drawn
by the Trustee and deposited in a Reserve Fund. Amounts in a Reserve Fund may be
distributed to Securityholders, or applied to reimburse the Servicer for
outstanding advances or may be used for other
53
purposes, in the manner and to the extent specified in the related Prospectus
Supplement. A Trust Estate may contain more than one Reserve Fund, each of which
may apply only to a specified class of Securities or to specified Loans.
Financial Guaranty Insurance Policies. If so specified in the related
Prospectus Supplement, a financial guaranty insurance policy or surety bond
("Financial Guaranty Insurance Policy") may be obtained and maintained for each
class or series of Securities. The issuer of any Financial Guaranty Insurance
Policy (a "Financial Guaranty Insurer") will be described in the related
Prospectus Supplement. A copy of any such Financial Guaranty Insurance Policy
will be attached as an exhibit to the related Prospectus Supplement.
A Financial Guaranty Insurance Policy will unconditionally and
irrevocably guarantee to Securityholders that an amount equal to each full and
complete insured payment will be received by an agent of the Trustee (an
"Insurance Paying Agent") on behalf of Securityholders, for distribution by the
Trustee to each Securityholder. The "insured payment" will be defined in the
related Prospectus Supplement, and will generally equal the full amount of the
distributions of principal and interest to which Securityholders are entitled
under the related Pooling and Servicing Agreement plus any other amounts
specified therein or in the related Prospectus Supplement (the "Insured
Payment").
Financial Guaranty Insurance Policies may apply only to certain specified
classes, or may apply at the Property level and only to specified Loans.
The specific terms of any Financial Guaranty Insurance Policy will be as
set forth in the related Prospectus Supplement. Financial Guaranty Insurance
Policies may have limitations including (but not limited to) limitations on the
insurer's obligation to guarantee the obligations of the Company to repurchase
or substitute for any Loans, Financial Guaranty Insurance Policies will not
guarantee any specified rate of prepayments and/or to provide funds to redeem
Securities on any specified date.
Subject to the terms of the related Pooling and Servicing Agreement, the
Financial Guaranty Insurer may be subrogated to the rights of each
Securityholder to receive payments under the Securities to the extent of any
payment by such Financial Guaranty Insurer under the related Financial Guaranty
Insurance Policy.
Other Insurance, Guarantees and Similar Instruments or Agreements. If
specified in the related Prospectus Supplement, a Trust may include in lieu of
some or all of the foregoing or in addition thereto third party guarantees, and
other arrangements for maintaining timely payments or providing additional
protection against losses on all or any specified portion of the assets included
in such Trust, paying administrative expenses, or accomplishing such other
purpose as may be described in the Prospectus Supplement. The Trust may include
a guaranteed investment contract or reinvestment agreement pursuant to which
funds held in one or more accounts will be invested at a specified rate. If any
class of Securities has a floating interest rate, or if any of the Loans bears
interest at a floating interest rate, the Trust may include an interest rate
swap contract, an interest rate cap agreement or similar contract providing
limited protection against interest rate risks.
Cross Support. If specified in the Prospectus Supplement, the beneficial
ownership of separate groups of assets included in a Trust may be evidenced by
separate classes of the related series of Securities. In such case, credit
support may be provided by a cross-support feature which requires that
distributions be made with respect to one class of Securities may be made from
excess amounts available from other asset groups within the same Trust which
support other classes of Securities. The Prospectus Supplement for a series that
includes a cross-support feature will describe the manner and conditions for
applying such cross-support feature.
If specified in the Prospectus Supplement, the coverage provided by one or
more forms of credit support may apply concurrently to two or more separate
Trusts. If applicable, the Prospectus Supplement will identify the Trusts to
which such credit support relates and the manner of determining the amount of
the coverage provided thereby and of the application of such coverage to the
identified Trusts.
54
Overcollateralization. If specified in the Prospectus Supplement,
subordination provisions of a Trust may be used to accelerate to a limited
extent the amortization of one or more classes of Securities relative to the
amortization of the related Loans. The accelerated amortization is achieved by
the application of certain excess interest to the payment of principal of one or
more classes of Securities. This acceleration feature creates, with respect to
the Loans or groups thereof, overcollateralization which results from the excess
of the aggregate principal balance of the related Loans, or a group thereof,
over the principal balance of the related class of Securities. Such acceleration
may continue for the life of the related Security, or may be limited. In the
case of limited acceleration, once the required level of overcollateralization
is reached, and subject to certain provisions specified in the related
Prospectus Supplement, such limited acceleration feature may cease, unless
necessary to maintain the required level of overcollateralization.
Maintenance of Credit Enhancement. To the extent that the applicable
Prospectus Supplement does not expressly provide for Credit Enhancement
arrangements in lieu of some or all of the arrangements mentioned below, the
following paragraphs shall apply.
If a form of Credit Enhancement has been obtained for a series of
Securities, the Company will be obligated to exercise its best reasonable
efforts to keep or cause to be kept such form of credit support in full force
and effect throughout the term of the applicable Pooling and Servicing
Agreement, unless coverage thereunder has been exhausted through payment of
claims or otherwise, or substitution therefor is made as described below under
"Reduction or Substitution of Credit Enhancement."
In lieu of the Company's obligation to maintain a particular form of Credit
Enhancement, the Company may obtain a substitute or alternate form of Credit
Enhancement. If the Servicer obtains such a substitute form of Credit
Enhancement, it will maintain and keep such form of Credit Enhancement in full
force and effect as provided herein. Prior to its obtaining any substitute or
alternate form of Credit Enhancement, the Company will obtain written
confirmation from the Rating Agency or Agencies that rated the related series of
Securities that the substitution or alternate form of Credit Enhancement for the
existing Credit Enhancement will not adversely affect the then- current ratings
assigned to such Securities by such Rating Agency or Agencies.
The Servicer, on behalf of itself, the Trustee and Securityholders, will
provide the Trustee information required for the Trustee to draw under a Letter
of Credit or Financial Guaranty Insurance Policy, will present claims to each
Credit Enhancer, to the issuer of each Special Hazard Insurance Policy or other
special hazard instrument, to the issuer of each Bankruptcy Bond and will take
such reasonable steps as are necessary to permit recovery under such Letter of
Credit, Financial Guaranty Insurance Policy, Purchase Obligation, insurance
policies or comparable coverage respecting defaulted Loans or Loans which are
the subject of a bankruptcy proceeding. Additionally, the Servicer will present
such claims and take such steps as are reasonably necessary to provide for the
performance by another party of its Purchase Obligation. As set forth above, all
collections by the Servicer under any Purchase Obligation, any Pool Insurance
Policy, or any Bankruptcy Bond and, where the related property has not been
restored, any Special Hazard Insurance Policy, are to be deposited initially in
the Principal and Interest Account and ultimately in the Distribution Account,
subject to withdrawal as described above. All draws under any Letter of Credit
or Financial Guaranty Insurance Policy will be deposited directly in the
Distribution Account.
If any Property securing a defaulted Loan is damaged and proceeds, if any,
from the related hazard insurance policy or any applicable Special Hazard
Instrument are insufficient to restore the damaged property to a condition
sufficient to permit recovery under any applicable form of Credit Enhancement,
the Servicer is not required to expend its own funds to restore the damaged
property unless it determines (i) that such restoration will increase the
proceeds to one or more classes of Securityholders on liquidation of the Loan
after reimbursement of the Servicer for its expenses and (ii) that such expenses
will be recoverable by it through Liquidation Proceeds or Insurance Proceeds. If
recovery under any applicable form of Credit Enhancement is not available
because the Servicer has been unable to make the above determinations, has made
such determinations incorrectly or recovery is not available for any other
reason, the Servicer is nevertheless obligated to follow such normal practices
and procedures (subject to the preceding sentence) as it deems necessary or
55
advisable to realize upon the defaulted Loan and in the event such determination
has been incorrectly made, is entitled to reimbursement of its expenses in
connection with such restoration.
Reduction or Substitution of Credit Enhancement. The amount of credit
support provided pursuant to any of the Credit Enhancements (including, without
limitation, a Pool Insurance Policy, Financial Guaranty Insurance Policy,
Special Hazard Insurance Policy, Bankruptcy Bond, Letter of Credit, or any
alterative form of Credit Enhancement) may be reduced under certain specified
circumstances. In addition, if so described in the related Prospectus
Supplement, any formula used in calculating the amount or degree of Credit
Enhancement may be changed without the consent of the Securityholders upon
written confirmation from each Rating Agency then rating the Securities that
such change will not adversely affect the then-current rating or ratings
assigned to the Securities. In most cases, the amount available pursuant to any
Credit Enhancement will be subject to periodic reduction in accordance with a
schedule or formula on a nondiscretionary basis pursuant to the terms of the
related Pooling and Servicing Agreement as the aggregate outstanding principal
balance of the Loans declines. Additionally, in certain cases, such credit
support (and any replacements therefor) may be replaced, reduced or terminated
upon the written assurance from each applicable Rating Agency that the then
current rating of the related series of Securities will not be adversely
affected. Furthermore, in the event that the credit rating of any obligor under
any applicable Credit Enhancement is downgraded, the credit rating of the
related Securities may be downgraded to a corresponding level, and the Company
thereafter will not be obligated to obtain replacement credit support in order
to restore the rating of the Securities, and also will be permitted to replace
such credit support with other Credit Enhancement instruments issued by obligors
whose credit ratings are equivalent to such downgraded level and in lower
amounts which would satisfy such downgraded level, provided that the
then-current, albeit downgraded, rating of the related series of Securities is
maintained. Where the credit support is in the form of a Reserve Fund, a
permitted reduction in the amount of Credit Enhancement will result in a release
of all or a portion of the assets in the Reserve Fund to the Company, the
Servicer or such other person that is entitled thereto. Any assets so released
will not be available to fund distribution obligations in future periods.
HAZARD INSURANCE; CLAIMS THEREUNDER
Each Loan will be required to be covered by a hazard insurance policy (as
described below). The following is only a brief description of certain insurance
policies and does not purport to summarize or describe all of the provisions of
these policies. Such insurance is subject to underwriting and approval of
individual Loans by the respective insurers. The descriptions of any insurance
policies described in the Prospectus or any Prospectus Supplement and the
coverage thereunder do not purport to be complete and are qualified in their
entirety by reference to such forms of policies, sample copies of which are
available from the Trustee upon request.
Hazard Insurance Policies
The terms of the Loans require each Obligor to maintain a hazard insurance
policy for the Loan. Additionally, the Pooling and Servicing Agreement will
require the Servicer to cause to be maintained with respect to each Loan a
hazard insurance policy with a generally acceptable carrier that provides for
fire and extended coverage relating to such Loan in an amount not less than the
least of (i) the outstanding principal balance of the Loan, (ii) the minimum
amount required to compensate for damage or loss on a replacement cost basis or
(iii) the full insurable value of the premises.
If a Mortgage Loan relates to a Property in an area identified in the
Federal Register by the Federal Emergency Management Agency as having special
flood hazards, the Servicer will be required or cause to be required to maintain
with respect thereto a flood insurance policy in a form meeting the requirements
of the then-current guidelines of the Federal Insurance Administration with a
generally acceptable carrier in an amount representing coverage, and which
provides for recovery by the Servicer on behalf of the Trust of insurance
proceeds relating to such Mortgage Loan of not less than the least of (i) the
outstanding principal balance of the Mortgage Loan, (ii) the minimum amount
required to compensate for damage or loss on a replacement cost basis,
56
(iii) the maximum amount of insurance that is available under the Flood Disaster
Protection Act of 1973, as amended. Pursuant to the related Pooling and
Servicing Agreement, the Servicer will be required to indemnify the Trust out of
the Servicer's own funds for any loss to the Trust resulting from the Servicer's
failure to maintain such flood insurance.
In the event that the Servicer obtains and maintains a blanket policy
insuring against fire with extended coverage and against flood hazards on all of
the Mortgage Loans, then, to the extent such policy names the Servicer as loss
payee and provides coverage in an amount equal to the aggregate unpaid principal
balance on the Mortgage Loans without co-insurance, and otherwise complies with
the requirements of the Pooling and Servicing Agreement, the Servicer shall be
deemed conclusively to have satisfied its obligations with respect to fire and
hazard insurance coverage under the Pooling and Servicing Agreement. Such
blanket policy may contain a deductible clause, in which case the Servicer will
be required, in the event that there shall not have been maintained on the
related Property a policy complying with the Pooling and Servicing Agreement,
and there shall have been a loss that would have been covered by such policy, to
deposit in the Principal and Interest Account from the Servicer's own funds the
difference, if any, between the amount that would have been payable under a
policy complying with the Pooling and Servicing Agreement and the amount paid
under such blanket policy.
While the Servicer does not actively monitor the maintenance of hazard
insurance by borrowers (other than borrowers for Manufactured Housing), it
responds to the notices of cancellation or expiration as joint-loss payee by
requiring verification of replacement coverage.
THE COMPANY
Access Financial Lending Corp. ("AFL" or the "Company"), a Delaware
corporation, provides housing finance programs to consumers throughout the
United States through its Mortgage Lending and Manufactured Housing Programs.
The Company is the successor by merger of Access Financial Lending Corp., a
Delaware corporation (formerly Equicon Corporation), whose principal business
was the purchase of non-conforming mortgages, and Access Financial Corp., whose
principal business was the retail financing of manufactured housing. The merger
occurred on July 1, 1996.
The Company is a wholly-owned subsidiary of Access Financial Holdings Corp.
("AFH"), which is a Delaware corporation and wholly-owned subsidiary of Cargill
Financial Services Corporation. AFH was formed in January 1996 to facilitate the
continued growth of the housing finance business.
The Company maintains its principal offices at 400 Highway 169 South, Suite
400, St. Louis Park, Minnesota 55426-0365.
THE SERVICER
The Servicer for each series of Securities will be specified in the related
Prospectus Supplement.
THE POOLING AND SERVICING AGREEMENT
As described above under "Description of the Securities--General," each
series of Securities will be issued pursuant to a Pooling and Servicing
Agreement as described in that section. The following describes certain
additional provisions common to each Pooling and Servicing Agreement.
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Servicing and Other Compensation and Payment of Expenses
Each servicer, whether the Servicer, any Sub-Servicer and any Master
Servicer (either the Servicer or any Sub-Servicer or any Master Servicer being a
"Servicer"), will retain a fee in connection with its servicing activities for
each series of Securities equal to the percentage per annum specified in the
related Prospectus Supplement (the "Base Servicing Fee"), generally payable
monthly with respect to each Loan directly serviced by such Servicer at
one-twelfth the annual rate, of the then-outstanding principal amount of each
such Loan as of the first day of each calendar month. The Master Servicer acting
as master servicer with respect to Loans being serviced directly by a
Sub-Servicer will retain a fee equal to the percentage per annum specified in
the related Prospectus Supplement or Current Report on Form 8-K ("Master
Servicing Fee"), generally payable monthly on one-twelfth the annual rate, of
the then-outstanding principal amount of each such Loan as of the first day of
each calendar month. The Base Servicing Fees and the Master Servicing Fee are
collectively referred to as the "Servicing Fee."
In addition to the Base Servicing Fee, each Servicer will generally be
entitled under the Pooling and Servicing Agreement to retain additional
servicing compensation in the form of release fees, bad check charges,
assumption fees, late payment charges, or any other servicing-related fees, Net
Liquidation Proceeds not required to be deposited in the Principal and Interest
Account pursuant to the Pooling and Servicing agreement, and similar items.
The Master Servicer will pay or cause to be paid certain ongoing expenses
associated with each Trust Estate and incurred by it in connection with its
responsibilities under the Pooling and Servicing Agreement, including, without
limitation, payment of any fee or other amount payable in respect of any
alternative Credit Enhancement arrangements, payment of the fees and
disbursements of the Master Servicer, the Trustee or accountant, any custodian
appointed by the Trustee, the Security Registrar and any Paying Agent, and
payment of expenses incurred in enforcing the obligations of Sub-Servicers and
Originators. The Master Servicer may be entitled to reimbursement of expenses
incurred in enforcing the obligations of Sub-Servicers and Originators under
certain limited circumstances. In addition, as indicated in the preceding
section, the Master Servicer will be entitled to reimbursements for certain
expenses incurred by it in connection with Liquidated Loans and in connection
with the restoration of Properties, such right of reimbursement being prior to
the rights of Securityholders to receive any related Liquidation Proceeds
(including Insurance Proceeds).
The Prospectus Supplement for a series of Securities will specify if there
was any stripped portion of the interest payments due under the related Note
that was retained by the originator or broker (the "Originator's Retained
Yield"). Any such Originator's Retained Yield will be a specified portion of the
interest payable on each Loan in a Loan Pool. Any such Originator's Retained
Yield will be established on a loan-by-loan basis and the amount thereof with
respect to each Loan in a Loan Pool will be specified on an exhibit to the
related Pooling and Servicing Agreement. Any Originator's Retained Yield in
respect of a Loan will represent a specified portion of the interest payable
thereon and will not be part of the related Trust Estate. Any partial recovery
of interest in respect of a Loan will be allocated between the owners of any
Originator's Retained Yield and the holders of classes of Securities entitled to
payments of interest as provided in the Prospectus Supplement and the applicable
Pooling and Servicing Agreement.
Evidence as to Compliance
Each Pooling and Servicing Agreement will require the Servicer to deliver
annually to the Trustee and any Credit Enhancer, an officers' certificate
stating, as to each signer thereof, that (i) a review of the activities of the
Servicer during such preceding year and of performance under the related Pooling
and Servicing Agreement has been made under such officers' supervision, and (ii)
to the best of such officers' knowledge, based on such review, the Servicer has
fulfilled all its obligations under the related Pooling and Servicing Agreement
for such year, or, if there has been a default in the fulfillment of any such
obligations, specifying each such default known to such officers and the nature
and status thereof including the steps being taken by the Servicer to remedy
such defaults.
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Each Pooling and Servicing Agreement will require the Servicer to cause to
be delivered to the Trustee and any Credit Enhancer a letter or letters of a
firm of independent, nationally recognized certified public accountants
reasonably acceptable to the Credit Enhancer, if applicable, stating that such
firm has, with respect to the Servicer's overall servicing operations (i)
performed applicable tests in accordance with the compliance testing procedures
as set forth in Appendix 3 of the Audit Guide for Audits of HUD Approved
Nonsupervised Mortgagees or (ii) examined such operations in accordance with the
requirements of the Uniform Single Audit Program for Mortgage Bankers, and in
either case stating such firm's conclusions relating thereto.
Copies of the annual accountants' statement and the annual statement of
officers of the Servicer may be obtained by Securityholders without charge upon
written request to the Servicer.
Removal and Resignation of the Servicer
Each Pooling and Servicing Agreement will provide that the Servicer may
not resign from its obligations and duties thereunder, except in connection with
a permitted transfer of servicing, unless such duties and obligations are no
longer permissible under applicable law or are in material conflict by reason of
applicable law with any other activities of a type and nature presently carried
on by it or subject to the consent of the Master Servicer and the Trustee. No
such resignation will become effective until the Trustee, the Master Servicer or
a Successor Servicer has assumed the Servicer's obligations and duties under the
Pooling and Servicing Agreement. The Trustee, the Master Servicer, the
Securityholders or a Credit Enhancer, if applicable, will have the right,
pursuant to the related Pooling and Servicing Agreement, to remove the Servicer
upon the occurrence of any of (a) certain events of insolvency, readjustment of
debt, marshalling of assets and liabilities or similar proceedings regarding the
Servicer and certain actions by the Servicer indicating its insolvency or
inability to pay its obligations; (b) the failure of the Servicer to perform any
one or more of its material obligations under the Pooling and Servicing
Agreement as to which the Servicer shall continue in default with respect
thereto for a specified period, generally of sixty (60) days, after notice by
the Trustee, the Master Servicer or any Credit Enhancer (if required by the
Pooling and Servicing Agreement) of said failure; or (c) the failure of the
Servicer to cure any breach of any of its representations and warranties set
forth in the Pooling and Servicing Agreement which materially and adversely
affects the interests of the Securityholders or any Credit Enhancer, for a
specified period, generally of thirty (30) days after the Servicer's discovery
or receipt of notice thereof.
The Pooling and Servicing Agreement may also provide that the Company or
the related Credit Enhancer may remove the Servicer upon the occurrence of any
of certain events including:
(i) with respect to any Payment Date, if the total available funds
with respect to the Loans Group will be less than the related distribution
amount on the class of credit-enhanced securities in respect of such
Payment Date;
(ii) the failure by the Servicer to make any required Servicing
Advance;
(iii) the failure of the Servicer to perform one or more of its
material obligations under the Pooling and Servicing Agreement;
(iv) the failure by the Servicer to make any required Delinquency
Advance or to pay any Compensating Interest; or
(v) without cause on the part of the Servicer; provided that the
Certificate Insurer consents to such removal;
provided, however, that prior to any removal of the Servicer by the Company, or
the related Credit Enhancer pursuant to clauses (i), (ii) or (iii) above the
Servicer shall first have been given by the Company or the related Credit
Enhancer notice of the occurrence of one or more of the events set forth in
clauses (i) or (ii) above and the Servicer shall not have remedied, or shall not
have taken action satisfactory to the Company or such Credit Enhancer to remedy,
such event or events within a specified period, generally 30 days (60 days with
respect to
59
clause (iii)) after the Servicer's receipt of such notice; and provided, further
that in the event of the refusal or inability of the Servicer to make any
required Delinquency Advance or to pay any Compensating Interest as described in
clause (iv) above, such removal shall be effective (without the requirement of
any action on the part of the Company or such Credit Enhancer or of the Trustee)
not later than a shorter specified period, generally not in excess of five
business days, following the day on which the Trustee notifies an authorized
officer of the Servicer that a required Delinquency Advance or to pay any
Compensating Interest has not been received by the Trustee.
Resignation of the Master Servicer
Each Pooling and Servicing Agreement provides that the Master Servicer,
if any, may not resign from its obligations and duties thereunder, unless such
duties and obligations are no longer permissible under applicable law. No such
resignation is acceptable until a successor Master Servicer assumes such duties
and obligations.
Amendments
The Company, the Servicer, the Master Servicer and the Trustee may at any
time and from time to time, with the prior approval of the related Credit
Enhancer, if required, but without the giving of notice to or the receipt of the
consent of the Securityholders, amend a Pooling and Servicing Agreement, and the
Trustee will be required to consent to such amendment, for the purposes of (x)
(i) curing any ambiguity, or correcting or supplementing any provision of such
Pooling and Servicing Agreement which may be inconsistent with any other
provision of the Pooling and Servicing Agreement, (ii) in connection with a
Trust making REMIC elections, if accompanied by an approving opinion of counsel
experienced in federal income tax matters, removing the restriction against the
transfer of a REMIC residual security to a Disqualified Organization (as such
term is defined in the Code) or (iii) complying with the requirements of the
Code and the regulations proposed or promulgated thereunder; provided, however,
that such action shall not, as evidenced by an opinion of counsel delivered to
the Trustee, materially and adversely affect the interests of any Securityholder
(without its written consent) or (y) such other purposes set forth in the
related Pooling and Servicing Agreement.
Each Pooling and Servicing Agreement may also be amended by the Trustee,
the Company, the Servicer and the Master Servicer at any time and from time to
time, with the prior written approval of the related Credit Enhancer, if
required, and not less than a majority of the Percentage Interest represented by
each related class of Securities then outstanding, for the purpose of adding any
provisions or changing in any manner or eliminating any of the provisions of
such Pooling and Servicing Agreement or of modifying in any manner the rights of
the Securityholders thereunder; provided, however, that no such amendment shall
(a) change in any manner the amount of, or delay the timing of, payments which
are required to be distributed to any Securityholders without the consent of the
holder of such Security or (b) change the aforesaid percentages of Percentage
Interest which are required to consent to any such amendments, without the
consent of the holders of all Securities of the class or classes affected then
outstanding.
Termination; Retirement of Securities
Each Pooling and Servicing Agreement will provide that a Trust will
terminate upon the earlier of (i) the payment to the Securityholders of all
Securities issued by the Trust from amounts other than those available under, if
applicable, the related Credit Enhancement of all amounts required to be paid to
such Securityholders upon the later to occur of (a) the final payment or other
liquidation (or any advance made with respect thereto) of the last Loan in the
Trust Estate or (b) the disposition of all property acquired in respect of any
Loan remaining in the Trust Estate, (ii) any time when a Qualified Liquidation
(as defined in the Code) of the Trust Estate (if the related Trust is a REMIC)
is effected. In no event, however, will the trust created by the Pooling and
Servicing Agreement continue beyond the expiration of 21 years from the death of
the survivor of certain persons named in such Pooling and Servicing Agreement.
Written notice of termination of the Pooling and Servicing Agreement will be
given to each Securityholder, and the final distribution will be made only upon
surrender and cancellation of the Securities at an office or agency appointed by
the Trustee that will be specified in the notice of termination. If the
Securityholders are permitted to terminate the trust under the applicable
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Pooling and Servicing Agreement, a penalty may be imposed upon the
Securityholders based upon the fee that would be foregone by the Servicer
because of such termination.
Any purchase of Loans and property acquired in respect of Loans evidenced
by a series of Securities shall be made at the option of the Servicer, the
Company or, if applicable, the holder of the REMIC Residual Securities at the
price specified in the related Prospectus Supplement. The exercise of such right
will effect earlier than expected retirement of the Securities of that series,
but the right of the Servicer, the Company or, if applicable, such holder to so
purchase is subject to the aggregate principal balance of the Loans for that
series as of any Remittance Date being less than ten percent or a percentage
set forth in the related Prospectus Supplement of the aggregate principal
balance of the Loans at the Cut-Off Date for that series. The Prospectus
Supplement for each series of Securities will set forth the amounts that the
holders of such Securities will be entitled to receive upon such earlier than
expected retirement. If a REMIC election has been made, the termination of the
related Trust Estate will be effected in a manner consistent with applicable
federal income tax regulations and its status as a REMIC.
If set forth in the related Prospectus Supplement, termination of the Trust
may be effected by an auction sale. Within a period following a Remittance Date
as of which the aggregate Pool principal balance is less than 10% of the initial
aggregate Pool principal balance, if the optional termination rights have not
been exercised by the parties having such rights by such date, the Trustee shall
solicit bids for the purchase of all Loans remaining in the Trust. In the event
that satisfactory bids are received as described in the Agreement, the net sale
proceeds will be distributed to Certificateholders, in the same order of
priority as collections received in respect of the Loans. The Trustee, however,
will not accept any bid for the Loans unless certain requirements are met. The
sale of the Loans must be for an amount no less than fair market value. If
satisfactory bids are not received, the Trustee shall decline to sell the Loans
and shall not be under any obligation to solicit any further bids or otherwise
negotiate any further sale of the Loans. Such sale and consequent termination of
the Trust must constitute a "qualified liquidation" of each REMIC established by
the Trust under Section 860F of the Internal Revenue Code of 1986, as amended,
including, without limitation, the requirement that the qualified liquidation
takes place over a period not to exceed 90 days.
THE TRUSTEE
The Trustee under each Pooling and Servicing Agreement will be named in the
related Prospectus Supplement. Each Pooling and Servicing Agreement will provide
that the Trustee shall be under no obligation to exercise any of the rights or
powers vested in it by the Pooling and Servicing Agreement at the request or
direction of any of the Securityholders, unless such Securityholders shall have
offered to the Trustee reasonable security or indemnity against the costs,
expenses and liabilities which might be incurred by it in compliance with such
request or direction.
The Trustee may execute any of the trusts or powers granted by each Pooling
and Servicing Agreement or perform any duties thereunder either directly or by
or through agents or attorneys, and the Trustee will not be responsible for any
misconduct or negligence on the part of any agent or attorney appointed and
supervised with due care by it thereunder.
Pursuant to each Pooling and Servicing Agreement, the Trustee will not be
liable for any action it takes or omits to take in good faith which it
reasonably believes to be authorized by an authorized officer of any person or
within its rights or powers under the Pooling and Servicing Agreement.
Each Pooling and Servicing Agreement will permit the removal of the
Trustee upon the occurrence and continuance of one of the following events:
61
(1) the Trustee shall fail to distribute to the Securityholders
entitled thereto on any Payment Date amounts available for distribution in
accordance with the terms of the Pooling and Servicing Agreement; or
(2) the Trustee shall default in the performance of, or breach, any
covenant or agreement of the Trustee in the Pooling and Servicing
Agreement, or if any representation or warranty of the Trustee made in the
Pooling and Servicing Agreement or in any certificate or other writing
delivered pursuant thereto or in connection therewith shall prove to be
incorrect in any material respect as of the time when the same shall have
been made, and such default or breach shall continue or not be cured for
the period then specified in the related Pooling and Servicing Agreement
after the Trustee shall have received notice specifying such default or
breach and requiring it to be remedied; or
(3) a decree or order of a court or agency or supervisory authority
having jurisdiction for the appointment of a conservator or receiver or
liquidator in any insolvency, readjustment of debt, marshalling of assets
and liabilities or similar proceedings, or for the winding-up or
liquidation of its affairs, shall have been entered against the Trustee,
and such decree or order shall have remained in force undischarged or
unstayed for the period then specified in the related Pooling and Servicing
Agreement; or
(4) a conservator or receiver or liquidator or sequestrator or
custodian of the property of the Trustee is appointed in any insolvency,
readjustment of debt, marshalling of assets and liabilities or similar
proceedings of or relating to the Trustee or relating to all or
substantially all of its property; or
(5) the Trustee shall become insolvent (however insolvency is
evidenced), generally fail to pay its debts as they come due, file or
consent to the filing of a petition to take advantage of any applicable
insolvency or reorganization statute, make an assignment for the benefit of
its creditors, voluntarily suspend payment of its obligations, or take
corporate action for the purpose of any of the foregoing.
If an event described above occurs and is continuing, then, and in every
such case (i) the Company, (ii) the Securityholders (on the terms set forth in
the related Pooling and Servicing Agreement), or (iii) if there is a Credit
Enhancer, such Credit Enhancer may, whether or not the Trustee has resigned,
immediately, concurrently with the giving of notice to the Trustee, and without
delay, appoint a successor Trustee pursuant to the terms of the Pooling and
Servicing Agreement.
No Securityholder will have any right to institute any proceeding, judicial
or otherwise, with respect to a Pooling and Servicing Agreement or any Credit
Enhancement, if applicable, or for the appointment of a receiver or trustee, or
for any other remedy under the Pooling and Servicing Agreement, unless:
(1) such Securityholder has previously given written notice to the
Company and the Trustee of such Securityholder's intention to institute
such proceeding;
(2) the Securityholders of not less than 25% of the Percentage
Interests represented by certain specified classes of Securities then
outstanding shall have made written request to the Trustee to institute
such proceeding;
(3) such Securityholder or Securityholders have offered to the Trustee
reasonable indemnity, against the costs, expenses and liabilities to be
incurred in compliance with such request;
(4) the Trustee for the period specified in the related Pooling and
Servicing Agreement, generally not in excess of 60 days after receipt of
such notice, request and offer of indemnity, has failed to institute such
proceeding;
(5) as long as such action affects any credit-enhanced class of
Securities outstanding, the related Credit Enhancer has consented in
writing thereto; and
62
(6) no direction inconsistent with such written request has been given
to the Trustee during such specified period by the Securityholders of a
majority of the Percentage Interests represented by certain specified
classes of Securities;
No one or more Securityholders will have any right in any manner whatever by
virtue of, or by availing themselves of, any provision of the Pooling and
Servicing Agreement to affect, disturb or prejudice the rights of any other
Securityholder of the same class or to obtain or to seek to obtain priority or
preference over any other Securityholder of the same class or to enforce any
right under the Pooling and Servicing Agreement, except in the manner provided
in the Pooling and Servicing Agreement and for the equal and ratable benefit of
all of the Securityholders of the same class.
In the event the Trustee receives conflicting or inconsistent requests and
indemnity from two or more groups of Securityholders, each representing less
than a majority of the applicable class of Securities, the Trustee in its sole
discretion may determine what action, if any, shall be taken, notwithstanding
any other provision of the Pooling and Servicing Agreement.
Notwithstanding any other provision in the Pooling and Servicing Agreement,
the Securityholder of any Security has the right, which is absolute and
unconditional, to receive distributions to the extent provided in the Pooling
and Servicing Agreement with respect to such Security or to institute suit for
the enforcement of any such distribution, and such right shall not be impaired
without the consent of such Security.
Either (i) the Securityholders of a majority of the Percentage Interests
represented by certain specified classes of Securities then outstanding or (ii)
if there is a Credit Enhancer, such Credit Enhancer may direct the time, method
and place of conducting any proceeding for any remedy available to the Company
with respect to the Certificates or exercising any trust or power conferred on
the Trustee with respect to such Certificates; provided that:
(1) such direction shall not be in conflict with any rule of law or
with a Pooling and Servicing Agreement;
(2) the Company or the Trustee, as the case may be, shall have been
provided with indemnity satisfactory to them; and
(3) the Company or the Trustee, as the case may be, may take any other
action deemed proper by the Trustee which is not inconsistent with such
direction; provided, however, that the Company or the Trustee, as the case
may be, need not take any action which they determine might involve them in
liability or may be unjustly prejudicial to the Securityholders not so
directing.
The Trustee will be liable under the Pooling and Servicing Agreement only
to the extent of the obligations specifically imposed upon and undertaken by the
Trustee therein. Neither the Trustee nor any of the directors, officers,
employees or agents of the Trustee will be under any liability on any Security
or otherwise to any Account, the Company, the Servicer, the Master Servicer or
any Securityholder for any action taken or for refraining from the taking of any
action in good faith under a Pooling and Servicing Agreement, or for errors in
judgment; provided, however, that such provision shall not protect the Trustee
or any such person against any liability which would otherwise be imposed by
reason of negligent action, negligent failure to act or willful misconduct in
the performance of duties or by reason of reckless disregard of obligations and
duties thereunder.
YIELD CONSIDERATIONS
The yield to maturity of a Security will depend on the price paid by the
holder for such Security, the Pass-Through Rate on any such Security entitled to
payments of interest (which Pass-Through Rate may vary if so specified in the
related Prospectus Supplement) and the rate of payment of principal on such
Security (or the
63
rate at which the notional amount thereof is reduced if such Security is not
entitled to payments of principal) and other factors.
Each month the interest payable on an actuarial type of Loan will be
calculated as one-twelfth of the applicable Loan Rate multiplied by the
principal balance of such Loan outstanding as of a specified day, usually the
first day of the month prior to the month in which the Payment Date for the
related series of Securities occurs, after giving effect to the payment of
principal due on such day, subject to any Deferred Interest. With respect to
date of payment Loans, interest is charged to the Obligor at the Loan Rate on
the outstanding principal balance of such Note and calculated based on the
number of days elapsed between receipt of the Obligor's last payment through
receipt of the Obligor's most current payments. The amount of such payments with
respect to each Loan distributed (or accrued in the case of Deferred Interest or
Accrual Securities) either monthly, quarterly or semi-annually to holders of a
class of Securities entitled to payments of interest will be similarly
calculated on the basis of such class' specified percentage of each such payment
of interest (or accrual in the case of Accrual Securities) and will be expressed
as a fixed, adjustable or variable Pass-Through Loan Rate payable on the
outstanding principal balance or notional amount of such Security, calculated as
described herein and in the related Prospectus Supplement. Holders of Strip
Securities or a class of Securities having a fixed Pass-Through Rate that varies
based on the weighted average Loan Rate of the underlying Loans will be affected
by disproportionate prepayments and repurchases of Loans having higher Net Loan
Rates or rates applicable to the Strip Securities, as applicable.
The effective yield to maturity to each holder of fixed-rate Securities
entitled to payments of interest will be below that otherwise produced by the
applicable Pass-Through Rate and purchase price of such Security because, while
interest will accrue on each Loan from the first day of each month, the
distribution of such interest will be made once a month on the date set forth in
the related Prospectus Supplement (the " Interest Payment Date") or, in the case
of quarterly-pay Securities, on the Interest Payment Date of every third month
or, in the case of semi-annual-pay Securities, on the Interest Payment Date of
every sixth month following the month or months of accrual.
A class of Securities may be entitled to payments of interest at a fixed
Pass-Through Rate specified in the related Prospectus Supplement, a variable
Pass-Through Rate or adjustable Pass-Through Rate calculated based on the
weighted average of the Loan Rates (net of Servicing Fees (each, a "Net Loan
Rate")) of the related Loans for the designated periods preceding the Payment
Date if so specified in the related Prospectus Supplement, or at such other
variable rate as may be specified in the related Prospectus Supplement.
As will be described in the related Prospectus Supplement, the aggregate
payments of interest on a class of Securities, and the yield to maturity
thereon, will be affected by the rate of payment of principal on the Securities
(or the rate of reduction in the notional balance of Securities entitled only to
payments of interest) and, in the case of Securities evidencing interests in ARM
Loans, by changes in the Net Loan Rates on the ARM Loans. See "Maturity and
Prepayment Considerations" below. The yield on the Securities also will be
affected by liquidations of Loans following Obligor defaults and by purchases of
Loans required by the Pooling and Servicing Agreement in the event of breaches
of representations made in respect of such Loans by the Company, the
Originators, the Servicer and others, or repurchases due to conversions of ARM
Loans to a fixed interest rate. See "Underwriting Program--Representations" and
"Descriptions of the Securities--Assignment of Loans" above. In general, if a
class of Securities is purchased at initial issuance at a premium and payments
of principal on the related Loans occur at a rate faster than anticipated at the
time of purchase, the purchaser's actual yield to maturity will be lower than
that assumed at the time of purchase. Conversely, if a class of Securities is
purchased at initial issuance at a discount and payments of principal on the
related Loans occur at a rate slower than that assumed at the time of purchase,
the purchaser's actual yield to maturity will be lower than that originally
anticipated. The effect of principal prepayments, liquidations and purchases on
yield will be particularly significant in the case of a series of Securities
having a class entitled to payments of interest only or to payments of interest
that are disproportionately high relative to the principal payments to which
such class is entitled. Such a class likely will be sold at a substantial
premium to its principal balance, if any, and any faster than anticipated rate
of prepayments will adversely affect the yield to holders thereof. In certain
circumstances, rapid prepayments may result in the failure of such holders to
recoup their original investment. In addition, the yield to maturity
64
on certain other types of classes of Securities, including Accrual Securities or
certain other classes in a series including more than one class of Securities,
may be relatively more sensitive to the rate of prepayment on the related Loans
than other classes of Securities.
The timing of changes in the rate of principal payments on or repurchases
of the Loans may significantly affect an investor's actual yield to maturity,
even if the average rate of principal payments experienced over time is
consistent with an investor's expectation. In general, the earlier a prepayment
of principal on the underlying Loans or a repurchase thereof, the greater will
be the effect on an investor's yield to maturity. As a result, the effect on an
investor's yield of principal payments and repurchases occurring at a rate
higher (or lower) than the rate anticipated by the investor during the period
immediately following the issuance of a series of Securities would not be fully
offset by a subsequent like reduction (or increase) in the rate of principal
payments.
The Loan Rates on certain ARM Loans subject to negative amortization adjust
monthly and their amortization schedules adjust less frequently. During a period
of rising interest rates as well as immediately after origination (initial Loan
Rates are generally lower than the sum of the Indices applicable at origination
and the related Note Margins) the amount of interest accruing on the principal
balance of such Loans may exceed the amount of the minimum scheduled monthly
payment thereon. As a result, a portion of the accrued interest on negatively
amortizing Loans may become Deferred Interest that will be added to the
principal balance thereof and will bear interest at the applicable Loan Rate.
The addition of any such Deferred Interest to the principal balance will
lengthen the weighted average life of the Securities evidencing interests in
such Loans and may adversely affect yield to holders thereof depending upon the
price at which such Securities were purchased. In addition, with respect to
certain ARM Loans subject to negative amortization, during a period of declining
interest rates, it might be expected that each minimum scheduled monthly payment
on such a Loan would exceed the amount of scheduled principal and accrued
interest on the principal balance thereof, and since such excess will be applied
to reduce such principal balance, the weighted average life of such Securities
will be reduced and may adversely affect yield to holders thereof depending upon
the price at which such Securities were purchased.
For each Loan Pool, if all necessary advances are made and if there is no
unrecoverable loss on any Loan and if the related Credit Enhancer is not in
default under its obligations or other Credit Enhancement has not been
exhausted, the net effect of each distribution respecting interest will be to
pass-through to each holder of a class of Securities entitled to payments of
interest an amount which is equal to one month's interest (or, in the case of
quarterly-pay Securities, three month's interest or, in the case of
semi-annually-pay Securities, six month's interest) at the applicable
Pass-Through Rate on such class' principal balance or notional balance, as
adjusted downward to reflect any decrease in interest caused by any principal
prepayments and the addition of any Deferred Interest to the principal balance
of any Loan. "Description of the Securities--Principal and Interest on the
Securities."
With respect to certain of the ARM Loans, the Loan Rate at origination may
be below the rate that would result if the index and margin relating thereto
were applied at origination. Under typical underwriting standards, the Obligor
under each Loan will be qualified on the basis of the Loan Rate in effect at
origination. The repayment of any such Loan may thus be dependent on the ability
of the Obligor to make larger level monthly payments following the adjustment of
the Loan Rate.
MATURITY AND PREPAYMENT CONSIDERATIONS
As indicated above under "The Loan Pools," the original terms to maturity
of the Loans in a given Loan Pool will vary depending upon the type of Loans
included in such Loan Pool. The Prospectus Supplement for a series of Securities
will contain information with respect to the types and maturities of the Loans
in the related Loan Pool. The prepayment experience with respect to the Loans in
a Loan Pool will affect the maturity, average life and yield of the related
series of Securities.
With respect to Balloon Loans, payment of the Balloon Amount (which, based
on the amortization schedule of such Loans, may be a substantial amount) will
generally depend on the Obligor's ability to obtain
65
refinancing of such Loan or to sell the Property prior to the maturity of the
Balloon Loan. The ability to obtain refinancing will depend on a number of
factors prevailing at the time refinancing or sale is required, including,
without limitation, real estate values, the Obligor's financial situation,
prevailing mortgage loan interest rates, the Obligor's equity in the related
Property, tax laws and prevailing general economic conditions. Neither the
Company, the Servicer, the Master Servicer, nor any of their affiliates will be
obligated to refinance or repurchase any Loan or to sell the Property.
A number of factors, including obligor mobility, economic conditions,
enforceability of due-on-sale clauses, loan market interest rates and the
availability of funds, affect prepayment experience. The Loans will generally
contain due-on-sale provisions permitting the obligee to accelerate the maturity
of the Loan upon sale or certain transfers by the Obligor of the underlying
Property. The Servicer will generally enforce any due-on-sale clause to the
extent it has knowledge of the conveyance or proposed conveyance of the
underlying Property and it is entitled to do so under applicable law; provided,
however, that the Servicer will not take any action in relation to the
enforcement of any due-on-sale provision which would adversely affect or
jeopardize coverage under any applicable insurance policy. Certain ARM Loans may
be assumable under certain conditions if the proposed transferee of the related
Property establishes its ability to repay the Loan and, in the reasonable
judgment of the Servicer, the Master Servicer or the related Sub-Servicer, the
security for the ARM Loan would not be impaired or might be improved by the
assumption. The extent to which ARM Loans are assumed by purchasers of the
Properties rather than prepaid by the related Obligors in connection with the
sales of the Properties will affect the weighted average life of the related
series of Securities. See "Description of the Securities--Collection and Other
Servicing Procedures" and "Certain Legal Aspects of the Loans and Related
Matters--Enforceability of Certain Provisions" for a description of certain
provisions of the Pooling and Servicing Agreement and certain legal developments
that may affect the prepayment experience on the Loans.
There can be no assurance as to the rate of prepayment of the Loans. The
Company is not aware of any reliable, publicly available statistics relating to
the principal prepayment experience of diverse portfolios of loans such as the
Loans over an extended period of time. All statistics known to the Company that
have been compiled with respect to prepayment experience on loans indicates that
while some loans may remain outstanding until their stated maturities, a
substantial number will be paid prior to their respective stated maturities.
Although the Loan Rates on ARM Loans will be subject to periodic
adjustments, such adjustments will (i) not increase or decrease such Loan Rates
by more than a fixed percentage amount on each adjustment date, (ii) not
increase such Loan Rates over a fixed percentage amount during the life of any
ARM Loan and (iii) be based on an index (which may not rise and fall
consistently with interest rates) plus the related Note Margin (which may be
different from margins being used at the time for newly originated adjustable
rate loans). As a result, the Loan Rates on the ARM Loans in a Loan Pool at any
time may not equal the prevailing rates for similar, newly originated adjustable
rate loans. In certain rate environments, the prevailing rates on fixed-rate
loans may be sufficiently low in relation to the then-current Loan Rates on ARM
Loans that the rate of prepayment may increase as a result of refinancings.
There can be no certainty as to the rate of prepayments on the Loans during any
period or over the life of any series of Securities.
As may be described in the related Prospectus Supplement, the related
Pooling and Servicing Agreement may provide that all or a portion of the
principal collected on or with respect to the related Loans may be applied by
the related Trustee to the acquisition of additional Loans during a specified
period (rather than used to fund payments of principal to Securityholders during
such period) with the result that the related securities possess an
interest-only period, also commonly referred to as a revolving period, which
will be followed by an amortization period. Any such interest-only or revolving
period may, upon the occurrence of certain events to be described in the related
Prospectus Supplement, terminate prior to the end of the specified period and
result in the earlier than expected amortization of the related Securities.
In addition, and as may be described in the related Prospectus Supplement,
the related Pooling and Servicing Agreement may provide that all or a portion of
such collected principal may be retained by the Trustee (and held in certain
temporary investments, including Loans) for a specified period prior to being
used to fund payments of principal to Securityholders.
66
The result of such retention and temporary investment by the Trustee of
such principal would be to slow the amortization rate of the related Securities
relative to the amortization rate of the related Loans, or to attempt to match
the amortization rate of the related Securities to an amortization schedule
established at the time such Securities are issued. Any such feature applicable
to any Securities may terminate upon the occurrence of events to be described in
the related Prospectus Supplement, resulting in the current funding of principal
payments to the related Securityholders and an acceleration of the amortization
of such Securities.
Under certain circumstances, the Servicer, the Company or, if specified in
the related Prospectus Supplement, the holders of the REMIC Residual Securities
or the Credit Enhancer may have the option to purchase the Loans in a Trust
Estate. See "The Pooling and Servicing Agreement--Termination; Retirement of
Securities."
CERTAIN LEGAL ASPECTS OF THE LOANS AND RELATED MATTERS
Mortgage Loans
The following discussion contains certain legal aspects of mortgage
loans that are general in nature. Because such legal aspects are governed in
part by applicable state law (which laws may differ substantially), the
following does not purport to be complete nor to reflect the laws of any
particular state nor to encompass the laws of all states in which the Properties
may be situated. In the event that a particular Trust Fund contains mortgage
loans with a concentration in a particular state, and such state's laws vary
materially from the general discussion below, the related Prospectus Supplement
will elaborate on the relevant laws of such state. The following is qualified in
its entirety by reference to the applicable federal and state laws governing the
Mortgage Loans. Any particular legal matters related to specific types of
Mortgage Loans will be set forth in the related Prospectus Supplement.
General
The Mortgage Loans will be secured by either deeds of trust or mortgages,
depending upon the prevailing practice in the state in which the Property
subject to a Mortgage Loan is located. In some states, a mortgage creates a lien
upon the real property encumbered by the mortgage. In other states, the mortgage
conveys legal title to the property to the mortgagee subject to a condition
subsequent (i.e., the payment of the indebtedness secured thereby). The mortgage
is not prior to the lien for real estate taxes and assessments and other charges
imposed under governmental police powers. Priority between mortgages depends on
their terms in some cases or on the terms of separate subordination or
intercreditor agreements, and generally on the order of recordation of the
mortgage in the appropriate recording office. There are two parties to a
mortgage, the mortgagor, who is the obligor and homeowner, and the mortgagee,
who is the lender. Under the mortgage instrument, the mortgagor delivers to the
mortgagee a note or bond and the mortgage. In the case of a land trust, there
are three parties because title to the property is held by a land trustee under
a land trust agreement of which the obligor is the beneficiary; at origination
of a mortgage loan, the obligor executes a separate undertaking to make payments
on the mortgage note. Although a deed of trust is similar to a mortgage, a deed
of trust has three parties; the obligor-homeowner called the trustor (similar to
a mortgagor), a lender (similar to a mortgagee) called the beneficiary, and a
third-party grantee called the trustee. Under a deed of trust, the obligor
grants the property, irrevocably until the debt is paid, in trust, generally
with a power of sale, to the trustee to secure payment of the obligation. The
trustee's authority under a deed of trust and the mortgagee's authority under a
mortgage are governed by law, the express provisions of the deed of trust or
mortgage, and, in some cases, the directions of the beneficiary.
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Cooperative Loans
If specified in the Prospectus Supplement relating to a series of
Securities, the Mortgage Loans also may consist of Cooperative Loans evidenced
by Cooperative Notes secured by security interests in shares issued by
cooperatives, which are private corporations that are entitled to be treated as
housing cooperatives under federal tax law, and in the related proprietary
leases or occupancy agreements granting exclusive rights to occupy specific
dwelling units in the cooperatives' buildings. The security agreement will
create a lien upon, or grant a title interest in, the property which it covers,
the priority of which will depend on the terms of the particular security
agreement as well as the order of recordation of the agreement in the
appropriate recording office. Such a lien or title interest is not prior to the
lien for real estate taxes and assessments and other charges imposed under
governmental police powers.
Each cooperative share owns in fee or has a leasehold interest in all the
real property and owns in fee or leases the building and all separate dwelling
units therein. The cooperative is directly responsible for property management
and, in most cases, payment of real estate taxes, other governmental impositions
and hazard and liability insurance. If there is a blanket mortgage or mortgages
on the cooperative buildings or underlying land, as is generally the case, or an
underlying lease of the land, as is the case in some instances, the cooperative,
as property mortgagor, or lessee, as the case may be, also is responsible for
meeting these mortgage or rental obligations. A blanket mortgage is ordinarily
incurred by the cooperative in connection with either the construction or
purchase of the cooperative's buildings or the obtaining of capital by the
cooperative. The interest of the occupant under proprietary leases or occupancy
agreements as to which that cooperative is the landlord generally is subordinate
to the interest of the holder of a blanket mortgage and to the interest of the
holder of a land lease. If the cooperative is unable to meet the payment
obligations (i) arising under a blanket mortgage, the mortgagee holding a
blanket mortgage could foreclose on that mortgage and terminate all subordinate
proprietary leases and occupancy agreements or (ii) arising under its land
lease, the holder of the landlord's interest under the land lease could
terminate it and all subordinate proprietary leases and occupancy agreements.
Also, a blanket mortgage on a cooperative may provide financing in the form of a
mortgage that does not fully amortize, with a significant portion of principal
being due in one final payment at maturity. The inability of the cooperative to
refinance a mortgage and its consequent inability to make such final payment
could lead to foreclosure by the mortgagee. Similarly, a land lease has an
expiration date and the inability of the cooperative to extend its term or, in
the alterative, to purchase the land could lead to termination of the
cooperative's interest in the property and termination of all proprietary leases
and occupancy agreements. In either event, a foreclosure by the holder of a
blanket mortgage or the termination of the underlying lease could eliminate or
significantly diminish the value of any collateral held by the lender who
financed the purchase by an individual tenant-stockholder of cooperative shares
or, in the case of the Loans, the collateral securing the Cooperative Loans.
The cooperative is owned by tenant-stockholders who, through ownership of
stock or shares in the corporation, receive proprietary leases or occupancy
agreements that confer exclusive rights to occupy specific units. Generally, a
tenant-stockholder of a cooperative must make a monthly payment to the
cooperative representing such tenant-stockholder's pro rata share of the
cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a cooperative and accompanying occupancy rights are financed through
a cooperative share loan evidenced by a promissory note and secured by an
assignment of and a security interest in the occupancy agreement or proprietary
lease and a security interest in the related cooperative shares. The lender
generally takes possession of the share certificate and a counterpart of the
proprietary lease or occupancy agreement and a financing statement covering the
proprietary lease or occupancy agreement and the cooperative shares is filed in
the appropriate state and local offices to perfect the lender's interest in its
collateral. Subject to the limitations discussed below, upon default of the
tenant-stockholder, the lender may sue for judgment on the promissory note,
dispose of the collateral at a public or private sale or otherwise proceed
against the collateral or tenant-stockholder as an individual as provided in the
security agreement covering the assignment of the proprietary lease or occupancy
agreement and the pledge of cooperative shares. See "Foreclosure on Shares of
Cooperatives" below.
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Foreclosure
Foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale (private sale) under a specific provision in the deed of trust
and state laws which authorize the trustee to sell the property upon any default
by the borrower under the terms of the note or deed of trust. Beside the
non-judicial remedy, a deed of trust may be judicially foreclosed. In addition
to any notice requirements contained in a deed of trust, in some states, the
trustee must record a notice of default and within a certain period of time send
a copy to the borrower trustor and to any person who has recorded a request for
a copy of notice of default and notice of sale. In addition, the trustee must
provide notice in some states to any other individual having an interest of
record in the real property, including any junior lienholders. If the deed of
trust is not reinstated within a specified period, a notice of sale must be
posted in a public place and, in most states, published for a specific period of
time in one or more local newspapers. In addition, some state laws require that
a copy of the notice of sale be posted on the property and sent to all parties
having an interest of record in the real property.
Foreclosure of a mortgage is generally accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in completion
of the foreclosure may occasionally result from difficulties in locating
necessary parties. Judicial foreclosure proceedings are often not contested by
any of the applicable parties. If the mortgagee's right to foreclose is
contested, the legal proceedings necessary to resolve the issue can be
time-consuming.
In some states, the borrower-trustor has the right to reinstate the loan at
any time following default until shortly before the trustee's sale. In general,
in such states, the borrower, or any other person having a junior encumbrance on
the real estate, may, during a reinstatement period, cure the default by paying
the entire amount in arrears plus the costs and expenses incurred in enforcing
the obligation.
In the case of foreclosure under either a mortgage or a deed of trust, the
sale by the referee or other designated officer or by the trustee is a public
sale. However, because of the difficulty a potential buyer at the sale would
have in determining the exact status of title and because the physical condition
of the property may have deteriorated during the foreclosure proceedings, it is
uncommon for a third party to purchase the property at a foreclosure sale unless
there is a great deal of economic incentive for the new purchaser to purchase
the subject property at the sale. Rather, it is common for the lender to
purchase the property from the trustee or referee for a credit bid less than or
equal to the unpaid principal amount of the mortgage or deed of trust, accrued
and unpaid interest and the expense of foreclosure. Generally, state law
controls the amount of foreclosure costs and expenses, including attorneys'
fees, which may be recovered by a lender. Thereafter, subject to the right of
the borrower in some states to remain in possession during the redemption
period, the lender will assume the burdens of ownership, including obtaining
hazard insurance and making such repairs at its own expense as are necessary to
render the property suitable for sale. The lender will commonly obtain the
services of a real estate broker and pay the broker's commission in connection
with the sale of the property. Depending upon market conditions, the ultimate
proceeds of the sale of the property may not equal the lender's investment in
the property and, in some states, the lender may be entitled to a deficiency
judgment. Any loss may be reduced by the receipt of any mortgage insurance
proceeds.
Foreclosure on Shares of Cooperatives
The cooperative shares and proprietary lease or occupancy agreement owned
by the tenant-stockholder and pledged to the lender are, in almost all cases,
subject to restrictions on transfer as set forth in the cooperative's
certificate of incorporation and by-laws, as well as in the proprietary lease or
occupancy agreement. The proprietary lease or occupancy agreement, even while
pledged, may be cancelled by the cooperative for failure by the tenant
stockholder to pay rent or other obligations or charges owed by such
tenant-stockholder, including mechanics' liens against the cooperative buildings
incurred by such tenant-stockholder. Commonly, rent and other obligations and
charges arising under a proprietary lease or occupancy agreement that are owed
to the cooperative are made liens upon the shares to which the proprietary lease
or occupancy agreement relates. In addition, the proprietary lease or occupancy
agreement generally permits the cooperative to terminate such lease or agreement
in the event the borrower defaults in the performance of covenants thereunder.
Typically, the
69
lender and the cooperative enter into a recognition agreement that, together
with any lender protection provisions contained in the proprietary lease,
establishes the rights and obligations of both parties in the event of a default
by the tenant-stockholder on its obligations under the proprietary lease or
occupancy agreement. A default by the tenant-stockholder under the proprietary
lease or occupancy agreement usually will constitute a default under the
security agreement between the lender and the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate such lease or
agreement until the lender has been provided with notice of and an opportunity
to cure the default. The recognition agreement typically provides that if the
proprietary lease or occupancy agreement is terminated, the cooperative will
recognize the lender's lien against proceeds from a sale of the cooperative
apartment, subject, however, to the cooperative's right to sums due under such
proprietary lease or occupancy agreement or sums that have become liens on the
shares relating to the proprietary lease or occupancy agreement. The total
amount owed to the cooperative by the tenant-stockholder, which the lender
generally cannot restrict and does not monitor, could reduce the amount realized
upon a sale of the collateral below the outstanding principal balance of the
Cooperative Loan and accrued and unpaid interest thereon.
Recognition agreements generally also provide that in the event of a
foreclosure on a Cooperative Loan, the lender must obtain the approval or
consent of the cooperative as required by the proprietary lease before
transferring the cooperative shares or assigning the proprietary lease.
Generally, the lender is not limited in any rights it may have to dispossess the
tenant-stockholder.
In New York, foreclosure on the cooperative shares is accomplished by
public sale in accordance with the provisions of Article 9 of the UCC and the
security agreement relating to those shares. Article 9 of the UCC requires that
a sale be conducted in a "commercially reasonable" manner. Whether a sale has
been conducted in a "commercially reasonable" manner will depend on the facts in
each case. In determining commercial reasonableness, a court will look to the
notice given the debtor and the method, manner, time, place and terms of the
sale and the sale price. Generally, a sale conducted according to the usual
practice of banks selling similar collateral will be considered reasonably
conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the cooperative corporation to receive sums due under
the proprietary lease or occupancy agreement. If there are proceeds remaining,
the lender must account to the tenant-stockholder for the surplus. Conversely,
if a portion of the indebtedness remains unpaid, the tenant-stockholder is
generally responsible for the deficiency. See "Anti-Deficiency Legislation and
Other Limitations on Lenders" below.
Rights of Redemption
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the borrower and foreclosed junior obligors or other parties are given
a statutory period in which to redeem the property from the foreclosure sale. In
some states, redemption may occur only upon payment of the entire principal
balance of the loan, accrued interest and expenses of foreclosure. In other
states, redemption may be authorized if the former borrower pays only a portion
of the sums due. The effect of a statutory right of redemption is to diminish
the ability of the lender to sell the foreclosed property. The rights of
redemption would defeat the title of any purchaser subsequent to foreclosure or
sale under a deed of trust. Consequently, the practical effect of the redemption
right is to force the lender to maintain the property and pay the expenses of
ownership until the redemption period has expired. In some states, there is no
right to redeem property after a trustee's sale under a deed of trust.
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Anti-Deficiency Legislation and Other Limitations on Lenders
Certain states have imposed statutory prohibitions that limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure. A deficiency
judgment is a personal judgment against the former borrower equal in most cases
to the difference between the amount due to the lender and the net amount
realized upon the public sale of the real property. In the case of a Loan
secured by a property owned by a trust where the Mortgage Note is executed on
behalf of the trust, a deficiency judgment against the trust following
foreclosure or sale under a deed of trust, even if obtainable under applicable
law, may be of little value to the mortgagee or beneficiary if there are no
trust assets against which such deficiency judgment may be executed. Other
statutes require the beneficiary or mortgagee to exhaust the security afforded
under a deed of trust or mortgage by foreclosure in an attempt to satisfy the
full debt before bringing a personal action against the borrower. In certain
other states, the lender has the option of bringing a personal action against
the borrower on the debt without first exhausting such security; however, in
some of these states the lender, following judgment on such personal action, may
be deemed to have elected a remedy and may be precluded from exercising remedies
with respect to the security. Consequently, the practical effect of the election
requirement, in those states permitting such election, is that lenders will
usually proceed against the security first rather than bringing a personal
action against the borrower. Finally, in certain other states, statutory
provisions limit any deficiency judgment against the former borrower following a
foreclosure to the excess of the outstanding debt over the fair value of the
property at the time of the public sale. The purpose of these statutes is
generally to prevent a beneficiary or mortgagee from obtaining a large
deficiency judgment against the former borrower as a result of low or no bids at
the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other federal and state statutory provisions, including the federal bankruptcy
laws and state laws affording relief to debtors, may interfere with or affect
the ability of the secured mortgage lender to realize upon collateral or enforce
a deficiency judgment. For example, with respect to federal bankruptcy law, a
court with federal bankruptcy jurisdiction may permit a debtor through his or
her Chapter 11 or Chapter 13 rehabilitative plan to cure a monetary default in
respect of a mortgage loan on a debtor's residence by paying arrearages within a
reasonable time period and reinstating the original mortgage loan payment
schedule even though the lender accelerated the mortgage loan and final judgment
of foreclosure had been entered in state court (provided no sale of the
residence had yet occurred) prior to the filing of the debtor's petition. Some
courts with federal bankruptcy jurisdiction have approved plans, based on the
particular facts of the reorganization case, that effected the curing of a
mortgage loan default by paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction also have indicated that the
terms of a mortgage loan secured by property of the debtor may be modified.
These courts have allowed modifications that include reducing the amount of each
monthly payment, changing the rate of interest, altering the repayment schedule,
forgiving all or a portion of the debt and reducing the lender's security
interest to the value of the residence, thus leaving the lender a general
unsecured creditor for the difference between the value of the residence and the
outstanding balance of the loan.
Certain states have imposed general equitable principles upon judicial
foreclosure. These equitable principles are generally designed to relieve the
borrower from the legal effect of the borrower's default under the related loan
documents. Examples of judicial remedies that have been fashioned include
judicial requirements that the lender undertake affirmative and expensive
actions to determine the causes for the borrower's default and the likelihood
that the borrower will be able to reinstate the loan. In some cases, lenders
have been required to reinstate loans or recast payment schedules in order to
accommodate borrowers who are suffering from temporary financial disabilities.
In other cases, such courts have limited the right of the lender to foreclose if
the default under the loan is not monetary, such as the borrower failing to
adequately maintain the property or the borrower executing a second deed of
trust affecting the property.
Certain tax liens arising under the Internal Revenue Code of 1986, as
amended, may in certain circumstances provide priority over the lien of a
mortgage or deed of trust. In addition, substantive requirements
71
are imposed upon mortgage lenders in connection with the origination and the
servicing of mortgage loans by numerous federal and some state consumer
protection laws. These laws include, by example, the federal Truth-in-Lending
Act, Real Estate Settlement Procedures Act, Equal Credit Opportunity Act, Fair
Credit Billing Act, Fair Credit Reporting Act and related statutes and the
California Fair Debt Collection Practices Act. These laws and regulations impose
specific statutory liabilities upon lenders who originate mortgage loans and
fail to comply with the provisions of the law. In some cases, this liability may
affect assignees of the mortgage loans.
Environmental Legislation
Certain states impose a statutory lien for associated costs on property
that is the subject of a cleanup action by the state on account of hazardous
wastes or hazardous substances released or disposed of on the property. Such a
lien generally will have priority over all subsequent liens on the property and,
in certain of these states, will have priority over prior recorded liens
including the lien of a mortgage. In some states, however, such a lien will not
have priority over prior recorded liens of a deed of trust. In addition, under
federal environmental legislation and under state law in a number of states, a
secured party which takes a deed in lieu of foreclosure or acquires a mortgaged
property at a foreclosure sale or assumes active control over the operation or
management of a property so as to be deemed an "owner" or "operator" of the
property may be liable for the costs of cleaning up a contaminated site.
Although such costs could be substantial, it is unclear whether they would be
imposed on a lender (such as a Trust Estate) secured by residential real
property. In the event that title to a Property securing a Mortgage Loan in a
Trust Estate was acquired by the Trust and cleanup costs were incurred in
respect of the Property, the holders of the related series of Securities might
realize a loss if such costs were required to be paid by the Trust.
Enforceability of Certain Provisions
Generally all of the Loans contain due-on-sale clauses. These clauses
permit the lender to accelerate the maturity of the loan if the borrower sells,
transfers or conveys the property. The enforceability of these clauses has been
the subject of legislation or litigation in many states, and in some cases the
enforceability of these clauses was limited or denied. However, the Garn-St.
Germain Depository Institutions Act of 1982 (the "Garn-St. Germain Act")
preempts state constitutional, statutory and case law that prohibits the
enforcement of due-on-sale clauses and permits lenders to enforce these clauses
in accordance with their terms, subject to certain limited exceptions. The
Garn-St Germain Act does "encourage" lenders to permit assumption of loans at
the original rate of interest or at some other rate less than the average of the
original rate and the market rate.
The Garn-St. Germain Act also sets forth nine specific instances in which a
mortgage lender covered by the Garn-St. Germain Act may not exercise a
due-on-sale clause, notwithstanding the fact that a transfer of the property may
have occurred. These include intra-family transfers, certain transfers by
operation of law, leases of fewer than three years and the creation of a junior
encumbrance. Regulations promulgated under the Garn-St. Germain Act also
prohibit the imposition of a prepayment penalty upon the acceleration of a loan
pursuant to a due-on-sale clause.
The inability to enforce a due-on-sale clause may result in a mortgage loan
bearing an interest rate below the current market rate being assumed by a new
home buyer rather than being paid off, that may have an impact upon the average
life of the Mortgage Loans and the number of Mortgage Loans that may be
outstanding until maturity.
Upon foreclosure, courts have imposed general equitable principles. These
equitable principles generally are designed to relieve the borrower from the
legal effect of his defaults under the loan documents. Examples of judicial
remedies that have been fashioned include judicial requirements that the lender
undertake affirmative and expensive actions to determine the causes for the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's judgment and have required that lenders reinstate loans or recast
payment schedules in order to accommodate borrowers who are suffering from
temporary financial disability. In other cases, courts have limited the right of
the lender to foreclose if the default under the mortgage instrument is not
monetary, such as the borrower failing to adequately
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maintain the property or the borrower executing a second mortgage or deed of
trust affecting the property. Finally, some courts have been faced with the
issue of whether or not federal or state constitutional provisions reflecting
due process concerns for adequate notice require that borrowers under deeds of
trust or mortgages receive notices in addition to the statutorily prescribed
minimum. For the most part, these cases have upheld the notice provisions as
being reasonable or have found that the sale by a trustee under a deed of trust,
or under a mortgage having a power of sale, does not involve sufficient state
action to afford constitutional protections to the borrower.
Certain Provisions of California Deeds of Trust
Most institutional lenders in California use a form of deed of trust that
confers on the beneficiary the right both to receive all proceeds collected
under any hazard insurance policy and all awards made in connection with any
condemnation proceedings, and to apply such proceeds and awards to any
indebtedness secured by the deed of trust, in such order as the beneficiary may
determine, provided, however, that California law prohibits the beneficiary from
applying insurance and condemnation proceeds to the indebtedness secured by the
deed of trust unless the beneficiary's security has been impaired by the
casualty or condemnation, and, if such security has been impaired, permits such
proceeds to be so applied only to the extent of such impairment. Thus, in the
event improvements on the property are damaged or destroyed by fire or other
casualty, or in the event the property is taken by condemnation, and, as a
result thereof, the beneficiary's security is impaired, the beneficiary under
the underlying first deed of trust will have the prior right to collect any
insurance proceeds payable under a hazard insurance policy and any award of
damages in connection with the condemnation and to apply the same to the
indebtedness secured by the first deed of trust. Proceeds in excess of the
amount of indebtedness secured by a first deed of trust will, in most cases, be
applied to the indebtedness of a junior deed of trust.
Another provision typically found in the forms of deed of trust used by
most institutional lenders in California obligates the trustor to pay before
delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which appear prior to the deed
of trust, to provide and maintain fire insurance on the property, to maintain
and repair the property and not to commit or permit any waste thereof, and to
appear in and defend any action or proceeding purporting to affect the property
or the rights of the beneficiary under the deed of trust. Upon a failure of the
trustor to perform any of these obligations, the beneficiary is given the right
under the deed of trust to perform the obligation itself, at its election, with
the trustor agreeing to reimburse the beneficiary for any sums expended by the
beneficiary on behalf of the trustor. All sums so expended by the beneficiary
become part of the indebtedness secured by the deed of trust.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ("Title V"), provides that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. A similar federal statute
was in effect with respect to mortgage loans made during the first three months
of 1980. The Office of Thrift Supervision is authorized to issue rules and
regulations and to publish interpretations governing implementation of Title V.
The statute authorized any state to reimpose interest rate limits by adopting,
before April 1, 1983, a law or constitutional provision which expressly rejects
application of the federal law. In addition, even where Title V is not so
rejected, any state is authorized by the law to adopt a provision limiting
discount points or other charges on mortgage loans covered by Title V. Certain
states have taken action to reimpose interest rate limits or to limit discount
points or other charges.
As indicated above under "Underwriting Program--Representations," each
Originator of a Mortgage Loan will have represented that such Mortgage Loan was
originated in compliance with then applicable state laws, including usury laws,
in all material respects. However, the Loan Rates on the Mortgage Loans will be
subject to applicable usury laws as in effect from time to time.
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Alternative Mortgage Instruments
Alternative mortgage instruments, including ARM Loans and early ownership
mortgage loans, originated by non-federally chartered lenders have historically
been subjected to a variety of restrictions. Such restrictions differed from
state to state, resulting in difficulties in determining whether a particular
alternative mortgage instrument originated by a state-chartered lender was in
compliance with applicable law. These difficulties were alleviated substantially
as a result of the enactment of Title VIII of the Garn-St. Germain Act ("Title
VIII"). Title VIII provides that: notwithstanding any state law to the contrary,
state-chartered banks may originate alternative mortgage instruments in
accordance with regulations promulgated by the Comptroller of the Currency with
respect to origination of alternative mortgage instruments by national banks;
state-chartered credit unions may originate alternative mortgage instruments in
accordance with regulations promulgated by the National Credit Union
Administration with respect to origination of alternative mortgage instruments
by federal credit unions; and all other non-federally chartered housing
creditors, including state-chartered savings and loan associations,
state-chartered savings banks and mutual savings banks and mortgage banking
companies, may originate alterative mortgage instruments in accordance with the
regulations promulgated by the Federal Home Loan Bank Board, predecessor to the
Office of Thrift Supervision, with respect to origination of alternative
mortgage instruments by federal savings and loan associations. Title VIII
provides that any state may reject applicability of the provisions of Title VIII
by adopting, prior to October 15, 1985, a law or constitutional provision
expressly rejecting the applicability of such provisions. Certain states have
taken such action.
Soldiers' and Sailors' Civil Relief Act of 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended (the "Relief Act"), a Obligor who enters military service after the
origination of such Obligor's Mortgage Loan (including a Obligor who was in
reserve status and is called to active duty after origination of the Mortgage
Loan), may not be charged interest (including fees and charges) above an annual
rate of 6% during the period of such Obligor's active duty status, unless a
court orders otherwise upon application of the lender. The Relief Act applies to
Obligors who are members of the Army, Navy, Air Force, Marines, National Guard,
Reserves, Coast Guard, and officers of the U.S. Public Health Service assigned
to duty with the military. Because the Relief Act applies to Obligors who enter
military service (including reservists who are called to active duty) after
origination of the related Mortgage Loan, no information can be provided as to
the number of loans that may be effected by the Relief Act. Application of the
Relief Act would adversely affect, for an indeterminate period of time, the
ability of the Servicer to collect full amounts of interest on certain of the
Mortgage Loans. Any shortfall in interest collections resulting from the
application of the Relief Act or similar legislation or regulations, which would
not be recoverable from the related Mortgage Loans, would result in a reduction
of the amounts distributable to the holders of the related Securities, and would
not be covered by advances, any Letter of Credit or any other form of Credit
Enhancement provided in connection with the related series of Securities. In
addition, the Relief Act imposes limitations that would impair the ability of
the Servicer to foreclose on an affected Mortgage Loan during the Obligor's
period of active duty status, and, under certain circumstances, during an
additional three month period thereafter. Thus, in the event that the Relief Act
or similar legislation or regulations applies to any Mortgage Loan which goes
into default, there may be delays in payment and losses on the related
Securities in connection therewith. Any other interest shortfalls, deferrals or
forgiveness of payments on the Mortgage Loans resulting from similar legislation
or regulations may result in delays in payments or losses to Securityholders of
the related series.
Manufactured Housing Contracts
General
The following discussion of certain legal aspects of the Contracts is
general in nature. Because certain of such legal aspects are governed by
applicable state law (which laws may differ substantially), the following does
not purport to be complete nor reflect the laws of any particular state, nor
encompass the laws of all states in which the properties securing the Contracts
are situated. In the event that a particular Trust Fund contains Contracts with
a concentration in a particular state, and such state's laws
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vary materially from the general discussion below, the related Prospectus
Supplement will elaborate on the relevant laws of such state. The summaries are
qualified in their entirety by reference to the applicable federal and state
laws governing the Contracts.
As a result of the assignment of the Contracts in a Loan Pool to the
Trustee, the Trust will succeed collectively to all of the rights (including the
right to receive payment on such Contracts), and will assume the obligations of
the obligee, under such Contracts. Each Contract evidences both (a) the
obligation of the Obligor to repay the loan evidenced thereby, and (b) the grant
of a security interest in the Manufactured Home. Certain aspects of both
features of the Contracts are described more fully below.
The following discussion focuses on issues relating generally to the
Company's or any lender's interest in manufactured housing contracts.
Security Interests in the Manufactured Homes
The Manufactured Homes securing the Contracts may be located in all 50
states and the District of Columbia. Security interests in Manufactured Homes,
similar to the ones securing the Contracts, ("Manufactured Homes") generally may
be perfected either by notation of the secured party's lien on the certificate
of title or by delivery of the required documents and payment of a fee to the
state motor vehicle authority, depending on state law. In some non-title states,
perfection pursuant to the provisions of the UCC is required. Generally, with
respect to manufactured housing Contracts individually originated or purchased
by the Company, the Company effects such notation or delivery of the required
documents and fees, and obtains possession of the certificate of title or a lien
certificate, as appropriate, under the laws of the state in which any
Manufactured Home securing a manufactured housing conditional sales Contract is
registered. If the Company fails, due to clerical errors or otherwise, to effect
such notation or delivery, or files the security interest under the wrong law
(for example, under a motor vehicle title statute rather than under the UCC, in
a few states), the Company may not have a first-priority security interest in
the Manufactured Home securing a Contract. As Manufactured Homes have become
larger and often have been attached to their sites without any apparent
intention to move them, courts in many states have held that Manufactured Homes,
under certain circumstances, may become subject to real estate title and
recording laws. As a result, a security interest in a Manufactured Home could be
rendered subordinate to the interests of other parties claiming an interest in
the Manufactured Home under applicable state real estate law. In order to
perfect a security interest in a Manufactured Home under real estate laws, the
holder of the security interest must file either a "fixture filing" under the
provisions of the UCC or a real estate mortgage under the real estate laws of
the state where the Manufactured Home is located. These filings must be made in
the real estate records office of the county where the Manufactured Home is
located. Most of the Contracts in any Loan Pool will contain provisions
prohibiting the Obligor from permanently attaching the Manufactured Home to its
site if it was not so attached on the date of the Contract. As long as each
Manufactured Home was not so attached on the date of the Contract and the
Obligor does not violate this agreement, a security interest in the Manufactured
Home will be governed by the certificate of title laws or the UCC, and the
notation of the security interest on the certificate of title or the filing of a
UCC financing statement will be effective to maintain the priority of the
Company's security interest in the Manufactured Home. Upon the conveyance of
each Contract to the Company, the Company will represent that it had obtained a
perfected first-priority security interest in the Manufactured Home securing the
related Contract. Such representation, however, will not be based upon an
inspection of the site of any Manufactured Home to determine if the Manufactured
Home had become permanently attached to its site.
In the absence of fraud, forgery or permanent affixation of a Manufactured
Home to its site by the obligor, or administrative error by state recording
officials, the notation of the lien of the Company on the certificate of title
or delivery of the required documents and fees (or if applicable, perfection
under the UCC) will be sufficient to protect the Company against the rights of
subsequent purchasers of a Manufactured Home or subsequent lenders who take a
security interest in the Manufactured Home. If there are any Manufactured Homes
as to which the security interest in favor of the Company is not perfected, such
security interest would be subordinate to the claims of, among others,
subsequent purchasers for value of and holders of perfected security interests
in such Manufactured Homes.
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In the event that the Obligor of a Manufactured Home moves it to a state
other than the state in which such Manufactured Home initially is registered,
under the laws of most states, the perfected security interest in the
Manufactured Home would continue for four months after such relocation and
thereafter until the Obligor registers the Manufactured Home in such state. If
the Obligor were to relocate a Manufactured Home to another state and were to
re-register the Manufactured Home in such state, and if steps are not taken by
the Company or the applicable Trust, to re-perfect an existing security interest
in such state, the security interest in the Manufactured Home would cease to be
perfected. A majority of states generally require surrender of a certificate of
title to such Manufactured Home. The Company must therefore surrender possession
if it holds the certificate of title to such Manufactured Home or, in the case
of Manufactured Homes registered in states which provide for notation of lien,
the Company would receive notice of surrender if its security interest in the
Manufactured Home is noted on the certificate of title. Accordingly, the Company
would have the opportunity to re-perfect its security interest in the
Manufactured Home in the state of relocation. In states which do not require a
certificate of title for registration of a Manufactured Home, re-registration
could defeat the perfection. In the ordinary course of servicing its
manufactured housing Contracts, the Company takes steps to effect such
re-perfection upon receipt of notice of re-registration or information from the
Obligor as to relocation. Similarly, when an Obligor under a Contract sells a
Manufactured Home, the Company must surrender possession of the certificate of
title or the Company will receive notice as a result of its lien noted thereon
and accordingly the Company will have an opportunity to require satisfaction of
the related Contract before release of the lien. Such protections generally
would not be available in the case of security, interests in Manufactured Homes
located in non-title states where perfection of such security interest is
achieved by appropriate filings under the UCC (as in effect in such state).
Under the laws of most states, liens for repairs performed on a
Manufactured Home and liens for personal property taxes take priority over a
perfected security interest in the Manufactured Home. Upon the conveyance of
each Contract to the Trust, the Company will represent that it had obtained a
perfected first-priority security interest in the Manufactured Home securing the
related Contract. However, such warranty will not be based on any lien searches
or other review. In addition, such liens could arise after the date of initial
issuance of the Securities. Notice may not be given to the Company, the
Servicer, the Trustee or Securityholders in the event such a lien arises.
Enforcement of Security Interests in Manufactured Homes
The Servicer on behalf of the Trustee, to the extent required by the
Pooling and Servicing Agreement, may take action to enforce the Trustee's
security interest with respect to Contracts in default by repossession and
resale of the Manufactured Homes securing such defaulted Contracts. In general,
as long as a Manufactured Home has not become subject to the real estate law, a
creditor can repossess a Manufactured Home by voluntary surrender, by
"self-help" repossession that is "peaceful" (i.e., without breach of the peace)
or, in the absence of voluntary surrender and the ability to repossess without
breach of the peace, by judicial process. The holder of a manufactured housing
Contract generally must give the obligor a number of days' notice prior to
commencement of any repossession. The UCC and consumer protection laws in most
states place restrictions on repossession sales, including requiring prior
notice to the obligor and commercial reasonableness in effecting such a sale.
The law in most states also requires that the obligor be given notice of any
sales prior to resale of the unit so that the obligor may redeem at or before
such resale.
Under the laws applicable in most states, a creditor is entitled to obtain
a deficiency, judgment from an obligor for any deficiency on repossession and
resale of the Manufactured Home securing such obligor's Contract. However, some
states impose prohibitions or limitations on deficiency judgments, and in many
cases the defaulting obligor would have no assets with which to pay a judgment.
Certain other statutory provisions, including federal and state bankruptcy
and insolvency laws and general equitable principles, may limit or delay the
Company's ability to repossess and resell any Manufactured Home or enforce a
deficiency judgment.
Land Secured Contracts
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General. The Land Secured Contract will, to the extent described under "The
Loan Pool," be secured by Mortgages on the property on which the related
Manufactured Homes are located. The Mortgages will either be mortgages or deeds
of trust, depending on the general real estate practice in the state in which
the Property is located. A mortgage creates a lien upon the real property
described in the mortgage. There are two parties to a mortgage: the mortgagor,
who is the borrower, and the mortgagee, who is the lender. The mortgagor
delivers to the mortgagee a note or bond evidencing the loan and the mortgage. A
deed of trust normally has three parties: the real property owner called the
trustor (similar to a mortgagor), a lender called the beneficiary (similar to
the mortgagee) and a third-party grantee called the trustee. Under a deed of
trust, the trustor grants the property, irrevocably until the debt is paid, "in
trust with power of sale" to the trustee to secure payment of the obligation.
Non-Recordation. Because of the expenses and administrative inconvenience
involved, the assignment of mortgages or deeds of trust to the Trustee will not
be recorded with respect to the Mortgages securing each Land Secured Contract.
The failure to record the assignments to the Trustee of the Mortgage securing
Land Secured Contracts may result in the sale of such Contracts or the Trustee's
rights in the land secured by the Mortgage being ineffective against creditors
of the Company or against a trustee in bankruptcy of the Company or against a
subsequent purchaser of such Contracts from the Company, without notice of the
sale to the Trustee.
Foreclosure. Foreclosure of a mortgage is generally accomplished by
judicial action. The action is initiated by the service of legal pleadings upon
all parties having an interest of record in the real property. Delays in
completion of the foreclosure occasionally may result from difficulties in
locating and serving necessary parties. Judicial foreclosure proceedings are
generally not contested by any of the parties due to the lack of the mortgagor's
equity in the property. However, when the mortgagee's right to foreclosure is
contested, the legal proceedings necessary to resolve the issue can be time
consuming and expensive. After the completion of a judicial foreclosure
proceeding, the court issues a judgment of foreclosure and a court officer
conducts the sale of the property.
Foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale under a specific provision in the deed of trust that authorizes
the trustee to sell the property to a third party upon any default by the
borrower under the terms of the note or deed of trust. In certain states, such
foreclosure also may be accomplished by judicial action in the manner provided
for foreclosure of mortgages.
In some states, the borrower-trustor has the right to reinstate the loan at
any time following default until shortly before the trustee's sale. In general,
the borrower, or any other person having a junior encumbrance on the real
estate, may, during a reinstatement period, cure the default by paying the
entire amount in arrears plus the costs and expenses incurred in enforcing the
obligation. Certain state laws control the amount of foreclosure expenses and
costs, including attorneys' fees, which may be recovered by a lender.
The sale must be conducted by public auction and must be held in the county
where all or some part of the property subject to the mortgage is located.
However, because of the difficulty a potential buyer at the sale would have in
determining the exact status of title and because the physical condition of the
property may have deteriorated during the foreclosure proceedings, it is not
common for a third party to purchase the property at the foreclosure sale.
Rather, the lender generally purchases the property for an amount equal to the
unpaid principal amount of the note, accrued and unpaid interest and the
expenses of foreclosure. Thereafter, subject to the right of the borrower in
some states to remain in possession during the redemption period, the lender
will assume the burdens of ownership, including obtaining hazard insurance and
making such repairs at its own expense as are necessary to render the property
suitable for sale. The lender commonly will obtain the services of a real estate
broker and pay the broker a commission in connection with the sale of the
property. Depending upon market conditions, the ultimate proceeds of the sale of
the property may not equal the lender's investment in the property.
Rights of Redemption. In some states, after a sale pursuant to a deed of
trust or a foreclosure of a mortgage, the borrower and certain foreclosed junior
lienors are given a statutory period in which to redeem the property from the
foreclosure sale. Redemption may occur upon payment of the entire principal
balance of the
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loan, accrued statutory interest and expenses of foreclosure. The effect of a
right of redemption is to diminish the ability of the lender to sell the
foreclosed property. The exercise of a right of redemption would defeat the
title of any purchaser from the lender subsequent to foreclosure and before
expiration of the redemption period. Consequently, the practical effect of the
redemption right is to force the lender to maintain the property, and pay the
expenses of ownership until the redemption period has expired.
Anti-Deficiency Legislation and Other Limitations on Lenders. Certain
states have imposed statutory restrictions that limit the remedies of a
mortgagee under a mortgage relating to a single family residence. In some
states, statutes limit the right of the lender to obtain a deficiency judgment
against the borrower following foreclosure or sale under a deed of trust. A
deficiency judgment is a personal judgment against the borrower equal in most
cases to the difference between the amount due to the lender and the net amount
realized upon the foreclosure sale.
Some state statutes may require the lender to exhaust the security afforded
under a mortgage or deed of trust by foreclosure in an attempt to satisfy the
full debt before bringing a personal action against the borrower. In certain
other states, the lender has the option of bringing a personal action against
the borrower on the debt without first exhausting such security; however, in
some of these states, the lender, following judgment on such personal action,
may be deemed to have elected a remedy and may be precluded from exercising
remedies with respect to the security.
Other statutory provisions may limit any deficiency judgment against the
former borrower following a foreclosure sale to the excess of the outstanding
debt over the fair market value of the property at the time of such sale. The
purpose of these statutes is to prevent a beneficiary or a mortgagee from
obtaining a large deficiency judgment against the former borrower as a result of
low or no bids at the foreclosure sale.
In some states, exceptions to the anti-deficiency statutes are provided for
in certain instances where the value of the lender's security has been impaired
by acts or omissions of the borrower, for example, in the event of waste of the
property.
In addition to anti-deficiency and related legislation, numerous other
federal and state, statutory provisions, including the federal bankruptcy laws,
the federal Soldiers' and Sailors' Civil Relief Act of 1940 and state laws
affording relief to debtors, may interfere with or affect the ability of a
secured mortgage lender to realize upon its security. A bankruptcy court may
grant the debtor a reasonable time to cure a payment default, and in the case of
a mortgage loan not secured by the debtor's principal residence, also may reduce
the monthly payments due under such mortgage loan, change the rate of interest
and alter the mortgage loan repayment schedule. Certain court decisions have
applied such relief to claims secured by, the debtor's principal residence.
The Code provides priority to certain tax liens over the lien of the
mortgage or deed of trust. The laws of some states provide priority to certain
tax liens over the lien of the mortgage or deed of trust. Numerous federal and
some state consumer protection laws impose substantive requirements upon
mortgage lenders in connection with the origination, servicing and enforcement
of mortgage loans. These laws include the federal Truth in Lending Act, Real
Estate Settlement Procedures Act, Equal Credit Opportunity Act, Fair Credit
Billing Act, Fair Credit Reporting Act, and related statutes and regulations.
These federal laws and state laws impose specific statutory liabilities upon
lenders who originate or service mortgage loans and who fail to comply with the
provisions of the law. In some cases, this liability may affect assignees of the
mortgage loans.
Consumer Protection Laws
The so-called "Holder-in-Due-Course" rule of the Federal Trade Commission
is intended to defeat the ability of the transferor of a consumer credit
contract which is the seller of goods which gave rise to the transaction (and
certain related lenders and assignees) to transfer such contract free of notice
of claims by the obligor thereunder. The effect of this rule is to subject the
assignee of such a contract to all claims and defenses which the obligor could
assert against the seller of goods. Liability under this rule is limited to
amounts paid under such a contract; however, the obligor also may be able to
assert the rule to set off remaining amounts due
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as a defense against a claim brought by the assignee against such obligor.
Generally, this rule will apply to any Contracts conveyed to the Trustee and to
any claims made by the Servicer on behalf of the Trustee, as the assignee of the
Company. Numerous other federal and state consumer protection laws impose
requirements applicable to the origination and lending pursuant to such
Contracts, including the Truth in Lending Act, the Federal Trade Commission Act,
the Fair Credit Billing Act, the Fair Credit Reporting Act, the Equal Credit
Opportunity Act, the Fair Debt Collection Practices Act and the Uniform Consumer
Credit Code. In the case of some of these laws, the failure to comply with their
provisions may affect the enforceability of the related Contract or create
liability for the Trust.
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended (the "Relief Act"), if so required by a obligor under a manufactured
housing contract who enters military service after the origination of such
obligor's contract (including a obligor who is a member of the National Guard or
is in reserve status at the time of the origination of the contract and is later
called to active duty), such obligor may not be charged interest above an annual
rate of 6% during the period of such obligor's active duty status, unless a
court orders otherwise upon application of the lender. In addition, the Relief
Act imposes limitations which would impair the ability of any lender to
foreclose on an affected contract during the obligor's period of active duty
status. It is possible that application of the Relief Act to certain of the
Contracts could have an effect, for an indeterminate period of time, on the
ability of the Servicer to collect full amounts of interest or foreclose on such
Contracts and to the extent not covered by a Credit Facility, could result in
delays in payment or losses to the holders of the related Certificates. The
Company will not make any representation or warranty as to whether any Contract
is or could become subject to the Relief Act.
Transfers of Manufactured Homes; Enforceability of Restrictions on Transfer
The Contracts comprising any Loan Pool generally will prohibit the sale or
transfer of the related Manufactured Homes without the consent of the Obligee
and permit the acceleration of the maturity of the Contracts by the Obligee upon
any such sale or transfer that is not consented to. Under the Pooling and
Servicing Agreement, the Servicer may be required to consent to any such
transfer and to permit the assumption of the related Contract if the proposed
buyer meets the Servicer's underwriting standards and enters into an assumption
agreement, the Servicer determines that permitting such assumption will not
materially increase the risk of nonpayment of the Contract and such action will
not adversely affect or jeopardize any coverage under any insurance policy
required by the Agreement. If the Servicer determines that these conditions have
not been fulfilled, then it may be required to withhold its consent to the
transfer, but only to the extent permitted under the Contract and applicable law
and governmental regulations and only to the extent that such action will not
adversely affect or jeopardize any coverage under any insurance policy required
by the Agreement. In certain cases, a delinquent Obligor may attempt to transfer
a Manufactured Home in order to avoid a repossession proceeding with respect to
such Manufactured Home.
In the case of a transfer of a Manufactured Home after which the Obligee
desires to accelerate the maturity of the related Contract, the Obligee's
ability to do so will depend on the enforceability under state law of the clause
permitting acceleration on transfer. The Garn-St. Germain Depositary
Institutions Act of 1982 preempts, subject to certain exceptions and conditions,
state laws prohibiting enforcement of such clauses applicable to Manufactured
Homes. To the extent such exceptions and conditions apply in some states, the
Servicer may be prohibited from enforcing such a clause in respect of certain
Manufactured Homes.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Controls
Act of 1980, as amended ("Title V"), provides that, subject to the following
conditions, state usury limitations shall not apply to any loan which is secured
by a first lien on certain kinds of manufactured housing. The Contracts would be
covered under Title V if, among other things, they satisfy certain conditions
governing the terms of any prepayments, late charges and deferral fees and
requiring a 30-day notice period prior to instituting any action leading to
repossession of the related unit.
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Title V authorized any state to reimpose limitations on interest rates and
finance charges by adopting before April 1, 1983 a law or constitutional
provision which expressly rejects application of the federal law. Fifteen states
adopted such a law prior to the April 1, 1983 deadline. In addition, even where
Title V was not so rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on loans covered by Title V.
Upon the conveyance of each Contract to the Trust, Receivables Corp. will
represent that such Contract complied with applicable usury laws.
FEDERAL INCOME TAX CONSIDERATIONS
General
The following is a general discussion of the material anticipated federal
income tax considerations to investors of the purchase, ownership and
disposition of the Securities offered hereby. Dewey Ballantine, counsel to the
Company, has issued its approving opinion of the matters discussed herein. The
discussion is based upon laws, regulations, rulings and decisions now in effect,
all of which are subject to change. The discussion below does not purport to
deal with all federal tax considerations applicable to all categories of
investors, some of which may be subject to special rules. Investors should
consult their own tax advisors in determining the federal, state, local and any
other tax consequences to them of the purchase, ownership and disposition of the
Securities.
The following discussion addresses securities of three general types: (i)
securities ("Grantor Trust Securities") representing interests in a Trust (a
"Grantor Trust") which the Company will covenant not to elect to have treated as
a real estate mortgage investment conduit (a "REMIC"); (ii) securities ("REMIC
Securities") representing interests in a Trust, or a portion thereof, which the
Company will covenant to elect to have treated as a REMIC under Sections 860A
through 860G of the Internal Revenue Code of 1986, as amended (the "Code"); and
(iii) securities ("Debt Securities") that are intended to be treated for federal
income tax purposes as indebtedness secured by the underlying Loans. This
Prospectus does not address the tax treatment of partnership interests. Such a
discussion will be set forth in the related Prospectus Supplement for any Trust
issuing Securities characterized as partnership interests. The Prospectus
Supplement for each series of Securities will indicate whether a REMIC election
(or elections) will be made for the related Trust and, if a REMIC election is to
be made, will identify all "regular interests" and "residual interests" in the
REMIC. For purposes of this discussion, references to a "Securityholder" or a
"Holder" are to the beneficial owner of a Security.
Grantor Trust Securities
With respect to each series of Grantor Trust Securities, Dewey Ballantine,
special tax counsel to the Company, will deliver its opinion to the Company that
the related Grantor Trust will be classified as a grantor trust and not as a
partnership or an association taxable as a corporation. Accordingly, each Holder
of a Grantor Trust Security will generally be treated as the owner of an
interest in the Loans included in the Grantor Trust.
For purposes of the following discussion, a Grantor Trust Security
representing an undivided equitable ownership interest in the principal of the
Loans constituting the related Grantor Trust, together with interest thereon at
a pass-through rate, will be referred to as a "Grantor Trust Fractional Interest
Security." A Grantor Trust Security representing ownership of all or a portion
of the difference between interest paid on the Loans constituting the related
Grantor Trust and interest paid to the Holders of Grantor Trust Fractional
Interest Securities issued with respect to such Grantor Trust will be referred
to as a "Grantor Trust Strip Security."
Special Tax Attributes
Dewey Ballantine, special tax counsel to the Company, will deliver its
opinion to the Company that (a) Grantor Trust Fractional Interest Securities
will represent interests in (i) "qualifying real property loans" within the
meaning of Section 593(d) of the Code; (ii) "loans . . . secured by an interest
in real property" within the meaning of Section 7701(a)(19)(C)(v) of the Code;
and (iii) "obligation[s] (including any participation or certificate of
beneficial ownership therein) which . . . [are] principally secured by an
interest in real property"
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within the meaning of Section 860G(a)(3)(A) of the Code; and (b) interest on
Grantor Trust Fractional Interest Securities will be considered "interest on
obligations secured by mortgages on real property or on interests in real
property" within the meaning of Section 856(c)(3)(B) of the Code. In addition,
the Grantor Trust Strip Securities will be "obligation[s] (including any
participation or certificate of beneficial ownership therein) . . . principally
secured by an interest in real property" within the meaning of Section
860G(a)(3)(A) of the Code.
Taxation of Holders of Grantor Trust Securities
Holders of Grantor Trust Fractional Interest Securities generally will be
required to report on their federal income tax returns their respective shares
of the income from the Loans (including amounts used to pay reasonable servicing
fees and other expenses but excluding amounts payable to Holders of any
corresponding Grantor Trust Strip Securities) and, subject to the limitations
described below, will be entitled to deduct their shares of any such reasonable
servicing fees and other expenses. If a Holder acquires a Grantor Trust
Fractional Interest Security for an amount that differs from its outstanding
principal amount, the amount includible in income on a Grantor Trust Fractional
Interest Security may differ from the amount of interest distributable thereon.
See "--Discount and Premium." Individuals holding a Grantor Trust Fractional
Interest Security directly or through certain pass-through entities will be
allowed a deduction for such reasonable servicing fees and expense only to the
extent that the aggregate of such Holder's miscellaneous itemized deductions
exceeds 2% of such Holder's adjusted gross income. Further, Holders (other than
corporations) subject to the alternative minimum tax may not deduct
miscellaneous itemized deductions in determining alternative minimum taxable
income.
Holders of Grantor Trust Strip Securities generally will be required to
treat such Securities as "stripped coupons" under Section 1286 of the Code.
Accordingly, such a Holder will be required to treat the excess of the total
amount of payments on such a Security over the amount paid for such Security as
original issue discount and to include such discount in income as it accrues
over the life of such Security. See "--Discount and Premium."
Grantor Trust Fractional Interest Securities may also be subject to the
coupon stripping rules if a class of Grantor Trust Strip Securities is issued as
part of the same series of Securities. The consequences of the application of
the coupon stripping rules would appear to be that any discount arising upon the
purchase of such a Security (and perhaps all stated interest thereon) would be
classified as original issue discount and includible in the Holder's income as
it accrues (regardless of the Holder's method of accounting), as described below
under "--Discount and Premium." The coupon stripping rules will not apply,
however, if (i) the pass-through rate is no more than 100 basis points lower
than the gross rate of interest payable on the underlying Loans and (ii) the
difference between the outstanding principal balance on the Security and the
amount paid for such Security is less than 0.25% of such principal balance times
the weighted average remaining maturity of the Security.
Sales of Grantor Trust Securities
Any gain or loss recognized on the sale of a Grantor Trust Security (equal
to the difference between the amount realized on the sale and the adjusted basis
of such Grantor Trust Security) will be capital gain or loss, except to the
extent of accrued and unrecognized market discount, which will be treated as
ordinary income, and in the case of banks and other financial institutions
except as provided under Section 582(c) of the Code. The adjusted basis of a
Grantor Trust Security will generally equal its cost, increased by any income
reported by the seller (including original issue discount and market discount
income) and reduced (but not below zero) by any previously reported losses, any
amortized premium and by any distributions of principal.
Grantor Trust Reporting
The Trustee will furnish to each Holder of a Grantor Trust Fractional
Interest Security with each distribution a statement setting forth the amount of
such distribution allocable to principal on the underlying Loans and to interest
thereon at the rate at which interest is payable on such Security. In addition,
within a reasonable time after the end of each calendar year, based on
information provided by the Servicer, the Trustee
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will furnish to each Holder during such year such customary factual information
as the Servicer deems necessary or desirable to enable Holders of Grantor Trust
Securities to prepare their tax returns and will furnish comparable information
to the Internal Revenue Service (the "IRS") as and when required to do so by
law.
REMIC Securities
If provided in a related Prospectus Supplement, an election will be made to
treat a Trust as one or more REMICs under the Code. Qualification as a REMIC
requires ongoing compliance with certain conditions. With respect to each series
of Securities for which such an election is made, Dewey Ballantine, special tax
counsel to the Company, will deliver its opinion to the Company that, assuming
compliance with the Agreement, the Trust will be treated as a REMIC for federal
income tax purposes. A Trust for which a REMIC election is made will be referred
to herein as a "REMIC Trust." The Securities of each class will be designated as
"regular interests" in the REMIC Trust except that a separate class will be
designated as the "residual interest" in the REMIC Trust. The Prospectus
Supplement for each series of Securities will state whether Securities of each
class will constitute a regular interest (a "REMIC Regular Security") or a
residual interest (a "REMIC Residual Security").
A REMIC Trust will not be subject to federal income tax except with respect
to income from prohibited transactions and in certain other instances described
below. See "--Taxes on a REMIC Trust." Generally, the total income from the
Loans in a REMIC Trust will be taxable to the Holders of the Securities of that
series, as described below.
Regulations issued by the Treasury Department on December 23, 1992 (the
"REMIC Regulations") provide some guidance regarding the federal income tax
consequences associated with the purchase, ownership and disposition of REMIC
Securities. While certain material provisions of the REMIC Regulations are
discussed below, investors should consult their own tax advisors regarding the
possible application of the REMIC Regulations in their specific circumstances.
Special Tax Attributes
REMIC Regular Securities and REMIC Residual Securities will be "regular or
residual interests in a REMIC" within the meaning of Section 7701(a)(19)(C)(xi)
of the Code, "qualifying real property loans" within the meaning of Section
593(d) of the Code and "real estate assets" within the meaning of Section
856(c)(5)(A) of the Code. If at any time during a calendar year less than 95% of
the assets of a REMIC Trust consist of "qualified mortgages" (within the meaning
of Section 860G(a)(3) of the Code) then the portion of the REMIC Regular
Securities and REMIC Residual Securities that are qualifying assets under those
Sections during such calendar year may be limited to the portion of the assets
of such REMIC Trust that are qualified mortgages. Similarly, income on the REMIC
Regular Securities and REMIC Residual Securities will be treated as "interest on
obligations secured by mortgages on real property" within the meaning of Section
856(c)(3)(B) of the Code, subject to the same limitation as set forth in the
preceding sentence. For purposes of applying this limitation, a REMIC Trust
should be treated as owning the assets represented by the qualified mortgages.
REMIC Regular Securities and REMIC Residual securities held by a financial
institution to which Section 585, 586 or 593 of the Code applies will be treated
as evidences of indebtedness for purposes of Section 582(c)(1) of the Code.
REMIC Regular Securities will also be qualified mortgages with respect to other
REMICs.
Taxation of Holders of REMIC Regular Securities
Except as indicated below in this federal income tax discussion, the REMIC
Regular Securities will be treated for federal income tax purposes as debt
instruments issued by the REMIC Trust on the date such Securities are first sold
to the public (the "Closing Date") and not as ownership interests in the REMIC
Trust or its assets. Holders of REMIC Regular Securities that otherwise report
income under a cash method of accounting will be required to report income with
respect to such Securities under an accrual method. For additional tax
consequences relating to REMIC Regular Securities purchased at a discount or
with premium, see "-Discount and Premium," below.
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Taxation of Holders of REMIC Residual Securities
Daily Portions. Except as indicated below, a Holder of a REMIC Residual
Security for a REMIC Trust generally will be required to report its daily
portion of the taxable income or net loss of the REMIC Trust for each day during
a calendar quarter that the Holder owned such REMIC Residual Security. For this
purpose, the daily portion shall be determined by allocating to each day in the
calendar quarter its ratable portion of the taxable income or net loss of the
REMIC Trust for such quarter and by allocating the amount so allocated among the
Holders of REMIC Residual Securities (on such day) in accordance with their
percentage interests on such day. Any amount included in the gross income or
allowed as a loss of any Holder of a REMIC Residual Security by virtue of this
paragraph will be treated as ordinary income or loss.
The requirement that each Holder of a REMIC Residual Security report its
daily portion of the taxable income or net loss of the REMIC Trust will continue
until there are no Securities of any class outstanding, even though the Holder
of the REMIC Residual Security may have received full payment of the stated
interest and principal on its REMIC Residual Security.
The Trustee will provide to Holders of REMIC Residual Securities of each
series of Securities (i) such information as is necessary to enable them to
prepare their federal income tax returns and (ii) any reports regarding the
Securities of such series that may be required under the Code.
Taxable Income or Net Loss of a REMIC Trust. The taxable income or net loss
of a REMIC Trust will be the income from the qualified mortgages it holds and
any reinvestment earnings less deductions allowed to the REMIC Trust. Such
taxable income or net loss for a given calendar quarter will be determined in
the same manner as for an individual having the calendar year as the taxable
year and using the accrual method of accounting, with certain modifications.
First, a deduction will be allowed for accruals of interest (including any
original issue discount, but without regard to the investment interest
limitation in Section 163(d) of the Code) on the REMIC Regular Securities (but
not the REMIC Residual securities), even though REMIC Regular Securities are for
non-tax purposes evidences of beneficial ownership rather than indebtedness of a
REMIC Trust. Second, market discount or premium equal to the difference between
the total stated principal balances of the qualified mortgages and the basis of
the REMIC Trust therein generally will be included in income (in the case of
discount) or deductible (in the case of premium) by the REMIC Trust as it
accrues under a constant yield method, taking into account the "Prepayment
Assumption" (as defined in the related Prospectus Supplement, see "--Discount
and Premium--Original Issue Discount," below). The basis of a REMIC Trust in the
qualified mortgages is the aggregate of the issue prices of all the REMIC
Regular Securities and REMIC Residual Securities in the REMIC Trust on the
related Closing Date. If, however, a substantial amount of a class of REMIC
Regular Securities or REMIC Residual Securities has not been sold to the public,
then the fair market value of all the REMIC Regular Securities or REMIC Residual
Securities in that class as of the related Closing Date should be substituted
for the issue price.
Third, no item of income, gain, loss or deduction allocable to a prohibited
transaction (see "-Taxes on a REMIC Trust-- Prohibited Transactions") will be
taken into account. Fourth, a REMIC Trust generally may not deduct any item that
would not be allowed in calculating the taxable income of a partnership by
virtue of Section 703(a)(2) of the Code. Finally, the limitation on
miscellaneous itemized deductions imposed on individuals by Section 67 of the
Code will not be applied at the REMIC Trust level to any servicing and guaranty
fees (See, however, "--Pass-Through of Servicing and Guaranty fees to
Individuals.") In addition, under the REMIC Regulations, any expenses that are
incurred in connection with the formation of a REMIC Trust and the issuance of
the REMIC Regular Securities and REMIC Residual Securities are not treated as
expenses of the REMIC Trust for which a deduction is allowed. If the deductions
allowed to a REMIC Trust exceed its gross income for a calendar quarter, such
excess will be a net loss for the REMIC Trust for that calendar quarter. The
REMIC Regulations also provide that any gain or loss to a REMIC Trust from the
disposition of any asset, including a qualified mortgage or "permitted
investment" (as defined in Section 860G(a)(5) of the Code) will be treated as
ordinary gain or loss.
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A Holder of a REMIC Residual Security may be required to recognize taxable
income without being entitled to receive a corresponding amount of cash. This
could occur, for example, if the qualified mortgages are considered to be
purchased by the REMIC Trust at a discount, some or all of the REMIC Regular
Securities are issued at a discount, and the discount included as a result of a
prepayment on a Loan that is used to pay principal on the REMIC Regular
Securities exceeds the REMIC Trust's deduction for unaccrued original issue
discount relating to such REMIC Regular Securities. Taxable income may also be
greater in earlier years because interest expense deductions, expressed as a
percentage of the outstanding principal amount of the REMIC Regular Securities,
may increase over time as the earlier classes of REMIC Regular Securities are
paid, whereas interest income with respect to any given Loan expressed as a
percentage of the outstanding principal amount of that Loan, will remain
constant over time.
Basis Rules and Distributions. A Holder of a REMIC Residual security has an
initial basis in its Security equal to the amount paid for such REMIC Residual
Security. Such basis is increased by amounts included in the income of the
Holder and decreased by distributions and by any net loss taken into account
with respect to such REMIC Residual Security. A distribution on a REMIC Residual
Security to a Holder is not included in gross income to the extent it does not
exceed such Holder's basis in the REMIC Residual Security (adjusted as described
above) and, to the extent it exceeds the adjusted basis of the REMIC Residual
Security, shall be treated as gain from the sale of the REMIC Residual Security.
A Holder of a REMIC Residual Security is not allowed to take into account
any net loss for any calendar quarter to the extent such net loss exceeds such
Holder's adjusted basis in its REMIC Residual Security as of the close of such
calendar quarter (determined without regard to such net loss). Any loss
disallowed by reason of this limitation may be carried forward indefinitely to
future calendar quarters and, subject to the same limitation, may be used only
to offset income from the REMIC Residual Security.
Excess Inclusions. Any "excess inclusions" with respect to a REMIC Residual
Security are subject to certain special tax rules. With respect to a Holder of a
REMIC Residual Security, the "excess inclusions" for any calendar quarter is
defined as the excess (if any) of the daily portions of taxable income over the
sum of the "daily accruals" for each day during such quarter that such REMIC
Residual Security was held by such Holder. The "daily accruals" are determined
by allocating to each day during a calendar quarter its ratable portion of the
product of the "adjusted issue price" of the REMIC Residual Security at the
beginning of the calendar quarter and 120% of the "federal long-term rate" in
effect on the Settlement Date, based on quarterly compounding and properly
adjusted for the length of such quarter. For this purpose, the "adjusted issue
price" of a REMIC Residual Security as of the beginning of any calendar quarter
is equal to the "issue price" of the REMIC Residual Security, increased by the
amount of daily accruals for all prior quarters and decreased by any
distributions made with respect to such REMIC Residual Security before the
beginning of such quarter. The "issue price" of a REMIC Residual Security is the
initial offering price to the public (excluding bond houses and brokers) at
which a substantial number of the REMIC Residual Security was sold. The "federal
long-term rate" is a blend of current yields on Treasury securities having a
maturity of more than nine years, computed and published monthly by the IRS.
For Holders of REMIC Residual Securities that are thrift institutions
described in Section 593 of the Code, income from a REMIC Residual Security
generally may be offset by losses from other activities. Under the REMIC
Regulations, such an organization is treated as having applied its allowable
deductions for the year first to offset income that is not an excess inclusion
and then to offset that portion of its income that is an excess inclusion. For
other Holders of REMIC Residual Securities, any excess inclusions cannot be
offset by losses from other activities. For Holders that are subject to tax only
on unrelated business taxable income (as defined in Section 511 of the Code), an
excess inclusion of such Holder is treated as unrelated business taxable income.
With respect to variable contracts (within the meaning of Section 817 of the
Code), a life insurance company cannot adjust its reserve to the extent of any
excess inclusion, except as provided in regulations. The REMIC Regulations
indicate that if a Holder of a REMIC Residual Security is a member of an
affiliated group filing a consolidated income tax return, the taxable income of
the affiliated group cannot be less than the sum of the excess inclusions
attributable to all residual interests in REMICS held by members of the
affiliated group. For
84
a discussion of the effect of excess inclusions on certain foreign investors
that own REMIC Residual Securities, see "--Foreign Investors" below.
The REMIC Regulations provide that an organization to which Section 593 of
the Code applies and which is the Holder of a REMIC Residual Security may not
use its allowable deductions to offset any excess inclusions with respect to
such Security if such Security does not have "significant value." For this
purpose, a REMIC Residual Security has "significant value" under the REMIC
Regulations if (i) its issue price is at least 2% of the aggregate of the issue
prices of all the REMIC Regular Securities and REMIC Residual Securities in that
REMIC Trust and (ii) its "anticipated weighted average life" is at least 20% of
the anticipated weighted average life of such REMIC Trust.
In determining whether a REMIC Residual Security has significant value, the
"anticipated weighted average life" of such Security is based in part on the
Prepayment Assumption, except that all anticipated payments on such Security are
taken into account, regardless to their designation as principal or interest.
The anticipated weighted average life of a REMIC Trust is the weighted average
of the anticipated weighted average lives of the Securities.
The Treasury Department also has the authority to issue regulations that
would treat all taxable income of a REMIC Trust as excess inclusions if the
REMIC Residual Security does not have significant value. Although the Treasury
Department did not exercise this authority in the REMIC Regulations, future
regulations may contain such a rule. If such a rule were adopted, it is unclear
whether the test for significant value that is contained in the REMIC
Regulations and discussed in the two preceding paragraphs would be applicable.
If no such rule is applicable, excess inclusions would be calculated as
discussed above.
In the case of any REMIC Residual Securities that are held by a real estate
investment trust, the aggregate excess inclusions with respect to such REMIC
Residual Securities reduced (but not below zero) by the real estate investment
trust taxable income (within the meaning of Section 857(b)(2) of the Code,
excluding any net capital gain) will be allocated among the shareholders of such
trust in proportion to the dividends received by such shareholders from such
trust, and any amount so allocated will be treated as an excess inclusion with
respect to a REMIC Residual Security as if held directly by such shareholder.
Similar rules will apply in the case of regulated investment companies, common
trust funds and certain cooperatives that hold a REMIC Residual Security.
Pass-Through of Servicing and Guaranty Fees to Individuals. A Holder of a
REMIC Residual Security who is an individual will be required to include in
income a share of any servicing and guaranty fees. A deduction for such fees
will be allowed to such Holder only to the extent that such fees, along with
certain of such Holder's other miscellaneous itemized deductions exceed 2% of
such Holder's adjusted gross income. In addition, a Holder of a REMIC Residual
Security may not be able to deduct any portion of such fees in computing such
Holder's alternative minimum tax liability. A Holder's share of such fees will
generally be determined by (i) allocating the amount of such expenses for each
calendar quarter on a pro rata basis to each day in the calendar quarter, and
(ii) allocating the daily amount among the Holders in proportion to their
respective holdings on such day.
Taxes on a REMIC Trust
Prohibited Transactions. The Code imposes a tax on a REMIC equal to 100% of
the net income derived from "prohibited transactions." In general, a "prohibited
transaction" means the disposition of a qualified mortgage other than pursuant
to certain specified exceptions, the receipt of investment income from a source
other than a qualified mortgage or certain other permitted investments, the
receipt of compensation for services, or the disposition of an asset purchased
for temporary investment with payments on qualified mortgages pending
distributions on the regular and residual interests.
Contributions to a REMIC after the Startup Day. The Code imposes a tax on a
REMIC equal to 100% of the value of any property contributed to the REMIC after
the "startup day" (generally the same as the related
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Closing Date). Exceptions are provided for contributions to a REMIC (i) during
the three-month period beginning on the startup day, (ii) made to a qualified
reserve fund by a Holder of a residual interest, (iii) in the nature of a
guarantee, (iv) made to facilitate a qualified liquidation or clean-up call, and
(v) as otherwise permitted by Treasury regulations.
Net Income from Foreclosure Property. The Code imposes a tax on a REMIC
equal to the highest corporate rate on "net income from foreclosure property."
The terms "foreclosure property" (which includes property acquired by deed in
lieu of foreclosure) and "net income from foreclosure property" are defined by
reference to the rules applicable to real estate investment trusts. Generally,
foreclosure property would be treated as such for a period of two years, with
possible extensions. Net income from foreclosure property generally means gain
from the sale of foreclosure property that is inventory property and gross
income from foreclosure property other than qualifying rents and other
qualifying income for a real estate investment trust.
Sales of REMIC Securities
General. Except as provided below, if a REMIC Regular or Residual Security
is sold, the seller will recognize gain or loss equal to the difference between
the amount realized on the sale and its "adjusted basis" in the Security. The
"adjusted basis" of a REMIC Regular Security generally will equal the cost of
such Security to the seller, increased by any original issue discount or market
discount included in the seller's gross income with respect to such Security and
reduced by distribution on such Security previously received by the seller of
amounts included in the stated redemption price at maturity and by any premium
that has reduced the seller's interest income with respect to such Security. See
"--Discount and Premium." The adjusted basis of a REMIC Residual Security is
determined as described above under "--Taxation of Holder of REMIC Residual
Securities-Basis Rules and Distributions". Except as provided in the following
paragraphs or under Section 582(c) of the Code, any such gain or loss will be
capital gain or loss, provided such Security is held as a "capital asset"
(generally, property held for investment) within the meaning of Section 1221 of
the Code.
Gains from the sale of a REMIC Regular Security that might otherwise be
capital gain will be treated as ordinary income to the extent that such gain
does not exceed the excess, if any, of (i) the amount that would have been
includible in the income of the Holder of a REMIC Regular Security had income
accrued at a rate equal to 110% of the "applicable federal rate" (generally, an
average of current yields on Treasury securities) as of the date of purchase
over (ii) the amount actually includible in such Holder's income. In addition,
gain recognized on such a sale by a Holder of a REMIC Regular Security who
purchased such a Security at a market discount would also be taxable as ordinary
income in an amount not exceeding the portion of such discount that accrued
during the period such Security was held by such Holder, reduced by any market
discount includible in income under the rules described below under "--Discount
and Premium."
If a Holder of a REMIC Residual Security sells such Security at a loss, the
loss will not be recognized if, within six months before or after the sale of
the REMIC Residual Security, such Holder purchases another residual interest in
any REMIC or any interest in a taxable mortgage pool (as defined in Section
7701(i) of the Code) comparable to a residual interest in a REMIC. Such
disallowed loss would be allowed upon the sale of the other residual interest
(or comparable interest) if the rule referred to in the preceding sentence does
not apply to that sale. While this rule may be modified by Treasury regulations,
to date such regulations have not been published.
Transfer of REMIC Residual Securities. Section 860E(c) of the Code imposes
a substantial tax, payable by the transferor (or, if a transfer is through a
broker, nominee or other middleman as the transferee's agent, payable by that
agent) upon any transfer of a REMIC Residual Security to a "disqualified
organization" and upon a pass-through entity (including regulated investment
companies, real estate investment trusts, common trust funds, partnerships,
trusts, estates, certain cooperatives, and nominees) that owns a REMIC Residual
Security if such pass-through entity has a disqualified organization as a
record-holder. For purposes of the preceding sentence, a transfer includes any
transfer of record or beneficial ownership, whether pursuant to a purchase, a
default under a secured lending agreement or otherwise.
86
The term "disqualified organization" includes the United States, any state
or political subdivision thereof, any foreign government, any international
organization, or any agency or instrumentality of the foregoing (other than
certain taxable instrumentalities), any cooperative organization furnishing
electric energy or providing telephone service to persons in rural areas, or any
organization (other than a farmers' cooperative) that is exempt from federal
income tax, unless such organization is subject to the tax on unrelated business
income. Moreover, an entity will not qualify as a REMIC unless there are
reasonable arrangements designed to ensure that (i) residual interests in such
entity are not held by disqualified organizations and (ii) information necessary
for the application of the tax described herein will be made available.
Restrictions on the transfer of a REMIC Residual Security and certain other
provisions that are intended to meet this requirement are described in the
related Pooling and Servicing Agreement, and will be discussed more fully in the
related Prospectus Supplement relating to the offering of any REMIC Residual
Security. In addition, a pass-through entity (including a nominee) that holds a
REMIC Residual Security may be subject to additional taxes if a disqualified
organization is a record-holder therein. A transferor of a REMIC Residual
Security (or an agent of a transferee of a REMIC Residual Security, as the case
may be) will be relieved of such tax liability with respect to a transfer if (i)
the transferee furnishes to the transferor an affidavit that the transferee is
not a disqualified organization, and (ii) the transferor (or the transferee's
agent) does not have actual knowledge that the affidavit is false at the time of
the transfer. Similarly, no such tax will be imposed on a pass-through entity
for a period with respect to an interest therein owned by a disqualified
organization if (i) the record-holder of such interest furnishes to the
pass-through entity an affidavit that it is not a disqualified organization, and
(ii) during such period, the pass-through entity has no actual knowledge that
the affidavit is false.
Under the REMIC Regulations, a transfer of a "noneconomic residual
interest" to a U.S. Person (as defined below under "-- Foreign
Investors--Grantor Trust Securities and REMIC Regular Securities") will be
disregarded for all federal tax purposes unless no significant purpose of the
transfer is to impede the assessment or collection of tax. A REMIC Residual
Security would be treated as constituting a "noneconomic residual interest"
unless, at the time of the transfer, (i) the present value of the expected
future distributions on the REMIC Residual Securities is no less than the
product of the present value of the "anticipated excess inclusions" with respect
to such Security and the highest corporate rate of tax for the year in which the
transfer occurs, and (ii) the transferor reasonably expects that the transferee
will receive distributions from the applicable REMIC Trust in an amount
sufficient to satisfy the liability for income tax on any excess inclusions at
or after the time when such liability accrues. "Anticipated excess inclusions"
are the excess inclusions that are anticipated to be allocated to each calendar
quarter (or portion thereof) following the transfer of a REMIC Residual
Security, determined as of the date such Security is transferred and based on
events that have occurred as of that date and on the Prepayment Assumption. See
"-- Discount and Premium" and "--Taxation of Holders of REMIC Residual
Securities--Excess Inclusions".
The REMIC Regulations provide that a significant purpose to impede the
assessment or collection of tax exists if, at the time of the transfer, a
transferor of a REMIC Residual Security has "improper knowledge" (i.e., either
knew, or should have known, that the transferee would be unwilling or unable to
pay taxes due on its share of the taxable income of the REMIC Trust). A
transferor is presumed not to have improper knowledge if (i) the transferor
conducts, at the time of a transfer, a reasonable investigation of the financial
condition of the transferee and, as a result of the investigation, the
transferor finds that the transferee has historically paid its debts as they
come due and finds no significant evidence to indicate that the transferee will
not continue to pay its debts as they come due in the future, and (ii) the
transferee makes certain representations to the transferor in the affidavit
relating to disqualified organizations discussed above. Transferors of a REMIC
Residual Security should consult with their own tax advisors for further
information regarding such transfers.
Reporting and Other Administrative Matters.
For purposes of the administrative provisions of the Code, each REMIC Trust
will be treated as a partnership and the Holders of REMIC Residual Securities
will be treated as partners. The Trustee will prepare, sign and file federal
income tax returns for each REMIC Trust, which returns are subject to audit by
the IRS. Moreover, within a reasonable time after the end of each calendar year,
the Trustee will furnish to each Holder that received a distribution during such
year a statement setting forth the portions of any such distributions
87
that constitute interest distributions, original issue discount, and such other
information as is required by Treasury regulations and, with respect to Holders
of REMIC Residual Securities in a REMIC Trust, information necessary to compute
the daily portions of the taxable income (or net loss) of such REMIC Trust for
each day during such year. The Trustee will also act as the tax matters
partner for each REMIC Trust, either in its capacity as a Holder of a REMIC
Residual Security or in a fiduciary capacity. Each Holder of a REMIC Residual
Security, by the acceptance of its REMIC Residual Security, agrees that the
Trustee will act as its fiduciary in the performance of any duties required of
it in the event that it is the tax matters partner.
Each Holder of a REMIC Residual Security is required to treat items on its
return consistently with the treatment on the return of the REMIC Trust, unless
the Holder either files a statement identifying the inconsistency or establishes
that the inconsistency resulted from incorrect information received from the
REMIC Trust. The IRS may assert a deficiency resulting from a failure to comply
with the consistency requirement without instituting an administrative
proceeding at the REMIC Trust level. The Trustee does not intend to register
any REMIC Trust as a tax shelter pursuant to Section 6111 of the Code.
Termination
In general, no special tax consequences will apply to a Holder of a REMIC
Regular Security upon the termination of a REMIC Trust by virtue of the final
payment or liquidation of the last of the Loans remaining in the Trust. If a
Holder's adjusted basis in its REMIC Residual Security at the time such
termination occurs exceeds the amount of cash distributed to such Holder in
liquidation of its interest, although the matter is not entirely free from
doubt, it would appear that the Holder of the REMIC Residual Security is
entitled to a loss equal to the amount of such excess.
Debt Securities
General
With respect to each series of Debt Securities, Dewey Ballantine, special
tax counsel to the Company, will deliver its opinion to the Company that the
Securities will be classified as debt of the Company secured by the related
Loans. Consequently, the Debt Securities will not be treated as ownership
interests in the Loans or the Trust. Holders will be required to report income
received with respect to the Debt Securities in accordance with their normal
method of accounting. For additional tax consequences relating to Debt
Securities purchased at a discount or with premium, see "-- Discount and
Premium," below.
Special Tax Attributes
As described above, Grantor Trust Securities will possess certain special
tax attributes by virtue of their being ownership interests in the underlying
Loans. Similarly, REMIC Securities will possess similar attributes by virtue of
the REMIC provisions of the Code. In general, Debt Securities will not possess
such special tax attributes. Investors to whom such attributes are important
should consult their own tax advisors regarding investment in Debt Securities.
Sale or Exchange
If a Holder of a Debt Security sells or exchanges such Security, the Holder
will recognize gain or loss equal to the difference, if any, between the amount
received and the Holder's adjusted basis in the Security. The adjusted basis in
the Security generally will equal its initial cost, increased by any original
issue discount or market discount previously included in the seller's gross
income with respect to the Security and reduced by the payments previously
received on the Security, other than payments of qualified stated interest, and
by any amortized premium.
In general (except as described under "-Discount and Premium-- Market
Discount," below), except for certain financial institutions subject to Section
582(c) of the Code, any gain or loss on the sale or exchange of
88
a Debt Security recognized by a Holder who holds the Security as a capital asset
(within the meaning of Section 1221 of the Code), will be capital gain or loss
and will be long-term or short-term depending on whether the Security has been
held for more than one year.
Discount and Premium
A Security purchased for an amount other than its outstanding principal
amount will be subject to the rules governing original issue discount, market
discount or premium. In addition, all Grantor Trust Strip Securities and certain
Grantor Trust Fractional Interest Securities will be treated as having original
issue discount by virtue of the coupon stripping rules in Section 1286 of the
Code. In very general terms, (i) original issue discount is treated as a form of
interest and must be included in a Holder's income as it accrues (regardless of
the Holder's regular method of accounting) using a constant yield method; (ii)
market discount is treated as ordinary income and must be included in a Holder's
income as principal payments are made on the Security (or upon a sale of a
Security); and (iii) if a Holder so elects, premium may be amortized over the
life of the Security and offset against inclusions of interest income. These tax
consequences are discussed in greater detail below.
Original Issue Discount
In general, a Security will be considered to be issued with original issue
discount equal to the excess, if any, of its "stated redemption price at
maturity" over its "issue price." The "issue price" of a Security is the initial
offering price to the public (excluding bond houses and brokers) at which a
substantial number of the Securities was sold. The issue price also includes any
accrued interest attributable to the period between the beginning of the first
remittance period and the Closing Date. The stated redemption price at maturity
of a Security that has a notional principal amount or receives principal only,
or that is or may be a Security with respect to which certain accrued interest
is not distributed but added to the principal amount, is equal to the sum of all
distributions to be made under such Security. The "stated redemption price at
maturity" of any other Security is its stated principal amount, plus an amount
equal to the excess (if any) of the interest payable on the first Distribution
Date for the Security over the interest that accrues for the period from the
Closing Date to the first Distribution Date.
Notwithstanding the general definition, original issue discount will be
treated as zero if such discount is less than 0.25 % of the stated redemption
price at maturity multiplied by the weighted average life of the Security. The
weighted average life of a Security is apparently computed for this purpose as
the sum, for all distributions included in the stated redemption price at
maturity of the amounts determined by multiplying (i) the number of complete
years (rounding down for partial years) from the Closing Date until the date on
which each such distribution is expected to be made under the assumption that
the Loans prepay at the rate specified in the related Prospectus Supplement (the
"Prepayment Assumption"), by (ii) a fraction, the numerator of which is the
amount of such distribution and the denominator of which is the Security's
stated redemption price at maturity. If original issue discount is treated as
zero under this rule, the actual amount of original issue discount must be
allocated to the principal distributions on the Security and, when each such
distribution is received, gain equal to the discount allocated to such
distribution will be recognized.
Section 1272(a)(6) of the Code contains special original issue discount
rules directly applicable to REMIC Securities and Debt Securities and applicable
by analogy to Grantor Trust Securities. Investors in Grantor Trust Securities
should be aware that there can be no assurance that the rules described below
will be applied to such Securities. In particular with respect to Grantor Trust
Strip Securities, on June 12, 1996 the Treasury issued regulations concerning
the tax treatment of debt instruments that provide for one or more contingent
payments (the "Contingent Payment Regulations"). Investors should be aware that
while the Contingent Payment Regulations do not specifically address the
taxation of Grantor Trust Strip Securities, the IRS may take the position that
Grantor Trust Strip Securities should be taxed under the methods described in
those regulations. In the absence of specific guidance, however, the Trustee
will apply the rules of Section 1272(a)(6) to calculate accruals of original
issue discount on the Grantor Trust Securities. Under these rules (described in
greater detail below), (i) the amount and rate of accrual of original issue
discount on each series of Securities will be based on (x) the Prepayment
Assumption, and (y) in the case of a Security calling
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for a variable rate of interest, an assumption that the value of the index upon
which such variable rate is based remains equal to the value of that rate on the
Closing Date, and (ii) adjustments will be made in the amount of discount
accruing in each taxable year in which the actual prepayment rate differs from
the Prepayment Assumption.
Section 1272(a)(6)(b)(iii) of the Code requires that the prepayment
assumption used to calculate original issue discount be determined in the manner
prescribed in Treasury regulations. To date, no such regulations have been
promulgated. The legislative history of this Code provision indicates that the
assumed prepayment rate must be the rate used by the parties in pricing the
particular transaction. The Company anticipates that the Prepayment Assumption
for each series of Securities will be consistent with this standard. The Company
makes no representation, however, that the Loans for a given series will prepay
at the rate reflected in the Prepayment Assumption for that series or at any
other rate. Each investor must make its own decision as to the appropriate
prepayment assumption to be used in deciding whether or not to purchase any of
the Securities.
Each Holder of a Security must include in gross income the sum of the
"daily portions" of original issue discount on its Security for each day during
its taxable year on which it held such Security. For this purpose, in the case
of an original Holder, the "daily portions" of original issue discount will be
determined as described as follows. A calculation will first be made of the
portion of the original issue discount that accrued during each "accrual
period." The Trustee will supply, at the time and in the manner required by the
IRS, to Holders of Securities, brokers and middlemen information with respect to
the original issue discount accruing on the Securities. The Trustee will
report original issue discount based on accrual periods of one month, each
beginning on a payment date (or, in the case of the first such period, the
Closing Date) and ending on the day before the next payment date.
Under Section 1272(a)(6) of the Code, the portion of original issue
discount treated as accruing for any accrual period will equal the excess, if
any, of (i) the sum of (A) the present values of all the distributions remaining
to be made on the Security, if any, as of the end of the accrual period and (B)
the distribution made on such Security during the accrual period of amounts
included in the stated redemption price at maturity over (ii) the "adjusted
issue price" of such Security at the beginning of the accrual period. The
present value of the remaining distributions referred to in the preceding
sentence will be calculated based on (i) the yield to maturity of the Security,
calculated as of the Settlement Date, giving effect to the Prepayment
Assumption, (ii) events (including actual prepayments) that have occurred prior
to the end of the accrual period, (iii) the Prepayment Assumption, and (iv) in
the case of a Security calling for a variable rate of interest, and assumption
that the value of the index upon which such variable rate is based remains the
same as its value on the Closing Date over the entire life of such Security. The
"adjusted issued price" of a Security at any time will equal the issue price of
such Security, increased by the aggregate amount of previously accrued original
issue discount with respect to such Security, and reduced by the amount of any
distributions made on such Security as of that time of amounts included in the
stated redemption price at maturity. The original issue discount accruing during
any accrual period will then be allocated ratably to each day during the period
to determine the daily portion of original issue discount.
In the case of Grantor Trust Strip Securities and certain REMIC Securities,
the calculation described in the preceding paragraph may produce a negative
amount of original issue discount for one or more accrual periods. No definitive
guidance has been issued regarding the treatment of such negative amounts. The
legislative history of Section 1272(a)(6) indicates that such negative amounts
may be used to offset subsequent positive accruals, but may not offset prior
accruals and may not be allowed as a deduction item in a taxable year in which
negative accruals exceed positive accruals. Holders of such Securities should
consult their own tax advisors concerning the treatment of such negative
accruals.
A subsequent purchaser of a Security that purchases such Security at a cost
less than its remaining stated redemption price at maturity also will be
required to include in gross income for each day on which its holds such
Security, the daily portion of original issue discount with respect to such
Security (but reduced, if the cost of such Security to such purchaser exceeds
its adjusted issue price, by an amount equal to the product of (i) such daily
90
portion and (ii) a constant fraction, the numerator of which is such excess and
the denominator of which is the sum of the daily portions of original issue
discount on such Security for all days on or after the day of purchase).
Market Discount
A Holder that purchases a Security at a market discount, that is, at a
purchase price less than the remaining stated redemption price at maturity of
such Security (or, in the case of a Security with original issue discount, its
adjusted issue price), will be required to allocate each principal distribution
first to accrued market discount on the Security, and recognize ordinary income
to the extent that such distribution does not exceed the aggregate amount of
accrued market discount on such Security not previously included in income. With
respect to Securities that have unaccrued original issue discount, such market
discount must be included in income in addition to any original issue discount.
A Holder that incurs or continues indebtedness to acquire a Security at a market
discount may also be required to defer the deduction of all or a portion of the
interest on such indebtedness until the corresponding amount of market discount
is included in income. In general terms, market discount on a Security may be
treated as accruing either (i) under a constant yield method or (ii) in
proportion to remaining accruals of original issue discount, if any, or if none,
in proportion to remaining distributions of interest on the Security, in any
case taking into account the Prepayment Assumption. The Trustee will make
available, as required by the IRS, to Holders of Securities information
necessary to compute the accrual of market discount.
Notwithstanding the above rules, market discount on a Security will be
considered to be zero if such discount is less than 0.25% of the remaining
stated redemption price at maturity of such Security multiplied by its weighted
average remaining life. Weighted average remaining life presumably would be
calculated in a manner similar to weighted average life, taking into account
payments (including prepayments) prior to the date of acquisition of the
Security by the subsequent purchaser. If market discount on a Security is
treated as zero under this rule, the actual amount of market discount must be
allocated to the remaining principal distributions on the Security and, when
each such distribution is received, gain equal to the discount allocated to such
distribution will be recognized.
Securities Purchased at a Premium
A purchaser of a Security that purchases such Security at a cost greater
than its remaining stated redemption price at maturity will be considered to
have purchased such Security (a "Premium Security") at a premium. Such a
purchaser need not include in income any remaining original issue discount and
may elect, under Section 171(c)(2) of the Code, to treat such premium as
"amortizable bond premium." If a Holder makes such an election, the amount of
any interest payment that must be included in such Holder's income of each
period ending on a Distribution Date will be reduced by the portion of the
premium allocable to such period based on the Premium Security's yield to
maturity. The legislative history of the Tax Reform Act of 1986 states that such
premium amortization should be made under principles analogous to those
governing the accrual of market discount (as discussed above under "--Discount
and Premium--Market Discount"). If such election is made by the Holder, the
election will also apply to all bonds the interest on which is not excludible
from gross income ("fully taxable bonds") held by the Holder at the beginning of
the first taxable year to which the election applies and to all such fully
taxable bonds thereafter acquired by it, and is irrevocable without the consent
of the IRS. If such an election is not made, (i) such a Holder must include the
full amount of each interest payment in income as it accrues, and (ii) the
premium must be allocated to the principal distributions on the Premium Security
and, when each such distribution is received, a loss equal to the premium
allocated to such distribution will be recognized. Any tax benefit from the
premium not previously recognized will be taken into account in computing gain
or loss upon the sale or disposition of the Premium Security.
Some Securities may provide for only nominal distributions of principal in
comparison to the distributions of interest thereon. It is possible that the IRS
or the Treasury Department may issue guidance excluding such Securities from the
rules generally applicable to debt instruments issued at a premium. In
particular, it is possible that such a Security will be treated as having
original issue discount equal to the excess of the total payments to be received
thereon over its issue price. In such event, Section 1272(a)(6) of the Code
91
would govern the accrual of such original issue discount, but a Holder would
recognize substantially the same income in any given period as would be
recognized if an election were made under Section 171(e)(2) of the Code. Unless
and until the Treasury Department or the IRS publishes specific guidance
relating to the tax treatment of such Securities, the Trustee intends to furnish
tax information to Holders of such Securities in accordance with the rules
described in the preceding paragraph.
Special Election
For any Security acquired on or after April 4, 1994, a Holder may elect to
include in gross income all "interest" that accrues on the Security by using a
constant yield method. For purposes of the election, the term "interest"
includes stated interest, acquisition discount, original issue discount, de
minimis original issue discount, market discount, de minimis market discount and
unstated interest as adjusted by any amortizable bond premium or acquisition
premium. A Holder should consult it own tax advisor regarding the time and
manner of making and the scope of the election and the implementation of the
constant yield method.
Backup Withholding
Distributions of interest and principal, as well as distributions of
proceeds from the sale of Securities, may be subject to the "backup withholding
tax" under Section 3406 of the Code at rate of 31% if recipients of such
distributions fail to furnish to the payor certain information, including their
taxpayer identification numbers, or otherwise fail to establish an exemption
from such tax. Any amounts deducted and withheld from a distribution to a
recipient would be allowed as a credit against such recipient's federal income
tax. Furthermore, certain penalties may be imposed by the IRS on a recipient of
distributions that is required to supply information but that does not do so in
the proper manner.
Foreign Investors
Grantor Trust Securities and REMIC Regular Securities
Distributions made on a Grantor Trust Security or a REMIC Regular Security
to, or on behalf of, a Holder that is not a "U.S. Person" generally will be
exempt from United States federal income and withholding taxes. The term "U.S.
Person" means a citizen or resident of the United States, a corporation,
partnership or other entity created or organized in or under the laws of the
United States or any political subdivision thereof, or an estate trust that is
subject to United States federal income tax regardless of the source of its
income. This exemption is applicable provided (a) the Holder is not subject to
United States tax as a result of a connection to the United States other than
ownership of the Security, (b) the Holder signs a statement under penalties of
perjury that certifies that such Holder is not a U.S. Person, and provides the
name and address of such Holder, and (c) the last U.S. Person in the chain of
payment to the Holder receives such statement from such Holder or a financial
institution holding on its behalf and does not have actual knowledge that such
statement is false. Holders should be aware that the IRS might take the position
that this exemption does not apply to a Holder that also owns 10% or more of the
REMIC Residual Securities of any REMIC Trust, or to a Holder that is a
"controlled foreign corporation" described in Section 881(c)(3)(C) of the Code.
REMIC Residual Securities
Amounts distributed to a Holder of a REMIC Residual Security that is not a
U.S. Person generally will be treated as interest for purposes of applying the
30% (or lower treaty rate) withholding tax on income that is not effectively
connected with a United States trade or business. Temporary Treasury Regulations
clarify that amounts not constituting excess inclusions that are distributed on
a REMIC Residual Security to a Holder that is not a U.S. Person generally will
be exempt from United States federal income and withholding tax, subject to the
same conditions applicable to distributions on Grantor Trust Securities and
REMIC Regular Securities, as described above, but only to the extent that the
obligations directly underlying the REMIC Trust that issued the REMIC Residual
Security (e.g., Loans or regular interests in another REMIC) were issued after
July 18, 1984. In no case will any portion of REMIC income that constitutes an
excess inclusion be entitled to any exemption
92
from the withholding tax or a reduced treaty rate for withholding. See
"--Taxation of Holders of REMIC Residual Securities--Excess Inclusions."
Taxation of the Securities Classified as Partnership Interests
Certain Trusts may be treated as partnerships for Federal income tax
purposes. In such event, the Trust may issue Debt Securities in the form of
Notes, as described above, and may also issue Securities characterized as
partnership interests ("Partnership Interests") as discussed in the related
Prospectus Supplement.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in " Federal
Income Tax Considerations," potential investors should consider the state and
local income tax consequences of the acquisition, ownership, and disposition of
the Securities. State and local income tax law may differ substantially from the
corresponding federal law, and this discussion does not purport to describe any
aspect of the income tax laws of any state or locality. Therefore, potential
investors should consult their own tax advisors with respect to the various
state and local tax consequences of an investment in the Securities.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes certain fiduciary and prohibited transaction restrictions on employee
pension and welfare benefit plans subject to ERISA ("ERISA Plans"). Section 4975
of the Code imposes essentially the same prohibited transaction restrictions on
tax-qualified retirement plans described in Section 401(a) of the Code
("Qualified Retirement Plans") and on Individual Retirement Accounts ("IRAs")
described in Section 408 of the Code (collectively, "Tax-Favored Plans").
Certain employee benefit plans, such as governmental plans (as defined in
Section 3(32) of ERISA), are not subject to the ERISA requirements discussed
herein. Accordingly, assets of such plans may generally be invested in
Securities without regard to the ERISA considerations described below, subject
to the provisions of applicable federal and state law. Any such plan that is a
Qualified Retirement Plan and exempt from taxation under Sections 401(a) and
501(a) of the Code, however, is subject to the prohibited transaction rules set
forth in Section 503 of the Code.
Section 404 of ERISA imposes general fiduciary requirements, including
those of investment prudence and diversification and the requirement that a
Plan's investment be made in accordance with the documents governing the Plan.
In addition, section 406 of ERISA and Section 4975 of the Code prohibit a broad
range of transactions involving assets of ERISA Plans and Tax-Favored Plans
(collectively, "Plans") and persons ("Parties in Interest" under ERISA or
"Disqualified Persons" under the Code) who have certain specified relationships
to the Plans, unless a statutory or administrative exemption is available.
Certain Parties in Interest (or Disqualified Persons) that participate in a
prohibited transaction may be subject to a penalty (or an excise tax) imposed
pursuant to Section 502(i) of ERISA or Section 4975 of the Code, unless a
statutory or administrative exemption is available.
A Plan's investment in Securities may cause the Loans included in a Loan
Pool to be deemed Plan assets. The United States Department of Labor ("DOL") has
issued a final regulation (29 C.F.R. Section 2510.3-101) containing rules for
determining what constitutes the assets of a Plan. This regulation provides
that, as a general rule, the underlying assets and properties of corporations,
partnerships, trusts and certain other entities in which a Plan makes an
investment in an "equity interest" will be deemed for purposes of ERISA to be
assets of the Plan unless certain exceptions apply.
93
Under the terms of the regulation, the Trust Estate may be deemed to hold
plan assets by reason of a Plan's investment in a Security; such plan assets
would include an undivided interest in the Loans and any other assets held by
the Trust Estate. In such an event, persons providing services with respect to
the assets of the Trust Estate may be parties in interest, subject to the
fiduciary responsibility provisions of Title I of ERISA, including the
prohibited transaction provisions of Section 406 of ERISA (and of Section 4975
of the Code), with respect to transactions involving such assets unless such
transactions are subject to a statutory or administrative exemption.
An exception applies if the class of equity interests in question is: (i)
"widely held" (held by 100 or more investors who are independent of the Trust
Estate and each other); (ii) freely transferable; and (iii) sold as part of an
offering pursuant to (A) an effective registration statement under the
Securities Act of 1933, and then subsequently registered under the Securities
Exchange Act of 1934 or (B) an effective registration statement under Section
12(b) or 12(g) of the Securities Exchange Act of 1934 ("Publicly Offered
Securities"). In addition, the regulation provides that if at all times more
than 75% of the value of each class of equity interest in the Trust Estate is
held by investors other than benefit plan investors (which is defined as
including, among others, plans subject to ERISA, government plans and individual
retirement accounts), the investing Plan's assets will not include any of the
underlying assets of the Trust Estate.
Under the regulation, a Plan will not be considered to have invested in an
"equity interest" if the interest described is treated as indebtedness under
applicable local law and has no substantial equity features. Generally, a
profits interest in a partnership, an undivided ownership interest in property
and a beneficial ownership interest in a trust are deemed to be "equity
interests" under the final regulation. If Notes of a particular series were
deemed to be indebtedness under applicable local law without any substantial
equity features, an investing Plan's assets would include such Notes, but not,
by reason of such purchase, the underlying assets of the Trust Estate.
If an investing Plan's assets are considered to include the underlying
assets of the Trust Estate, an exemption may be available. Various underwriters
and placement agents have been granted individual exemptions by the DOL from
certain of the prohibited transaction rules of ERISA with respect to the initial
purchase, the holding and the subsequent resale by Plans of securities
representing interests in, and the operation of, asset-backed pass-through
trusts that consist of certain receivables, loans and other obligations that
meet the conditions and requirements of such exemptions (each such exemption is
referred to hereafter as the "Exemption"). These securities may include the
Certificates. The obligations that may be held in trusts covered by the
Exemption include obligations such as the Loans.
Among the conditions which must be satisfied for the Exemption to apply are
the following:
(i) The acquisition of the Certificates by a Plan is on terms
(including the price for the Certificates) that are at least as favorable to the
Plan as they would be in an arm' s-length transaction with an unrelated party;
(ii) The rights and interests evidenced by the Certificates acquired
by the Plan are not subordinated to the rights and interests evidenced by other
securities of the trust;
(iii) The Certificates acquired by the Plan have received a rating at
the time of such acquisition that is in one of the three highest generic rating
categories from either Standard & Poor's Ratings Group ("Standard & Poor's"),
Moody's Investors Service, Inc. ("Moody's"), Duff & Phelps Inc. ("D&P") or Fitch
Investors Service, Inc. ("Fitch");
(iv) The sum of all payments made to the underwriter in connection
with the distribution of the Certificates represents not more than reasonable
compensation for underwriting the Certificates. The sum of all payments made to
and retained by the seller pursuant to the sale of the obligations to the trust
represents not more than the fair market value of such obligations. The sum of
all payments made to and retained by the servicer represents not more than
reasonable compensation for the servicer's services under the related servicing
agreement and reimbursement of the servicer's reasonable expenses in connection
therewith;
94
(v) The Trustee is not an affiliate of any other member of the
Restricted Group (as defined below); and
(vi) The Plan investing in the Certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the Securities and
Exchange Commission under the Securities Act of 1933.
The trust also must meet the following requirements:
(i) the corpus of the trust must consist solely of assets of the type
which have been included in other investment pools;
(ii) securities in such other investment pools must have been rated in
one of the three highest rating categories of Standard & Poor's, Moody's, D&P or
Fitch for at least one year prior to the Plan's acquisition of securities; and
(iii) securities evidencing interests in such other investment pools
must have been purchased by investors other than Plans for at least one year
prior to any Plan's acquisition of Securities.
Moreover, the Exemption provides relief from certain self-dealing/conflict
of interest prohibited transactions that may occur when the Plan fiduciary
causes a Plan to acquire securities in a trust in which the fiduciary (or its
affiliate) is an obligor on the receivables held in the trust provided that,
among other requirements: (i) in the case of an acquisition in connection with
the initial issuance of Certificates, at least fifty (50) percent of each class
of Certificates in which Plans have invested is acquired by persons independent
of the Restricted Group and at least fifty (50) percent of the aggregate
interest in the trust is acquired by persons independent of the Restricted
Group; (ii) such fiduciary (or its affiliate) is an obligor with respect to five
(5) percent or less of the fair market value of the obligations contained in the
trust; (iii) the Plan's investment in Certificates does not exceed twenty-five
(25) percent of all of the Certificates outstanding after the acquisition; and
(iv) no more than twenty-five (25) percent of the assets of the Plan are
invested in securities representing an interest in one or more trusts containing
assets sold or serviced by the same entity. The Exemption does not apply to
Plans sponsored by the Company, the underwriters of the Certificates, the
Trustee, the Servicer, any obligor with respect to obligations included in a
Trust Estate constituting more than five (5) percent of the aggregate
unamortized principal balance of the assets in a Trust Estate, or any affiliate
of such parties (the "Restricted Group").
There are other class (e.g. Prohibited Transaction Class Exemption 83-1)
and individual prohibited transaction exemptions issued by the DOL that could
apply to a Plan's acquisition or holding of Securities. The applicable
Prospectus Supplement under "ERISA Considerations" may contain additional
information regarding the application of the Exemption, or other prohibited
transaction exemptions that may be available, with respect to the series offered
thereby.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the potential application of the
regulation described above, the Exemption or other class and individual
exemptions issued by the DOL to the purchase and holding of the Securities and
the potential consequences to their specific circumstances, prior to making an
investment in the Securities. Moreover, each Plan fiduciary should determine
whether under the general fiduciary standards of investment procedure and
diversification an investment in the Securities is appropriate for the Plan,
taking into account the overall investment policy of the Plan and the
composition of the Plan's investment portfolio. In this regard, purchasers that
are insurance companies should consult with their counsel with respect to the
United States Supreme Court case interpreting the fiduciary responsibility rules
of ERISA, John Hancock Mutual Life Insurance Co. v. Harris Trust and Savings
Bank, 114 S. Ct. 517 (1993). In John Hancock, the Supreme Court ruled that
assets held in an insurance company's general account may be deemed to be "plan
assets" for purposes of ERISA under certain circumstances. Prospective
purchasers should determine whether the decision affects their ability to
purchase the Securities.
95
A Plan that is exempt from federal income taxation pursuant to Section 501
of the Code (a "Tax Exempt Investor") nonetheless will be subject to federal
income taxation to the extent that its income is UBTI within the meaning of
Section 512 of the Code. All "excess inclusions" of a REMIC allocated to a REMIC
Residual Security held by a Tax Exempt Investor will be considered UBTI and thus
will be subject to federal income tax. See " Federal Income Tax
Considerations--REMICS--Taxation of Owners of REMIC Residual Securities--Excess
Inclusions."
LEGAL INVESTMENT MATTERS
Certain classes of Securities offered hereby and by the related Prospectus
Supplement will constitute "mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA") so long as they are
rated in at least the second highest rating category by any Rating Agency, and
as such may be legal investments for persons, trusts, corporations,
partnerships, associations, business trusts and business entities (including
depository institutions, life insurance companies and pension funds) created
pursuant to or existing under the laws of the United States or of any State
whose authorized investments are subject to state regulation to the same extent
that, under applicable law, obligations issued by or guaranteed as to principal
and interest by the United States or any agency or instrumentality thereof
constitute legal investments for such entities. Under SMMEA, if a State enacted
legislation on or prior to October 3, 1991 specifically limiting the legal
investment authority of any such entities with respect to "mortgage related
securities," such securities will constitute legal investments for entities
subject to such legislation only to the extent provided therein. Certain States
have enacted legislation which overrides the preemption provisions of SMMEA.
SMMEA provides, however, that in no event will the enactment of any such
legislation affect the validity of any contractual commitment to purchase, hold
or invest in "mortgage related securities," or require the sale or other
disposition of such securities, so long as such contractual commitment was made
or such securities acquired prior to the enactment of such legislation.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal with "mortgage
related securities" without limitation as to the percentage of their assets
represented thereby, federal credit unions may invest in such securities, and
national banks may purchase such securities for their own account without regard
to the limitations generally applicable to investment securities set forth in 12
U.S.C. 24 (Seventh), subject in each case to such regulations as the applicable
federal regulatory authority may prescribe.
The Federal Financial Institutions Examination Council has adopted a
supervisory policy statement (the "Policy Statement"), applicable to all
depository institutions, setting forth guidelines for and significant
restrictions on investments in "high-risk mortgage securities." The Policy
Statement has been adopted by the Federal Reserve Board, the Office of the
Comptroller of the Currency, the FDIC and the Office of Thrift Supervision with
an effective date of February 10, 1992. The Policy Statement generally indicates
that a mortgage derivative product will be deemed to be high risk if it exhibits
greater price volatility than a standard fixed rate thirty-year mortgage
security. According to the Policy Statement, prior to purchase, a depository
institution will be required to determine whether a mortgage derivative product
that it is considering acquiring is high-risk, and if so that the proposed
acquisition would reduce the institution's overall interest rate risk. Reliance
on analysis and documentation obtained from a securities dealer or other outside
party without internal analysis by the institution would be unacceptable. There
can be no assurance as to which classes of Securities will be treated as
high-risk under the Policy Statement. In addition, the National Credit Union
Administration has issued regulations governing federal credit union investments
which prohibit investment in certain specified types of securities, which may
include certain classes of Securities. Similar policy statements have been
issued by regulators having jurisdiction over other types of depository
institutions.
There may be other restrictions on the ability of certain investors either
to purchase certain classes of Securities or to purchase any class of Securities
representing more than a specified percentage of the investors' assets. The
Company will make no representations as to the proper characterization of any
class of Securities for legal investment or other purposes, or as to the ability
of particular investors to purchase any class of Securities under applicable
legal investment restrictions. These uncertainties may adversely affect the
liquidity
96
of any class of Securities. Accordingly, all investors whose investment
activities are subject to legal investment laws and regulations, regulatory
capital requirements or review by regulatory authorities should consult with
their own legal advisors in determining whether and to what extent the
Securities of any class constitute legal investments under SMMEA or are subject
to investment, capital or other restrictions, and whether SMMEA has been
overridden in any jurisdiction applicable to such investor.
USE OF PROCEEDS
Substantially all of the net proceeds to be received from the sale of
Securities will be applied by the Company to finance the purchase of, or to
repay short-term loans incurred to finance the purchase of, the Loans underlying
the Securities or will be deposited by the Company in its general funds and used
by the Company for general corporate purposes, such as payment of salaries,
rent, utilities and related business expenses. The Company expects that it will
make additional sales of securities similar to the Securities from time to time,
but the timing and amount of any such additional offerings will be dependent
upon a number of factors, including the volume of loans originated or purchased
by the Company, prevailing interest rates, availability of funds and general
market conditions.
METHODS OF DISTRIBUTION
The Securities offered hereby and by the related Prospectus Supplements
will be offered in series through one or more of the methods described below.
The Prospectus Supplement prepared for each series will describe the method of
offering being utilized for that series and will state the public offering or
purchase price of such series and the net proceeds to the Company from such
sale.
The Company intends that Securities will be offered through the following
methods from time to time and that offerings may be made concurrently through
more than one of these methods or that an offering of a particular series of
Securities may be made through a combination of two or more of these methods.
Such methods are as follows:
1. By negotiated firm commitment or best efforts underwriting and public
re-offering by underwriters;
2. By placements by the Company with institutional investors through
dealers; and
3. By direct placements by the Company with institutional investors.
If underwriters are used in a sale of any Securities (other than in
connection with an underwriting on a best efforts basis), such Securities will
be acquired by the underwriters for their own account and may be resold from
time to time in one or more transactions, including negotiated transactions, at
fixed public offering prices or at varying prices to be determined at the time
of sale or at the time of commitment therefor. The managing underwriter or
underwriters with respect to the offer and sale of a particular series of
Securities will be set forth on the cover of the Prospectus Supplement relating
to such series and the members of the underwriting syndicate, if any, will be
named in such Prospectus Supplement.
In connection with the sale of the Securities, underwriters may receive
compensation from the Company or from purchasers of the Securities in the form
of discounts, concessions or commissions. Underwriters and dealers participating
in the distribution of the Securities may be deemed to be underwriters in
connection with such Securities, and any discounts or commissions received by
them from the Company and any profit on the resale of Securities by them may be
deemed to be underwriting discounts and commissions under the Securities Act of
1933, as amended. The Prospectus Supplement will describe any such compensation
paid by the Company.
97
It is anticipated that the underwriting agreement pertaining to the sale of
any series of Securities will provide that the obligations of the underwriters
will be subject to certain conditions precedent, that the underwriters will be
obligated to purchase all such Securities if any are purchased (other than in
connection with an underwriting on a best efforts basis) and that, in limited
circumstances, the Company will indemnify the several underwriters and the
underwriters will indemnify the Company against certain civil liabilities,
including liabilities under the Securities Act of 1933, as amended, or will
contribute to payments required to be made in respect thereof.
The Prospectus Supplement with respect to any series offered by placements
through dealers will contain information regarding the nature of such offering
and any agreements to be entered into between the Company and purchasers of
Securities of such series.
The Company anticipates that the Securities offered hereby will be sold
primarily to institutional investors. Purchasers of Securities, including
dealers, may, depending on the facts and circumstances of such purchases, be
deemed to be "underwriters" within the meaning of the Securities Act of 1933, as
amended, in connection with reoffers and sales by them of Securities. Holders of
Securities should consult with their legal advisors in this regard prior to any
such reoffer or sale.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Dewey
Ballantine, New York, New York and by the office of the general counsel of the
Company.
ADDITIONAL INFORMATION
This Prospectus, together with the Prospectus Supplement for each series of
Securities, contains a discussion of the material terms of the applicable
exhibits to the Registration Statement and the documents referred to herein and
therein. Copies of such exhibits are on file at the offices of the Securities
and Exchange Commission in Washington, D.C., and may be obtained at rates
prescribed by the Commission upon request to the Commission and may be
inspected, without charge, at the Commission's offices.
98
INDEX OF PRINCIPAL DEFINITIONS
Page
----
Accounts ..............................................................40
Accrual Securities.........................................................8
AFH ..............................................................57
AFL ...........................................................1, 57
APR ..............................................................24
ARM Loans ..............................................................19
Balloon Amount...........................................................29
Balloon Loans.............................................................17
Bankruptcy Bond...........................................................53
Bankruptcy Loss...........................................................51
Bankruptcy Loss Amount...................................................51
Base Servicing Fee.......................................................58
Book-Entry Securities....................................................36
Bulk Acquisitions.........................................................10
Buydown Account..........................................................23
Buydown Funds.............................................................22
Buydown Mortgage Loans....................................................22
Buydown Period............................................................22
Cede ...............................................................14
Certificates...............................................................6
Closing Date..............................................................38
CLTV (Combined Loan-to-Value Ratio).......................................24
Code ...............................................................80
Collateral ............................................................1, 6
Collateral Pool...........................................................21
Collateral Schedule......................................................22
Company ...........................................................1, 57
Company's Seller's Guide..................................................31
Compensating Interest.....................................................44
Contracts ...........................................................1, 21
Conventional Loans.......................................................22
Convertible Loan..........................................................29
Cooperative ..............................................................26
Cooperative Loans.........................................................21
Cooperative Notes........................................................28
Credit Enhancement.........................................................2
Credit Enhancer......................................................21, 42
Cut-Off Date.............................................................24
Debt Securities......................................................14, 80
Debt Service Reduction....................................................53
Defaulted Mortgage Loss...................................................51
Deferred Interest........................................................17
Deficient Valuation.......................................................53
Deleted Loan..............................................................30
Delinquency Advances......................................................44
Designated Depository Institution.........................................40
Detailed Description.....................................................22
Determination Date.......................................................44
Direct or Indirect Participants..........................................21
Disqualified Persons......................................................93
99
Page
----
Distribution Account......................................................40
DTC ...............................................................14
Due Date ..............................................................39
Eligible Investments......................................................40
Equity Securities..........................................................7
ERISA ..............................................................13
ERISA Plan(s)............................................................93
Exchange Act.............................................................14
Extraordinary Losses......................................................51
FHA ...............................................................27
Financial Guaranty Insurance Policy......................................54
Financial Guaranty Insurer...............................................54
Fixed-Income Securities....................................................7
Forward Purchase Agreement................................................11
Fraud Loss ..............................................................51
Fraud Loss Amount........................................................51
Funding Period.......................................................11, 38
Garn-St. Germain Act.....................................................72
Graduated Payments.......................................................23
Grantor Trust............................................................80
Grantor Trust Fractional Interest Security...............................80
Grantor Trust Securities.............................................13, 80
Grantor Trust Strip Security.............................................80
Guidelines...............................................................30
Holder ...............................................................80
Home Improvement Loans....................................................21
Indenture ...............................................................7
Indenture Trustee..........................................................7
Index ..............................................................28
Indirect Participant(s)...................................................36
Insurance Paying Agent...................................................54
Insurance Proceeds........................................................39
Insured Payment..........................................................54
Interest Payment Date....................................................64
Interest Rate..............................................................7
Investment Company Act....................................................10
IRAs ...............................................................93
IRS ..............................................................81
Junior Lien Loans.........................................................25
Land Secured Contracts....................................................18
Letter of Credit..........................................................52
Letter of Credit Bank.....................................................52
Liquidated Mortgage Loan..................................................17
Liquidation Proceeds......................................................17
Loan Pool ...............................................................1
Loan Purchase Price.......................................................30
Loan Rate ..............................................................22
Loans ...............................................................22
LTV ..............................................................24
Manufactured Homes........................................................27
Manufacturer's Invoice Price.............................................25
Master Commitments.......................................................32
100
Page
----
Master Servicer............................................................6
Master Servicing Fee.....................................................58
Mixed Use Loans.......................................................1, 21
Modified Loans...........................................................29
Mortgage Loans.........................................................1, 21
Mortgage Pool Insurance Policy............................................52
Mortgages ..............................................................10
Multi-family Loans........................................................21
Negotiated Transactions...................................................10
Net Liquidation Proceeds.................................................40
Net Loan Rate............................................................64
Note Margin ..............................................................28
Notes ...........................................................6, 27
Obligor ..............................................................16
Originator's Retained Yield...............................................58
Originators ...............................................................1
Participants..............................................................36
Parties in Interest.......................................................93
Partnership Interests....................................................14
Pass-Through Rate.........................................................43
Paying Agent.............................................................43
Payment Date...............................................................9
Percentage Interest......................................................43
Physical Certificates.....................................................35
Plan(s) ..............................................................13
Policy Statement.........................................................96
Pool Factor..............................................................46
Pooling and Servicing Agreement............................................7
Pre-Funding Account.......................................................11
Premium Security.........................................................91
Prepayment Assumption....................................................83
Principal Prepayments.....................................................39
Properties...............................................................22
Property ..............................................................10
Purchase Obligation.......................................................15
Qualified Replacement Loan................................................30
Qualified Retirement Plans...............................................93
Qualifying Rate...........................................................31
Rating Agencies..........................................................14
Realized Loss.............................................................50
Record Date ...............................................................9
Relief Act...........................................................21, 79
REMIC ...............................................................80
REMIC Regular Securities..................................................13
REMIC Regular Security...................................................82
REMIC Regulations........................................................82
REMIC Residual Securities.................................................13
REMIC Residual Security..................................................82
REMIC Securities.........................................................80
REMIC Trust..............................................................82
REMIC(s) ...............................................................2
Remittance Date..........................................................41
101
Page
----
Remittance Period..........................................................9
REO Property.............................................................48
Reserve Fund..............................................................53
Rule of 78's.............................................................24
Securities ............................................................1, 6
Security Registrar........................................................35
Securityholder...........................................................80
Securityholders............................................................1
Senior Lien..............................................................25
Senior Securities..........................................................8
Servicer ...............................................................6
Servicer(s) ...............................................................2
Servicing Advance(s).................................................... 45
Servicing Agreement........................................................7
Servicing Fee............................................................58
Single Family Loans.......................................................21
SMMEA ...............................................................13
Special Hazard Amount....................................................51
Special Hazard Insurance Policy..........................................53
Special Hazard Insurer...................................................53
Special Hazard Loss.......................................................51
Statistic Calculation Date...............................................24
Strip Securities...........................................................8
Sub-Servicers..............................................................2
Sub-Servicing Account.....................................................39
Sub-Servicing Agreement..................................................49
Subordinate Securities.....................................................8
Subordinate(d) Amount.....................................................51
Subsequent Collateral.....................................................11
Subsequent Loans..........................................................38
Tax Exempt Investor......................................................96
Tax-Favored Plans........................................................93
Title V ...........................................................73, 79
Title VIII ..............................................................73
Trust ...............................................................1
Trust Agreement............................................................6
Trust Estate...............................................................1
Trustee ...............................................................6
UCC ...............................................................36
102
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
Set forth below is an estimate of the amount of fees and expenses (other
than underwriting discounts and commissions) to be incurred in connection with
the issuance and distribution of the Offered Certificates.
SEC Filing Fee......................................... $345
Trustee's Fees and Expenses*........................... 5,000
Legal Fees and Expenses*............................... 212,500
Accounting Fees and Expenses*.......................... 30,000
Printing and Engraving Expenses*....................... 35,000
Blue Sky Qualification and Legal
Investment Fees and Expenses*........................ 10,000
Rating Agency Fees*.................................... 40,000
Certificate Insurer's Fee*............................. 40,000
Miscellaneous*......................................... 200,000
-------
TOTAL............................................. $ 572,845
=========
- ----------
* Estimated in accordance with Item 511 of Regulation S-K.
Item 15. Indemnification of Directors and Officers.
Indemnification. Under the laws which govern the organization of the
Registrant, the Registrant has the power and in some instances may be required
to provide an agent, including an officer or director, who was or is a party or
is threatened to be made a party to certain proceedings, with indemnification
against certain expenses, judgments, fines, settlements and other amounts under
certain circumstances.
Article VII, Section 6 of the By-Laws of Access Financial Lending Corp.
provides that each person (including the heirs, executors, administrators, or
estate of such person) who by reason of the fact that such person is or was a
director, officer, employee or agent of the corporation or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise, and
who was, is or is threatened to be made a defendant in any threatened, pending
or completed suit, action or proceeding, shall be indemnified by the corporation
to the full extent permitted or authorized by the General Corporation Law of
Delaware against any liability, judgment, fine, amount paid in settlement, cost
and expense (including attorneys' fees) actually and reasonably incurred by such
person in defense of said suit, action or proceeding including, without limiting
the generality of the foregoing, any liability, judgment, fine, amount paid in
settlement, cost and expense (including attorneys' fees) arising out of or
connected with the unlawful restraint or confinement of any such person for any
purpose.
The form of the Underwriting Agreement, filed as Exhibit 1.1 to this
Registration Statement, provides that Access Financial Lending Corp. will
indemnify and reimburse the underwriter(s) and each director, officer and
controlling person of the underwriter(s) with respect to certain expenses and
liabilities, including liabilities under the 1933 Act or other federal or state
regulations or under the common law, which arise out of or are based on certain
material misstatements or omissions in the Registration Statement. In addition,
the Underwriting Agreement provides that the underwriter(s) will similarly
indemnify and reimburse Access Financial Lending Corp. and each director,
officer and controlling person of Access Financial Lending Corp. with respect to
certain material misstatements or omissions in the Registration Statement which
are based on certain written information furnished by the underwriter(s) for use
in connection with the preparation of the Registration Statement.
II-1
Insurance. As permitted under the laws which govern the organization of the
Registrant, the Registrant has adopted by-laws which permit the board of
directors to purchase and maintain insurance on behalf of the Registrant's
agents, including its officers and directors, against any liability asserted
against them in such capacity or arising out of such agents' status as such,
whether or not the Registrant would have the power to indemnify them against
such liability under applicable law. Access Financial Lending Corp. has general
liability policies which insure its agents, including directors and officers,
for general liability exposures.
As permitted by the Employee Retirement Income Security Act of 1974, Access
Financial Lending Corp. has obtained insurance covering all employees entrusted
with fiduciary responsibilities under certain of its employee welfare or benefit
plans. The maximum coverage provided by this policy is an aggregate of
$5,000,000 per year, subject to a maximum $100,000 deductible amount with
respect to each claim.
Item 16. Exhibits.
1.1** -- Form of Underwriting Agreement.
1.2** -- Form of Indemnification Agreement.
3.1** -- Certificate of Incorporation of Access Financial Lending Corp.
3.2** -- By-Laws of Access Financial Lending Corp.
4.1** -- Form of Pooling and Servicing Agreement.
4.2** -- Form of Pooling and Servicing Agreement.
5.1* -- Opinion of Dewey Ballantine with respect to validity.
8.1* -- Opinion of Dewey Ballantine with respect to tax matters.
10.1** -- Form of Financial Guaranty Insurance Policy.
23.1 -- Consents of Dewey Ballantine are included in its opinions
filed as Exhibits 5.1 and 8.1 hereto.
99.1* -- Form of Prospectus Supplement.
99.2* -- Form of Prospectus Supplement.
- ----------
* Filed herewith.
** Previously filed.
II-2
Item 17. Undertakings.
A. Undertaking in respect of indemnification
Insofar as indemnification for liabilities arising under the 1933 Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described above in Item 15, 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 Registrants 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
them is against public policy as expressed in the 1933 Act and will be
governed by the final adjudication of such issue.
B. Undertaking pursuant to Rule 415.
The 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 (i) and (ii) do not apply if the
information required to be included in the post-effective
amendment is contained in periodic reports filed by the
Issuer pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are incorporated 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.
II-3
C. Undertaking pursuant to Rule 430A.
The Registrant hereby undertakes:
(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus
filed as part of a registration statement in reliance upon Rule
430A and contained in the form of prospectus filed by the
Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-4
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 for filing on Form S-3 and has duly caused this Amendment No. 2
to the registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of St. Louis Park, State of Minnesota on
the 16th day of August, 1996.
ACCESS FINANCIAL LENDING CORP.
By /s/ Leslie Zejdlik Foster
-------------------------
Leslie Zejdlik Foster
President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the registration statement has been signed below by the following
persons in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Leslie Zejdlik Foster Director and President August 16, 1996
- ------------------------- (Principal Executive Officer)
Leslie Zejdlik Foster
/s/ Heather A. McQueen Director and Treasurer August 16, 1996
- ------------------------- (Principal Financial Officer and
Heather A. McQueen Principal Accounting Officer)
/s/ Kenneth M. Duncan Director, Chairman of the Board August 16, 1996
- ------------------------- of Directors and Chief Executive
Kenneth M. Duncan Officer
II-5
EXHIBIT INDEX
Exhibit Location of Document in
Number Description of Document Sequential Numbering System
- --------------------------------------------------------------------------------
1.1** -- Form of Underwriting Agreement.
1.2** -- Form of Indemnification Agreement.
3.1** -- Certificate of Incorporation of
Access Financial Lending Corp.
3.2** -- By-Laws of Access Financial
Lending Corp.
4.1** -- Form of Pooling and Servicing
Agreement.
4.2** -- Form of Pooling and Servicing
Agreement.
5.1* -- Opinion of Dewey Ballantine with
respect to validity.
8.1* -- Opinion of Dewey Ballantine with
respect to tax matters.
10.1** -- Form of Financial Guaranty
Insurance Policy.
23.1 -- Consents of Dewey Ballantine are
included in its opinions filed as
Exhibits 5.1 and 8.1 hereto.
99.1* -- Form of Prospectus Supplement.
99.2* -- Form of Prospectus Supplement.
- ----------
* Filed herewith.
** Previously filed.